10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒   Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarter ended September 30, 2017

or

☐   Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________ to ____________

Commission File Number: 000-02040

CARBON NATURAL GAS COMPANY

(Exact name of registrant as specified in its charter)

Delaware	26-0818050
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1700 Broadway, Suite 1170, Denver, CO	80290
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (720) 407-7043

(Former name, address and fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒               NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES ☒               NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐		Smaller reporting company	☒
Accelerated filer	☐		Emerging growth company	☐
Non-accelerated filer	☐	(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐               NO ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

At November 10, 2017, there were 6,059,640 issued and outstanding shares of the Company’s common stock, $0.01 par value.

Carbon Natural Gas Company

TABLE OF CONTENTS

Part I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements	1
Consolidated Balance Sheets (unaudited)	1
Consolidated Statements of Operations (unaudited)	2
Consolidated Statements of Stockholders’ Equity (unaudited)	3
Consolidated Statements of Cash Flows (unaudited)	4
Notes to the Consolidated Financial Statements (unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 4. Controls and Procedures	40
Part II – OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6. Exhibits	41

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CARBON NATURAL GAS COMPANY

Consolidated Balance Sheets

	September 30,			December 31,
(in thousands, except share and per share data)	2017			2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,119		$	858
Accounts receivable:
Revenue		2,349			2,369
Trade receivables		1,023			330
Receivable – related party		346			-
Other		39			1,921
Commodity derivative asset		190			-
Prepaid expense, deposits and other current assets		585			305
Total current assets		5,651			5,783
Property and equipment (note 4):
Oil and gas properties, full cost method of accounting;
Proved, net		32,059			33,212
Unproved		1,926			1,999
Other property and equipment, net		773			325
		34,758			35,536
Investments in affiliates (note 5)		14,245			668
Other long-term assets		847			725
Total assets	$	55,501		$	42,712
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 9)	$	8,093		$	9,121
Firm transportation contract obligations (note 12)		234			561
Commodity derivative liability		-			1,341
Total current liabilities		8,327			11,023
Non-current liabilities:
Firm transportation contract obligations (note 12)		166			261
Commodity derivative liability		-			591
Ad valorem taxes payable		561			628
Warrant derivative liability		4,600			-
Asset retirement obligations (note 2)		5,120			5,006
Notes payable (note 6)		22,140			16,230
Total non-current liabilities		32,587			22,716
Commitments (note 12)
Stockholders’ equity:
Preferred stock, $0.01 par value; authorized 1,000,000 shares, no shares issued and outstanding at September 30, 2017 and December 31, 2016		-			-
Common stock, $0.01 par value; authorized 200,000,000 shares, 5,627,589 and 5,482,673 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		56			55
Additional paid-in capital		58,339			57,588
Accumulated deficit		(45,701	)		(50,535	)
Total Carbon stockholders’ equity		12,694			7,108
Non-controlling interests		1,893			1,865
Total stockholders’ equity		14,587			8,973
Total liabilities and stockholders’ equity	$	55,501		$	42,712

See accompanying notes to Consolidated Financial Statements.

1

CARBON NATURAL GAS COMPANY

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands except per share amounts)	2017			2016			2017			2016
Revenue:
Natural gas sales	$	3,689		$	1,431		$	11,706		$	3,484
Oil sales		997			765			3,189			2,201
Commodity derivative (loss) gain		(499	)		160			2,642			(474	)
Other income		8			9			28			10
Total revenue		4,195			2,365			17,565			5,221
Expenses:
Lease operating expenses		1,605			622			4,311			1,864
Transportation costs		556			364			1,571			1,121
Production and property taxes		331			184			1,186			443
General and administrative		2,129			2,327			5,623			5,402
General and administrative - related party reimbursement		(423	)		-			(723	)		-
Depreciation, depletion and amortization		613			393			1,847			1,332
Accretion of asset retirement obligations		77			35			232			105
Impairment of oil and gas properties		-			-			-			4,299
Total expenses		4,888			3,925			14,047			14,566
Operating (loss) income		(693	)		(1,560	)		3,518			(9,345	)
Other income and (expense):
Interest expense		(299	)		(38	)		(821	)		(141	)
Warrant derivative gain		811			-			2,494			-
Equity investment loss		(285	)		(4	)		(285	)		(10	)
Other		20			-			20			17
Total other income (expense)		247			(42	)		1,408			(134	)
Income (loss) before income taxes		(446	)		(1,602	)		4,926			(9,479	)
Provision for income taxes		-			-			-			-
Net income (loss) before non-controlling interests		(446	)		(1,602	)		4,926			(9,479	)
Net income (loss) attributable to non-controlling interests		16			(3	)		92			(435	)
Net income (loss) attributable to controlling interest	$	(462	)	$	(1,599	)	$	4,834		$	(9,044	)
Net income (loss) per common share:
Basic	$	(0.08	)	$	(0.29	)	$	0.87		$	(1.66	)
Diluted	$	(0.08	)	$	(0.29	)	$	0.36		$	(1.66	)
Weighted average common shares outstanding:
Basic		5,628			5,507			5,579			5,455
Diluted		5,628			5,507			6,486			5,455

See accompanying notes to Consolidated Financial Statements.

2

CARBON NATURAL GAS COMPANY

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands)

					Additional			Non-						Total
	Common Stock				Paid-in			Controlling			Accumulated			Stockholders’
	Shares		Amount		Capital			Interests			Deficit			Equity
Balances, December 31, 2016		5,483	$	55	$	57,588		$	1,865		$	(50,535	)	$	8,973
Stock-based compensation		-		-		752			-			-			752
Restricted stock vested		65		-		-			-			-			-
Performance units vested		80		1		(1	)		-			-			-
Non-controlling interest distributions, net		-		-		-			(64	)		-			(64	)
Net income		-		-		-			92			4,834			4,926
Balances, September 30, 2017		5,628	$	56	$	58,339		$	1,893		$	(45,701	)	$	14,587

See accompanying notes to Consolidated Financial Statements.

3

CARBON NATURAL GAS COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
(in thousands)	2017			2016
Cash flows from operating activities:
Net income (loss)	$	4,926		$	(9,479	)
Items not involving cash:
Depreciation, depletion and amortization		1,847			1,332
Accretion of asset retirement obligations		232			105
Impairment of oil and gas properties		-			4,299
Unrealized commodity derivative (gain) loss		(2,179	)		823
Warrant derivative unrealized gain		(2,494	)		-
Stock-based compensation expense		752			2,037
Investment in affiliates (gain) loss		315			10
Amortization of debt issuance costs		131			-
Other		(108	)		(8	)
Net change in:
Accounts receivable		863			43
Prepaid expenses, deposits and other current assets		(280	)		27
Accounts payable, accrued liabilities and firm transportation contract obligations		(1,425	)		118
Net cash provided by (used in) operating activities		2,580			(693	)
Cash flows from investing activities:
Development and acquisition of properties and equipment		(1,268	)		(328	)
Proceeds from sale of oil and gas properties and other assets		16			8
Other long-term assets		(56	)		57
Investment in affiliates		(6,798	)		275
Net cash (used in) provided by investing activities		(8,106	)		12
Cash flows from financing activities:
Proceeds from notes payable		7,210			707
Payments on notes payable		(1,300	)		(200	)
Debt issuance costs		(59	)		-
Distributions to non-controlling interests		(64	)		(3	)
Net cash provided by financing activities		5,787			504
Net increase (decrease) in cash and cash equivalents		261			(177	)
Cash and cash equivalents, beginning of period		858			305
Cash and cash equivalents, end of period	$	1,119		$	128

See accompanying notes to Consolidated Financial Statements.

4

CARBON NATURAL GAS COMPANY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Organization

The Company’s business is comprised of the assets and properties of Carbon Natural Gas Company and its subsidiaries as well as its equity investments in Carbon Appalachian Company, LLC (“Carbon Appalachia”) and Carbon California Company, LLC (“Carbon California”).

Appalachian and Illinois Basin Operations

In the Appalachian and Illinois Basins, Nytis Exploration Company, LLC (“Nytis LLC”) conducts operations for the Company and Carbon Appalachia.

California Operations

In California, Carbon California Operating Company, LLC (“CCOC”), conducts Carbon California’s operations.

Collectively, Carbon Natural Gas Company, CCOC, Nytis Exploration (USA) Inc. (“Nytis USA”) and Nytis LLC are referred to as the Company.

5

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly the Company’s financial position as of September 30, 2017 and the Company’s results of operations and cash flows for the three and nine months ended September 30, 2017 and 2016. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year because of the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results and other factors. For a more complete understanding of the Company’s operations, financial position and accounting policies, the unaudited Consolidated Financial Statements and the notes thereto should be read in conjunction with the Company’s audited Consolidated Financial Statements for the year ended December 31, 2016 filed on Form 10-K with the Securities and Exchange Commission (“SEC”).

In the course of preparing the unaudited Consolidated Financial Statements, management makes various assumptions, judgments and estimates to determine the reported amount of assets, liabilities, revenue and expenses and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events and accordingly, actual results could differ from amounts initially established.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Carbon, CCOC, Nytis USA and its consolidated subsidiary, Nytis LLC. Carbon owns 100% of Nytis USA and CCOC. Nytis USA owns approximately 99% of Nytis LLC.

Nytis LLC also holds an interest in 64 oil and gas partnerships. For partnerships where the Company has a controlling interest, the partnerships are consolidated. The Company is currently consolidating on a pro-rata basis 46 partnerships. In these instances, the Company reflects the non-controlling ownership interest in partnerships and subsidiaries as non-controlling interests on its Consolidated Statements of Operations and reflects the non-controlling ownership interests in the net assets of the partnerships as non-controlling interests within stockholders’ equity on its Consolidated Balance Sheets. All significant intercompany accounts and transactions have been eliminated.

In accordance with established practice in the oil and gas industry, the Company’s unaudited Consolidated Financial Statements also include its pro-rata share of assets, liabilities, income, lease operating costs and general and administrative expenses of the oil and gas partnerships in which the Company has a non-controlling interest.

Non-majority owned investments that do not meet the criteria for pro-rata consolidation are accounted for using the equity method when the Company has the ability to significantly influence the operating decisions of the investee. When the Company does not have the ability to significantly influence the operating decisions of an investee, the cost method is used. All transactions, if any, with investees have been eliminated in the accompanying unaudited Consolidated Financial Statements.

Accounting for Oil and Gas Operations

The Company uses the full cost method of accounting for oil and gas properties. Accordingly, all costs incidental to the acquisition, exploration and development of oil and gas properties, including costs of undeveloped leasehold, dry holes and leasehold equipment, are capitalized. Overhead costs incurred that are directly identified with acquisition, exploration and development activities undertaken by the Company for its own account, and which are not related to production, general corporate overhead or similar activities, are also capitalized.

6

Unproved properties are excluded from amortized capitalized costs until it is determined if proved reserves can be assigned to such properties. The Company assesses its unproved properties for impairment at least annually. Significant unproved properties are assessed individually.

Capitalized costs are depleted by an equivalent unit-of-production method, converting oil to gas at the ratio of one barrel of oil to six thousand cubic feet of natural gas. Depletion is calculated using capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.

No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves. All costs related to production activities, including work-over costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred.

The Company performs a ceiling test quarterly. The full cost ceiling test is a limitation on capitalized costs prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is not a fair value based measurement, rather it is a standardized mathematical calculation. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using the un-weighted arithmetic average of the first-day-of-the month price for the previous twelve month period, excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. Should the net capitalized costs exceed the sum of the components noted above, a ceiling test write-down would be recognized to the extent of the excess capitalized costs. Such impairments are permanent and cannot be recovered in future periods even if the sum of the components noted above exceeds the capitalized costs in future periods.

For the three and nine months ended September 30, 2017, the Company did not recognize a ceiling test impairment as the Company’s full cost pool did not exceed the ceiling limitations. For the three months ended September 30, 2016, the Company did not recognize a ceiling test impairment as the Company’s full cost pool did not exceed the ceiling limitations. For the nine months ended September 30, 2016, the Company recognized a ceiling test impairment of approximately $4.3 million as the Company’s full cost pool exceeded its ceiling limitations. Future declines in oil and natural gas prices, and increases in future operating expenses and future development costs could result in additional impairments of our oil and gas properties in future periods. Impairment charges are a non-cash charge and accordingly, do not affect cash flow, but adversely affect our net income and stockholders’ equity.

Investments in Affiliates

Investments in non-consolidated affiliates are accounted for under either the cost or equity method of accounting, as appropriate. The cost method of accounting is generally used for investments in affiliates in which the Company has less than 20% of the voting interests of a corporate affiliate or less than a 3% to 5% interest of a partnership or limited liability company and does not have significant influence. Investments in non-consolidated affiliates, accounted for using the cost method of accounting, are recorded at cost and impairment assessments for each investment are made annually to determine if a decline in the fair value of the investment, other than temporary, has occurred. A permanent impairment is recognized if a decline in the fair value occurs.

If the Company holds between 20% and 50% of the voting interest in non-consolidated corporate affiliates or generally greater than a 3% to 5% interest of a partnership or limited liability company and exerts significant influence or control (e.g., through its influence with a seat on the board of directors or management of operations), the equity method of accounting is generally used to account for the investment. Equity method investments will increase or decrease by the Company’s share of the affiliate’s profits or losses and such profits or losses are recognized in the Company’s Consolidated Statements of Operations. For its equity method investments in Carbon Appalachia and Carbon California, the Company uses the hypothetical liquidation at book value method to recognize its share of the affiliate’s profits or losses. The Company reviews equity method investments for impairment whenever events or changes in circumstances indicate that an other than temporary decline in value has occurred.

7

Related Party Transactions

On February 15, 2017, the Company entered into a limited liability company agreement of Carbon California to make investments in California oil and gas projects. Pursuant to the limited liability agreement, Carbon California reimbursed the Company for (i) due diligence costs incurred on behalf of Carbon California, (ii) transaction-related costs and (iii) management-related costs in connection with its role as manager of Carbon California. Management-related reimbursements were $150,000 and $375,000 for the three months ended September 30, 2017 and period February 15, 2017 (inception) through September 30, 2017, respectively.   

On April 3, 2017, the Company entered into the limited liability company agreement of Carbon Appalachia to make investments in Appalachia oil and gas projects. Pursuant to the limited liability agreement, Carbon Appalachia reimbursed the Company for (i) due diligence costs incurred on behalf of Carbon Appalachia, (ii) transaction-related costs and (iii) management-related costs in connection with its role as manager of Carbon Appalachia. Management-related reimbursements were approximately $273,000 and $348,000 for the three months ended September 30, 2017 and period April 3, 2017 (inception) through September 30, 2017, respectively. As of September 30, 2017, Carbon Appalachia owes the Company approximately $273,000 in connection with its role as manager.

Warrant Derivative Liability

The Company issued warrants related to investments in Carbon California and Carbon Appalachia. The Company accounts for these warrants in accordance with guidance contained in Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, which requires these warrants to be recorded on the balance sheet as either an asset or a liability measured at fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that the Company’s warrants do not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as liabilities. The warrants are subject to remeasurement at each balance sheet date, with any change in the fair value recognized as a component of other income or expense, net in the statement of operations. For the three and nine months ended September 30, 2017, changes in the fair value of warrants accounted for gains of approximately $811,000 and $2.5 million, respectively.

Asset Retirement Obligations

The Company’s asset retirement obligations (“ARO”) relate to future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and returning such land to its original condition. The fair value of a liability for an ARO is recorded in the period in which it is incurred and the cost of such liability is recorded as an increase in the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period and the capitalized cost is depleted on a units-of-production basis as part of the full cost pool. Revisions to estimated AROs result in adjustments to the related capitalized asset and corresponding liability.

The estimated ARO liability is based on estimated economic lives, estimates as to the cost to abandon the wells in the future, and federal and state regulatory requirements. The liability is discounted using a credit-adjusted risk-free rate estimated at the time the liability is incurred or increased as a result of a reassessment of expected cash flows and assumptions inherent in the estimation of the liability. Upward revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells. AROs are valued utilizing Level 3 fair value measurement inputs.

8

The following table is a reconciliation of the ARO for the nine months ended September 30, 2017 and 2016:

(in thousands)	Nine Months Ended September 30,
	2017			2016
Balance at beginning of period	$	5,120		$	3,095
Accretion expense		232			105
Additions during period		5			5
Obligations on sale of oil & gas properties		(93	)		-
		5,264			3,205
Less: ARO recognized as a current liability		(144	)		-
Balance at end of period	$	5,120		$	3,205

Earnings (Loss) Per Common Share

Basic earnings or loss per common share is computed by dividing the net income or loss attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period. The shares of restricted common stock granted to certain officers, directors and employees of the Company are included in the computation of basic net income or loss per share only after the shares become fully vested. Diluted earnings per common share includes both the vested and unvested shares of restricted stock and the potential dilution that could occur upon exercise of warrants to acquire common stock, computed using the treasury stock method, which assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company with the proceeds from the exercise of warrants (which were assumed to have been made at the average market price of the common shares during the reporting period).

The following table sets forth the calculation of basic and diluted income (loss) per share:

in thousands except per share amounts	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Basic Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$	(462	)	$	(1,599	)	$	4,834		$	(9,044	)
Weighted average shares outstanding, basic		5,628			5,507			5,579			5,455
Net income (loss) per common share, basic	$	(0.08	)	$	(0.29	)	$	0.87			(1.66	)
Diluted Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$	(462	)	$	(1,599	)	$	4,834		$	(9,044	)
Less: decrease in fair value of warrant		-			-			(2,494	)		-
Adjusted net income (loss) available to common shareholders, diluted	$	(462	)	$	(1,599	)	$	2,340		$	(9,044	)
Weighted average shares outstanding, basic		5,628			5,507			5,579			5,455
Add: dilutive effects of warrant and nonvested shares of restricted stock		-			-			907			-
Weighted-average shares outstanding, diluted		5,628			5,507			6,486			5,455
Net income (loss) per common share, diluted	$	(0.08	)	$	(0.29	)	$	0.36		$	(1.66	)

For the three months ended September 30, 2017, the Company had a net loss, and therefore, the diluted net loss per share calculation excluded the anti-dilutive effect of approximately 284,000 non-vested shares of restricted stock and approximately 617,000 in-the-money warrants. In addition, approximately 276,000 restricted performance units, subject to future contingencies, are excluded from the basic and diluted loss per share calculations.

For the nine months ended September 30, 2017, the Company had net income and the diluted net income per share calculation for that period includes the dilutive effect of approximately 284,000 non-vested shares of restricted stock and approximately 623,000 in-the-money warrants. In addition, approximately 276,000 restricted performance units, subject to future contingencies, are excluded from the basic and diluted loss per share calculations.

9

For the three and nine months ended September 30, 2016, the Company had a net loss and therefore, the diluted net loss per share calculation excluded the anti-dilutive effect of approximately 13,000 warrants and approximately 291,000 non-vested shares of restricted stock in each period. In addition, approximately 298,000 restricted performance units, in each period, subject to future contingencies were excluded from the basic and diluted loss per share calculations.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and disclosure of contingent assets and liabilities. Significant items subject to such estimates and assumptions include the carrying value of oil and gas properties, the estimate of proved oil and gas reserve volumes and the related depletion and present value of estimated future net cash flows and the ceiling test applied to capitalized oil and gas properties, determining the amounts recorded for deferred income taxes, stock-based compensation, fair value of commodity derivative instruments, fair value of warrants, equity method investments, fair value of assets acquired qualifying as business contributions and asset retirement obligations. Actual results could differ from those estimates and assumptions used, and the use of such estimates may result in volatility within the Company’s financial statements. 

Adopted and Recently Issued Accounting Pronouncements

In February 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”). The objective of this ASU is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and should be applied using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting ASU 2016-02.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The FASB subsequently issued ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, which deferred the effective date of ASU 2014-09 and provided additional implementation guidance. These ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application. The Company plans to adopt these ASUs effective January 1, 2018 using the modified retrospective method. The Company is in the process of assessing its contracts with customers and evaluating the effect of adopting these standards on its financial statements, accounting policies, internal controls and disclosures. The adoption is not expected to have a significant impact on the Company’s net income or cash flows, however, the Company is currently evaluating the proper classification of certain pipeline gathering, transportation and gas processing agreements to determine whether changes to total revenues and expenses will be necessary under the new standards.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. These amendments change the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The amendments in this update affect investments in loans, investments in debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact on its consolidated financial statements of adopting ASU 2016-13.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of “a business” to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company elected to early adopt this pronouncement effective January 1, 2017.

Note 3 – Acquisitions and Divestitures

In October 2016, Nytis LLC completed an acquisition (the “EXCO Acquisition”) consisting of producing natural gas wells and natural gas gathering facilities located in the Company’s Appalachian Basin operating area. The natural gas gathering facilities are primarily used to gather the Company’s natural gas production. The acquisition was pursuant to a purchase and sale agreement, effective October 1, 2016 (the “EXCO Purchase Agreement”) by and among EXCO Production Company (WV), LLC, BG Production Company (WV), LLC and EXCO Resources (PA) LLC (collectively, the “Sellers”) and Nytis LLC, as the buyer. The purchase price of the acquired assets was $9.0 million subject to customary closing adjustments plus certain assumed obligations.

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The EXCO Acquisition included proved developed reserves, production and operating cash flow in a location where the Company has similar assets.

EXCO Acquisition Unaudited Pro Forma Results of Operations

Below are consolidated results of operations for the nine months ended September 30, 2017 and 2016 as though the EXCO Acquisition had been completed as of January 1, 2016. The EXCO Acquisition closed October 3, 2016, and accordingly, the Company’s unaudited consolidated statement of operations for the nine months ended September 30, 2017 includes the results of operations for the nine months ended September 30, 2017 of the EXCO properties acquired. 

	Unaudited Pro Forma Consolidated Results
	For Nine Months Ended September 30,
(in thousands, except per share amounts)	2017		2016
Revenue	$	17,565	$	10,990
Net income (loss) before non-controlling interests		4,926		(4,447	)
Net income (loss) attributable to non-controlling interests		92		(435	)
Net income (loss) attributable to controlling interests		4,834		(4,012	)
Net income (loss) income per share (basic)		0.87		(0.74	)
Net income (loss) income per share (diluted)		0.36		(0.74	)

Note 4 – Property and Equipment

Net property and equipment as of September 30, 2017 and December 31, 2016 consists of the following:

(in thousands)	September 30, 2017			December 31, 2016
Oil and gas properties:
Proved oil and gas properties	$	112,211		$	111,771
Unproved properties not subject to depletion		1,926			1,999
Accumulated depreciation, depletion, amortization and impairment		(80,152	)		(78,559	)
Net oil and gas properties		33,985			35,211
Furniture and fixtures, computer hardware and software, and other equipment		1,661			990
Accumulated depreciation and amortization		(888	)		(665	)
Net other property and equipment		773			325
Total net property and equipment	$	34,758		$	35,536

As of September 30, 2017, and December 31, 2016, the Company had approximately $1.9 million and $2.0 million, respectively, of unproved oil and gas properties not subject to depletion. The costs not subject to depletion relate to unproved properties that are excluded from amortized capital costs until it is determined if proved reserves can be assigned to such properties. The excluded properties are assessed for impairment at least annually. Subject to industry conditions, evaluation of most of these properties and the inclusion of their costs in amortized capital costs is expected to be completed within five years.

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During the nine months ended September 30, 2017 and 2016, the Company capitalized general and administrative expenses applicable to development and exploration activities of approximately $178,000 and $431,000, respectively.

Depletion expense related to oil and gas properties for the three and nine months ended September 30, 2017 was approximately $521,000, or $0.38 per Mcfe, and $1.6 million, or $0.40 per Mcfe, respectively. For the three and nine months ended September 30, 2016, depletion expense was approximately $368,000, or $0.60 per Mcfe, and $1.2 million, or $0.68 per Mcfe, respectively.

Depreciation and amortization expense related to furniture and fixtures, computer hardware and software and other equipment for the three months ended September 30, 2017 and 2016 was approximately $91,000 and $25,000, respectively and for the nine months ended September 30, 2017 and 2016 was approximately $254,000 and $85,000, respectively. 

Note 5– Investments in Affiliates

Carbon California

On February 15, 2017, the Company entered into a limited liability company agreement (the “Carbon California LLC Agreement”) of Carbon California, a Delaware limited liability company established by the Company. Pursuant to the Carbon California LLC Agreement, Carbon acquired a 17.8% interest in Carbon California represented by Class B Units. The Class B Units were acquired for no cash consideration. No further equity commitments have been made or are required by the Company under the Carbon California LLC Agreement.

On February 15, 2017, Carbon California (i) issued and sold Class A Units to two institutional investors for an aggregate cash consideration of $22.0 million, (ii) entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with two institutional investors for the issuance and sale of up to $25.0 million of Senior Secured Revolving Notes (the “Senior Revolving Notes”) due February 15, 2022 and (iii) entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with one institutional investor for the issuance and sale of $10.0 million of Senior Subordinated Notes (the “Subordinated Notes”) due February 15, 2024. The Company is not a guarantor of the Senior Revolving Notes or the Subordinate Notes. The closing of the Note Purchase Agreement and the Securities Purchase Agreement on February 15, 2017, resulted in the sale and issuance by Carbon California of (i) Senior Revolving Notes in the principal amount of $10.0 million and (ii) Subordinated Notes in the original principal amount of $10.0 million. The maximum principal amount available under the Senior Revolving Notes is based upon the borrowing base attributable to Carbon California’s proved oil and gas reserves which is to be determined at least semi-annually. The current borrowing base is $15.0 million, of which $10.0 million is outstanding as of September 30, 2017.

Net proceeds from the offering transaction were used by Carbon California to complete the acquisitions of oil and gas assets in the Ventura Basin of California, which acquisitions also closed on February 15, 2017. The remainder of the net proceeds may be used to fund field development projects and to fund future complementary acquisitions and for general working capital purposes of Carbon California.

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In connection with the Company entering into the Carbon California LLC Agreement described above and Carbon California engaging in the transactions also described above, the Company issued to an affiliate of one of the institutional investors which purchased Class A Units of Carbon California (which is also an affiliate of the Company’s largest stockholders), a warrant to purchase approximately 1.5 million shares of the Company’s common stock at an exercise price of $7.20 per share (the “California Warrant”). The exercise price for the California Warrant is payable exclusively with Class A Units of Carbon California held by this investor and the number of shares of the Company’s common stock for which the California Warrant is exercisable is determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of the warrantholder’s Class A Units of Carbon California by (b) the exercise price. The California Warrant has a term of seven years and includes certain standard registration rights with respect to the shares of the Company’s common stock issuable upon exercise of the California Warrant. If exercised, the California Warrant provides Carbon an opportunity to increase its ownership stake in Carbon California without requiring the payment of cash.  

Based on its 17.8% interest in Carbon California, its ability to appoint a member to the board of directors and its role of manager of Carbon California, the Company is accounting for its investment in Carbon California under the equity method of accounting as it believes it can exert significant influence. The Company uses the hypothetical liquidation at book value method (“HLBV”) to determine its share of profits or losses in Carbon California and adjusts the carrying value of its investment accordingly. The HLBV is a balance-sheet approach that calculates the amount each member of Carbon California would receive if Carbon California were liquidated at book value at the end of each measurement period. The change in the allocated amount to each member during the period represents the income or loss allocated to that member. In the event of liquidation of Carbon California, to the extent that Carbon California has net income, available proceeds are first distributed to members holding Class A and Class B units and any remaining proceeds are then distributed to members holding Class A units, of which the Company holds none. For the three months ended September 30, 2017, and for the period of February 15, 2017 through September 30, 2017, Carbon California incurred a net loss. Should Carbon California report income, the Company will not record income (or losses) until the Company’s share of such income equals the amount of its share of losses not previously reported. While income may be recorded in future periods, the ability of Carbon California to make distributions to its owners, including us, is dependent upon the terms of its credit facilities, which currently prohibit distributions unless agreed to by the lender.

The Company accounted for the California Warrant, at issuance, as the initial investment in Carbon California and a liability based on the fair value of the California Warrant as of the date of grant (February 15, 2017). Future changes to the fair value of the California Warrant are recognized in earnings.

As of grant date of the California Warrant, the Company estimated that the fair market value of the California Warrant was approximately $5.8 million and recorded that amount to its investment in Carbon California and a long-term liability. As of September 30, 2017, the Company estimated that the fair value of the California Warrant was approximately $3.0 million. The difference in the fair value of the California Warrant from the grant date though September 30, 2017 was approximately $2.8 million and approximately $1.3 million and $2.8 million was recognized in warrant derivative gain in the Company’s unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2017, respectively. See Note 10 for additional information.

The following table sets forth, for the periods presented, selected historical financial data for Carbon California.

(in thousands, except per share amounts)	Three Months Ended September 30, 2017			February 15, 2017 (Inception) through September 30, 2017
Revenues	$	1,994		$	6,511
Operating expenses		2,625			6,578
Loss from continuing operations		(1,135	)		(1,313	)
Net loss		(1,135	)		(1,313	)

Carbon Appalachia

Outlined below is a summary of i) the Company’s contributions, ii) its resulting percent of Class A unit ownership and iii) the Company’s overall resulting sharing percentage of Carbon Appalachia after giving effect of all classes of ownership. Each contribution and its use is described in detail following the table.

Timing	Capital Contribution	Resulting Class A Units (%)	Resulting Sharing %
April 2017	$0.24 million	2.00%	2.98%
August 2017	$3.71 million	15.20%	16.04%
September 2017	$2.92 million	18.55%	19.37%
November 2017*	Warrant exercise*	26.50%	27.24%

* See Note 14 for further details regarding the November 1, 2017 exercise of the Appalachia Warrant

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On April 3, 2017, the Company finalized a limited liability company agreement (the “Carbon Appalachia LLC Agreement”) and the initial funding of Carbon Appalachia. Carbon Appalachia was formed by Carbon and two institutional investors to acquire producing assets in the Southern Appalachian Basin and has an initial equity commitment of $100.0 million, of which $37.0 million has been contributed as of September 30, 2017.

Pursuant to the Carbon Appalachia LLC Agreement, Carbon acquired a 2.0% interest in Carbon Appalachia for $240,000 of Class A Units associated with its initial equity commitment of $2.0 million. Carbon also has the ability to earn up to an additional 19.6% of Carbon Appalachia distributions (represented by Class B Units) after certain return thresholds to the holders of Class A Units are met. The Class B Units were acquired for no cash consideration.

In addition, Carbon acquired a 1.0% interest represented by Class C Units which were obtained in connection with the contribution to Carbon Appalachia of a portion of its working interest in undeveloped properties in Tennessee. If Carbon Appalachia agrees to drill horizontal Chattanooga Shale wells on these properties, it will pay 100% of the cost of drilling and completion of the first 20 wells to earn a 75% working interest in such properties. Carbon, through its subsidiary, Nytis LLC, will retain a 25% working interest in the properties.

In connection with and concurrently with the closing of the acquisition described below, Carbon Appalachia Enterprises, LLC, formerly known as Carbon Tennessee Company, LLC (“Carbon Appalachia Enterprises”), an indirect subsidiary of Carbon Appalachia, entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank with an initial borrowing base of $10.0 million. The Company is not a guarantor of this credit facility.

Borrowings under the credit facility, along with the initial equity contributions made to Carbon Appalachia, were used to complete the acquisition of natural gas producing properties and related facilities located predominantly in Tennessee (the “April 2017 Acquisition”). The purchase price was $20.0 million, subject to normal and customary pre and post-closing adjustments, and Carbon Appalachia Enterprises used $8.5 million drawn from the credit facility toward the purchase price.

During the quarter ended September 30, 2017, CAC completed two acquisitions, one on August 15, 2015 and the other on September 29, 2017. Each acquisition is described in more detail below.

On August 15, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties and related facilities located predominantly in the state of West Virginia (the “August 2017 Acquisition”). The purchase price was $21.5 million, subject to normal and customary pre- and post-closing adjustments.

On August 15, 2017, the Carbon Appalachia LLC Agreement was amended and restated. Pursuant to the amended and restated Carbon Appalachia LLC Agreement, Carbon increased its capital commitment in Carbon Appalachia from $2.0 million to $23.6 million and its portion of any subsequent capital call from 2.0% to 26.5%. Aggregate capital commitments of all Members remained at $100.0 million. As each subsequent capital call is made, Carbon will contribute 26.5%. The Company is the sole manager of Carbon Appalachia and maintains the ability to earn additional ownership interests of Carbon Appalachia (represented by Class B Units) after certain thresholds to the holders of Class A Units are met. The Company also maintains its 1.0% carried interest represented by Class C Units.

In connection with and concurrently with the closing of the August 2017 Acquisition, the borrowing base of its existing credit facility with LegacyTexas Bank increased to $22.0 million and Carbon Appalachia Enterprises borrowed $8.0 million from its existing credit facility with LegacyTexas Bank. Carbon Appalachia received equity funding in the amount of $14.0 million from its members, including $3.7 million from Carbon. The contributed funds and funds drawn from the credit facility were used to pay the purchase price.

On September 29, Carbon Appalachia Enterprises amended its 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank, resulting in a borrowing base of $50.0 million with redeterminations as of April 1 and October 1 each year and the addition of East West Bank as a participating lender. As of September 30, 2017, there was approximately $38.0 million outstanding under the credit facility. 

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On September 29, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties, natural gas gathering pipelines and related facilities located predominantly in the state of West Virginia (the “September 2017 Acquisition”). The purchase price was $41.3 million, subject to normal and customary pre- and post-closing adjustments.

In connection with and concurrently with the closing of the September 2017 Acquisition described above, Carbon Appalachia Enterprises borrowed $20.4 million from its credit facility. Carbon Appalachia received equity funding in the amount of $11.0 million from its members, including $2.9 million from Carbon. The contributed funds and funds drawn from the credit facility were used to pay the purchase price.

In connection with the Company entering into the Carbon Appalachia LLC Agreement described above and Carbon Appalachia Enterprises engaging in the April 2017 Acquisition, the Company issued to an affiliate of one of the institutional investors which purchased Class A Units of Carbon Appalachia (which is also an affiliate of the Company’s largest stockholders), a warrant to purchase approximately 408,000 shares of the Company’s common stock at an exercise price of $7.20 per share (the “Appalachia Warrant”). The exercise price for the Appalachia Warrant is payable exclusively with Class A Units of Carbon Appalachia held by this investor and the number of shares of the Company common stock for which the Appalachia Warrant is exercisable is determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of the warrantholder’s Class A Units of Carbon Appalachia plus a 10% internal rate of return by (b) the exercise price. The Appalachia Warrant has a term of seven years and includes certain standard registration rights with respect to the shares of Carbon’s common stock issuable upon exercise of the Appalachia Warrant. If exercised, the Appalachia Warrant provides Carbon an opportunity to increase its ownership stake in Carbon Appalachia without requiring the payment of cash.

Based on its 19.4% combined Class A and Class C interest (and its ability as of September 30, 2017 to earn up to an additional 16.3%) in Carbon Appalachia, its ability to appoint a member to the board of directors and its role of manager of Carbon Appalachia, the Company is accounting for its investment in Carbon Appalachia under the equity method of accounting as it believes it can exert significant influence. The Company uses the HLBV to determine its share of profits or losses in Carbon Appalachia and adjusts the carrying value of its investment accordingly. The Company’s investment in Carbon Appalachia is represented by its Class A and C interests, which it acquired by contributing approximately $6.9 million in cash and unevaluated property. In the event of liquidation of Carbon Appalachia, available proceeds are first distributed to members holding Class A and Class C Units until their contributed capital is recovered with an internal rate of return of 10%. Any additional distributions would then be shared between holders of Class A, Class B and Class C Units. For the period of April 3, 2017 through September 30, 2017, Carbon Appalachia incurred a net loss, of which the Company’s share is approximately $348,000. While income may be recorded in future periods, the ability of Carbon Appalachia to make distributions to its owners, including us, is dependent upon the terms of its credit facilities, which currently prohibit distributions unless agreed to by the lender.

The Company accounted for the Appalachia Warrant, at issuance, as an investment in Carbon Appalachia and a liability based on the fair value of the Appalachia Warrant as of the date of grant (April 3, 2017). Future changes to the fair value of the Appalachia Warrant are recognized in earnings.

As of the grant date of the Appalachia Warrant, the Company estimated that the fair value of the Appalachia Warrant was approximately $1.3 million and recorded that amount to its investment in Carbon Appalachia and a long-term liability. As of September 30, 2017, the Company estimated that the fair value of the Appalachia Warrant was approximately $1.6 million. The difference in the fair value of the Appalachia Warrant from the grant date through September 30, 2017 was approximately $323,000 and approximately $497,000 and $323,000 was recognized in derivative warrant gain in the Company’s unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2017. See Note 10 for additional information. On November 1, 2017, the holder of the Appalachia Warrant exercised the warrant. See Note 14 for additional information.

The following table sets forth, for the periods presented, selected historical financial data for Carbon Appalachia.

(in thousands, except per share amounts)	Three Months Ended September 30, 2017			April 3, 2017 (Inception) through September 30, 2017
Revenues	$	1,348		$	2,905
Operating expenses		2,691			4,449
Loss from continuing operations		(1,545	)		(1,874	)
Net loss		(1,545	)		(1,874	)

Crawford County Gas Gathering Company

The Company has a 50% interest in Crawford County Gas Gathering Company, LLC (“CCGGC”) which owns and operates pipelines and related gathering and treatment facilities which services the Company’s natural gas production in the Illinois Basin. The Company accounts for its investment in CCGGC under the equity method of accounting, and its share of income or loss is recognized in the Company’s statement of operations. During the nine months ended September 30, 2017 and 2016, the Company recorded equity method income of approximately $32,000 and equity method loss of approximately $10,000, respectively, related to this investment. In addition, during the third quarter of 2017 and first quarter of 2016, the Company received cash distributions from CCGGC of approximately $68,000 and $275,000, respectively.

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Note 6 – Bank Credit Facility

In 2016, Carbon entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank. LegacyTexas Bank is the initial lender and acts as administrative agent.

The credit facility has a maximum availability of $100.0 million (with a $500,000 sublimit for letters of credit), which availability is subject to the amount of the borrowing base. The initial borrowing base established under the credit facility was $17.0 million. The borrowing base is subject to semi-annual redeterminations in March and September. On March 30, 2017, the borrowing base was increased to $23.0 million. As of September 30, 2017, the borrowing base remained at $23.0 million.

The credit facility is guaranteed by each existing and future direct or indirect subsidiary of Carbon (subject to certain exceptions). The obligations of Carbon and the subsidiary guarantors under the credit facility are secured by essentially all tangible and intangible personal and real property of the Company (subject to certain exclusions).

Interest is payable quarterly and accrues on borrowings under the credit facility at a rate per annum equal to either (i) the base rate plus an applicable margin between 0.50% and 1.50% or (ii) the Adjusted LIBOR rate plus an applicable margin between 3.50% and 4.50% at Carbon’s option. The actual margin percentage is dependent on the credit facility utilization percentage. Carbon is obligated to pay certain fees and expenses in connection with the credit facility, including a commitment fee for any unused amounts of 0.50%.

The credit facility contains certain affirmative and negative covenants that, among other things, limit the Company’s ability to (1) incur additional debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge or consolidate, wind-up, dissolve or liquidate; (v) make dividends and distributions on, or repurchases of, equity; (vi) make certain investments; (vii) enter into certain transactions with its affiliates; (viii) enter into sales-leaseback transaction; (ix) make optional or voluntary payment of debt; (x) change the nature of its business; (xi) change its fiscal year to make changes to the accounting treatment or reporting practices; (xii) amend constituent documents; and (xiii) enter into certain hedging transactions.

The affirmative and negative covenants are subject to various exceptions, including certain basket amounts and acceptable transaction levels. In addition, the credit facility requires Carbon’s compliance, on a consolidated basis, with (i) maximum funded Debt/EBITDA ratio of 3.5 to 1.0 and (ii) a minimum current ratio of 1.0 to 1.0, commencing with the quarter ended March 31, 2017.

In the third quarter of 2017, the Company contributed approximately $6.6 to Carbon Appalachia to fund its share of producing oil and gas properties acquired during the third quarter. This funding was provided primarily with borrowings under the credit facility. The funded Debt/EBITDA and current ratio covenants negotiated at the time the credit facility was established did not contemplate the Company’s contributions for its investment in Carbon Appalachia and, as a result, the Company was not in compliance with the financial covenants associated with the credit facility as of September 30, 2017. However, the Company has obtained a waiver of the funded debt/EBITDA ratio and the current ratio covenants as of September 30, 2017. The Company has requested that LegacyTexas Bank amend such financial covenants to take into account the Company’s investment in Carbon Appalachia. While the Company believes its relationship with LegacyTexas Bank is such that the requested amendment is likely, there can be no assurance that the bank will agree to an amendment.

Carbon may at any time repay the loans under the credit facility, in whole or in part, without penalty. Carbon must pay down borrowings under the credit facility or provide mortgages of additional oil and natural gas properties to the extent that outstanding loan and letters of credit exceed the borrowing base.

As required under the terms of the credit facility, the Company entered into derivative contracts at fixed pricing for a certain percentage of its production. The Company is party to an ISDA Master Agreement with BP Energy Company that establishes standard terms for the derivative contracts and an inter-creditor agreement with LegacyTexas Bank and BP Energy Company whereby any credit exposure related to the derivative contracts entered into by the Company and BP Energy Company is secured by the collateral and backed by the guarantees supporting the credit facility.

As of September 30, 2017, there were approximately $22.1 million in outstanding borrowings and approximately $860,000 of additional borrowing capacity available under the credit facility. The Company’s effective borrowing rate at September 30, 2017 was approximately 5.82%.

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Note 7 – Income Taxes

The Company recognizes deferred income tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company has net operating loss carryforwards available in certain jurisdictions to reduce future taxable income. Future tax benefits for net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.

At September 30, 2017, the Company has established a full valuation allowance against the balance of net deferred tax assets.

Note 8 – Stockholders’ Equity

Authorized and Issued Capital Stock

Effective March 15, 2017 and pursuant to a reverse stock split approved by the shareholders and Board of Directors, each 20 shares of issued and outstanding common stock became one share of common stock and no fractional shares were issued. References to the number of shares and price per share give retroactive effect to the reverse stock split for all periods presented.

As of September 30, 2017, the Company had 200,000,000 shares of common stock authorized with a par value of $0.01 per share, of which approximately 5.6 million were issued and outstanding and 1,000,000 shares of preferred stock authorized with a par value of $0.01 per share, none of which were issued and outstanding. During the first nine months of 2017, the increase in the Company’s issued and outstanding common stock was a result of restricted stock and performance units that vested during the period.

Equity Plans Prior to Merger

Pursuant to the merger of Nytis USA with and into the Company in 2011, all options, warrants and restricted stock were adjusted to reflect the conversion ratio used in the merger.  

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Nytis USA Restricted Stock Plan

As of September 30, 2017, all restricted stock issued under the Nytis USA Restricted Stock Plan (“Nytis USA Plan”) have vested. The Company accounted for these grants at their intrinsic value. From the date of grant through March 31, 2013, the Company estimated that none of these shares would vest and accordingly, no compensation cost had been recorded through March 31, 2013.

In June 2013, the vesting terms of these restricted stock grants were modified so that 25% of the shares would vest on the first of January from 2014 through 2017. As such, the Company recognized compensation expense for those restricted stock grants based on the fair value of the shares on the date the vesting terms were modified. Compensation expense recognized for those restricted stock grants was approximately $84,000 and approximately $252,000 for the three and nine months ended September 30, 2016, respectively. No compensation expense was recognized for those restricted stock grants for the three and nine months ended September 30, 2017. As of December 31, 2016, compensation costs relative to those restricted stock grants were fully recognized.

Carbon Stock Incentive Plans

The Company has two stock plans, the Carbon 2011 and 2015 Stock Incentive Plans (collectively the “Carbon Plans”). The Carbon Plans were approved by the shareholders of the Company and in the aggregate provide for the issuance of approximately 1.1 million shares of common stock to Carbon officers, directors, employees or consultants eligible to receive these awards under the Carbon Plans.

The Carbon Plans provide for granting Director Stock Awards to non-employee directors and for granting Incentive Stock Options, Non-qualified Stock Options, Restricted Stock Awards, Performance Awards and Phantom Stock Awards, or a combination of the foregoing, as is best suited to the circumstances of the particular employee, officer, director or consultant.

Restricted Stock

During the nine months ended September 30, 2017, approximately 81,000 shares of restricted stock were granted under the terms of the Carbon Plan in addition to 462,000 shares granted during previous years. For employees, these restricted stock awards either vest ratably over a three-year service period or cliff vest after a three-year service period. For non-employee directors, the awards vest upon the earlier of a change in control of the Company or the date their membership on the Board of Directors is terminated other than for cause. The Company recognizes compensation expense for these restricted stock grants based on the estimated grant date fair value of the shares, amortized ratably over three years for employee awards (based on the required service period for vesting) and seven years for non-employee director awards (based on a market survey of the average tenure of directors among U.S. public companies). As of September 30, 2017, approximately 258,000 of these restricted stock grants have vested.

Compensation costs recognized for these restricted stock grants were approximately $160,000 and $186,000 for the three months ended September 30, 2017 and 2016, respectively, and $513,000 and $554,000 for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was approximately $1.3 million of unrecognized compensation costs related to these restricted stock grants. This cost is expected to be recognized over the next 6.5 years.

Performance Units

During the nine months ended September 30, 2017, approximately 60,000 shares of performance units were granted under the terms of the Carbon plans in addition to approximately 401,000 shares granted during previous years. The performance units represent a contractual right to receive one share of the Company’s common stock subject to the terms and conditions of the agreements including the achievement of certain performance measures relative to a defined peer group or the achievement of certain performance measures over a defined period of time for the Company as well as the lapse of forfeiture restrictions pursuant to the terms and conditions of the agreements, including for certain of the grants, the requirement of continuous employment by the grantee prior to a change in control of the Company. Based on the relative achievement of performance, approximately 272,000 restricted performance units are outstanding as of September 30, 2017. 

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The Company accounts for the performance units granted during 2012 and 2014 through 2017 at their fair value determined at the date of grant. The final measurement of compensation cost will be based on the number of performance units that ultimately vest. At September 30, 2017, the Company estimated that none of the performance units granted in 2012 and 2016 through 2017 would vest due to change in control or other performance provisions and accordingly, no compensation cost has been recorded for these performance units. At September 30, 2016, the Company estimated that it was probable that certain of the performance units granted in 2014 and 2015 would vest. Compensation costs of approximately $53,000 and $239,000 related to these performance units were recognized for the three and nine months ended September 30, 2017, respectively. Compensation expense of approximately $1.1 million was recognized for these performance units for the three and nine months ended September 30, 2016. As of September 30, 2017, if change in control and other performance provisions pursuant to the terms and conditions of these agreements are met in full, the estimated unrecognized compensation cost related to the performance units granted in 2012 and 2014 through 2017 would be approximately $2.4 million.

The performance units granted in 2013 contain specific vesting provisions, no change in control provisions nor any performance conditions other than stock price performance. Due to different earning requirements compared to the performance units granted in 2012 and 2014 through 2017, the Company recognized compensation expense for the performance units granted in 2013 based on the grant date fair value of the performance units, amortized ratably over three years (the performance period). The fair value of the performance units granted in 2013 was estimated using a Monte Carlo simulation (“MCS”) valuation model using the following key assumptions: no expected dividends, volatility of our stock and those of defined peer companies used to determine our performance relative to the defined peer group, a risk-free interest rate and an expected life of three years. Compensation costs recognized for these performance unit grants were nil and approximately $127,000 for the three and nine months ended September 30, 2016, respectively. As of September 30, 2016, compensation costs relative to these performance units had been fully recognized. 

Note 9 – Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at September 30, 2017 and December 31, 2016 consist of the following:

(in thousands)	September 30, 2017		December 31, 2016
Accounts payable	$	1,801	$	2,315
Oil and gas revenue payable to oil and gas property owners		1,583		1,415
Gathering and transportation payables		498		468
Production taxes payable		212		113
Drilling advances received from joint venture partner		422		955
Accrued drilling costs		-		4
Accrued lease operating costs		535		282
Accrued ad valorem taxes		1,461		1,552
Accrued general and administrative expenses		1,085		1,572
Accrued interest		232		184
Other liabilities		264		261
Total accounts payable and accrued liabilities	$	8,093	$	9,121

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Note 10 – Fair Value Measurements

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1:	Quoted prices are available in active markets for identical assets or liabilities;
Level 2:	Quoted prices in active markets for similar assets or liabilities that are observable for the asset or liability; or
Level 3:	Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s policy is to recognize transfers in and/or out of the fair value hierarchy as of the end of the reporting period for which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed below for all periods presented.

Assets Measured and Recorded at Fair Value on a Recurring Basis

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 by level within the fair value hierarchy:

(in thousands)	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
September 30, 2017
Assets:
Commodity derivatives	$	-	$	247	$	-	$	247
Liabilities:
Warrant derivatives	$	-	$	-	$	4,600	$	4,600
December 31, 2016
Liabilities:
Commodity derivatives	$	-	$	1,932	$	-	$	1,932

Level 2 Fair Value Measurements

As of September 30, 2017, the Company’s commodity derivative financial instruments are comprised of twelve natural gas swap agreements, ten oil swap agreements and one natural gas costless collar agreement. The fair values of these agreements are determined under an income valuation technique. The valuation requires a variety of inputs, including contractual terms, published forward prices, volatilities for options, and discount rates, as appropriate. The Company’s estimates of fair value of derivatives include consideration of the counterparty’s credit worthiness, the Company’s credit worthiness and the time value of money. The consideration of these factors resulted in an estimated exit-price for each derivative asset or liability under a market place participant’s view. All the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy. The counterparty for all the Company’s commodity financial instruments as of September 30, 2017 is BP Energy Company.

Level 3 Fair Value Measurements

A third-party valuation specialist is utilized to determine the fair value of the Company’s California Warrant and Appalachia Warrant. These warrants are designated as Level 3. The Company reviews these valuations, including the related model inputs and assumptions, and analyzes changes in fair value measurements between periods. The Company corroborates such inputs, calculations and fair value changes using various methodologies, and reviews unobservable inputs for reasonableness utilizing relevant information from other published sources. Due to the limited trading volume of the Company’s shares, adjustments are made to the per share value.

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The Company estimated the fair value of the California Warrant on February 15, 2017, the grant date of the warrant, to be approximately $5.8 million, using a call option pricing model with the following assumptions: a seven-year term, exercise price of $7.20, volatility rate of 41.8% and a risk-free rate of 2.3%. As the Company will receive Class A units in Carbon California in the event the holder exercises the California Warrant, the Company also considered the fair value of the Class A units in its valuation. The Company remeasured the California Warrant as of September 30, 2017, using a Monte Carlo valuation model which utilized unobservable inputs including the percentage return on the Company’s shares at various timelines, the percentage return on the privately-held Carbon California Class A units at various timelines, an exercise price of $7.20, volatility rate of 45%, a risk-free rate of 2.1% and an estimated remaining term of 6.4 years. For the quarter ended September 30, 2017, it was determined that a change from the Black Scholes model to the Monte Carlo valuation model with the ability to incorporate the multitude of probabilities associated with various market participant exercise scenarios was appropriate given the passage of time between the formation and funding of Carbon California in February 2017. As of September 30, 2017, the fair value of the California Warrant was approximately $3.0 million.

The Company estimated the fair value of the Appalachia Warrant on April 3, 2017, the grant date of the warrant, to be approximately $1.3 million, using a call option pricing model with the following assumptions: a seven-year term, exercise price of $7.20, volatility rate of 39.3% and a risk-free rate of 2.1%. As the Company will receive Class A units in Carbon Appalachia in the event the holder exercises the Appalachia Warrant, the Company also considered the fair value of the Class A units in its valuation. The Company remeasured the Appalachia Warrant as of September 30, 2017, using a Monte Carlo valuation model which utilized unobservable inputs including the percentage return on the Company’s shares at various timelines, the percentage return on the privately-held Carbon Appalachia Class A units at various timelines, an exercise price of $7.20, volatility rate of 45%, a risk-free rate of 2.1% and an estimated remaining term of 6.5 years. For the quarter ended September 30, 2017, it was determined that a change from the Black Scholes model to the Monte Carlo valuation model with the ability to incorporate the multitude of probabilities associated with various market participant exercise scenarios was appropriate given the passage of time between the formation and funding of Carbon Appalachia in April 2017. As of September 30, 2017, the fair value of the Appalachia Warrant was approximately $1.6 million.

The following table summarizes the changes in fair value of our financial instruments classified as Level 3 in the fair value hierarchy:

(in thousands)	California Warrant			Appalachia Warrant		Total
Balance, December 31, 2016	$	-		$	-	$	-
Warrant derivative liability		5,769			1,325		7,094
Unrealized (gain) loss included in warrant derivative gain		(2,817	)		323		2,494
Balance, September 30, 2017	$	2,952		$	1,648	$	4,600

Assets Measured and Recorded at Fair Value on a Non-Recurring Basis

The fair value of the Company’s asset retirement obligations are measured and recorded at fair value on a non-recurring basis, are based on unobservable pricing inputs and therefore, are included within the Level 3 fair value hierarchy.

The Company uses the income valuation technique to estimate the fair value of asset retirement obligations using the amounts and timing of expected future dismantlement costs, credit-adjusted risk-free rates and time value of money. During the nine months ended September 30, 2017 and 2016, the Company recorded additions to asset retirement obligations of approximately $5,000 in each period. See Note 2 for additional information.

Note 11 – Physical Delivery Contracts and Gas Derivatives

The Company has historically used commodity-based derivative contracts to manage exposures to commodity price on a portion of its oil and natural gas production. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. The Company also enters into, on occasion, oil and natural gas physical delivery contracts to effectively provide commodity price hedges. Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives. Therefore, these contracts are not recorded at fair value in the unaudited Consolidated Financial Statements.

Pursuant to the terms of the Company’s credit facility with LegacyTexas Bank, the Company has entered into swap and costless collar derivative agreements to hedge a portion of its oil and natural gas production for 2017 through 2019. As of September 30, 2017, these derivative agreements consisted of the following:

	Natural Gas Swaps				Natural Gas Collars				Oil Swaps
			Weighted				Weighted				Weighted
			Average				Average Price				Average
Year	MMBtu		Price (a)		MMBtu		Range (a)		Bbl		Price (b)
2017		900,000	$	3.27		30,000		$3.00 - $3.48		23,000	$	52.64
2018		3,390,000	$	3.01		90,000		$3.00 - $3.48		60,000	$	53.36
2019		1,920,000	$	2.85		-		-		48,000	$	53.76

(a) NYMEX Henry Hub Natural Gas futures contract for the respective delivery month.

(b) NYMEX Light Sweet Crude West Texas Intermediate futures contract for the respective delivery month

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For its swap instruments, the Company receives a fixed price for the hedged commodity and pays a floating price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty. Costless collars are designed to establish floor and ceiling prices on anticipated future oil and gas production. The ceiling establishes a maximum price that the Company will receive for the volumes under contract, while the floor establishes a minimum price.

The following table summarizes the fair value of the derivatives recorded in the unaudited Consolidated Balance Sheets.

These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

(in thousands)	September 30, 2017		December 31, 2016
Commodity derivative contracts:
Current assets	$	190	$	-
Non-current assets	$	57	$	-
Current liabilities	$	-	$	1,341
Non-current liabilities	$	-	$	591

The table below summarizes the commodity settlements and unrealized gains and losses related to the Company’s derivative instruments for the three and nine months ended September 30, 2017 and 2016. These commodity derivative settlements and unrealized gains and losses are recorded and included in commodity derivative income or loss in the accompanying unaudited Consolidated Statements of Operations. 

(in thousands)	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017		2016
Commodity derivative contracts:
Settlement gains	$	345		$	17	$	463	$	349
Unrealized (losses) gains		(844	)		143		2,179		(823	)
Total settlement and unrealized (losses) gains, net	$	(499	)	$	160	$	2,642	$	(474	)

Commodity derivative settlement gains and losses are included in cash flows from operating activities in the Company’s unaudited Consolidated Statements of Cash Flows.

The counterparty in all the Company’s derivative instruments is BP Energy Company. The Company has entered into an ISDA Master Agreement with BP Energy Company that establishes standard terms for the derivative contracts and an inter-creditor agreement with LegacyTexas Bank and BP Energy Company whereby any credit exposure related to the derivative contracts entered into by the Company and BP Energy Company is secured by the collateral and backed by the guarantees supporting the credit facility.

The Company nets its derivative instrument fair value amounts executed with its counterparty pursuant to an ISDA master agreement, which provides for the net settlement over the term of the contracts and in the event of default or termination of the contracts. The following table summarizes the location and fair value amounts of all derivative instruments in the unaudited Consolidated Balance Sheet, as well as the gross recognized derivative assets, liabilities and amounts offset in the unaudited Consolidated Balance Sheet as of September 30, 2017.

						Net
	Gross					Recognized
	Recognized		Gross			Fair Value
	Assets/		Amounts			Assets/
Balance Sheet Classification	Liabilities		Offset			Liabilities
Commodity derivative assets:
Current assets	$	448	$	(258	)	$	190
Other long-term assets		305		(248	)		57
Total derivative assets	$	753	$	(506	)	$	247
Commodity derivative liabilities:
Current liability	$	258	$	(258	)	$	-
Non-current liabilities		248		(248	)		-
Total derivative liabilities	$	506	$	(506	)	$	-

Due to the volatility of oil and natural gas prices, the estimated fair values of the Company’s derivatives are subject to fluctuations from period to period.

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Note 12 – Commitments

Employment Agreements

The Company has entered into employment agreements with certain executives and officers of the Company. The term of the agreements generally range from one to two years and provide for renewal provisions in one year increments thereafter. The agreements provide for, among other items, severance and continuation of benefit payments upon termination of employment or certain change of control events.

Firm Transportation Contracts

The Company has entered into long-term firm transportation contracts to ensure the transport for a portion of its gas production to purchasers. Firm transportation volumes and the related demand charges for the remaining term of these contracts at September 30, 2017 are summarized in the table below.

Period	Dekatherms per day		Demand Charges
Oct 2017 - Apr 2018		5,530	$	0.20 - $0.65
May 2018 - May 2020		3,230	$	0.20 - $0.62
Apr 2020 – May 2020		2,150	$	0.20
Jun 2020 – May 2036		1,000	$	0.20

A liability of approximately $400,000 related to firm transportation contracts assumed in asset acquisitions, which represents the remaining commitment, is reflected on the Company’s unaudited Consolidated Balance Sheet as of September 30, 2017. The fair value of these firm transportation obligations was determined based upon the contractual obligations assumed by the Company and discounted based upon the Company’s effective borrowing rate. These contractual obligations are being amortized on a monthly basis as the Company pays these firm transportation obligations.

Capital Commitments

In its participation as a Class A member of Carbon Appalachia, the Company has made a capital commitment of $23.6 million, of which it has contributed $6.9 million as of September 30, 2017.

Litigation

From time to time, the Company is a party to various commercial and regulatory claims, pending or threatened legal action, and other proceedings that arise in the ordinary course of business. It is the opinion of management that none of the current matters of contention are reasonably likely to have a material adverse impact on our business, financial position, results of operations, or cash flows.

Note 13 – Supplemental Cash Flow Disclosure

Supplemental cash flow disclosures for the nine months ended September 30, 2017 and 2016 are presented below:

	Nine Months Ended September 30,
(in thousands)	2017			2016
Cash paid during the period for:
Interest	$	645		$	117
Non-cash transactions:
Increase in net asset retirement obligations	$	5		$	5
Decrease in accounts payable and accrued liabilities included in oil and gas properties	$	(12	)	$	(23	)
Issuance of warrants for investment in affiliates	$	7,094		$	-

Note 14 – Subsequent Events

On November 1, 2017, the holder of the Appalachia Warrant (see Note 5) exercised the warrant resulting in the issuance of 432,051 shares of the Company’s common stock in exchange for Class A Units representing approximately 7.95% of then outstanding Class A Units of Carbon Appalachia. After giving effect to the exercise, Carbon owns 26.5% of Carbon Appalachia outstanding Class A Units along with its 1% Class C ownership. The Company is evaluating any accounting effects of the exercise.

On November 13, 2017, LegacyTexas Bank reaffirmed the Company’s borrowing base associated with the credit facility at $23.0 million.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General Overview

All expectations, forecasts, assumptions and beliefs about our future results, condition, operations and performance are forward-looking statements as described under the heading “Forward Looking Statements” at the end of this Item. Our actual results may differ materially because of a number of risks and uncertainties. The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto and the information included or incorporated by reference in the Company’s 2016 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Carbon is an independent oil and natural gas company engaged in the acquisition, exploration, development and production of oil and natural gas properties located in the United States. We focus on conventional and unconventional reservoirs, including shale, tight sands and coalbed methane. Our executive offices are in Denver, Colorado and we maintain offices in Lexington, Kentucky, and Santa Paula, California from which we conduct our oil and gas operations.

At September 30, 2017, our proved developed reserves were comprised of 7% oil and 93% natural gas. Our current capital expenditure program is focused on the acquisition and development of oil and natural gas properties in areas where we currently operate. We believe that our asset and lease position, combined with our low operating expense structure and technical expertise, provides us with a portfolio of opportunities for the development of our oil and natural gas properties. Our growth plan is centered on the following activities:

● Additional acquisition and development of oil and gas properties through our equity method investments in Carbon Appalachia and Carbon California;

● Producing property and land acquisitions and development projects that provide attractive risk adjusted rates of return and complement our existing asset base; and

● Development, optimization and maintenance of a portfolio of low risk, long-lived oil and natural gas properties that provide stable cash flows and attractive risk adjusted rates of return.

Our revenue, profitability and future growth rate depend on many factors which are beyond our control, including but not limited to, economic, political and regulatory developments and competition from other industry participants. Our financial results are sensitive to fluctuations in oil and natural gas prices. Oil and gas prices historically have been volatile and may fluctuate widely in the future. The following table highlights the quarterly average of NYMEX oil and natural gas prices for the last eight calendar quarters:

	2015		2016								2017
	Q4		Q1		Q2		Q3		Q4		Q1		Q2		Q3
Oil (Bbl)	$	42.17	$	33.51	$	45.60	$	44.94	$	49.33	$	51.86	$	48.29	$	48.19
Natural Gas (MMBtu)	$	2.17	$	2.06	$	1.98	$	2.93	$	2.98	$	3.07	$	3.09	$	2.89

Low oil and natural gas prices may decrease our revenues, may reduce the amount of oil and natural gas that the Company can produce economically and potentially lower our oil and natural gas reserves. The Company’s estimated proved reserves may decrease if the economic life of the underlying producing wells is shortened as a result of lower oil and natural gas prices. A substantial or extended decline in oil or natural gas prices may result in future impairments of our proved reserves and may materially and adversely affect our future business, financial condition, cash flows, results of operations or liquidity. Lower oil and natural gas prices may also reduce the amount of borrowing base under our bank credit facility, which is determined at the discretion of our lender and may make it more difficult to comply with the covenants and other restrictions under our bank credit facility.

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The Company uses the full cost method of accounting for its oil and gas properties and performs a ceiling test quarterly. The ceiling calculation utilizes a rolling 12 month average commodity price. Due to the effect of lower commodity prices in 2016, the Company recognized an impairment of approximately $4.3 million for the year ended December 31, 2016. The Company has not recorded an impairment in 2017. 

Future write downs or impairments, if any, are difficult to predict and will depend not only on commodity prices, but also other factors that include, but are not limited to, incremental proved reserves that may be added each period, revisions to previous reserve estimates, capital expenditures and operating costs. There are numerous uncertainties inherent in the estimation of proved reserves and accounting for oil and natural gas properties in subsequent periods. The estimates described in this paragraph should not be construed as indicative of our future results.

Impairment charges do not affect cash flows from operating activities, but do adversely affect net income and stockholders’ equity. An extended decline in oil or natural gas prices may materially and adversely affect our future business, financial condition, cash flows and liquidity.

Future property acquisitions or dispositions could have a material impact on our financial condition and results of operations by increasing or decreasing our reserves, production and revenues as well as expenses and future capital expenditures. We currently anticipate that we would finance any future acquisitions with available borrowings under our credit facility, sales of properties or the issuance of additional equity or debt.

Operational Highlights

Weakness in commodity prices has had an adverse impact on our results of operations and the amount of cash flow available to invest in exploration and development activities. Based on recent and expected future prices for oil and natural gas and the resultant reduced rate of return on drilling projects, we reduced our drilling activity to manage and optimize the utilization of our capital resources. During 2016 and for the nine months ended September 30, 2017, we concentrated our efforts on the acquisition of producing properties including the EXCO Acquisition and our equity investments in Carbon California Company, LLC (“Carbon California”) and Carbon Appalachian Company, LLC (“Carbon Appalachia”). Our field development activities have consisted principally of the optimization of our gathering facilities and marketing arrangements to provide greater flexibility in transporting our natural gas production to markets with more favorable pricing.

At September 30, 2017, we had approximately 411,000 net acres of mineral leases located in the Appalachian and Illinois Basins of the United States. Approximately 66% of this acreage is held by production and of the remaining acreage, approximately 55% have lease terms of greater than five years remaining in the primary term or contractual extension periods.

In the Appalachia Basin, the principal focus of our producing property acquisition and development activities has related to the EXCO Acquisition. Since the acquisition of these properties in October 2016, we have focused on the reduction of operating expenses, optimization of natural gas gathering and compression facilities and the identification of development project opportunities. In addition, since 2010, we have drilled 56 horizontal wells in a Berea sandstone oil formation located in Eastern Kentucky, including two wells in 2017. These activities have enhanced our well performance, improved well drilling and completion performance, including reduced drilling days, increased horizontal lateral length, decreased cost per frac stage and reduced days from spud to first production. In addition, we have established an infrastructure of oil and natural gas gathering and water handling and disposal facilities which will benefit the economics of future drilling.

Our natural gas properties are largely held by production and contain a low risk multi-year development inventory of potential future drilling locations which, at the appropriate level of natural gas commodity price, will provide significant drilling and completion opportunities from multiple proven producing formations.

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Recent Developments and Factors Affecting Comparability

The Company is evaluating producing property and land acquisition opportunities in its operating area, including investments through its affiliates, in California and the Appalachian Basin that would expand the Company’s operations and provide attractive risk adjusted rates of return on invested capital. The drilling of oil and natural gas wells during 2017 is contingent on our expectation of future oil and natural gas prices. 

Effective March 15, 2017 and pursuant to a reverse stock split approved by the shareholders and Board of Directors, each 20 shares of issued and outstanding common stock became one share of common stock and no fractional shares were issued. All references to the number of shares of common stock and per share amounts give retroactive effect to the reverse stock split for all periods presented.

Acquisitions

EXCO Acquisition

In October 2016, Nytis LLC completed the acquisition of producing natural gas wells and natural gas gathering facilities located primarily in West Virginia from EXCO Production Company (WV), LLC; BG Production Company (WV), LLC; and EXCO Resources (PA) LLC. The purchase price of the acquired assets was $9.0 million subject to customary closing adjustments plus certain assumed obligations.

The acquired assets increased the natural gas production, reserves and cash flow of the Company and have resulted in a reduction in general and administrative expenses (per unit of production). The assets also contain an inventory of development projects. The acquired assets consisted of the following:

● Approximately 2,300 natural gas wells and over 900 miles of associated natural gas gathering pipelines and compression facilities operated by the Company that are primarily used for the acquired wells. As of September 30, 2017, these wells were producing approximately 8,100 net Mcfe per day (95% natural gas).

● Average working and net revenue interest of the acquired wells of 94% and 79%, respectively.

● Estimated proved developed producing reserves of approximately 46.4 Bcfe (97% natural gas).

● Approximately 201,000 net acres of oil and natural gas mineral interests.

In connection with and concurrently with the closing of the EXCO Acquisition, Carbon entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank. Borrowings under the credit facility were used (i) to pay off and terminate Nytis LLC’s then existing credit facility, (ii) to pay the purchase price of the EXCO Acquisition, (iii) to pay costs and expenses associated with the acquisition and the credit facility and (iv) provide working capital for the Company. The initial borrowing base established under the credit facility was $17.0 million. The borrowing base is subject to semi-annual redeterminations in March and September, commencing March 2017. On March 30, 2017, the borrowing base was increased to $23.0 million.

Investments in Affiliates

Carbon California

On February 15, 2017, the Company entered into a limited liability company agreement (the “Carbon California LLC Agreement”) of Carbon California. Carbon California was formed by Carbon and two institutional investors to acquire producing assets in California.

Carbon California (i) issued and sold Class A Units to two institutional investors for an aggregate cash consideration of $22.0 million, (ii) entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with two institutional investors for the issuance and sale of up to $25.0 million of Senior Secured Revolving Notes (the “Senior Revolving Notes”) due February 15, 2022 and (iii) entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with one institutional investor for the issuance and sale of $10.0 million of Senior Subordinated Notes (the “Subordinated Notes”) due February 15, 2024. The Company is not a guarantor of the Senior Revolving Notes or the Subordinate Notes. The closing of the Note Purchase Agreement and the Securities Purchase Agreement on February 15, 2017, resulted in the sale and issuance by Carbon California of (i) Senior Revolving notes in the principal amount of $10.0 million and (ii) Subordinated Notes in the original principal amount of $10.0 million. The maximum principal amount available under the Senior Revolving Notes is based upon the borrowing base attributable to Carbon California’s proved oil and gas reserves which is to be determined at least semi-annually. The current borrowing base is $15.0 million, of which $10.0 million is outstanding as of September 30, 2017.

Pursuant to the Carbon California LLC Agreement, Carbon acquired a 17.8% interest in Carbon California represented by Class B Units. The Class B Units were acquired for no cash consideration. In connection with its role as the manager of Carbon California, $600,000 of general and administrative expenses on an annual basis is to be reimbursed to the Company by Carbon California.

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Net proceeds from the offering transactions were used by Carbon California to complete the acquisitions of oil and gas assets in the Ventura Basin of California, which acquisitions also closed on February 15, 2017. The remainder of the net proceeds are being used to fund field development projects and to fund future complementary acquisitions and for general working capital purposes of Carbon California. The Company formed Carbon California Operating Company, LLC (“CCOC”) to operate the acquired assets. 

In connection with the Company entering into the Carbon California LLC Agreement described above and Carbon California engaging in the transactions also described above, the Company issued to an affiliate of one of the institutional investors which purchased Class A Units of Carbon California (which is also an affiliate of the Company’s largest stockholders), a warrant to purchase approximately 1.5 million shares of the Company’s common stock at an exercise price of $7.20 per share (the “Warrant”). The exercise price for the Warrant is payable exclusively with Class A Units of Carbon California held by this investor and the number of shares of the Company’s common stock for which the Warrant is exercisable is determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of the warrantholder’s Class A Units of Carbon California by (b) the exercise price. The Warrant has a term of seven years and includes certain standard registration rights with respect to the shares of the Company’s common stock issuable upon exercise of the Warrant. If exercised, the Warrant provides the Company an opportunity to increase its ownership stake in Carbon California without requiring the payment of cash.

As of grant date of the California Warrant, the Company estimated that the fair market value of the California Warrant was approximately $5.8 million and recorded that amount to its investment in Carbon California and a long-term liability. As of September 30, 2017, the Company estimated that the fair value of the California Warrant was approximately $3.0 million. The difference in the fair value of the California Warrant from the grant date though September 30, 2017 was approximately $2.8 million and approximately $1.3 million and $2.8 million was recognized in warrant derivative gain in the Company’s unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2017, respectively.

The following table sets forth, for the periods presented, selected unaudited historical statements of operations data for Carbon California.

	Three Months Ended			February 15, 2017 (Inception) through
(in thousands except production data)	September 30, 2017			September 30, 2017
	(Unaudited)			(Unaudited)
Revenue:
Natural gas sales	$	329		$	777
Oil sales		2,130			4,839
NGL sales		186			393
Commodity derivative (loss) gain		(651	)		502
Total revenues		1,994			6,511
Expenses:
Lease operating and transportation expenses		1,691			3,627
Production and property taxes		84			369
General and administrative		398			1,481
Depreciation, depletion and amortization		391			935
Accretion of asset retirement obligations		52			156
Other		9			10
Total operating expenses		2,625			6,578
Other expense:
Interest expense		504			1,246
Net loss	$	(1,135	)	$	(1,313	)
Production data:
Natural gas (Mcf)		110,839			269,234
Oil (Bbl)		44,363			103,055
NGLs (Bbl)		7,519			18,132
Combined (Mcfe)		422,131			996,356

The Company uses the hypothetical liquidation at book value method (“HLBV”), to determine its share of profits or losses in Carbon California and adjusts the carrying value of its investment accordingly. The HLBV is a balance-sheet approach that calculates the amount each member of Carbon California would receive if the membership were liquidated at book value at the end of each measurement period. The change in the allocated amount to each member during the period represents the income or loss allocated to that member. In the event of liquidation of Carbon California, to the extent that Carbon California has net income, available proceeds are first distributed to members holding Class A and Class B Units and any remaining proceeds are then distributed to members holding Class A units, of which the Company holds none. For the three months ended September 30, 2017, and for the period of February 15, 2017 (inception) through September 30, 2017, Carbon California incurred a net loss. For purposes of the HLBV, the Company’s membership interest in Carbon California is zero. Therefore, no adjustment is made to the Company’s membership interest, and accordingly the Company did not record any equity method investment gain or loss. While income may be recorded in future periods, the ability of Carbon California to make distributions to its owners, including us, is dependent upon the terms of its credit facilities, which currently prohibit distributions unless agreed to by the lender.

27

Carbon Appalachia

Outlined below is a summary of i) the Company’s contributions, ii) its resulting percent of Class A unit ownership and iii) the Company’s overall resulting sharing percentage of Carbon Appalachia after giving effect of all classes of ownership. Each contribution and its use is described in detail following the table.

Timing	Capital Contribution	Resulting Class A Units (%)	Resulting Sharing %
April 2017	$0.24 million	2.00%	2.98%
August 2017	$3.71 million	15.20%	16.04%
September 2017	$2.92 million	18.55%	19.37%
November 2017*	Warrant exercise*	26.50%	27.24%

* SeeNote 14 to the unaudited Consolidated Financial Statements for further details regarding the November 1, 2017 exercise of the Appalachia Warrant

On April 3, 2017, the Company entered in to a limited liability company agreement (the “Carbon Appalachia LLC Agreement”). Carbon Appalachia was formed by Carbon and two institutional investors to acquire producing assets in Southern Appalachia and has an initial equity commitment of $100.0 million, of which $37.0 million has been contributed as of September 30, 2017.

Pursuant to the Carbon Appalachia LLC Agreement, Carbon acquired a 2.0% interest in Carbon Appalachia for $240,000 of Class A Units associated with its initial Class A equity commitment of $2.0 million. Carbon also has the ability to earn up to an additional 19.6% of Carbon Appalachia distributions (represented by Class B Units) after certain return thresholds to the holders of Class A Units are met. The Class B Units were acquired for no cash consideration.

In addition, Carbon acquired a 1.0% interest represented by Class C Units which were obtained in connection with the contribution to Carbon Appalachia of a portion of its working interest in the Company’s undeveloped properties in Tennessee. If Carbon Appalachia agrees to drill wells on these properties, it will pay 100% of the cost of drilling and completion of the first 20 wells to earn a 75% working interest in such properties. Carbon, through its subsidiary, Nytis LLC, will retain a 25% working interest in the properties.

In connection with and concurrently with the closing of the acquisition described below, Carbon Appalachia Enterprises, LLC, formerly known as Carbon Tennessee Company, LLC (“Carbon Appalachia Enterprises”), an indirect subsidiary of Carbon Appalachia, entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank with an initial borrowing base of $10.0 million.

Borrowings under the credit facility, along with the initial equity contributions made to Carbon Appalachia, were used to complete the acquisition of natural gas producing properties and related facilities located predominantly in Tennessee (the “April 2017 Acquisition”). The purchase price was $20.0 million, subject to normal and customary pre and post-closing adjustments, and Carbon Appalachia Enterprises used $8.5 million drawn from the credit facility toward the purchase price.

During the quarter ended September 30, 2017, CAC completed two acquisitions, one on August 15, 2015 and the other on September 29, 2017. Each acquisition is described in more detail below.

On August 15, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties and related facilities located predominantly in the state of West Virginia (the “August 2017 Acquisition”). The purchase price was $21.5 million, subject to normal and customary pre- and post-closing adjustments.

On August 15, 2017, the Carbon Appalachia LLC Agreement was amended and restated. Pursuant to the amended and restated Carbon Appalachia LLC Agreement, Carbon increased its Class A equity capital commitment from $2.0 million to $23.6 million and its portion of any subsequent capital call from 2.0% to 26.5%. Aggregate capital commitments of all Members remained at $100.0 million. As each subsequent captial call is made, Carbon will contribute equity at 26.5%. The Company is the sole manager of Carbon Appalachia and maintains the ability to earn additional ownership interests of Carbon Appalachia (represented by Class B Units) after certain thresholds to the holders of Class A Units are met. The Company also maintains its 1.0% interest represented by Class C Units.

In connection with and concurrently with the closing of the August 2017 Acquisition, the borrowing base of its existing credit facility with LegacyTexas Bank increased to $22.0 million and Carbon Appalachia Enterprises borrowed $8.0 million from its existing credit facility with LegacyTexas Bank. Carbon Appalachia received equity funding in the amount of $14.0 million from its members, including $3.7 million from Carbon. The contributed funds and funds drawn from the credit facility were used to pay the purchase price.

On September 29, 2017, Carbon Appalachia Enterprises amended its 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank, resulting in a borrowing base of $50.0 million with redeterminations as of April 1 and October 1 each year and the addition of East West Bank as a participating lender. As of September 30, 2017, there was approximately $38.0 million outstanding under the credit facility.

On September 29, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties, natural gas gathering pipelines and related facilities located predominantly in the state of West Virginia (the “September 2017 Acquisition”). The purchase price was $41.3 million, subject to normal and customary pre- and post-closing adjustments.

28

In connection with and concurrently with the closing of the September 2017 Acquisition described above, Carbon Appalachia Enterprises borrowed $20.4 million from its existing credit facility. Carbon Appalachia received equity funding in the amount of $11.0 million from its members, including $2.9 million from Carbon. The contributed funds and funds drawn from the credit facility were used to pay the purchase price.

In connection with the Company entering into the Carbon Appalachia LLC Agreement described above and Carbon Appalachia Enterprises engaging in the April 2017 Acquisition, the Company issued to an affiliate of one of the institutional investors which purchased Class A Units of Carbon Appalachia (which is also an affiliate of the Company’s largest stockholders), a warrant to purchase approximately 408,000 shares of the Company’s common stock at an exercise price of $7.20 per share (the “Appalachia Warrant”). The exercise price for the Appalachia Warrant is payable exclusively with Class A Units of Carbon Appalachia held by this investor and the number of shares of the Company common stock for which the Appalachia Warrant is exercisable is determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of the warrantholder’s Class A Units of Carbon Appalachia plus a 10% internal rate of return by (b) the exercise price. The Appalachia Warrant has a term of seven years and includes certain standard registration rights with respect to the shares of Carbon’s common stock issuable upon exercise of the Appalachia Warrant. If exercised, the Appalachia Warrant provides Carbon an opportunity to increase its ownership stake in Carbon Appalachia without requiring the payment of cash.

The Company accounted for the Appalachia Warrant, at issuance, as an investment in Carbon Appalachia and a liability based on the fair value of the Appalachia Warrant as of the date of grant (April 3, 2017). Future changes to the fair value of the Appalachia Warrant are recognized in earnings.

As of the grant date of the Appalachia Warrant, the Company estimated that the fair value of the Appalachia Warrant was approximately $1.3 million and recorded that amount to its investment in Carbon Appalachia and a long-term liability. As of September 30, 2017, the Company estimated that the fair value of the Appalachia Warrant was approximately $1.6 million. The difference in the fair value of the Appalachia Warrant from the grant date through September 30, 2017 was approximately $323,000 and approximately $497,000 and $323,000 was recognized in warrant derivative gain in the Company’s unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2017. On November 1, 2017, the holder of the Appalachia Warrant exercised the warrant.

The following table sets forth, for the periods presented, selected unaudited historical statements of operations data for Carbon Appalachia. 

	Three Months Ended			April 3, 2017 (Inception) through
(in thousands except production data)	September 30, 2017			September 30, 2017
	(Unaudited)			(Unaudited)
Revenue:
Natural gas sales	$	2,153		$	3,160
Oil sales		126			280
Gas transportation		77			318
Commodity derivative loss		(1,008	)		(853	)
Total revenues		1,348			2,905
Expenses:
Lease operating and transportation expenses		1,056			1,437
Production and property taxes		237			272
General and administrative		964			1,809
Depreciation, depletion and amortization		414			907
Accretion of asset retirement obligations		20			24
Total expenses		2,691			4,449
Other expense:
Interest expense		202			330
Net loss	$	(1,545	)	$	(1,874	)
Production data:
Natural gas (Mcf)		722,795			1,009,084
Oil (Bbl)		3,133			6,892
Combined (Mcfe)		741,593			1,050,436

The Company uses the HLBV to determine its share of profits or losses in Carbon Appalachia and adjust the value of its investment accordingly. The HLBV is a balance-sheet approach that calculates the amount each member of Carbon Appalachia would receive if the entity were liquidated at book value at the end of each measurement period. The change in the allocated amount to each member during the period represents the income or loss allocated to that member. In the event of liquidation of Carbon Appalachia, available proceeds are first distributed to holders of Class A and Class C units until their contributed capital is recovered with an internal rate of return of 10%. Any additional distributions would then be shared between holders of Class A, Class B and Class C Units. For purposes of the HLBV, the Company’s membership interest in Carbon Appalachia is represented by its approximate $6.9 million contributed capital. For the period of April 3, 2017 (inception) through September 30, 2017, Carbon Appalachia incurred a net loss, of which the Company’s share is approximately $348,000, and accordingly the Company recorded this amount to equity investment loss. While income may be recorded in future periods, the ability of Carbon Appalachia to make distributions to its owners, including us, is dependent upon the terms of its credit facility, which currently prohibits distributions unless agreed to by the lender.

29

Results of Operations

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

The following discussion and analysis relates to items that have affected our results of operations for the three months ended September 30, 2017 and 2016. The following table sets forth, for the periods presented, selected historical statements of operations data. The information contained in the table below should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto and the information under “Forward Looking Statements” below.

	Three Months Ended
	September 30,						Percent
(in thousands except production and per unit data)	2017			2016			Change
Revenue:
Natural gas sales	$	3,689		$	1,431			158	%
Oil sales		997			765			30	%
Commodity derivative (loss) gain		(499	)		160			(413	%)
Other income		8			9			*
Total revenues		4,195			2,365			77	%
Expenses:
Lease operating expenses		1,605			622			158	%
Transportation costs		556			364			53	%
Production and property taxes		331			184			80	%
General and administrative		2,129			2,327			(8	%)
General and administrative – related party reimbursement		(423	)		-			*
Depreciation, depletion and amortization		613			393			56	%
Accretion of asset retirement obligations		77			35			118	%
Total expenses		4,888			3,925			25	%
Operating income (loss)	$	(693	)	$	(1,560	)		*
Other income and (expense):
Interest expense		(299	)		(38	)		691	%
Warrant derivative gain		811			-			*
Other		20			-			*
Equity investment income (loss)		(285	)		(4	)		*
Total other income (expense)	$	247		$	(42	)		*
Production data:
Natural gas (Mcf)		1,244,951			507,608			145	%
Oil (Bbl)		21,848			17,626			24	%
Combined (Mcfe)		1,376,039			613,364			124	%
Average prices before effects of hedges:
Natural gas (per Mcf)	$	2.96		$	2.82			5	%
Oil (per Bbl)	$	45.62		$	43.40			5	%
Combined (per Mcfe)	$	3.40		$	3.58			(5	%)
Average prices after effects of hedges**:
Natural gas (per Mcf)	$	2.84		$	3.08			(8	%)
Oil (per Bbl)	$	29.52		$	44.99			(34	%)
Combined (per Mcfe)	$	3.04		$	3.84			(21	%)
Average costs (per Mcfe):
Lease operating expenses	$	1.17		$	1.01			16	%
Transportation costs	$	0.40		$	0.59			(32	%)
Production and property taxes	$	0.24		$	0.30			20	%
Cash-based general and administrative expense, net of related party reimbursement	$	1.08		$	1.55			(30	%)
Depreciation, depletion and amortization	$	0.45		$	0.64			(30	%)

* Not meaningful or applicable

** Includes settled and unrealized commodity derivative gains and losses. 

30

Oil and natural gas sales- Revenues from sales of oil and natural gas increased 113% to approximately $4.7 million for the three months ended September 30, 2017 from approximately $2.2 million for the three months ended September 30, 2016. This increase was primarily due to a 24% and 145% increase in oil and natural gas sales volumes, respectively, combined with a 5% increase for both oil and natural gas prices. The increases in production were primarily attributable to properties acquired in the EXCO Acquisition, which occurred in the fourth quarter of 2016.

Commodity derivative gains and losses- To achieve more predictable cash flows and to reduce our exposure to downward price fluctuations, we enter into derivative contracts including fixed price swap contracts and costless collars. Because we do not designate these derivatives as cash flow hedges, they do not receive hedge accounting treatment and all mark-to-markets gains or losses, as well as settlement gains or losses on the derivative instruments, are currently recognized in our results of operations. The unrealized gains and losses represent the changes in the fair value of these contracts as oil and natural gas futures prices fluctuate relative to the fixed price we will receive from these contracts. For the three months ended September 30, 2017 and 2016, we had hedging losses of approximately $499,000 and hedging gains of approximately $160,000, respectively.

Lease operating expenses- Lease operating expenses for the three months ended September 30, 2017 increased 158% compared to the three months ended September 30, 2016. The increase was primarily attributable to the acquisition of the EXCO properties and resultant increased production volumes. On a per Mcfe basis, lease operating expenses increased from $1.01 per Mcfe for the three months ended September 30, 2016 to $1.17 per Mcfe for the three months ended September 30, 2017. The increase was primarily attributable to decreases in personnel related costs during the three months ended September 30, 2016 attributable to cost reduction measures implemented by the Company in response to low commodity prices.

Transportation costs- Transportation costs for the three months ended September 30, 2017 increased 53% compared to the three months ended September 30, 2016. This increase is attributable to an increase in production as a result of properties acquired in the EXCO Acquisition. On a per Mcfe basis, these expenses decreased from $0.59 per Mcfe for the three months ended September 30, 2016 to $0.40 per Mcfe for the three months ended September 30, 2017. The decrease on a per Mcfe basis is primarily due to lower transportation costs per unit for the properties acquired in the EXCO Acquisition in the fourth quarter of 2016 compared to the Company’s other natural gas properties.

Production and property taxes- Production and property taxes increased from approximately $184,000 for the three months ended September 30, 2016 to approximately $331,000 for the three months ended September 30, 2017. This increase is primarily attributable to increased oil and natural gas sales as a result of properties acquired in the EXCO Acquisition. Production taxes averaged approximately 4.1% and 4.0% of oil and natural gas sales for the three months ended September 30, 2017 and 2016, respectively. Ad valorem tax rates, which can fluctuate by year, are determined by individual counties where the Company has production and are assessed on the Company’s sales one or two years in arrears depending on the location of the production.

Depreciation, depletion and amortization (DD&A)- DD&A increased from approximately $393,000 for the three months ended September 30, 2016 to approximately $613,000 for the three months ended September 30, 2017 primarily due to an increase in oil and natural gas production offset, in part, by a decrease in the depletion rate. The decrease in depletion rate is primarily attributable to the properties acquired in the EXCO Acquisition in the fourth quarter of 2016 which reduced the Company’s blended depletion rate. On a per Mcfe basis, DD&A decreased from $0.64 per Mcfe for the three months ended September 30, 2016 to $0.45 per Mcfe for the three months ended September 30, 2017.

Impairment of oil and gas properties- The Company did not record an impairment for the three months ended September 30, 2017 and 2016. The ceiling limitation calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any recorded impairment is not reversible at a later date.

General and administrative expenses- Cash-based general and administrative expenses increased from approximately $954,000 for the three months ended September 30, 2016 to approximately $1.9 million for the three months ended September 30, 2017. This increase is primarily attributable to personnel-related costs and other costs associated with completed acquisition and potential acquisition opportunities incurred during the three months ended September 30, 2017 and decreases in personnel related costs during the three months ended September 30, 2016 attributable to cost reduction measures implemented by the Company in response to low commodity prices. The increase was partially offset by reimbursements of approximately $423,000 the Company received from Carbon California and Carbon Appalachia in connection with its role as manager of the entities. Non-cash stock based compensation and other general and administrative expenses for the three months ended September 30, 2017 and 2016 are summarized in the following table:

General and administrative expenses
(in thousands)					Increase/
	2017		2016		(Decrease)
Stock-based compensation	$	213	$	1,373	$	(1,160	)
Other general and administrative expenses		1,916		954		962
General and administrative expense, net	$	2,129	$	2,327	$	(198	)

Interest expense- Interest expense increased from approximately $38,000 for the three months ended September 30, 2016 to approximately $299,000 for the three months ended September 30, 2017 primarily due to higher outstanding debt balances related to borrowings i) to complete the EXCO Acquisition in October 2016 and ii) to fund Carbon’s share of the August 2017 acquisition.

31

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The following discussion and analysis relates to items that have affected our results of operations for the nine months ended September 30, 2017 and 2016. The following table sets forth, for the periods presented, selected historical statements of operations data. The information contained in the table below should be read in conjunction with the Company’s unaudited Consolidated Financial Statements and Notes thereto and the information under “Forward Looking Statements” below.

	Nine Months Ended
	September 30,						Percent
(in thousands except production and per unit data)	2017			2016			Change
Revenue:
Natural gas sales	$	11,706		$	3,484			236	%
Oil sales		3,189			2,201			45	%
Commodity derivative gain (loss)		2,642			(474	)		657	%
Other income		28			10			177	%
Total revenues		17,565			5,221			236	%
Expenses:
Lease operating expenses		4,311			1,864			131	%
Transportation costs		1,571			1,121			40	%
Production and property taxes		1,186			443			168	%
General and administrative		5,623			5,402			4	%
General and administrative – related party reimbursement		(723	)		-			*
Depreciation, depletion and amortization		1,847			1,332			39	%
Accretion of asset retirement obligations		232			105			120	%
Impairment of oil and gas properties		-			4,299			*
Total expenses		14,047			14,566			(4	%)
Operating income (loss)	$	3,518		$	(9,345	)		*
Other income and (expense):
Interest expense		(821	)		(141	)		485	%
Warrant derivative gain		2,494			-			*
Other income		20			17			*
Equity investment income (loss)		(285	)		(10	)		*
Total other income (expense)	$	1,408		$	(134	)		*
Production data:
Natural gas (Mcf)		3,601,946			1,502,505			140	%
Oil (Bbl)		66,959			55,530			21	%
Combined (Mcfe)		4,003,700			1,835,685			118	%
Average prices before effects of hedges:
Natural gas (per Mcf)	$	3.25		$	2.32			40	%
Oil (per Bbl)	$	47.63		$	39.63			20	%
Combined (per Mcfe)	$	3.72		$	3.10			20	%
Average prices after effects of hedges**:
Natural gas (per Mcf)	$	3.77		$	2.08			81	%
Oil (per Bbl)	$	58.88		$	37.59			57	%
Combined (per Mcfe)	$	4.38		$	2.84			54	%
Average costs (per Mcfe):
Lease operating expenses	$	1.08		$	1.02			6	%
Transportation costs	$	0.39		$	0.61			(36	%)
Production and property taxes	$	0.30		$	0.24			25	%
Cash-based general and administrative expense, net of related party reimbursement	$	1.04		$	1.83			(43	%)
Depreciation, depletion and amortization	$	0.46		$	0.73			(37	%)

* Not meaningful or applicable

** Includes settled and unrealized commodity derivative gains and losses.

Oil and natural gas sales- Revenues from sales of oil and natural gas increased 162% to approximately $14.9 million for the nine months ended September 30, 2017 from approximately $5.7 million for the nine months ended September 30, 2016. This increase was primarily due to a 21% and 140% increase in oil and natural gas sales volumes, respectively, combined with a 20% and 40% increase in oil and natural gas prices, respectively. The increases in production were primarily attributable to properties acquired in the EXCO Acquisition, which occurred in October 2016.

32

Commodity derivative gains and losses- To achieve more predictable cash flows and to reduce our exposure to downward price fluctuations, we enter into derivative contracts including fixed price swap contracts and costless collars. Because we do not designate these derivatives as cash flow hedges, they do not receive hedge accounting treatment and all mark-to-markets gains or losses, as well as settlement gains or losses on the derivative instruments, are currently recognized in our results of operations. The unrealized gains and losses represent the changes in the fair value of these contracts as oil and natural gas futures prices fluctuate relative to the fixed price we will receive from these contracts. For the nine months ended September 30, 2017 we had hedging gains of approximately $2.6 million compared with hedging losses of approximately $474,000 for the nine months ended September 30, 2016.

Lease operating expenses- Lease operating expenses for the nine months ended September 30, 2017 increased 131% compared to the first nine months of 2016. The increase was primarily attributable to the acquisition of the EXCO properties and resultant increased production volumes. On a per Mcfe basis, lease operating expenses were $1.02 per Mcfe for the nine months ended September 30, 2016 and $1.08 per Mcfe for the nine months ended September 30, 2017. The increase was primarily attributable to decreases in personnel related costs during the three months ended September 30, 2016 attributable to cost reduction measures implemented by the Company in response to low commodity prices.

Transportation costs- Transportation costs for the nine months ended September 30, 2017 increased 40% compared to the nine months ended September 30, 2016. This increase is attributable to an increase in production as a result of properties acquired in the EXCO Acquisition. On a per Mcfe basis, these expenses decreased from $0.61 per Mcfe for the nine months ended September 30, 2016 to $0.39 per Mcfe for the nine months ended September 30, 2017. The decrease on a per Mcfe basis is primarily due to lower transportation costs per unit for the properties acquired in the EXCO Acquisition in the fourth quarter of 2016 compared to the Company’s other natural gas properties.

Production and property taxes- Production and property taxes increased from approximately $443,000 for the nine months ended September 30, 2016 to approximately $1.2 million for the nine months ended September 30, 2017. This increase is primarily attributable to increased oil and natural gas sales as a result of properties acquired in the EXCO Acquisition. Production taxes averaged 4.2% and 4.1% of oil and natural gas sales for the nine months ended September 30, 2017 and 2016, respectively. Ad valorem tax rates, which can fluctuate by year, are determined by individual counties where the Company has production and are assessed on the Company’s oil and gas sales one or two years in arrears depending on the location of the production.

Depreciation, depletion and amortization (DD&A)- DD&A increased from approximately $1.3 million for the nine months ended September 30, 2016 to approximately $1.8 million for the nine months ended September 30, 2017 primarily due to an increase in oil and natural gas production offset, in part, by a decrease in the depletion rate. The decrease in depletion rate is primarily attributable to the properties acquired in the EXCO Acquisition in the fourth quarter of 2016 which reduced the Company’s blended depletion rate. On a per Mcfe basis, DD&A decreased from $0.73 per Mcfe for the nine months ended September 30, 2016 to $0.46 per Mcfe for the nine months ended September 30, 2017.

Impairment of oil and gas properties- Due to low commodity prices used in the ceiling calculation based on the required trailing 12-month average at March 31, 2016 and June 30, 2016, the Company had impairment expenses of approximately $4.3 million for the nine months ended September 30, 2016. The Company did not record an impairment for the nine months ended September 30, 2017. The ceiling limitation calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any recorded impairment is not reversible at a later date.

General and administrative expenses- Cash-based general and administrative expenses increased from approximately $3.4 million for the nine months ended September 30, 2016 to approximately $4.9 million for the nine months ended September 30, 2017. This increase is primarily attributable to personnel-related costs and other costs associated with completed acquisition and potential acquisition opportunities incurred during the nine months ended September 30, 2017 and decreases in personnel related costs during the nine months ended September 30, 2016 attributable to cost reduction measures implemented by the Company in response to low commodity prices. This increase was partially offset by approximately $723,000 in reimbursements the Company received from Carbon California and Carbon Appalachia in connection with its role as manager of these entities. Non-cash stock based compensation and other general and administrative expenses for the nine months ended September 30, 2017 and 2016 are summarized in the following table:

General and administrative expenses
(in thousands)					Increase
	2017		2016		(Decrease)
Stock-based compensation	$	752	$	2,037	$	(1,285	)
Other general and administrative expenses		4,871		3,365		1,506
General and administrative expense, net	$	5,623	$	5,402	$	221

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Interest expense- Interest expense increased from approximately $141,000 for the nine months ended September 30, 2016 to approximately $821,000 for the nine months ended September 30, 2017 primarily due to higher outstanding debt balances related to borrowings i) to complete the EXCO Acquisition in October 2016 and ii) to fund Carbon’s share of the August 2017 acquisition.

Liquidity and Capital Resources

Our exploration, development and acquisition activities may require us to make significant operating and capital expenditures. Historically, we have used cash flow from operations and our bank credit facility as our primary sources of liquidity and on occasion, we have engaged in the sale of assets. Changes in the market prices for oil and natural gas directly impact our level of cash flow generated from operations. The prices we receive for our production are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, access to capital and future rate of growth. We employ a commodity hedging strategy in an attempt to moderate the effects of commodity price fluctuations on our cash flow.

In connection with the closing of the EXCO Acquisition and entering into the credit facility with LegacyTexas Bank, the Company entered into derivative agreements to hedge a portion of its oil and natural gas production.

The following table reflects the Company’s outstanding derivative hedges as of September 30, 2017:

	Natural Gas Swaps				Natural Gas Collars				Oil Swaps
			Weighted				Weighted				Weighted
			Average				Average Price				Average
Year	MMBtu		Price (a)		MMBtu		Range (a)		Bbl		Price (b)
2017		900,000	$	3.27		30,000		$3.00 - $3.48		23,000	$	52.64
2018		3,390,000	$	3.01		90,000		$3.00 - $3.48		60,000	$	53.36
2019		1,920,000	$	2.85		-		-		48,000	$	53.76

(a) NYMEX Henry Hub Natural Gas futures contract for the respective period.

(b) NYMEX Light Sweet Crude West Texas Intermediate future contract for the respective period.

This hedge program mitigates uncertainty regarding cash flow that we will receive with respect to a portion of our expected production through 2019. Future hedging activities may result in reduced income or even financial losses to us. See “Risk Factors—The use of derivative instruments used in hedging arrangements could result in financial losses or reduce income,” in our Annual Report on Form 10-K for further details of the risks associated with our hedging activities. In the future, we may determine to increase or decrease our hedging positions.

The Company is manager of both Carbon California and Carbon Appalachia, and in connection with its role as manager, certain general and administrative expenses will be reimbursed. The amount of reimbursement by Carbon California is $600,000 annually, payable quarterly. The amount of the reimbursement from Carbon Appalachia varies quarterly based upon the percentage of production of Carbon Appalachia assets in comparison to the Company’s historical assets. The reimbursement from Carbon Appalachia was approximately $273,000 during the three months ended September 30, 2017.

Historically, the primary source of liquidity has been our credit facility (described below). In October 2016, the Company entered into a four-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank with an initial borrowing base of $17.0 million. The borrowing base is subject to semi-annual redeterminations in March and September. On March 30, 2017, the Borrowing base was increased to $23.0 million. As of September 30, 2017, the borrowing base remained at $23.0 million. See “Bank Credit Facility” below for further details.

34

As of September 30, 2017, there was approximately $22.1 million in borrowings and approximately $860,000 of additional borrowing capacity under the credit facility. We have made aggregate cash contributions of approximately $6.9 million to date under equity commitments of $23.6 million associated with Carbon California and Carbon Appalachia. The potential acquisition of additional oil and natural gas properties or increased equity commitments associated with Carbon California or Carbon Appalachia may result in a need for additional capital.

Our ability to access the debt and equity capital markets on desired terms is affected by general economic conditions, the domestic and global financial markets, our operational and financial performance, the value of our equity securities, prevailing commodity prices, and other factors which may be outside of our control.

We expect to fund our future activities and equity commitments with cash flow from operations, our credit facility or the issuance of additional equity or debt. Such transactions, if any, will depend on general economic conditions, domestic and global financial markets, the Company’s operational and financial performance, the value of our equity securities, prevailing commodity prices, potential adjustments to our borrowing base and other factors which may be outside of our control. Current market conditions may limit our ability to source attractive acquisition opportunities and to issue new debt or equity securities in the public or private markets. We expect that our net cash provided by operating activities may be adversely affected by continued low commodity prices. We believe that our expected future cash flows provided by operating activities will be sufficient to fund our normal recurring activities and contractual obligations.

If low commodity prices continue, we may continue to defer our planned capital expenditures. We believe that our financial flexibility to adjust our spending levels will provide us with sufficient liquidity to meet our financial obligations should economic conditions deteriorate. See “Risk Factors”, in our Annual Report filed on Form 10-K with the SEC, for a discussion of the risks and uncertainties that affect our business and financial and operating results.

Bank Credit Facility

In 2016, Carbon entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank. LegacyTexas Bank is the initial lender and acts as administrative agent.

The credit facility has a maximum availability of $100.0 million (with a $500,000 sublimit for letters of credit), which availability is subject to the amount of the borrowing base. The initial borrowing base established under the credit facility was $17.0 million. The borrowing base is subject to semi-annual redeterminations in March and September. On March 30, 2017, the borrowing base was increased to $23.0 million. As of September 30, 2017, the borrowing base was remained at $23.0 million, of which approximately $22.1 million was drawn. The Company’s effective borrowing rate at September 30, 2017 was approximately 5.82%. 

The credit facility is guaranteed by each existing and future direct or indirect subsidiary of Carbon (subject to certain exceptions). The obligations of Carbon and the subsidiary guarantors under the credit facility are secured by essentially all tangible and intangible personal and real property of the Company (subject to certain exclusions).

Interest is payable quarterly and accrues on borrowings under the credit facility at a rate per annum equal to either (i) the base rate plus an applicable margin between 0.50% and 1.50% or (ii) the Adjusted LIBOR rate plus an applicable margin between 3.50% and 4.50% at Carbon’s option. The actual margin percentage is dependent on the credit facility utilization percentage. Carbon is obligated to pay certain fees and expenses in connection with the credit facility, including a commitment fee for any unused amounts of 0.50%.

The credit facility contains affirmative and negative covenants that, among other things, limit the Company’s ability to (i) incur additional debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge or consolidate, wind-up, dissolve or liquidate; (v) make dividends and distributions on, or repurchases of, equity; (vi) make certain investments; (vii) enter into certain transactions with its affiliates; (viii) enter into sales-leaseback transactions; (ix) make optional or voluntary payment of debt; (x) change the nature of its business; (xi) change its fiscal year to make changes to the accounting treatment or reporting practices; (xii) amend constituent documents; and (xiii) enter into certain hedging transactions.

35

The affirmative and negative covenants are subject to various exceptions, including basket amounts and acceptable transaction levels. In addition, the credit facility requires Carbon’s compliance, on a consolidated basis, with (i) a maximum funded Debt/EBITDA ratio of 3.5 to 1.0 and (ii) a minimum current ratio of 1.0 to 1.0.

In the third quarter of 2017, the Company contributed approximately $6.6 to Carbon Appalachia to fund its share of producing oil and gas properties acquired during the third quarter. This funding was provided primarily with borrowings under the credit facility. The funded Debt/EBITDA and current ratio covenants negotiated at the time the credit facility was established did not contemplate the Company’s contributions for its investment in Carbon Appalachia and, as a result, the Company was not in compliance with the financial covenants associated with the credit facility as of September 30, 2017. However, the Company has obtained a waiver of the funded debt/EBITDA ratio and the current ratio covenants as of September 30, 2017. The Company has requested that LegacyTexas Bank amend such financial covenants to take into account the Company’s investment in Carbon Appalachia. While the Company believes its relationship with LegacyTexas Bank is such that the requested amendment is likely, there can be no assurance that the bank will agree to an amendment.

On November 13, 2017, LegacyTexas Bank reaffirmed the Company’s borrowing base associated with its credit facility at $23.0 million. 

Carbon may at any time repay the loans under the credit facility, in whole or in part, without penalty. Carbon must pay down borrowings under the credit facility or provide mortgages of additional oil and natural gas properties to the extent that outstanding loans and letters of credit exceed the borrowing base.

As required under the terms of the credit facility, the Company entered into derivative contracts with fixed pricing for a certain percentage of its production. The Company is a party to an ISDA Master Agreement with BP Energy Company that established standard terms for the derivative contracts and an inter-creditor agreement with LegacyTexas Bank and BP Energy Company whereby any credit exposure related to the derivative contracts entered into by the Company and BP Energy Company is secured by the collateral and backed by the guarantees supporting the credit facility.

Sources and Uses of Cash

Our primary sources of liquidity and capital resources are operating cash flow and borrowings under our credit facility. Our primary uses of funds are expenditures for acquisition, exploration and development activities, leasehold and property acquisitions, other capital expenditures and debt service.

Low prices for our oil and natural gas production may adversely impact our operating cash flow and amount of cash available for development activities.

The following table presents net cash provided by or used in operations, investing and financing activities for the nine months ended September 30, 2017 and 2016.

	Nine Months Ended
	September 30,
(in thousands)	2017			2016
Net cash provided by (used in) operating activities	$	2,580		$	(693	)
Net cash (used in) provided by investing activities	$	(8,106	)	$	12
Net cash provided by financing activities	$	5,787		$	504

36

Net cash provided by or used in operating activities is primarily affected by production volumes and commodity prices, net of the effects of settlements of our derivative contracts, and changes in working capital. Operating cash flows increased approximately $3.3 million for the nine months ended September 30, 2017 as compared to the same period in 2016. This increase was primarily due to increased revenues from the acquisition of producing oil and natural gas properties in the Appalachian Basin in the fourth quarter of 2016 and higher oil and natural gas prices in the nine months ended September 30, 2017 as compared to the same period in 2016.

Net cash provided by or used in investing activities is primarily comprised of the acquisition, exploration and development of oil and natural gas properties, net of dispositions of oil and natural gas properties in addition to expenditures to fund the Company’s equity investment in Carbon Appalachia. Net cash used in investing activities increased approximately $8.1 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The Company increased its capital expenditures for the development and acquisition of properties and equipment in the nine months ended September 30, 2017 by approximately $940,000 compared to the nine months ended September 30, 2016. In addition, during the nine months ended September 30, 2017, the Company made an approximate $6.9 million equity investment in Carbon Appalachia partially offset by a $68,000 cash distribution from Crawford County Gas Gathering; whereas, during the nine months ended September 30, 2016, the Company received a cash distribution of $275,000 from Crawford County Gas Gathering Company.

The increase in cash provided by financing cash flows of approximately $5.3 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 was primarily due to $7.2 million in proceeds from borrowings under the credit facility partially offset by increased debt repayments in the nine months ended September 30, 2017 as compared to the same period in 2016.

Capital Expenditures

Capital expenditures incurred for the nine months ended September 30, 2017 and 2016 are summarized in the following table:

	Nine Months Ended September 30,
(in thousands)	2017		2016
Unevaluated property acquisitions	$	230	$	95
Drilling and development		738		192
Other		284		41
Total capital expenditures	$	1,252	$	328

Capital expenditures presented in the table above represent cash used for capital expenditures.

Due to low commodity prices, the Company reduced its drilling program in 2016 and for the nine months ended September 30, 2017 and has focused on the optimization of our gathering facilities and marketing arrangements to provide greater flexibility in moving natural gas production to markets with more favorable pricing. Other factors impacting the level of our capital expenditures include the cost and availability of oil field services, general economic and market conditions and weather disruptions.

Off-Balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of September 30, 2017, the off-balance sheet arrangements and transactions that we have entered into include (i) operating lease agreements and (ii) contractual obligations for which the ultimate settlement amounts are not fixed and determinable, such as natural gas transportation contracts, and (iii) oil and natural gas physical delivery contracts that are not expected to be net cash settled and are considered to be normal sales contracts and not derivatives. We do not believe that any of these arrangements are reasonably likely to materially affect our liquidity or availability of, or requirements for, capital resources.

37

Non-GAAP Measures

EBITDA and Adjusted EBITDA

“EBITDA” and “Adjusted EBITDA” are non-GAAP financial measures. We define EBITDA as net income (loss) before interest expense, taxes, depreciation, depletion and amortization. We define Adjusted EBITDA as EBITDA prior to accretion of asset retirement obligations, ceiling test write downs of oil and gas properties, non-cash stock-based compensation expense, non-cash warrant derivative gains and losses and the gain or loss on sold investments or properties. EBITDA and Adjusted EBITDA is consolidated including non-controlling interests and as used and defined by us, may not be comparable to similarly titled measures employed by other companies and are not measures of performance calculated in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flow provided by or used in operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. EBITDA and Adjusted EBITDA provide no information regarding a company’s capital structure, borrowings, interest costs, capital expenditures, and working capital movement or tax position. EBITDA and Adjusted EBITDA do not represent funds available for discretionary use because those funds are required for debt service, capital expenditures, working capital, income taxes, franchise taxes, exploration and development expenses, and other commitments and obligations. However, our management believes EBITDA and Adjusted EBITDA are useful to an investor in evaluating our operating performance because these measures:

● are widely used by investors in the oil and natural gas industry to measure a company’s operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods, book value of assets, capital structure and the method by which assets were acquired, among other factors; and

● help investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and are used by our management for various purposes, including as a measure of operating performance, in presentations to our board of directors, as a basis for strategic planning and forecasting and by our lenders pursuant to a covenant under the Company’s credit facility.

There are significant limitations to using EBITDA and Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of operations of different companies and the different methods of calculating EBITDA and Adjusted EBITDA reported by different companies. 

The following table represents a reconciliation of our net earnings or losses, the most directly comparable GAAP measure to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2017 and 2016. 

	Three Months Ended
	September 30,
(in thousands)	2017			2016
Net income (loss)	$	(446	)	$	(1,602	)
Adjustments:
Interest expense		299			38
Depreciation, depletion and amortization		613			393
EBITDA		466			(1,171	)
Adjusted EBITDA
EBITDA		466			(1,171	)
Adjustments:
Non-cash stock-based compensation		213			1,373
Non-cash warrant derivative gains		(811	)		-
Accretion of asset retirement obligations		77			35
Adjusted EBITDA	$	(55	)	$	237

38

	Nine Months Ended
	September 30,
(in thousands)	2017			2016
Net income (loss)	$	4,926		$	(9,479	)
Adjustments:
Interest expense		821			141
Depreciation, depletion and amortization		1,847			1,332
EBITDA		7,594			(8,006	)
Adjusted EBITDA
EBITDA		7,594			(8,006	)
Adjustments:
Non-cash stock-based compensation		752			2,037
Non-cash warrant derivative gains		(2,494	)		-
Impairment of oil and gas properties		-			4,299
Accretion of asset retirement obligations		232			105
Adjusted EBITDA	$	6,084		$	(1,565	)

Forward Looking Statements

The information in this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than statements of historical or present facts, that address activities, events, outcomes, and other matters that the Company plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates, or anticipates (and other similar expressions) will, should, or may occur in the future. Generally, the words “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “could,” “should,” “future,” “potential,” “continue,” variations of such words, and similar expressions identify forward-looking statements. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events.

These forward-looking statements appear in a number of places in this report and include statements with respect to, among other things:

● estimates of our oil and natural gas reserves;

● estimates of our future oil and natural gas production, including estimates of any increases or decreases in our production;

● our future financial condition and results of operations;

● our future revenues, cash flows, and expenses;

● our access to capital and our anticipated liquidity;

● our future business strategy and other plans and objectives for future operations;

● our outlook on oil and natural gas prices;

● the amount, nature, and timing of future capital expenditures, including future development costs;

● our ability to access the capital markets to fund capital and other expenditures;

● our assessment of our counterparty risk and the ability of our counterparties to perform their future obligations; and

● the impact of federal, state

39

We believe the expectations and forecasts reflected in our forward-looking statements are reasonable, but we can give no assurance that they will prove to be correct. We caution you that these forward-looking statements can be affected by inaccurate assumptions and are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production, and sale of oil and natural gas. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included or incorporated in our Annual Report filed on Form 10-K with the SEC.

Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update this information to reflect events or circumstances after the filing of this report with the SEC, except as required by law. All forward-looking statements, expressed or implied, included in this Form 10-Q and attributable to the Company are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we may make or persons acting on our behalf may issue.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information related to the Company and its consolidated subsidiaries is made known to the officers who certify the Company’s financial reports and the Board of Directors.

As required by Rule 13a - 15(b) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”), we have evaluated under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a - 15(e) and 15d-15(e) under the Exchange Act as of September 30, 2017. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, as appropriate, to allow such persons to make timely decisions regarding required disclosures.

Our principal executive officer and principal financial officer have concluded that our current disclosure controls and procedures were effective as of September 30, 2017 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting that occurred during our quarterly period ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

40

PART II. OTHER INFORMATION

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

All sales of unregistered equity securities that occurred during the period covered by this report, and through November 14, 2017, have been previously reported on a current report on Form 8-K or in a quarterly report on Form 10-Q.

ITEM 6. Exhibits

Exhibit No.	Description
2.1*	Purchase and Sale Agreement by and between Carbon West Virginia Company, LLC and n dated June 30, 2017.  Portions of the Purchase and Sale Agreement have been omitted pursuant to a request for confidential treatment.
2.2*	Purchase and Sale Agreement by and among Carbon West Virginia Company, LLC, n, n, n and n, dated May 25, 2017.  Portions of the Purchase and Sale Agreement have been omitted pursuant to a request for confidential treatment.
3(i)(a)	Amended and Restated Certificate of Incorporation of Carbon Natural Gas Company incorporated by reference to exhibit 3(i) to Form 8-K for Carbon Natural Gas Company filed on May 5, 2011.
3(i)(b)	Amended and Restated Certificate of Designation with respect to Series A Convertible Preferred Stock of Carbon Natural Gas Company, incorporated by reference to exhibit 3(i) to Form 8-K for Carbon Natural Gas Company filed July 6, 2011.
3(i)(c)	Certificate of Amendment to Certificate of Incorporation of Carbon Natural Gas Company, incorporated by reference to exhibit 3(i) to Form 8-K for Carbon Natural Gas Company filed on July 19, 2011.
3(ii)	Amended and Restated Bylaws incorporated by reference to exhibit 3(i) to Form 8-K filed on May 5, 2015.
4.1	Form of Warrant with respect to Carbon Appalachian Company, LLC, incorporated by reference to exhibit 4.1 to Form 8-K for Carbon Natural Gas Company filed on April 3, 2017.
10.1*	Amended and Restated Limited Liability Company Agreement of Carbon Appalachian Company, LLC dated August 15, 2017.
31.1*	Certification of Chief Executive Officer Pursuant to Rule 13a-15(e) / Rule 15d-15(e).
31.2*	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) / Rule 15(e)/15d-15(e).
32.1†	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
101*	Interactive data files pursuant to Rule 405 of Regulation S-T.

*	Filed herewith
†	Not considered to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section

41

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CARBON NATURAL GAS COMPANY
	(Registrant)
Date: November 14, 2017	By:	/s/ Patrick R. McDonald
		PATRICK R. MCDONALD,
		Chief Executive Officer
Date: November 14, 2017	By:	/s/ Kevin D. Struzeski
		KEVIN D. STRUZESKI
		Chief Financial Officer

42

EX-2.1

Exhibit 2.1

Portions of this document have been omitted as marked

and filed separately with the Commission.

PURCHASE AND SALE AGREEMENT

by and between

(■)

as “Seller,”

and

Carbon WEST VIRGINIA Company, LLC,

as “Buyer,”

dated as of

June 30, 2017

TABLE OF CONTENTS 

		Page
Article I	DEFINITIONS AND RULES OF CONSTRUCTION	1
Section 1.1	Definitions	1
Section 1.2	Rules of Construction	18
Article II	PURCHASE AND SALE; CLOSING	19
Section 2.1	Purchase and Sale of the Shares, Oil and Gas Assets and Gathering Assets	19
Section 2.2	Purchase Price	19
Section 2.3	Deposit	20
Section 2.4	Net Cash Flow Adjustment	20
Section 2.5	The Closing	21
Section 2.6	Post-Closing Purchase Price Reconciliation	23
Section 2.7	Effect of Closing	25
Section 2.8	Intercompany Accounts	25
Article III	REPRESENTATIONS AND WARRANTIES RELATING TO SELLER	25
Section 3.1	Organization of Seller	25
Section 3.2	Authorization; Enforceability	25
Section 3.3	No Conflict	26
Section 3.4	Litigation	26
Section 3.5	Brokers’ Fees	26
Section 3.6	Bankruptcy	26
Article IV	REPRESENTATIONS AND WARRANTIES RELATING TO the Company, THE OIL AND GAS ASSETS and the gathering assets	26
Section 4.1	Organization of the Company	26
Section 4.2	Shares; Capitalization of the Company	27
Section 4.3	No Conflict	27
Section 4.4	Subsidiaries	27
Section 4.5	Financial Statements	28
Section 4.6	Absence of Certain Changes	28
Section 4.7	Contracts	29
Section 4.8	Litigation	31
Section 4.9	Employees and Labor Relations	31
Section 4.10	Taxes	31
Section 4.11	Environmental Matters	32
Section 4.12	Legal Compliance	33
Section 4.13	Permits	33
Section 4.14	Title	33
Section 4.15	Insurance	34
Section 4.16	Regulatory and Administrative Matters	34

- i -

Table of Contents

(continued)

		Page
Section 4.17	Preference Rights	34
Section 4.18	Wells	35
Section 4.19	Proposed Operations or Expenditures	35
Section 4.20	Bankruptcy	35
Section 4.21	Prepayments, Hedges	35
Section 4.22	Fair Market Value	35
Section 4.23	Suspense Amounts	35
Section 4.24	Payout Balances	36
Section 4.25	Current Bonds	36
Section 4.26	Gas Imbalances	36
Section 4.27	Take-or-Pay	36
Article V	REPRESENTATIONS AND WARRANTIES RELATING TO BUYER	36
Section 5.1	Organization of Buyer	36
Section 5.2	Authorization; Enforceability	36
Section 5.3	No Conflict	37
Section 5.4	Litigation	37
Section 5.5	Brokers’ Fees	37
Section 5.6	Investment Representation	37
Section 5.7	Funds	37
Section 5.8	Bankruptcy	37
Article VI	OIL AND GAS ASSETS TITLE AND ENVIRONMENTAL ADJUSTMENTS	38
Section 6.1	No Warranty or Representation	38
Section 6.2	Buyer’s Title Review	38
Section 6.3	Determination of Title Defects	41
Section 6.4	Seller Title Credit	42
Section 6.5	Exclusion of Title Defect Properties; Indemnification	43
Section 6.6	Deferred Title Claims and Disputes	43
Section 6.7	Buyer’s Environmental Review	44
Section 6.8	Exclusion of Environmental Defect Properties; Indemnification	45
Section 6.9	Deferred Environmental Claims and Disputes	46
Section 6.10	No Duplication	46
Article VII	PREFERENCE RIGHTS AND SELLER APPROVALS	47
Section 7.1	Compliance	47
Section 7.2	Effect of Preference Rights	47
Section 7.3	Seller Approvals	47
Section 7.4	Express Conditions on Sale	47

- ii -

Table of Contents

(continued)

		Page
Article VIII	COVENANTS	48
Section 8.1	Conduct of Business	48
Section 8.2	Access	48
Section 8.3	Third Party Approvals	49
Section 8.4	Regulatory Filings	49
Section 8.5	Books and Records	49
Section 8.6	Excluded Assets	50
Section 8.7	Seller Marks	50
Section 8.8	Permits	50
Section 8.9	Insurance	50
Section 8.10	Supplements to Disclosure Schedules	51
Section 8.11	Recording	51
Section 8.12	Casualty and Condemnation	51
Section 8.13	Surety Bonds	52
Section 8.14	Office Lease	52
Section 8.15	Extension of Primary Lease Terms	52
Article IX	TAX MATTERS	52
Section 9.1	Tax Returns	52
Section 9.2	Transfer Taxes	53
Section 9.3	Purchase Price Allocation	54
Section 9.4	Straddle Periods	54
Section 9.5	Property Tax Allocation	54
Section 9.6	Tax Cooperation	55
Section 9.7	Tax Indemnification	55
Section 9.8	Tax Contests	56
Section 9.9	Amended Tax Returns and Claims for Refund	57
Section 9.10	Tax Refunds	57
Section 9.11	Termination of Tax Sharing Agreements	58
Section 9.12	Tax Treatment of Indemnity Payments	58
Section 9.13	Conflict	58
Section 9.14	Conduct of Business	58
Article X	CONDITIONS TO OBLIGATIONS	58
Section 10.1	Conditions to Obligations of Buyer	58
Section 10.2	Conditions to the Obligations of Seller	59
Article XI	INDEMNIFICATION	60
Section 11.1	Survival	60
Section 11.2	Indemnification	60
Section 11.3	Indemnification Procedures	61
Section 11.4	Limitations on Liability of Seller	62

- iii -

Table of Contents

(continued)

		Page
Section 11.5	Waiver of Other Representations and Warranties	63
Section 11.6	Exclusive Remedy	63
Section 11.7	Express Negligence	64
Article XII	TERMINATION	64
Section 12.1	Termination	64
Section 12.2	Effect of Termination	65
Article XIII	MISCELLANEOUS	65
Section 13.1	Notices	65
Section 13.2	Assignment	65
Section 13.3	Rights of Third Parties	65
Section 13.4	Expenses	65
Section 13.5	Counterparts	67
Section 13.6	Entire Agreement	67
Section 13.7	Disclosure Schedules	67
Section 13.8	Amendments	67
Section 13.9	Publicity	67
Section 13.10	Severability	67
Section 13.11	Governing Law; Jurisdiction	68
Section 13.12	Further Assurances	68
Section 13.13	Non-Recourse to Non-Parties	68
Section 13.14	Records	68

- iv -

Exhibits and Disclosure Schedules

Exhibits

Exhibit A-1	-	Arbitration Procedures
Exhibit A-2	-	Property Schedule
Exhibit 1.1(a)	-	Form of Assignment of Shares
Exhibit 1.1(b)	-	Form of (■) Gathering Assets Conveyance
Exhibit 1.1(c)	-	Form of (■) Gathering Assets Conveyance
Exhibit 1.1(d)	-	Form of Oil and Gas Assets Conveyance
Exhibit 1.1(e)	-	Form of Oil and Gas Lease
Exhibit 1.1(f)	-	Form of Transition Services Agreement
Exhibit 2.5(b)(ix)	-	Form of Non-Foreign Affidavit

Disclosure Schedules

Schedule 1.1(a)	-	Certain Excluded Oil and Gas Assets
Schedule 1.1(b)	-	(■) Gathering Contracts
Schedule 1.1(c)	-	(■) Gathering Contracts
Schedule 1.1(d)	-	(■) Gathering Surface Contracts
Schedule 1.1(e)	-	(■) Gathering Surface Contracts
Schedule 1.1(f)	-	Gathering Systems
Schedule 1.1(g)	-	Buyer’s Knowledge Persons
Schedule 1.1(h)	-	Seller’s Knowledge Persons
Schedule 1.1(i)	-	Certain Permitted Liens
Schedule 2.6(a)	-	Net Working Capital Methodology
Schedule 3.4	-	Seller Litigation
Schedule 4.5	-	Certain Liabilities
Schedule 4.6	-	Certain Changes
Schedule 4.7(a)	-	Material Contracts
Schedule 4.7(c)	-	Material Contracts – Exceptions
Schedule 4.8	-	Company and (■) Litigation
Schedule 4.10	-	Taxes
Schedule 4.11	-	Environmental Matters
Schedule 4.12	-	Legal Compliance
Schedule 4.13	-	Absence of Permits
Schedule 4.14	-	Title Exceptions
Schedule 4.15	-	Seller’s Policies
Schedule 4.16	-	Regulatory and Administrative Matters
Schedule 4.17(a)	-	Preference Rights
Schedule 4.17(b)	-	Seller Approvals
Schedule 4.18	-	Certain Wells
Schedule 4.19	-	Outstanding Commitments
Schedule 4.21	-	Prepayments; Hedging
Schedule 4.23	-	Suspense Amounts
Schedule 4.24		Payout Balances
Schedule 4.25		Current Bonds; Other Credit Support Instruments
Schedule 4.26		Gas Imbalances
Schedule 5.3	-	Buyer Approvals
Schedule 8.1	-	Conduct of Business
Schedule 8.13	-	Surety Bonds

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PURCHASE AND SALE AGREEMENT

THIS PURCHASE AND SALE AGREEMENT dated as of June 30, 2017 (this “Agreement”), is entered into by and between (■) a Delaware corporation (“Seller”), and CARBON WEST VIRGINIA COMPANY, LLC, a Delaware limited liability company (“Buyer”).

RECITALS

WHEREAS, Seller owns (i) all of the outstanding capital stock (the “Shares”) of (■) Corporation, a Delaware corporation (the “Company”), (ii) certain gathering system related assets located in Virginia, West Virginia, and Ohio, and (iii) certain oil and gas related assets located in Virginia, West Virginia, and Ohio;

WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, the Shares and such assets;

WHEREAS, (■) Corporation (“(■)”), a wholly owned subsidiary of Seller, owns certain gathering system assets located in Virginia and West Virginia; and

WHEREAS, Seller desires to cause (■) to assign its interest in such assets to Buyer, and Buyer desires to accept assignment of such assets from (■).

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

Article I
DEFINITIONS AND RULES OF CONSTRUCTION

Section 1.1 Definitions. As used herein, the following terms shall have the following meanings:

“Accountant” has the meaning set forth in Section 2.6(d).

“Adjusted Purchase Price” has the meaning set forth in Section 2.2.

“Adjustment Period” has the meaning set forth in Section 2.4(a).

“Adjustment Statement” has the meaning set forth in Section 2.4(a).

“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with, such specified Person through one or more intermediaries or otherwise. For the purposes of this definition, “control” means, where used with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have correlative meanings.

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“Agreement” has the meaning set forth in the Preamble to this Purchase and Sale Agreement.

“Agreed Rate” means a rate equal to LIBOR (determined, as applicable, on the Closing Date and at the end of each 30 day period thereafter) plus 1%.

“Arbitration Procedures” means the arbitration procedures attached as Exhibit A-1 to this Agreement.

“Asset Straddle Period” has the meaning set forth in Section 9.5.

“Assignment of Shares” means the Assignment and Assumption Agreement covering the Shares in the form attached as Exhibit 1.1(a) to this Agreement.

“Assumed Liabilities” means all obligations and liabilities of any kind whatsoever arising from or relating to the Oil and Gas Assets, the Gathering Assets or the respective Businesses associated therewith, whether known or unknown, liquidated or contingent, and regardless of whether the same are deemed to have arisen or accrued or are attributable to periods before, on or after the applicable Effective Time; provided, however, “Assumed Liabilities” shall not include Retained Liabilities.

“Base Purchase Price” has the meaning set forth in Section 2.2.

“(■)” has the meaning set forth in the Recitals to this Agreement.

“(■) Gathering Assets Conveyance” means the Conveyance, Assignment and Bill of Sale in the form attached as Exhibit 1.1(b) to this Agreement.

“ (■) Gathering Assets” means all of the right, title and interest of (■) in and to the following, except to the extent any of the same constitute an Excluded Gathering Asset:

(a)       the Gathering Systems;

(b)       the Gathering Surface Contracts;

(c)       all equipment, machinery, fixtures and other tangible personal property and improvements located on any of the Gathering Systems or used or held for use primarily in connection with the operation of any of the Gathering Systems;

(d)       the Gathering Contracts; and

(e)       the Gathering Records.

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“Burden” means any and all royalties (including lessor’s royalty), overriding royalties, production payments, net profits interests, reversionary interests and other burdens upon, measured by or payable out of production (excluding, for the avoidance of doubt, any Taxes).

“Business” means (a) in the case of the Company, the business and operations of the Company as currently conducted by the Company, (b) in the case of the (■) Gathering Assets, the ownership and operation of the (■) Gathering Assets by Seller, as currently owned and operated by Seller, (c) in the case of the (■) Gathering Assets, the ownership and operation of the (■) Gathering Assets by (■), as currently owned and operated by(■), and (d) in case of the Oil and Gas Assets, the ownership and operation of the Oil and Gas Assets by Seller, as currently owned and operated by Seller.

“Business Day” means any day that is not a Saturday, Sunday or legal holiday in the State of Texas or a federal holiday in the United States of America.

“Buyer” has the meaning set forth in the Preamble to this Agreement.

“Buyer Approvals” has the meaning set forth in Section 5.3.

“Buyer Indemnified Parties” has the meaning set forth in Section 11.2(a).

“Claim Notice” has the meaning set forth in Section 11.3(a).

“Closing” has the meaning set forth in Section 2.5(a).

“Closing Date” has the meaning set forth in Section 2.5(a).

“Code” means the Internal Revenue Code of 1986, as amended.

“(■) Gathering Assets” means all of the right, title and interest of Seller in and to the following, except to the extent any of the same constitute an Excluded Gathering Asset:

(a)       the Gathering Systems;

(b)       the Gathering Surface Contracts;

(c)       all equipment, machinery, fixtures and other tangible personal property and improvements located on any of the Gathering Systems or used or held for use primarily in connection with the operation of any of the Gathering Systems;

(d)       the Gathering Contracts; and

(e)       the Gathering Records.

“(■) Gathering Assets Conveyance” means the Conveyance, Assignment and Bill of Sale in the form attached as Exhibit 1.1(c) to this Agreement.

“Company” has the meaning set forth in the Recitals to this Agreement.

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“Company Liabilities” means all obligations and liabilities of any kind whatsoever of the Company arising from or relating to the Shares or the Business of the Company, whether known or unknown, liquidated or contingent, and regardless of whether the same are deemed to have arisen, accrued or are attributable to periods before, on or after the Effective Time applicable to the Company.

“Confidentiality Agreement” means that certain Confidentiality Agreement dated April 21, 2017, by and between Carbon Natural Gas Company and Seller.

“Contract” means any legally binding agreement, commitment, lease, license or contract, whether oral or written.

“Debt Payoff Amount” means the amount of all unpaid Third-Party Debt of the Company as of the Closing Date, including principal, accrued and unpaid interest, breakage costs and prepayment fees or penalties or change in control payments that will be incurred in connection with the payment and discharge of such Third-Party Debt as contemplated by this Agreement.

“Deep Formations” (■)

“Defect Deductible” has the meaning set forth in Section 6.2(d).

“Defensible Title” shall mean, in the case of the Property Subdivisions, such title of Seller that, as of the applicable Effective Time (or, in the case of any Property Subdivision or interest therein acquired or obtained after such Effective Time, as of the date same was acquired or obtained) and at Closing: (a) for each Property Subdivision, entitles Seller to receive not less than the Net Revenue Interest for such Property Subdivision as set forth in Part II of the Property Schedule without reduction at any time during the productive life thereof; (b) for each Property Subdivision, obligates Seller to bear not more than the Working Interest for such Property Subdivision as set forth in Part II of the Property Schedule unless there is a proportionate increase in the Net Revenue Interest during the productive life thereof; and (c) except for Permitted Liens, is free and clear of all Liens.

“Deferred Environmental Adjustment Claim” has the meaning set forth in Section 6.9.

“Deferred Title Adjustment Claim” has the meaning set forth in Section 6.6.

“Deferred Matters Date” has the meaning set forth in Section 6.6.

“Deposit” has the meaning set forth in Section 2.3(a).

“Disclosure Schedules” means the schedules attached hereto.

“Dollars” and “$” means the lawful currency of the United States of America.

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“Effective Time” means (a) with respect to the Oil and Gas Assets, 7:00 a.m. (Central Standard Time) on April 1, 2017, (b) with respect to the Gathering Assets, 12:01 a.m. (Central Standard Time) on April 1, 2017, and (c) with respect to the Shares, 12:01 a.m. (Central Daylight Time) on the Closing Date.

“Environmental Defect” has the meaning set forth in Section 6.7(c).

“Environmental Defect Property” has the meaning set forth in Section 6.7(b).

“Environmental Law” means any applicable Law relating to the environment, natural resources, or the protection thereof, including any applicable provisions of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. § 5101, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. § 6901, et seq., the Clean Water Act, 33 U.S.C. § 1251, et seq., the Clean Air Act, 42 U.S.C. § 7401, et seq., the Toxic Substances Control Act, 15 U.S.C. § 2601, et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. § 136, et seq., and the Oil Pollution Act of 1990, 33 U.S.C. § 2701, et seq., and all analogous state or local statutes, and the regulations promulgated pursuant thereto.

“Environmental Permits” means all Permits required by any applicable Environmental Law.

“Estimated Net Working Capital” means $0.

“Examination Period” has the meaning set forth in Section 6.2(a).

“Excluded Gathering Assets” means the following described assets and properties:

(a)       All deposits, cash, checks, funds, and accounts receivable attributable to the Gathering Assets with respect to any period prior to the applicable Effective Time;

(b)       Claims of Seller or (■), as applicable, for refund of, credit attributable to, or loss carry forwards with respect to Taxes attributable to the Gathering Assets for any period prior to the applicable Effective Time;

(c)       All corporate, financial, Tax, and legal records of Seller and (■), as applicable, except as set forth in the definition of “Gathering Records;”

(d)       Subject to Section 8.12, all rights, titles, interests, and claims of Seller or (■), as applicable, with respect to the Gathering Assets (i) under any policy or agreement of insurance; (ii) under any bond, or (iii) to any insurance or condemnation proceeds or awards (to the extent such insurance or condemnation proceeds or awards relate to events occurring prior to the applicable Effective Time);

(e)       All computer or communications software or intellectual property (including tapes, data, and program documentation and all tangible manifestations and technical information relating thereto) owned, licensed, or used by Seller or (■) other than those owned by Seller or (■) and used exclusively in connection with the Gathering Assets; and

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(f)       Any logo, service mark, copyright, trade name, or trademark of or associated with Seller or any Affiliate of Seller or any business of Seller or of any Affiliate of Seller.

“Excluded Oil and Gas Assets” means the following described assets and properties:

(a)       All right, title and interest of Seller in and to the Deep Formations, including each Hydrocarbon Interest described in items (i) and (ii) of clause (a) of the definition of Oil and Gas Assets to the extent such Hydrocarbon Interest covers depths within the Deep Formations, together with (i) any and all wells drilled in the Deep Formations and all oil, gas and other hydrocarbons and minerals produced or extracted from such Hydrocarbon Interests that may be found within the Deep Formations and (ii) the right to (A) use the surface of the lease acreage covered under any of the Subject Interests for purposes of exploring for, drilling, operating and producing oil, gas and other hydrocarbons or minerals from the Deep Formations, and (B) construct and maintain pipelines and other structures on the surface of the lease acreage covered under any of the Subject Interests for purposes of such production and related operations; provided that, with respect to items (A) and (B) of this clause (a), such use or construction and maintenance may not unreasonably interfere with the ownership or operation of the Subject Interests by Buyer in any material respect;

(b)       Subject to Seller’s obligation in Section 2.5(b)(v), all fee mineral interests owned by Seller and any lessor royalties derived from the Oil and Gas Leases executed by and between Seller and Buyer at the Closing;

(c)       All deposits, cash, checks, funds and accounts receivable attributable to the Oil and Gas Assets with respect to any period prior to the applicable Effective Time;

(d)       All (i) oil, gas and other hydrocarbons produced and sold from or attributable to the Subject Interests with respect to all periods prior to the applicable Effective Time, (ii) oil, gas and other hydrocarbons attributable to the Subject Interests which, at the applicable Effective Time, are in storage, within processing plants, in pipelines or otherwise held in inventory, and (iii) proceeds from or of such oil, gas and other hydrocarbons;

(e)       All receivables and cash proceeds which were expressly taken into account and for which credit was given in the determination of Net Cash Flow pursuant to Section 2.4, as adjusted pursuant to Section 2.6;

(f)       Claims of Seller for refund of, credit attributable to, or loss carry forwards with respect to (i) Taxes attributable to the Oil and Gas Assets for any period prior to the applicable Effective Time or (ii) any Taxes attributable to the Excluded Oil and Gas Assets;

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(g)       All corporate, financial, Tax, and legal records of Seller, except as set forth in the definition of “Oil and Gas Assets;”

(h)       Subject to Section 8.12, all rights, titles, interests and claims of Seller or any Affiliate of Seller with respect to the Oil and Gas Assets (i) under any policy or agreement of insurance, (ii) under any bond or (iii) to any insurance or condemnation proceeds or awards (to the extent such insurance or condemnation proceeds or awards relate to events occurring prior to the applicable Effective Time);

(i)       All computer or communications software or intellectual property (including tapes, data, and program documentation and all tangible manifestations and technical information relating thereto) owned, licensed, or used by Seller;

(j)       Any logo, service mark, copyright, trade name or trademark of or associated with Seller or any Affiliate of Seller or any business of Seller or of any Affiliate of Seller;

(k)       All seismic, geological, geophysical, engineering and other data and interpretations, files and records (in whatever form) other than well logs, well diagrams, drilling and sidecore samples and other open hole information related to the wells included in the Oil and Gas Assets;

(l)       Any futures, options, swaps, hedges or other derivatives of Seller or any of its Affiliates;

(m)       All master service agreements or similar Contracts; and

(n)       All rights, interests, assets and properties described in Schedule 1.1(a).

“Excluded Tax Liabilities” means, except as otherwise provided in Section 9.2 and Section 9.5, (a) any Taxes imposed as a result of the ownership or operation of the Oil and Gas Assets, the Gathering Assets, or the respective Businesses associated therewith, whether known or unknown, for any Tax period ending on or before April 1, 2017, or the portion of any Asset Straddle Period that ends on such date, (b) any other Taxes of the Seller or (■) for any Tax period other than any Taxes imposed as a result of the ownership or operation of the Oil and Gas Assets, the Gathering Assets, or the respective Businesses associated therewith, whether known or unknown, for any Tax period beginning after April 1, 2017, or the portion of any Asset Straddle Period that begins after such date, and (c) any Transfer Taxes for which Seller is responsible pursuant to Section 9.2.

“Final Adjustment Statement” has the meaning set forth in Section 2.6(a).

“Final Net Working Capital” has the meaning set forth in Section 2.6(a).

“Final Net Working Capital Statement” has the meaning set forth in Section 2.6(a).

“Financial Statements” has the meaning set forth in Section 4.5(a).

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“GAAP” means generally accepted accounting principles of the United States of America, consistently applied.

“Gas Imbalance Adjustment” means the positive or negative amount, if any, equal to (i)(A) all Gas Imbalances owed to Seller minus (B) all Gas Imbalances owed by Seller, in each case, existing with respect to the Oil and Gas Assets at the Effective Time (expressed in Mcf), multiplied by (ii) the Price Index.

“Gas Imbalances” means any production, pipeline, transportation or processing imbalances existing with respect to the Oil and Gas Assets.

“Gathering Assets” means the (■) Gathering Assets and the (■) Gathering Assets.

“Gathering Contracts” means all Contracts (other than any Contract exclusively between Seller, on the one hand, and the Company or (■), on the other hand, each of which Contracts will be terminated effective as of the Closing) by which any Gathering System is bound, or that relate to or are otherwise applicable to any Gathering System, including (a) in the case of Seller, those identified on Schedule 1.1(b), and (b) in the case of (■), those identified on Schedule 1.1(c), but excluding, in each case, any such Contracts to the extent transfer is restricted by third-party agreement or Law and the necessary consents to transfer are not obtained pursuant to Section 8.3.

“Gathering Records” means all land files, contract files, right-of-way records, surveys, maps, plats, correspondence, Tax Records, and other similar records, in each case relating to any of the Gathering Systems, or used or held for use in connection with the maintenance and operation thereof, but excluding any such files, documents and records to the extent disclosure or transfer is restricted by Law and attorney-client privileged communications and work product of Seller’s or (■)’s, as applicable, legal counsel (other than title opinions).

“Gathering Surface Contracts” means all easements, permits, licenses, servitudes, rights-of-way, surface leases, fee interests in real property and other surface rights appurtenant to, and used or held for use in connection with any of the Gathering Systems, including, (a) in the case of Seller, those identified on Schedule 1.1(d), and (b) in the case of (■), those identified on Schedule 1.1(e), but excluding, in each case, any of the same to the extent transfer is restricted by third-party agreement or Law and the necessary consents to transfer are not obtained pursuant to Section 8.3.

“Gathering Systems” means those certain natural gas pipelines systems described on Schedule 1.1(f), which, for the sake of clarity, shall include all pipelines, gathering lines and flowlines owned by the Company, Seller or (■) and associated with the Oil and Gas Assets.

“Governmental Authority” means any federal, state, municipal, local or similar governmental authority, regulatory or administrative agency, court or arbitral body.

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“Hydrocarbon Interests” shall mean (a) leases affecting, relating to or covering any oil, gas and other hydrocarbons in place and the leasehold interests and estates in the nature of working or operating interests under such leases, as well as overriding royalties, net profits interests, production payments, carried interests, rights of recoupment and other interests in, under or relating to such leases, (b) fee interests in oil, gas or other hydrocarbons in place, (c) royalty interests in oil, gas or other hydrocarbons in place, (d) any other interest in oil, gas or other hydrocarbons in place, (e) any economic or contractual rights, options or interests in and to any of the foregoing, including, without limitation, any farmout or farmin agreement or production payment affecting any interest or estate in oil, gas or other hydrocarbons in place, and (f) any and all rights and interests attributable or allocable thereto by virtue of any pooling, unitization, communitization, production sharing or similar agreement, order or declaration.

“Hydrocarbon Value” has the meaning set forth in Section 2.6(a).

“Indemnified Party” has the meaning set forth in Section 11.3(a).

“Indemnifying Party” shall have the meaning set forth in Section 11.3(a).

“Initial Adjustment Amount” has the meaning set forth in Section 2.4(a).

“Knowledge” means (a) with respect to Buyer, the actual knowledge (excluding any imputed or implied knowledge) of the persons listed on Schedule 1.1(g) and (b) with respect to Seller, the actual knowledge (excluding any imputed or implied knowledge) of the persons listed on Schedule 1.1(h).

“Lands” has the meaning set forth in clause (b) of the definition of Oil and Gas Assets.

“Law” means any applicable law, statute, rule, regulation, ordinance, order, judgment or decree of a Governmental Authority and any applicable common law.

“LIBOR” means the rate for any one month loan which appears on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of such service, for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of any period for which interest may be due under this Agreement.

“Lien” means any charge, pledge, option, mortgage, deed of trust, hypothecation, or security interest.

“Losses” means all actual liabilities, losses, damages, awards, Taxes, costs and expenses (including reasonable fees and expenses of counsel) reduced by (a) insurance proceeds actually received from third parties relating thereto and (b) indemnification or reimbursement payments actually received from third parties relating thereto, in the case of clauses (a) and (b), net of any expenses (excluding Taxes) with respect thereto or incurred in connection therewith; provided, however, that Losses shall not include any special, punitive, exemplary, incidental, consequential or indirect damages or any lost profits, lost benefits, loss of enterprise value, diminution in value of any business, damage to reputation or loss to goodwill; provided, further, however, that the preceding proviso shall not apply to the extent a Party is required to pay such damages to a third party in connection with a matter for which such Party is entitled to indemnification under Article XI.

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“Material Adverse Effect” means any circumstance, change or effect that is materially adverse to the Businesses, the Gathering Assets, the Oil and Gas Assets or the assets, properties, results of operations or financial condition of the Company, taken as a whole, or on the ability of Seller to consummate the transactions contemplated hereby but shall exclude any circumstance, change or effect resulting or arising from:

(a)       any change in general business or economic conditions (including any change in prices for natural gas or other commodities) in the industries or markets in which the Company, Seller (with respect to the (■) Gathering Assets and the Oil and Gas Assets), or (■) (with respect to the (■) Gathering Assets) operate or conduct business;

(b)       seasonal reductions in revenues and/or earnings of the Company, Seller (with respect to the (■) Gathering Assets and the Oil and Gas Assets), or (■) (with respect to the (■) Gathering Assets) in the ordinary course of their respective Businesses and consistent with past years;

(c)       national or international political, social or economic conditions, including any engagement in hostilities, whether or not pursuant to the declaration of a national emergency or war, the occurrence of any military or terrorist attack (other than a military or terrorist attack on the Gathering Assets or the Oil and Gas Assets) or a general economic recession;

(d)       financial, debt, credit, or securities markets (including any disruption thereof) in the United States or elsewhere;

(e)       changes in Law, GAAP or any other accounting principles, or the interpretation thereof;

(f)       the entry into or announcement of this Agreement, actions contemplated by this Agreement, or the consummation of the transactions contemplated hereby;

(g)       any actions or inactions of Seller taken in compliance with this Agreement or consented to by Buyer;

(h)       matters that will be reflected in the determination of Final Net Working Capital as of the applicable Effective Time or otherwise reflected in the determination of the Adjusted Purchase Price; or

(i)       the loss of any employee involved in any of the Businesses.

Any determination as to whether any circumstance, change or effect has a Material Adverse Effect shall be made only after taking into account all effective insurance coverages and third-party indemnification or reimbursement rights with respect to such circumstance, change or effect.

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“Material Contracts” has the meaning set forth in Section 4.7(a).

“Net Cash Flow” has the meaning set forth in Section 2.4(c).

“Net Revenue Interest” means an interest (expressed as a percentage or decimal fraction) in and to all oil and gas produced and saved from or attributable to a Property Subdivision.

“Net Working Capital,” which may be positive or negative, means an amount equal to the total current assets of the Company, calculated as of 12:01 a.m. on the Closing Date, minus the total current liabilities of the Company, calculated as of that time, determined (x) in accordance with GAAP and consistent with the methodology set forth in Schedule 2.6(a), and (y) without giving effect to the transactions contemplated hereby. For purposes of calculating Net Working Capital as described above:

(a)       “current assets” shall mean the current assets of the Company determined in accordance with GAAP (including inventory of tangible equipment and pipe and working gas in storage) and, whether or not consistent with GAAP, consistent with the methodology set forth in Schedule 2.6(a); provided that, for the avoidance of doubt, “current assets” shall exclude intercompany accounts receivable; and

(b)       “current liabilities” shall mean the current liabilities of the Company determined in accordance with GAAP and, whether or not consistent with GAAP, consistent with the methodology set forth in Schedule 2.6(a); provided that, for the avoidance of doubt, “current liabilities” shall exclude (i) intercompany accounts payable; and (ii) accrued liabilities for employee incentive bonuses.

Schedule 2.6(a) contains a sample schedule setting forth the items to be included as the current assets and the current liabilities of the Company for purposes of calculating the Final Net Working Capital under this Agreement.

“Office Lease” means that certain Lease dated June 19, 2000, by and between The (■) and Seller, as amended.

“Oil and Gas Assets” means the following described assets and properties, except to the extent any of the same constitute an Excluded Oil and Gas Asset:

(a)       All right, title and interest of Seller in and to (i) the undivided interests specified in the Property Schedule in, to or under the Hydrocarbon Interests specifically described therein, and (ii) all other Hydrocarbon Interests of Seller in, to or under any lands covered by or subject to any of the Hydrocarbon Interests described in the Property Schedule, even though such interests of Seller may be incorrectly described or referred to in, or a description thereof may be omitted from, the Property Schedule, insofar, but only insofar, in the case of each of items (i) and (ii) of this clause (a), as such interests cover depths above the Deep Formations (collectively, the “Subject Interests”);

(b)       All right, title and interest of Seller in and to the lands covered by the Subject Interests or lands pooled, communitized or unitized therewith (the “Lands”);

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(c)       All right, title and interest of Seller in and to the following insofar, but only insofar, as the same are attributable to the Subject Interests: (i) all rights with respect to the use and occupancy of the surface of and the subsurface depths under the Lands; (ii) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Subject Interest being a part thereof; (iii) all agreements and contracts, easements, rights-of-way, servitudes and other estates to the extent related to or used in connection with the exploration, development or operation of the Subject Interests, but excluding any such agreement, contract, easement, right-of-way, servitude or other estate to the extent transfer of same is restricted by third-party agreement or Law and the necessary consents to transfer are not obtained pursuant to Section 8.3; (iv) all oil and gas wells and associated wellbores and hydrocarbons produced therefrom, insofar and only insofar as such wells, wellbores and hydrocarbons relate to the depths from the surface to the top of the Deep Formations; (v) all Permits used in connection with the exploration, development or operation of the Subject Interests, but excluding any such Permit to the extent transfer of same is restricted by Law; and (vi) all other real and personal property located upon the Lands and used in connection with the exploration, development or operation of the Subject Interests;

(d)       Except to the extent transfer thereof may not be made without violating legal constraints or obligations or waiving any attorney/client privilege, copies of any and all lease files, title files, well files, drilling reports and land files, in each case, (i) relating primarily to the Subject Interests or the ownership, use, maintenance or operation of the other Oil and Gas Assets and (ii) in Seller’s actual possession or control (the “Oil and Gas Records”); and

(e)       All (i) oil, gas and other hydrocarbons produced from and to the extent attributable to the Subject Interests with respect to all periods subsequent to the applicable Effective Time, (ii) proceeds from or of such oil, gas and other hydrocarbons and (iii) accounts receivable related to the positive Gas Imbalance Adjustment, if any.

“Oil and Gas Base Purchase Price” has the meaning set forth in Section 2.2.

“Oil and Gas Assets Conveyance” means the General Conveyance in the form attached as Exhibit 1.1(d) to this Agreement.

“Oil and Gas Lease” means the Oil, Gas and Mineral Lease in the form attached as Exhibit 1.1(e) to this Agreement.

“Oil and Gas Records” has the meaning set forth in clause (d) of the definition of Oil and Gas Assets.

“Order” means any judgment, injunction order, ruling, award, decree or other order that is issued by a Governmental Authority.

“Organizational Documents” means any charter, certificate of incorporation, certificate of formation, articles of association, bylaws, operating agreement, partnership agreement or similar formation or governing documents and instruments.

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“Parties” means Seller and Buyer and “Party” means either Seller or Buyer.

“Permits” means authorizations, licenses, permits or certificates issued by Governmental Authorities; provided, however, right-of-way agreements and similar rights and approvals are not included in the definition of Permits.

“Permitted Liens” means:

(a)       Preferential purchase rights;

(b)       Third-party consent and notice requirements and similar restrictions;

(c)       Liens for Taxes or assessments not yet delinquent or, if delinquent, being contested in good faith by appropriate actions for which adequate reserves have been established in accordance with GAAP;

(d)       Materialmen’s, mechanics’, repairmen’s, workers’, contractors’, operators’, carriers’ and other similar liens and charges arising in the ordinary course of business for amounts not yet delinquent (including any amounts being withheld as provided by Law), or if delinquent, being contested in good faith by appropriate actions;

(e)       All rights to consent by, required notices to, filings with, or other actions by Governmental Authorities in connection with the sale or conveyance of the Oil and Gas Assets, the Gathering Assets or the Shares or interests therein if they are not required or customarily obtained prior to the sale or conveyance;

(f)       All rights reserved to or vested in any Governmental Authority to control or regulate any of the Oil and Gas Assets, the Gathering Assets or any of the assets of the Company in any manner and all obligations and duties under all Laws of such Governmental Authority or under any franchise, grant, license or permit issued by any such Governmental Authority;

(g)       Imbalances associated with any of the Oil and Gas Assets, the Gathering Assets or any of the assets of the Company;

(h)       Any Lien listed in any Disclosure Schedule or noted in the Financial Statements insofar, but only insofar, as such Lien will be released at or prior to Closing;

(i)       Any Lien arising under any original purchase price conditional sales contract or equipment lease that is not related to indebtedness;

(j)       Any easement, right-of-way or servitude that does not individually or in the aggregate materially interfere with the use and operation of the Oil and Gas Assets or the Gathering Assets as currently used and operated;

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(k)       The express terms and conditions of the Contracts listed in Schedule 1.1(i) (copies of each of which have been provided to Buyer), any Material Contract and of any other Contract referenced in any Disclosure Schedule to the extent that the net cumulative effect of such terms and conditions, as to a particular Property Subdivision, does not operate to reduce the Net Revenue Interest of Seller in such Property Subdivision below the Net Revenue Interest shown therefor in Part II of the Property Schedule or increase the Working Interest of Seller in such Property Subdivision above the Working Interest shown therefor in Part II of the Property Schedule without a proportionate increase in the Net Revenue Interest of Seller;

(l)       Any pledge or deposit to secure any obligation under any workers or unemployment compensation Law or similar legislation or to secure any public or statutory obligation;

(m)       Any other agreements, instruments, liens, charges, encumbrances, defects, discrepancies or irregularities which do not, individually or in the aggregate, interfere in any material respect with the value, operation or ownership of the Oil and Gas Assets, the Gathering Assets or any of the Businesses;

(n)       Any liens or security interests created by Law or reserved in oil, gas and/or mineral leases for royalty, bonus or rental or for compliance with the terms of the Subject Interests;

(o)       Any Permits, surface leases and other rights with respect to operations to the extent such matters do not interfere in any material respect with the Company’s, Seller’s or (■)’s, as applicable, operation of the portion of the Gathering Assets, the Oil and Gas Assets or the other assets burdened thereby;

(p)       All royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other burdens to the extent that the net cumulative effect of such burdens, as to a particular Property Subdivision, does not operate to reduce the Net Revenue Interest of Seller in such Property Subdivision below the Net Revenue Interest shown therefor in Part II of the Property Schedule or increase the Working Interest of Seller in such Property Subdivision above the Working Interest shown therefor in Part II of the Property Schedule without a proportionate increase in the Net Revenue Interest of Seller;

(q)       All obligations by virtue of a prepayment, advance payment or similar arrangement under any contract for the sale of gas production, including by virtue of “take-or-pay” or similar provisions, to deliver gas produced from or attributable to the Subject Interests after the applicable Effective Time without then or thereafter being entitled to receive full payment therefor insofar, but only insofar, that such obligations are taken into account in determining the Adjusted Purchase Price;

(r)       Any encumbrance, title defect or other matter (whether or not constituting a Title Defect) waived or deemed waived by Buyer pursuant to Article VI;

(s)       Rights reserved to or vested in any Governmental Authority to control or regulate any of the wells or units or other properties included in the Oil and Gas Assets and all applicable Laws and Orders so long as the same do not, as to a particular Property Subdivision, decrease Seller’s Net Revenue Interest in such Property Subdivision below the Net Revenue Interest shown therefor in Part II of the Property Schedule;

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(t)       The terms and conditions of all (i) Contracts relating to the Subject Interests which are not addressed in other clauses of this definition of “Permitted Liens” (except for any terms or provisions of such Contracts covered by this clause (i) that are not usual and customary for agreements of such nature) and (ii) the Subject Interests, to the extent, in each case, such terms and conditions do not, as to a particular Property Subdivision, decrease Seller’s Net Revenue Interest in such Property Subdivision below the Net Revenue Interest shown therefor in Part II of the Property Schedule; and

(u)       Conventional rights of reassignment requiring notice and/or the reassignment (or granting an opportunity to receive an assignment) of a leasehold interest to the holders of such reassignment rights prior to surrendering or releasing such leasehold interest (except circumstances where such rights have ripened into a current right of reassignment).

“Person” means any individual, firm, corporation, partnership, limited liability company, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind.

“Pre-Closing Tax Period” means (i) any Tax period ending on or before the Closing Date and (ii) the portion of any Straddle Period that ends on the Closing Date.

“Price Index” means the average of the first-of-the-month (of the month immediately following the Closing Date) Appalachia indices published by Inside FERC’s Gas Market Report for Dominion Transmission, Inc. and Columbia Gas Transmission Corp.

“Preference Property” has the meaning set forth in Section 7.2.

“Preference Right” means any right or agreement that enables any Person to purchase or acquire any of the Shares, the assets of the Company, the Gathering Assets or the Oil and Gas Assets or any interest therein or portion thereof as a result of or in connection with the execution or delivery of this Agreement or the consummation or performance of the terms and conditions contemplated by this Agreement.

“Property Schedule” means Exhibit A-2 attached to and made a part of this Agreement.

“Property Subdivision” means each well described or referenced in Part II of the Property Schedule.

“Property Taxes” has the meaning set forth in Section 9.5.

“Reasonable Efforts” means efforts in accordance with reasonable commercial practice and without the incurrence of unreasonable costs or expenses.

“Remediation Amount” has the meaning set forth in Section 6.7(c).

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“Representatives” means, as to any Person, its officers, directors, employees, counsel, accountants, financial advisers and consultants.

“Reserve Analysis” means that certain reserve analysis prepared by Seller with respect to the Oil and Gas Assets as of December 31, 2016 and audited as to production curve fits by (■) and posted in the virtual data room maintained by Seller in the Seller West Virginia · mdb file.

“Retained Asset” shall be as defined in Section 7.3.

“Retained Liabilities” means all obligations and liabilities to the extent arising from, based upon, related to or associated with the following:

(a)       The failure to pay operating expenses and capital expenditures incurred by Seller in the ownership, drilling, completion, development and operation of the Oil and Gas Assets and attributable to the period prior to the Effective Time;

(b)       Other than and except for monies held in suspense and for which the Base Purchase Price is reduced pursuant to Section 2.2(h) (the obligations in respect of which are Assumed Liabilities), for a period of two (2) years following the Closing Date, the failure to properly, timely and legally pay, in accordance with the terms of any lease, contract, or applicable Laws, all Burdens with respect to the ownership or operation of the Oil and Gas Assets prior to the Effective Time, including, without limitation, claims of improper calculation or payment of royalties (including overriding royalties and other Burdens on production) related to deduction of post-production costs, incorrect measurement of hydrocarbon production, or use of posted or index prices or prices paid by Affiliates;

(c)       Personal injury or wrongful death claims attributable to the ownership or operation of the Oil and Gas Assets and the Gathering Assets prior to the Closing Date;

(d)       The Excluded Oil and Gas Assets and the Excluded Gathering Assets;

(e)       The matters set forth on Schedule 3.4 and Schedule 4.8;

(f)       The Excluded Tax Liabilities;

(g)       The disposal or transport of any hydrocarbons or hazardous substances to or at an off-site waste disposal location, which hydrocarbons or hazardous substances were produced or generated by or resulted from operations on the Oil and Gas Assets prior to the Effective Time; and

(h)       The employment relationship between the Company (or its Affiliates) and any of its past, present, or future employees.

“Seller“ has the meaning set forth in the Preamble to this Agreement.

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“Seller Affiliated Group” means the “affiliated group” (as defined in Section 1504(a) of the Code) and any other group of taxable entities filing a consolidated, combined, affiliated or unitary income and/or franchise Tax Return, in each case, of which Seller or any of its Affiliates (other than the Company) is the common parent.

“Seller Approvals” has the meaning set forth in Section 4.17(b).

“Seller Indemnified Parties” has the meaning set forth in Section 11.2(b).

“Seller Marks” has the meaning set forth in Section 8.7.

“Seller’s Policies” has the meaning set forth in Section 4.15(a).

“Seller Title Credit” has the meaning set forth in Section 6.4.

“Shares” has the meaning set forth in the Recitals to this Agreement.

“Straddle Period” has the meaning set forth in Section 9.4.

“Subject Interests” has the meaning set forth in clause (a) of the definition of Oil and Gas Assets.

“Tax” or “Taxes” means (a) any federal, state, local or foreign taxes, assessments, duties or similar charges of any kind whatsoever, including any income, gross receipts, license, payroll, employment, excise, severance, premium, windfall profits, environmental, customs duties, capital stock, capital gain, petroleum profits, value added, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, escheat or unclaimed property, ad valorem, sales, use, transfer, stamp, registration, minimum, alternative or add-on minimum, estimated or other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not and (b) any liability in respect of any item described in clause (a) payable by reason of assumption, transferee or successor liability, operation of law, Treasury Regulations Section 1.1502-6(a) (or comparable provision of state, local or foreign law) or otherwise.

“Tax Accrual” means the aggregate amount of the accruals, reserves, and provisions for Taxes reflected in the computation of the Final Net Working Capital that has become final and binding pursuant to Section 2.6.

“Tax Authority” means any Governmental Authority having jurisdiction over the assessment, determination, collection or imposition of any Tax.

“Tax Claim” has the meaning set forth in Section 9.8(a).

“Tax Records” means Tax Returns (other than any Tax Return relating to a Seller Affiliated Group) and other books and records with respect to Tax matters relating to the Company for any taxable period beginning on or before the Closing Date.

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“Tax Return” means any report, return, election, document, estimated Tax filing, declaration or other filing provided or required to be provided to any Tax Authority including any amendments thereto.

“Third-Party Claim” has the meaning set forth in Section 11.3(a).

“Third-Party Debt” means all (i) outstanding indebtedness for borrowed money of the Company from any Person and (ii) outstanding indebtedness of any Person other than the Company that is secured by a Lien on any assets or equity interest of the Company or guaranteed by the Company.

“Title Defect” has the meaning set forth in Section 6.3.

“Title Defect Amount” has the meaning set forth in Section 6.2(d).

“Title Defect Property” has the meaning set forth in Section 6.2(c).

“Transfer Taxes” has the meaning set forth in Section 9.2.

“Transition Services Agreement” means the Transition Services Agreement in the form attached as Exhibit 1.1(f) to this Agreement.

“Treasury Regulations” means the regulations promulgated under the Code, as such regulations may be amended from time to time.

“Working Interest” shall mean the percentage of costs and expenses attributable to the maintenance, development and operation of a Property Subdivision.

Section 1.2 Rules of Construction.

(a)       All article, section, schedule and exhibit references used in this Agreement are to articles, sections, schedules and exhibits to this Agreement unless otherwise specified. The schedules and exhibits attached to this Agreement constitute a part of this Agreement and are incorporated herein for all purposes.

(b)       If a term is defined as one part of speech (such as a noun), it shall have a corresponding meaning when used as another part of speech (such as a verb). Terms defined in the singular have the corresponding meanings in the plural, and vice versa. Unless the context of this Agreement clearly requires otherwise, words importing the masculine gender shall include the feminine and neutral genders and vice versa. The term “includes” or “including” shall mean “including without limitation.” The words “hereof,” “hereto,” “hereby,” “herein,” “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular section or article in which such words appear. The term “cost” includes expense and the term “expense” includes “cost.”

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(c)       The Parties acknowledge that each Party and its attorneys have reviewed this Agreement and that any rule of construction to the effect that any ambiguities are to be resolved against the drafting Party, or any similar rule operating against the drafter of an agreement, shall not be applicable to the construction or interpretation of this Agreement.

(d)       The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement.

(e)       All references to currency herein shall be to, and all payments required hereunder shall be paid in, Dollars.

(f)       All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP.

(g)       Any event hereunder requiring the payment of cash or cash equivalents and any action to be taken hereunder on a day that is not a Business Day shall be deferred until the first Business Day occurring after such day.

(h)       Each exhibit and schedule to this Agreement is a part of this Agreement, but if there is any conflict or inconsistency between the main body of this Agreement and any exhibit or schedule, the provisions of the main body of this Agreement shall prevail.

Article II
PURCHASE AND SALE; CLOSING

Section 2.1 Purchase and Sale of the Shares, Oil and Gas Assets and Gathering Assets. At the Closing, upon the terms and subject to the conditions set forth in this Agreement, Seller shall (a) sell, assign, transfer and convey to Buyer, and Buyer shall purchase and acquire from Seller, effective as of the Effective Time applicable thereto, the Shares, the Oil and Gas Assets, and the (■) Gathering Assets, and (b) cause (■) to sell, assign, transfer and convey to Buyer, and Buyer shall purchase and acquire from (■), effective as of the Effective Time applicable thereto, the (■) Gathering Assets.

Section 2.2 Purchase Price. The aggregate consideration payable by Buyer to Seller for the Shares, the Gathering Assets, and the Oil and Gas Assets shall be Forty-One Million Three Hundred Thousand Dollars ($41,300,000.00), $1,417,143 of which is attributable to the Shares, $39,382,857 of which is attributable to the Oil and Gas Assets (the “Oil and Gas Base Purchase Price”), $250,000 of which is attributable to the (■) Gathering Assets, and $250,000 of which is attributable to the (■) Gathering Assets (collectively, the “Base Purchase Price”). The “Adjusted Purchase Price” shall be the Base Purchase Price (a) as adjusted by the Initial Adjustment Amount as provided in Section 2.4(a), (b) as may be adjusted for Title Defects, if any, in accordance with Section 6.2(d), (c) as may be adjusted for excluded Title Defect Properties, if any, in accordance with Section 6.5(a), (d) as may be adjusted for Environmental Defects, if any, in accordance with Section 6.7(c), (e) as may be adjusted for excluded Environmental Defect Properties, if any, in accordance with Section 6.8(a), (f) as may be adjusted for payments of portions of the Base Purchase Price received by Seller from holders of Preference Rights contemporaneously with Closing in accordance with and as contemplated by Section 7.2, (g) as may be adjusted on account of Retained Assets as contemplated by Section 7.3, (h) as adjusted downward by an amount equal to the aggregate amount of proceeds which Seller is holding in suspense as of the Closing Date in respect of past production of oil, gas or other hydrocarbons attributable to the Oil and Gas Assets, (i) as adjusted upwards for any costs and expenses owed by Buyer pursuant to Section 8.15 and (j) as adjusted downward by the Debt Payoff Amount, if any.

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Section 2.3 Deposit.

(a)       On July 5, 2017, Buyer shall deposit by wire transfer in same day funds into escrow with Seller the sum of (■), representing (■) percent (■) of the Base Purchase Price (the “Deposit”). If the transactions contemplated by this Agreement are consummated in accordance with the terms of this Agreement, the Deposit shall be applied to the Adjusted Purchase Price to be paid by Buyer at the Closing. The Deposit shall not bear interest, and if Buyer receives credit for the Deposit against the Adjusted Purchase Price paid at Closing or if the Deposit is refunded to Buyer in accordance with Section 2.3(b), such payment, or credit, shall be in the amount of the Deposit and shall not include any additional amounts.

(b)       If this Agreement is terminated prior to the Closing, Seller will retain the Deposit unless (i) the Parties mutually agree to terminate this Agreement in accordance with Section 12.1(a), or (ii) this Agreement is terminated pursuant to Section 12.1(b), Section 12.1(c)(ii), Section 12.1(d) or Section 12.1(e). If Buyer is entitled to receive the Deposit pursuant to this Section 2.3(b), then Seller will refund the Deposit to Buyer within three Business Days of termination of this Agreement.

Section 2.4 Net Cash Flow Adjustment.

(a)       The Base Purchase Price shall be increased or decreased, as the case may be, by an amount equal to the Net Cash Flow with respect to the Oil and Gas Assets and the Gathering Assets for the time period (the “Adjustment Period”) beginning at the applicable Effective Time and ending at 7:00 a.m. (local time) on the Closing Date. Seller shall deliver to Buyer on or prior to the second Business Day preceding the Closing Date a statement (the “Adjustment Statement”) setting forth Seller’s preliminary determination (“Initial Adjustment Amount”) of the Net Cash Flow. If the Initial Adjustment Amount shown on the Adjustment Statement is a positive number, then the Base Purchase Price shall be increased by such amount for purposes of determining the Adjusted Purchase Price. If the Initial Adjustment Amount shown on the Adjustment Statement is a negative number, then the Base Purchase Price shall be decreased by such amount for purposes of determining the Adjusted Purchase Price.

(b)       The Adjustment Statement shall be based upon actual information available to Seller at the time of its preparation and upon Seller’s good faith estimates and assumptions. There shall be attached to the Adjustment Statement such supporting documentation as is reasonably necessary to provide a basis for the Net Cash Flow shown therein.

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(c)       The “Net Cash Flow” shall be the algebraic sum of (i) a positive amount equal to the aggregate amount paid by Seller as Seller’s share of the costs and expenses of exploration, maintenance, development, production and operation of the Oil and Gas Assets and the Gathering Assets with respect to the Adjustment Period (including prepayments of any such costs or expenses), including all costs and expenses associated with Seller’s three (3) district offices located in West Virginia and its office located in (■) West Virginia (including the salaries, wages and benefit costs of all employees employed therein other than the salaries, wages, and benefit costs of the Account Executive and the West Virginia Superintendent who are both employed in Seller’s (■), West Virginia office), (ii) a positive amount equal to the sum of (A) all overhead charges paid by Seller to any operator of any of the Oil and Gas Assets, and (B) with respect to all Oil and Gas Assets operated by Seller or any Affiliate of Seller, an overhead charge for all such Oil and Gas Assets equal to (■) per month (prorated for any partial month) with respect to the Adjustment Period, (iii) a positive amount equal to the amount, if any, by which the Gas Imbalance Adjustment is greater than zero, (iv) a negative amount equal to the aggregate net proceeds received by Seller from the sale or disposition of oil, gas and other hydrocarbons produced from the Oil and Gas Assets during the Adjustment Period or from the rental, sale, salvage or other disposition of any other Oil and Gas Assets during the Adjustment Period, (v) a negative amount equal to the aggregate proceeds received by Seller or (■) related to the gathering and transportation of hydrocarbons with respect to the Gathering Assets during the Adjustment Period, (vi) a negative amount equal to the amount, if any, by which the Gas Imbalance Adjustment is less than zero and (vii) any other amount (either positive of negative) agreed upon by the Parties in writing.

Section 2.5 The Closing.

(a)       The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of (■), commencing at 10:00 a.m. local time on (i) September 29, 2017, or if all conditions in Article X to be satisfied at Closing have not yet been satisfied or waived as of the scheduled Closing Date, then on the fifth (5^th) Business Day immediately following the date on which such conditions have been satisfied or waived subject to the rights of the Parties set forth in Article XII, or (ii) such other date as Buyer and Seller may mutually determine (the “Closing Date”). The Closing shall be deemed to have been consummated as of the applicable Effective Time.

(b)       At the Closing, Seller will deliver the following documents and deliverables to Buyer:

(i)       the Assignment of Shares, duly executed by Seller;

(ii)       the Oil and Gas Assets Conveyance, duly executed by Seller;

(iii)       the (■) Gathering Assets Conveyance, duly executed by Seller;

(iv)       the (■) Gathering Assets Conveyance, duly executed by (■);

(v)       an Oil and Gas Lease covering each of the fee mineral tracts described in Part I of the Property Schedule, duly executed by Seller;

(vi)       the Transition Services Agreement, duly executed by Seller;

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(vii)       the resignations (or evidence of removal) of each officer and director of the Company, effective as of the Closing Date;

(viii)       the certificate referenced in Section 10.1(c), duly executed by Seller;

(ix)       a non-foreign certificate, as such certificate is referred to in Section 1445(b)(2) of the Code, in the form attached hereto as Exhibit 2.5(b)(ix), duly executed by each of Seller and (■);

(x)       letters in lieu of division and transfer orders executed by Seller relating to the Subject Interests in form reasonably necessary to reflect the conveyances contemplated hereby; and

(xi)       such other certificates, instruments and documents as may be reasonably requested by Buyer prior to the Closing Date to carry out the intent and purposes of this Agreement.

(c)       At the Closing, Buyer will deliver the following documents and deliverables to Seller:

(i)       an amount equal to the Adjusted Purchase Price less the Deposit by wire transfer of immediately available funds to an account or accounts specified by Seller;

(ii)       the Assignment of Shares, duly executed by Buyer;

(iii)       the Oil and Gas Assets Conveyance, duly executed by Buyer;

(iv)       the (■) Gathering Assets Conveyance, duly executed by Buyer;

(v)       the (■) Gathering Assets Conveyance, duly executed by Buyer;

(vi)       an Oil and Gas Lease covering each of the fee mineral tracts described in Part I of the Property Schedule, duly executed by Buyer;

(vii)       the Transition Services Agreement, duly executed by Buyer;

(viii)       the certificate referenced in Section 10.2(c), duly executed by Buyer

(ix)       evidence that the Buyer Approvals set forth in Schedule 5.3 have been duly made, given, or obtained and are in full force and effect; and

(x)       such other certificates, instruments and documents as may be reasonably requested by Seller prior to the Closing Date to carry out the intent and purposes of this Agreement.

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Section 2.6 Post-Closing Purchase Price Reconciliation.

(a)       The Net Working Capital as of the Effective Time applicable to the Company (the “Final Net Working Capital”) shall be determined in accordance with GAAP and consistent with the methodology set forth on Schedule 2.6(a) and with the procedures set forth in this Section 2.6 and the Final Net Working Capital as so determined shall be final and binding on Buyer and Seller. In addition, after the Closing, Seller shall review the Adjustment Statement and determine the actual Net Cash Flow. As soon as reasonably practicable following the Closing Date, and in any event within ninety (90) days thereafter, Seller shall prepare and deliver to Buyer (i) a calculation of the Final Net Working Capital, together with reasonably detailed supporting information (the “Final Net Working Capital Statement”), (ii) a calculation of the fair market value (which shall be calculated based on the Price Index) of all produced oil, gas and other hydrocarbons (including linefill and working storage gas) owned by (x) the Company or Seller as of the applicable Effective Time and used or held for use in connection with any Business and (y) Seller or (■) as of the applicable Effective Time and used in connection with the Gathering Assets (the “Hydrocarbon Value”), together with reasonable substantiation thereof, and (iii) a statement of the actual Net Cash Flow and such supporting documentation as is reasonably necessary to support the Net Cash Flow shown therein and such additional documentation as Buyer may reasonably request (the “Final Adjustment Statement”).

(b)       From and after the Closing Date, Buyer shall provide Seller and its Representatives reasonable access to the records of the Company and Buyer to the extent related to the Final Net Working Capital, Hydrocarbon Value and Net Cash Flow and shall cause the employees of Buyer and the Company to cooperate with Seller in connection with Seller’s preparation of the Final Net Working Capital Statement and the Final Adjustment Statement.

(c)       Within forty-five (45) days after Buyer’s receipt of the Final Net Working Capital Statement and the Final Adjustment Statement, Buyer shall notify Seller as to whether Buyer agrees or disagrees with the Final Net Working Capital Statement and the Final Adjustment Statement and, if Buyer disagrees, such notice shall set forth in reasonable detail the particulars of such disagreement. If Buyer provides Seller a notice of agreement or does not provide Seller a notice of disagreement within such forty-five (45) day period, then Buyer shall be deemed to have accepted the calculations and the amounts set forth in the Final Net Working Capital Statement and the Final Adjustment Statement delivered by Seller, which shall then be final, binding and conclusive for all purposes hereunder. If such a notice of disagreement is timely provided (which notice shall be in writing and set forth all of Buyer’s disagreements with respect to any portion of the Final Net Working Capital Statement or the Final Adjustment Statement, as applicable, together with Buyer’s proposed changes thereto, and shall include an explanation in reasonable detail of, and such supporting documentation as is reasonably necessary to support, such changes), then Buyer and Seller shall each use Reasonable Efforts for a period of thirty (30) days thereafter to resolve any such disagreements with respect to the calculations in (i) the Final Net Working Capital Statement and the determination of the Final Net Working Capital or (ii) the Final Adjustment Statement and the determination of the actual Net Cash Flow.

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(d)       If, at the end of the thirty (30) day resolution period, the Parties are unable to resolve any disagreements as to items in the Final Net Working Capital Statement or the Final Adjustment Statement, then either Seller or Buyer may submit any unresolved disagreements to Ernst & Young LLP (or such other independent accounting firm of recognized national standing as may be mutually selected by Buyer and Seller) for resolution. If Ernst & Young LLP is not willing or able to serve in such capacity, then Seller shall within ten (10) days deliver to Buyer a listing of three other accounting firms of recognized national or regional standing that do not have a current relationship with Seller or any of its Affiliates and Buyer shall within ten (10) days after receipt of such list, select one of such three accounting firms (such firm as is ultimately selected pursuant to the aforementioned procedures being the “Accountant”). The Accountant shall be charged with determining as promptly as practicable, but in any event within thirty (30) days after the date on which such dispute is referred to the Accountant, any disputed items required to determine the Final Net Working Capital or the actual Net Cash Flow. The Accountant will act as an arbitrator to determine and resolve, based solely on presentations by Buyer and Seller, and not by independent review, only those issues still in dispute. The costs and expenses of the Accountant shall be borne 50% by Seller and 50% by Buyer. The determination of the Accountant shall be final, binding and conclusive for all purposes hereunder.

(e)       Within five (5) Business Days of the date on which the last disputed item required to determine the Final Net Working Capital or the actual Net Cash Flow is resolved pursuant to this Section 2.6 (whether by agreement of the Parties, any failure by Buyer to provide a timely notice of disagreement pursuant to subsection (c) or a final determination by the Accountant pursuant to subsection (d)), (i) (1) if the Final Net Working Capital exceeds the Estimated Net Working Capital, then Buyer shall pay to Seller an amount equal to the difference between the Final Net Working Capital and the Estimated Net Working Capital, or (2) if the Estimated Net Working Capital exceeds the Final Net Working Capital, then Seller shall pay to Buyer an amount equal to the difference between the Estimated Net Working Capital and the Final Net Working Capital, (ii) (1) if the actual Net Cash Flow exceeds the Initial Adjustment Amount, then Buyer shall pay to Seller an amount equal to the difference between the actual Net Cash Flow and the Initial Adjustment Amount, or (2) if the Initial Adjustment Amount exceeds the actual Net Cash Flow, then Seller shall pay to Buyer an amount equal to the difference between the Initial Adjustment Statement and the actual Net Cash Flow, and (iii) Buyer shall pay to Seller an amount equal to the Hydrocarbon Value.

(f)       The provisions of this Section 2.6 and of any section of this Agreement shall apply in such a manner so as not to give the components and calculations duplicative effect to any item of adjustment and, the Parties covenant and agree that no amount shall be (or is intended to be) included, in whole or in part (either as an increase or reduction) more than once in the calculation of (including any component of) Net Working Capital or any other calculated amount pursuant to this Agreement if the effect of such additional inclusion (either as an increase or reduction) would be to cause such amount to be overstated or understated for purposes of such calculation. The Parties acknowledge and agree that, if there is a conflict between a determination, calculation or methodology set forth in Schedule 2.6(a) or the definitions contained in this Agreement, as applicable, on the one hand, and those provided by GAAP, on the other hand, (i) the determination, calculation or methodology set forth in Schedule 2.6(a) or the definitions contained in this Agreement, as applicable, shall control to the extent that the matter is included in Schedule 2.6(a) or the definitions contained in this Agreement, as applicable, as a line item or specific adjustment and (ii) the determination, calculation or methodology prescribed by GAAP shall control to the extent the matter is not so addressed in Schedule 2.6(a) or the definitions contained in this Agreement, as applicable, or requires reclassification as an asset or liability to be included in a line item or specific adjustment.

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Section 2.7 Effect of Closing.

(a)       All proceeds, accounts receivable, income, revenues and monies attributable to the Oil and Gas Assets, and Gathering Assets for periods prior to the applicable Effective Time shall belong to Seller. All proceeds, accounts receivable, income, revenues and monies attributable to the Oil and Gas Assets, and Gathering Assets for periods on and after the applicable Effective Time shall belong to Buyer.

(b)       If monies are received by a Party which, under the terms of this Section 2.7, belong to the other Party, the same shall immediately be paid over to the proper Party.

Section 2.8 Intercompany Accounts. Notwithstanding any other provision of this Agreement to the contrary, prior to or on the Closing Date, Seller shall, and shall cause its Affiliates (including the Company) to, net, to the extent possible, and settle, forgive, dividend, contribute, or take other necessary or appropriate action with respect to all intercompany accounts between (a) Seller and its Affiliates (other than the Company), on the one hand, and (b) the Company, on the other hand. The effect of the foregoing shall be to eliminate, pay off, or otherwise cause to be zero such intercompany accounts prior to the Closing.

Article III
REPRESENTATIONS AND WARRANTIES RELATING TO SELLER

Seller hereby represents and warrants to Buyer as follows:

Section 3.1 Organization of Seller. Seller is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Delaware and has the requisite corporate power and authority to own the Shares, the Oil and Gas Assets and the (■) Gathering Assets. Seller is duly licensed or qualified in each jurisdiction in which the ownership or operation of its assets or the character of its activities is such as to require it to be so licensed or qualified, except where the failure to be so licensed or qualified would not reasonably be expected to have a Material Adverse Effect.

Section 3.2 Authorization; Enforceability. (a) Seller has all requisite corporate power and authority to execute and deliver this Agreement and to perform all obligations to be performed by it hereunder, (b) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized and approved by all requisite corporate action on the part of Seller, and (c) this Agreement has been duly and validly executed and delivered by Seller, and this Agreement constitutes a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar Laws now or hereinafter in effect relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at Law), the power of a court to deny enforceability of remedies based on public policy, and the effect of statutory and other Laws regarding fraudulent conveyances and preferential transfers.

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Section 3.3 No Conflict. The execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated hereby by Seller (assuming all required filings, consents, approvals, authorizations and notices have been made, given or obtained and all Preference Rights have been complied with) do not and shall not:

(a)       violate any Organizational Document of Seller; or

(b)       (i) violate, in any material respect, any Law applicable to Seller or (ii) (A) materially breach the terms of any material Contract to which Seller is a party or by which Seller may be bound, (B) result in the termination of any such material Contract, or (C) result in the creation of any Lien upon any of the Shares, the Oil and Gas Assets or the Gathering Assets.

Section 3.4 Litigation. Except as set forth on Schedule 3.4, (a) there are no lawsuits, actions or arbitration proceedings before any Governmental Authority pending or, to the Knowledge of Seller, threatened in writing against Seller with respect to the Shares, the Oil and Gas Assets or the Gathering Assets and (b) there are no Orders that remain unsatisfied that are binding upon Seller with respect to the Shares, the Oil and Gas Assets or the Gathering Assets.

Section 3.5 Brokers’ Fees. No broker, finder, investment banker or other Person is entitled to any brokerage fee, finders’ fee or other commission in connection with the transactions contemplated by this Agreement based upon arrangements made by Seller or any of its Affiliates except for fees and commissions which are payable by Seller.

Section 3.6 Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending against, being contemplated by, or, to the Knowledge of Seller, threatened against Seller.

Article IV
REPRESENTATIONS AND WARRANTIES RELATING TO
the Company, THE OIL AND GAS ASSETS and
the gathering assets

Seller hereby represents and warrants to Buyer as follows:

Section 4.1 Organization of the Company. The Company is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Delaware and has the requisite corporate power and authority to own or lease its assets and to conduct its Business as it is now being conducted. The Company is duly licensed or qualified in each jurisdiction in which the ownership or operation of its assets or the character of its activities is such as to require it to be so licensed or qualified, except where the failure to be so licensed or qualified would not reasonably be expected to have a Material Adverse Effect.

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Section 4.2 Shares; Capitalization of the Company.

(a)       The authorized capital stock of the Company consists of 1,000 shares of common stock, par value $1.00 per share, of which 1,000 shares are issued and outstanding and constitute the Shares. All of the Shares have been duly authorized, are validly issued, fully paid and non-assessable, and are owned of record and beneficially by the Seller, free and clear of all Liens. Upon consummation of the transactions contemplated by this Agreement, Buyer shall own all of the Shares, free and clear of all Liens other than transfer restrictions imposed by securities Laws.

(b)       All of the Shares were issued in compliance with applicable Laws. None of the Shares were issued in violation of any agreement, arrangement or commitment to which Seller or the Company is a party or is subject to or in violation of any preemptive or similar rights of any person.

(c)       There are no outstanding or authorized options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to the capital stock of the Company or obligating Seller or the Company to issue or sell any shares of capital stock of, or any other interest in, the Company. The Company does not have outstanding or authorized any stock appreciation, phantom stock, profit participation or similar rights. There are no voting trusts, stockholder agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any of the Shares.

Section 4.3 No Conflict. The execution, delivery and performance of this Agreement by the Company and (■) and the consummation of the transactions contemplated hereby by the Company and (■) (assuming all required filings, consents, approvals, authorizations, and notices have been made, given or obtained and all Preference Rights have been complied with) do not and shall not:

(a)       violate any Organizational Document of the Company or (■), as applicable;

(b)       (i) cause the Company to violate, in any material respect, any Law applicable to the Company or its assets or (ii) (A) cause the Company to materially breach the terms of any Material Contract to which the Company is a party or its assets are bound, (B) result in the termination of any such Material Contract to which the Company is a party or its assets are bound, or (C) result in the creation of any Lien upon any of the Shares, the assets of the Company under any Material Contract to which the Company is a party or its assets are bound; or

(c)       (i) cause (■) to violate, in any material respect, any Law applicable to (■) or its assets or (ii) (A) cause (■) to materially breach the terms of any Material Contract to which (■) is a party or its assets are bound, (B) result in the termination of any such Material Contract to which (■) is a party or its assets are bound, or (C) result in the creation of any Lien upon any of the (■) Gathering Assets under any Material Contract to which (■) is a party or its assets are bound.

Section 4.4 Subsidiaries. The Company does not own any equity interest in any Person.

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Section 4.5 Financial Statements.

(a)       Seller has previously delivered to Buyer the unaudited financial statements of the Company as of the fiscal years ended December 31, 2015, and December 31, 2016 and for the five month period ended May 31, 2017 (the “Financial Statements”). The Financial Statements were prepared in accordance with GAAP (except that they do not include footnotes, allocations of corporate overhead expenses, and interim period income taxes and, in the case of the Financial Statements as of the fiscal year ended December 31, 2015, they do not include Tax attributes associated with net operating loss carry forwards). The Financial Statements present fairly in all material respects the results of operations and cash flows of the Company as of the respective dates thereof, and the respective balance sheets present fairly in all material respects the financial condition of the Company as of the respective dates thereof.

(b)       Except as disclosed on Schedule 4.5, the Company does not have any liabilities of a nature required to be reflected on a balance sheet prepared in accordance with GAAP, whether accrued, absolute, contingent or otherwise, and whether due or to become due, except liabilities (i) that are reflected in the Financial Statements, (ii) that were incurred after May 31, 2017, in the ordinary course of business consistent with past practices, or (iii) that do not have a Material Adverse Effect.

Section 4.6 Absence of Certain Changes. Except as disclosed on Schedule 4.6, from December 31, 2016, through the date of this Agreement, the Business of the Company has been conducted, in all material respects, in the ordinary course consistent with past practices and there has not been any:

(a)       event, occurrence or development that has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

(b)       amendment of the charter, by-laws or other organizational documents of the Company;

(c)       split, combination or reclassification of any of the Shares;

(d)       issuance, sale or other disposition by the Company of any of its capital stock, or grant of any options, warrants or other rights to purchase or obtain (including upon conversion, exchange or exercise) any of the Company’s capital stock;

(e)       declaration or payment of any dividends or distributions on or in respect of any of the Company’s capital stock or redemption, purchase or acquisition of the Company’s capital stock;

(f)       material change by the Company in any method of accounting or accounting practice, except as required by GAAP;

(g)       incurrence (from a Person other than an Affiliate), assumption or guarantee by the Company of any indebtedness for borrowed money;

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(h)       except as otherwise provided in Section 2.8, any loan by the Company to (or forgiveness of any loan by the Company to), or entry into any other transaction with, any of the Company’s stockholders or current or former directors and officers;

(i)       entry by the Company into a new line of business or abandonment or discontinuance of existing lines of business;

(j)       adoption by the Company of any plan of merger, consolidation, or reorganization;

(k)       acquisition by the Company by merger or consolidation with, or by purchase of a substantial portion of the assets or stock of, or by any other manner, any business or any Person or any division thereof;

(l)       action by the Company to (i) make, change or rescind any Tax election, (ii) amend any Tax Return, (iii) settle or compromise any Tax claim or liability, (iv) change (or make a request to change) any method of accounting for Tax purposes, (v) waive or extend any statute of limitations in respect of Taxes, (vi) surrender any right to claim a refund of Taxes, or (vii) enter into any closing agreement with respect to Taxes;

(m)       termination, material modification or cancellation of any insurance coverage on the assets of the Company;

(n)       failure to maintain the Company’s books and records in accordance with past practice;

(o)       a Contract to do any of the foregoing entered into by the Company.

Section 4.7 Contracts.

(a)       Schedule 4.7(a) contains a true and complete listing of the following Gathering Contracts and the following Contracts to which the Company is a party or by which any of its assets are bound or which are binding upon the Gathering Assets or the Oil and Gas Assets and Seller’s, or in the case of the (■) Gathering Assets, (■)’s, operation thereof that exist as of the date of this Agreement and will exist following the Closing (the Contracts listed on Schedule 4.7(a) being “Material Contracts”):

(i)       each Contract involving a remaining commitment to pay capital expenditures in excess of $100,000 in any calendar year or $250,000 in the aggregate;

(ii)       each Contract for lease of personal property (including compressors) or real property (excluding any real property that is the subject of any (x) Gathering Surface Contract or (y) Subject Interest) involving aggregate payments following the Closing in excess of $100,000 in any calendar year which is not cancellable without penalty on sixty (60) days’ or less prior written notice;

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(iii)       each Contract between Seller or an Affiliate of Seller (other than the Company), on the one hand, and the Company, on the other hand, to which Seller or an Affiliate of Seller (other than the Company) will be a party after the Closing;

(iv)       each Contract for the transportation or the sale, purchase, exchange, or other disposition of oil, gas or other hydrocarbons which is not cancellable without penalty on sixty (60) days or less prior written notice and that generated revenue in excess of $75,000 in calendar year 2015 or 2016;

(v)       each Contract that provides for a limit on the ability of the Company or the owner of the Gathering Assets or the Oil and Gas Assets to compete in any line of business or in any geographic area during any period of time after the Closing;

(vi)       except for (A) the Subject Interests, (B) operating, unitization, pooling and communitization Contracts, (C) Contracts for the sale, purchase, exchange or other disposition of oil, gas or other hydrocarbons or for the gathering, transporting, storing, dehydration, compression, fractionation, treating, handling, disposal or processing of oil, gas or other hydrocarbons, and (D) Contracts of the nature described in clauses (i) through (v) above or in clauses (vii) through (xii) below, (1) each Contract involving aggregate payments or receipts following the Closing in excess of $250,000 in any calendar year and (2) each Gathering Contract involving aggregate payments or receipts following the Closing in excess of $250,000 in any calendar year, that, in either case, cannot be terminated by the Company, Seller or (■), as applicable, upon sixty (60) days’ or less notice;

(vii)       each Contract that is an operating agreement;

(viii)       each Contract that is a development agreement, farmout agreement or farmin agreement (pursuant to which the farmee thereunder has outstanding rights to earn an interest in a Subject Interest) or participation agreement;

(ix)       each Contract that is a Tax partnership agreement;

(x)       each Contract that creates an area of mutual interest;

(xi)       each Contract that is a guaranty for which the Company is obligated; and

(xii)       each Contract that is a dedication agreement.

(b)       True and complete copies of all Material Contracts (other than any Material Contracts that contain confidentiality provisions prohibiting their disclosure) have been made available to Buyer.

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(c)       Except as set forth in Schedule 4.7(c), each Material Contract (i) is in full force and effect and (ii) is the valid and binding obligation of the Company, Seller or (■), as applicable, and is enforceable against the Company, Seller or (■), as applicable, and, to the Knowledge of Seller, each other party thereto, in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar Laws now or hereinafter in effect relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at Law), the power of a court to deny enforceability of remedies based on public policy, and the effect of statutory and other Laws regarding fraudulent conveyances and preferential transfers. Except as set forth in Schedule 4.7(c), neither the Company, Seller nor (■), as applicable, nor, to the Knowledge of Seller, any other party thereto, is in material breach of any Material Contract, and neither Seller, the Company nor (■), as applicable, has received any written notice of termination or material breach of any Material Contract. Except as set forth in Schedule 4.7(c), no Material Contract creates any express indemnification obligations that a reasonably prudent operator of oil and gas properties would consider to be outside industry standards.

Section 4.8 Litigation. Except as set forth in Schedule 4.8, (a) there are no lawsuits, actions or arbitration proceedings before any Governmental Authority pending or, to the Knowledge of Seller, threatened in writing, against the Company or (■) (with respect to the (■) Gathering Assets) and (b) there are no Orders that remain unsatisfied that are pending against the Company or (■) (with respect to the (■) Gathering Assets).

Section 4.9 Employees and Labor Relations. The Company does not directly employ any individual nor has it directly employed any individual in the past five years. The Company is not a party to any collective bargaining agreement.

Section 4.10 Taxes. Except as set forth on Schedule 4.10:

(a)       each of the Company, Seller (with regard to the Oil and Gas Assets and the (■) Gathering Assets) and (■) (with regard to the (■) Gathering Assets) has duly and timely filed (including extensions) all Tax Returns required to be filed by it under Law and all such Tax Returns were correct and complete in all material respects;

(b)       all Taxes owed by the Company, Seller (with regard to the Oil and Gas Assets and the (■) Gathering Assets) and (■) (with regard to the (■) Gathering Assets) (whether or not shown or required to be shown on any Tax Return) have been paid;

(c)       none of the Company, Seller (with regard to the Oil and Gas Assets and the (■) Gathering Assets) or (■) (with regard to the (■) Gathering Assets) is now under audit or examination by any Tax Authority or subject to any judicial or administrative proceeding by or with any Tax Authority;

(d)       except for Permitted Liens, there are no Liens on any of the assets of the Company, the Oil and Gas Assets or the Gathering Assets that have arisen as a result of any failure (or alleged failure) to pay any Tax or otherwise in respect of Taxes;

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(e)       the Company is not a party to any Tax allocation or sharing arrangement which will survive the Closing (excluding commercial agreements entered into in the ordinary course of business the primary purpose of which does not relate to Taxes);

(f)       each of the Company, Seller (with regard to the Oil and Gas Assets and the (■) Gathering Assets) and (■) (with regard to the (■) Gathering Assets) has withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, creditor, or other third party;

(g)       there is no dispute or claim concerning any Tax liability of the Company, Seller (with regard to the Oil and Gas Assets and the (■) Gathering Assets) or (■) (with regard to the (■) Gathering Assets) either (A) claimed or raised by any Tax Authority in writing or (B) as to which the Company, Seller (with regard to the Oil and Gas Assets and the (■) Gathering Assets) or (■) (with regard to the (■) Gathering Assets) has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency;

(h)       the Company has not been a “distributing corporation” or a “controlled corporation” in connection with a distribution described under Section 355 of the Code, or any comparable provision of state, local or foreign Law;

(i)       the Company is not, and has not been, a party to any transaction that is “listed transaction” as defined in Section 6707A of the Code and Treasury Regulation Section 1.6011-4(b)(2), or any comparable provision of state, local, or foreign Law;

(j)       no claim has been made in writing by a Tax Authority with respect to the Gathering Assets, the Oil and Gas Assets, or the Company in a jurisdiction where the Seller, (■), or the Company, as applicable, does not file Tax Returns that it is or may be subject to taxation by that jurisdiction;

(k)       the Company will not be required, for any Tax period (or portion thereof) ending after the Closing Date, to include any material item of income in taxable income that is attributable to (i) any installment sale or open transaction disposition made on or prior to the Closing Date, (ii) deferred intercompany gain or any excess loss account described in Treasury Regulations under Section 1502 of the Code (or any corresponding or similar provision of federal, state, local or foreign Tax Law) entered into or created prior to the Closing, or (iii) prepaid amount received on or prior to the Closing Date; and

(l)       the Company has not entered into a closing agreement with the Internal Revenue Service under Section 7121 of the Code (or any comparable provision of state, local or foreign Tax law) and is not subject to any private letter ruling of the Internal Revenue Service or comparable ruling by any other Tax Authority.

Section 4.11 Environmental Matters. As of the date of this Agreement, to the Knowledge of Seller, except as set forth on Schedule 4.11:

(a)       the operations of the Company, the Oil and Gas Assets and the Gathering Assets are in compliance, in all material respects, with all Environmental Laws, which compliance includes the possession and maintenance of, and compliance, in all material respects, with, all material Environmental Permits required under all Environmental Laws;

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(b)       neither the Company nor any of the Oil and Gas Assets nor any of the Gathering Assets is the subject of any pending Order that remains unsatisfied under any Environmental Laws requiring remediation or the payment of a fine or penalty; and

(c)       neither the Company nor any of the Oil and Gas Assets nor any of the Gathering Assets is subject to any action before any Governmental Authority pending or threatened in writing, whether judicial or administrative, alleging noncompliance, in any material respect, with or potential material liability under any Environmental Law.

Notwithstanding anything to the contrary contained in this Section 4.11 or elsewhere in this Agreement, Seller makes no, and disclaims any, representation or warranty, express, implied, statutory or otherwise, with respect to the presence or absence of naturally occurring radioactive material in or on the assets of the Company, the Oil and Gas Assets or the Gathering Assets.

Section 4.12 Legal Compliance. Except with respect to (a) matters set forth on Schedule 3.4, Schedule 4.8, and Schedule 4.12, (b) compliance with Laws concerning Taxes (as to which certain representations and warranties are made pursuant to Section 4.10) and (c) compliance with Environmental Laws (as to which certain representations and warranties are made pursuant to Section 4.11), the Company, the Oil and Gas Assets and the Gathering Assets are in compliance, in all material respects, with all Laws.

Section 4.13 Permits. Except with respect to (a) matters set forth on Schedule 4.13 and (b) Environmental Permits (as to which certain representations and warranties are made pursuant to Section 4.11), to the Knowledge of Seller, each of the Company, Seller (with respect to the Oil and Gas Assets and the (■) Gathering Assets) and (■) (with respect to the (■) Gathering Assets) possess all Permits necessary for it to own its assets and operate its Business. To the Knowledge of Seller, (a) all such Permits are in full force and effect and (b) there are no lawsuits or other proceedings before any Governmental Authority pending or threatened in writing against the Company, Seller (with respect to the Oil and Gas Assets or the (■) Gathering Assets) or (■)(with respect to the (■) Gathering Assets) that seek the revocation, cancellation, suspension, or adverse modification thereof.

Section 4.14 Title. Except as disclosed on Schedule 4.14, in all material respects, (a) the Company owns or has the right to use all real property interests necessary for the operation of its Business, (b) Seller owns or has the right to use all (■) Gathering Assets necessary for the operation of the Business applicable to such assets, (c) (■) owns or has the right to use all (■) Gathering Assets necessary for the operation of the Business applicable to such assets, and (d) each of such real property interests is free and clear of all Liens (other than Permitted Liens) granted or suffered by any action of the Company, Seller (with respect to the (■) Gathering Assets), (■) (with respect to the (■) Gathering Assets), or any Person claiming by, through or under the Company, Seller or (■) , as applicable.

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Section 4.15 Insurance.

(a)       Schedule 4.15 sets forth a true and complete list of all of the policies of insurance carried by Seller or the Company that insure the operation of the Company’s Business and the assets of the Company, the Oil and Gas Assets or the Business applicable to such assets, or the Gathering Assets or the Business applicable to such assets on or prior to the Closing Date (the “Seller’s Policies”). All premiums payable under the Seller’s Policies have been paid in a timely manner.

(b)       With respect to the policies of insurance insuring the Company or its assets, such Seller’s Policies are in full force and effect. Neither the Seller nor any of its Affiliates (including the Company) has received any written notice of cancellation of, premium increase with respect to, or alteration of coverage under, any of such Seller’s Policies. Such Policies do not provide for any retrospective premium adjustment or other experience-based liability on the part of the Company. All such Seller’s Policies (i) are valid and binding in accordance with their terms; (ii) are provided by carriers who are financially solvent; and (iii) have not been subject to any lapse in coverage. Except as set forth on Schedule 4.15, there are no material claims pending with respect to the Company or its assets under any such Seller’s Policies or, to Seller’s Knowledge, any occurrence or circumstance which could reasonably be the basis of any such claim under any such Seller’s Policies. None of Seller or any of its Affiliates (including the Company) is in default under, or has otherwise failed to comply with, in any material respect, any provision contained in any such Seller’s Policy. Notwithstanding anything in this Agreement to the contrary, such Seller’s Policies will not remain in full force and effect with respect to the Company or the Company assets following the consummation of the transactions contemplated by this Agreement, and Buyer acknowledges that it must acquire insurance policies if it wishes for the Company assets to be insured following the Closing.

Section 4.16 Regulatory and Administrative Matters. Except as disclosed on Schedule 4.16, to the Knowledge of Seller, (a) there are no administrative or regulatory proceedings pending or threatened against the Company and (b) as of the date of this Agreement, the Company has not received any written notice or claim, that challenge the rates, charges and/or fees for transportation services or any other terms and conditions of service currently in effect under the tariff or tariffs currently in effect or the result of which would be to materially change, alter, or modify the rates, charges and/or fees for gas transportation or storage service or any other terms and conditions of service currently in effect under the tariff or tariffs currently in effect.

Section 4.17 Preference Rights.

(a)       Except as disclosed on Schedule 4.17(a), to the Knowledge of Seller, none of the Shares, the assets of the Company, the Oil and Gas Assets nor the Gathering Assets are subject to a Preferential Right.

(b)       Except for the consents set forth on Schedule 4.17(b) (the “Seller Approvals”) and consents that are customarily obtained following the closing in transactions of this nature, to the Knowledge of Seller, there are no requirements for consents from any Governmental Authority or any third party to any assignment that Seller is required to obtain in connection with the transfer of the Shares, the Gathering Assets and the Oil and Gas Assets by Seller to Buyer or the consummation of the transactions contemplated by this Agreement by Seller.

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Section 4.18 Wells. Except as set forth on Schedule 4.18, there is no well:

(a)       included in the Oil and Gas Assets operated by Seller and, to the Knowledge of Seller, there is no well included in the Oil and Gas Assets operated by a third party, with respect to which Seller, or such third party operator, is in violation of Law for failing to timely plug and abandon; and

(b)       included in the Oil and Gas Assets that, to the Knowledge of Seller, has been plugged and abandoned other than in compliance in all material respects with Law.

Section 4.19 Proposed Operations or Expenditures. Except as set forth on Schedule 4.19, as of the date of this Agreement, there are no outstanding authorities for expenditure or other commitments to conduct any operations or expend any amount of money on or with respect to the Oil and Gas Assets, the Gathering Assets or the assets of the Company which are binding on Seller, (■) or the Company or the Oil and Gas Assets, the Gathering Assets or the assets of the Company, and will be binding on Buyer after Closing and which Seller reasonably anticipates will require the expenditure of money in excess of (■) per item (net to Seller’s interest).

Section 4.20 Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending against, being contemplated by, or, to the Knowledge of Seller, threatened against the Company or (■).

Section 4.21 Prepayments, Hedges. Except as shown on Schedule 4.21, (i) other than in connection with Gas Imbalances, neither Seller, (■) nor the Company has received any prepayments or other payments that would require Buyer to deliver or transport any hydrocarbons after the Closing Date without receiving full payment therefor, and (ii) neither Seller, (■) nor the Company has entered into any hedging arrangements that affect the sale or marketing of hydrocarbons produced from the Oil and Gas Properties after the Closing. other than in connection with Gas Imbalances,

Section 4.22 Fair Market Value. In preparing to dispose of the Shares, the Gathering Assets and the Oil and Gas Assets in this Agreement, Seller engaged in an auction sale customary with industry practice. As a result of the process, Seller selected Buyer’s bid, which Seller recognizes as a commercially fair offer. Neither the Seller, nor its Affiliates, has any information, and will not assert, that the Base Purchase Price does not reflect a purchase of the Shares, the Gathering Assets and the Oil and Gas Assets at fair market value.

Section 4.23 Suspense Amounts. Except for the monies held in suspense by Seller for the account of third parties as set forth on Schedule 4.23, there are no monies held in suspense by Seller and for the account of third parties that are attributable to sales of hydrocarbons produced from the Oil and Gas Assets as of June 13, 2017.

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Section 4.24 Payout Balances. With respect to wells included in the Oil and Gas Assets operated by Seller (or its Affiliates) and, to Seller’s Knowledge with respect to wells included in the Oil and Gas Assets operated by a third party, Schedule 4.24 contains a list of the status of any “payout” balance, as of the respective dates set forth therein, for each such well that is subject to a reversion or other adjustment at some level of cost recovery or payout.

Section 4.25 Current Bonds. Schedule 4.25 lists, by entity, all bonds, letters of credit and other similar instruments maintained by (i) the Company, (ii) Seller and (iii) (■) or any of their respective Affiliates with respect to the assets of the Company, the Gathering Assets or the Oil and Gas Assets.

Section 4.26 Gas Imbalances. Except as set forth on Schedule 4.26, (i) there are no Gas Imbalances existing with respect to the Oil and Gas Assets operated by Seller or, to the Knowledge of Seller, existing with respect to the Oil and Gas Assets operated by a third party, in each case, as of the respective dates set forth therein, and (ii) Seller has not received any deficiency payments under gas contracts for which any party has a right to take deficiency gas from Seller, nor, except in connection with Gas Imbalances, has Seller received any payments for production which are subject to refund or recoupment out of future production.

Section 4.27 Take-or-Pay. Seller is not obligated under a take-or-pay or similar arrangement with respect to the Oil and Gas Assets or the Gathering Assets.

Article V
REPRESENTATIONS AND WARRANTIES RELATING TO BUYER

Buyer hereby represents and warrants to Seller as follows:

Section 5.1 Organization of Buyer. Buyer is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Delaware.

Section 5.2 Authorization; Enforceability. (a) Buyer has all requisite limited liability company power and authority to execute and deliver this Agreement and to perform all obligations to be performed by it hereunder, (b) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized and approved by all requisite action on the part of Buyer, and (c) this Agreement has been duly and validly executed and delivered by Buyer, and this Agreement constitutes a valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar Laws now or hereinafter in effect relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at Law), and considerations of public policy, including the effect of statutory and other Laws regarding fraudulent conveyances and preferential transfers.

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Section 5.3 No Conflict. The execution and delivery of this Agreement by Buyer and the consummation of the transactions contemplated hereby by Buyer (assuming all required filings, consents, approvals, authorizations and notices set forth in Schedule 5.3 (collectively, the “Buyer Approvals”) have been made, given or obtained) do not and shall not:

(a)       violate any Organizational Document of Buyer; or

(b)       except as would not reasonably be expected to have a material and adverse impact on the ability of Buyer to enter into and perform its obligations under this Agreement, (i) violate any Law applicable to Buyer or require any filing with, consent, approval or authorization of, or notice to, any Person or (ii) (A) breach the terms of any material Contract to which Buyer is a party or by which Buyer may be bound, (B) result in the termination of any such material Contract, or (C) result in the creation of any Lien upon any of the properties or assets of Buyer.

Section 5.4 Litigation. (a) There are no lawsuits, actions or arbitration proceedings before any Governmental Authority pending or, to the Knowledge of Buyer, threatened in writing against Buyer that would reasonably be expected to have a material and adverse impact on the ability of Buyer to perform its obligations under this Agreement and (b) there is no Order binding upon Buyer that would reasonably be expected to have a material and adverse impact on the ability of Buyer to perform its obligations under this Agreement.

Section 5.5 Brokers’ Fees. No broker, finder, investment banker or other Person is entitled to any brokerage fee, finders’ fee or other commission in connection with the transactions contemplated by this Agreement based upon arrangements made by Buyer or any of its Affiliates except for fees and commissions which are payable by Buyer.

Section 5.6 Investment Representation. Buyer is purchasing the Shares for its own account with the present intention of holding the Shares for investment purposes and not with a view to or for sale in connection with any public distribution of the Shares in violation of any federal or state securities Laws. Buyer has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in the Shares. Buyer acknowledges that the Shares have not been registered under applicable federal and state securities Laws and that the Shares may not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of unless such transfer, sale, assignment, pledge, hypothecation or other disposition is registered under applicable federal and state securities Laws or pursuant to an exemption from registration under any federal or state securities Laws. In addition, Buyer is an experienced and knowledgeable investor in all aspects of the oil and gas business, Buyer is able to bear the economic risks of its acquisition and ownership of the assets of the Company, the Oil and Gas Assets, and the Gathering Assets, and Buyer is capable of evaluating (and has evaluated) the merits and risks of such assets and Buyer’s acquisition and ownership thereof. Prior to entering into this Agreement, Buyer was advised by its counsel and such other Persons it has deemed appropriate concerning this Agreement and has relied solely on an independent investigation and evaluation of, and appraisal and judgment with respect to, the geologic and geophysical characteristics of such assets, the estimated reserves recoverable therefrom, and the price and expense assumptions applicable thereto. Buyer is an “accredited investor,” as such term is defined in Regulation D of the Securities Act of 1933, as amended, and will acquire such assets for its own account and not with a view to a sale or distribution thereof in violation of any federal or state securities Laws.

Section 5.7 Funds. Buyer has, and at all times prior to Closing will have, available to it sufficient funds available to enable Buyer to consummate the transactions contemplated hereby and to pay the Adjusted Purchase Price and all related fees and expenses of Buyer.

Section 5.8 Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending against, being contemplated by, or, to the Knowledge of Buyer, threatened against Buyer.

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Article VI
OIL AND GAS ASSETS TITLE
AND ENVIRONMENTAL ADJUSTMENTS

Section 6.1 No Warranty or Representation. Without limiting Buyer’s right to adjust the Base Purchase Price by operation of Section 6.2 and Section 6.5(a) and except for the special warranty of title which is contained in the Oil and Gas Assets Conveyance, Seller makes no warranty or representation, express, implied, statutory or otherwise, with respect to Seller’s title to any of the Oil and Gas Assets and Buyer hereby acknowledges and agrees that, except as provided above, Buyer’s sole remedy for any defect of title, including any Title Defect, with respect to any of the Oil and Gas Assets shall be pursuant to the procedures set forth in this Article VI, which remedies (other than those provided for in Section 6.5(b)) shall cease, and be deemed to be finally and conclusively satisfied, in all respects, upon the Closing. Without limiting Buyer’s right to adjust the Base Purchase Price by operation of Sections 6.7(c) and 6.8(a), (i) Seller makes no warranty or representation, express, implied, statutory or otherwise, with respect to the environmental condition of the Oil and Gas Assets and (ii) Buyer hereby acknowledges and agrees that Buyer’s sole remedy for any Environmental Defect shall be pursuant to the procedures set forth in this Article VI, which remedies (other than those provided for in Sections 6.8(b) and 6.9) shall cease, and be deemed to be finally and conclusively satisfied, in all respects, upon the Closing. Furthermore, Seller makes no warranty or representation, express, implied, statutory or otherwise, with respect to the accuracy or completeness of the information, records and data now, heretofore or hereafter made available to Buyer in connection with this Agreement (including any description of the Oil and Gas Assets, pricing assumptions, potential for production of oil, gas or other hydrocarbons from the Subject Interests or any other matters contained in or related to the Reserve Analysis or any other material furnished to Buyer by Seller or by Seller’s Representatives).

Section 6.2 Buyer’s Title Review.

(a)       Buyer’s Assertion of Title Defects. During the period commencing on the execution of this Agreement and terminating on August 29, 2017 (the “Examination Period”), Buyer shall notify Seller in writing of any matters which, in Buyer’s reasonable opinion, constitute Title Defects and which Buyer intends to assert as a Title Defect with respect to any portion of a Property Subdivision pursuant to this Article VI. Except for the special warranty of title which is contained in the Oil and Gas Assets Conveyance with respect to Title Defects of which Buyer does not have Knowledge on or prior to the expiration of the Examination Period, but otherwise for all purposes of this Agreement, Buyer shall be deemed to have waived any Title Defect which Buyer fails to assert as a Title Defect by written notice given to Seller on or before the expiration of the Examination Period. To be effective, Buyer’s written notice of a Title Defect must include (i) a brief description of the matter constituting the asserted Title Defect, (ii) the claimed Title Defect Amount attributable thereto, and (iii) supporting documents reasonably necessary for Seller (as well as any title attorney or examiner hired by Seller) to verify the existence of such asserted Title Defect. To give Seller an opportunity to commence reviewing and curing Title Defects, Buyer agrees to use good faith efforts to give Seller written notice of any Title Defect which Buyer determined to be existing during the immediately preceding calendar week by the close of business of each Monday during the Examination Period, which notice may be preliminary in nature and supplemented prior to the end of the Examination Period. By the close of business of each Monday during the Examination Period, Buyer shall also use good faith efforts to furnish Seller with written notice of any Seller Title Credit which is known by Buyer or is discovered by any of Buyer’s Representatives while conducting Buyer’s title review, due diligence or investigation with respect to the Subject Interests and Property Subdivisions.

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(b)       Purchase Price Allocations. The Oil and Gas Base Purchase Price has been allocated by Buyer among the various Subject Interests in Property Subdivisions in the manner and in accordance with the respective values set forth in Part II of the Property Schedule. If any adjustment is made to the Base Purchase Price pursuant to this Section 6.2, a corresponding adjustment shall be made to the portion of the Oil and Gas Base Purchase Price allocated to the affected Property Subdivision in Part II of the Property Schedule.

(c)       Seller’s Opportunity to Cure. Seller shall have until the Closing Date, at its cost and expense, if it so elects but without obligation, to cure all or a portion of such asserted Title Defects. Any asserted Title Defects which are waived by Buyer or cured within such time shall be deemed “Permitted Liens” hereunder and under the Oil and Gas Assets Conveyance. If Seller within such time fails to cure any Title Defect of which Buyer has given timely written notice as required above and Buyer has not and does not waive same on or before the day immediately preceding the Closing Date, the Property Subdivision affected by such uncured and unwaived Title Defect shall be a “Title Defect Property”.

(d)       Buyer’s Title Adjustments. Subject to Sections 6.5 and 6.6, as Buyer’s sole and exclusive remedy with respect to Title Defects, Buyer shall be entitled to reduce the Base Purchase Price by the amount, if any, by which the aggregate amount of Title Defect Amounts with respect to all Title Defect Properties conveyed to Buyer at the Closing (to the extent in excess of the aggregate amount of Seller Title Credits with respect to all Property Subdivisions), together with the aggregate amount of Remediation Amounts attributable to all Environmental Defect Properties conveyed to Buyer at the Closing, exceeds an amount equal to (■) percent (■) of the Base Purchase Price (the “Defect Deductible”). As used herein, the term “Title Defect Amount” shall mean, with respect to a Title Defect Property, the amount by which the value of such Title Defect Property is impaired as a result of the existence of one or more uncured and unwaived Title Defects, which amount shall be determined as follows:

(1)       If the Title Defect results from Seller having a lesser Net Revenue Interest in such Title Defect Property than the Net Revenue Interest specified therefor in Part II of the Property Schedule, and the Working Interest has been reduced proportionately, the Title Defect Amount shall be equal to the product obtained by multiplying the portion of the Oil and Gas Base Purchase Price allocated to such Title Defect Property in Part II of the Property Schedule by a fraction, the numerator of which is the reduction in the Net Revenue Interest and the denominator of which is the Net Revenue Interest specified for such Title Defect Property in Part II of the Property Schedule.

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(2)       If the Title Defect results from Seller having a greater Working Interest in a Title Defect Property set forth in Part II of the Property Schedule than the Working Interest specified therefor in Part II of the Property Schedule, the Title Defect Amount shall be equal to the present value (discounted at 10% compounded annually) of the increase in the costs and expenses forecasted in the Reserve Analysis with respect to such Title Defect Property for the period from and after the applicable Effective Time which is attributable to such increase in Seller’s Working Interest; provided, however, that no Title Defect Amount shall be allowed on account of and to the extent that an increase in Seller’s Working Interest in such a Property Subdivision has the effect of proportionately increasing Seller’s Net Revenue Interest therein.

(3)       If the Title Defect results from the existence of a lien, the Title Defect Amount shall be an amount sufficient to discharge such lien.

(4)       If the Title Defect results from any matter not described in paragraphs (1), (2) or (3) above, the Title Defect Amount shall be an amount equal to the difference between the value of the Title Defect Property affected by such Title Defect with such Title Defect and the value of such Title Defect Property without such Title Defect (taking into account the portion of the Oil and Gas Base Purchase Price allocated in Part II of the Property Schedule to such Title Defect Property); provided, however, if such Title Defect is reasonably susceptible of being cured, the Title Defect Amount shall not be greater than the reasonable cost and expense of curing such Title Defect.

(5)       If a Title Defect is not effective or does not affect a Title Defect Property throughout the entire productive life of such Title Defect Property, such fact shall be taken into account in determining the Title Defect Amount.

(6)       The Title Defect Amount with respect to a Title Defect Property shall be determined without duplication of any costs or losses included in another Title Defect Amount hereunder. For example, but without limitation, if a lien affects more than one Title Defect Property or the curative work with respect to one Title Defect results (or is reasonably expected to result) in the curing of any other Title Defect affecting the same or another Title Defect Property, the amount necessary to discharge such lien or the cost and expense of such curative work shall only be included in the Title Defect Amount for one Title Defect Property and only once in such Title Defect Amount.

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(7)       If a Title Defect affects only a portion of a Property Subdivision (as contrasted with an undivided interest in the entirety of such Property Subdivision) and a portion of the Oil and Gas Base Purchase Price has not been allocated specifically to such portion of a Property Subdivision in the Property Schedule, then for purposes of computing the Title Defect Amount, the portion of the Oil and Gas Base Purchase Price allocated to such Property Subdivision shall be further allocated among the portions of such Property Subdivision in the proportion that the net acreage (or net acre feet, as appropriate) of such Property Subdivision affected by such Title Defect bears to the net acreage (or net acre feet, as appropriate) in the entire Property Subdivision. In the event such Property Subdivision is subject to a unitization agreement, the foregoing allocation shall be made in a manner which is consistent with the allocation of production or productive acreage in such unitization agreement.

(8)       The Title Defect Amount attributable to a Title Defect Property or any portion thereof shall not exceed the portion of the Oil and Gas Base Purchase Price allocated to such Title Defect Property or such portion thereof calculated in accordance with paragraph (7) above. For example, but without limitation, if Seller does not own fifty percent (50%) of the Net Revenue Interest specified in the Property Schedule for a Title Defect Property and such unowned fifty percent (50%) interest is also burdened by a lien, the Title Defect Amount for such Title Defect Property shall not exceed the portion of the Oil and Gas Base Purchase Price allocable to such fifty percent (50%) interest notwithstanding that it may be affected by multiple Title Defects.

(9)       Notwithstanding the foregoing, if the Title Defect Amount determined pursuant to the foregoing with respect to a Title Defect Property is (■) or less, then the Title Defect Amount with respect to such Title Defect Property shall be deemed to be zero.

The Defect Deductible shall be restored to the extent that any portion thereof is applied as a credit against a Title Defect Amount attributable to a Title Defect which is subsequently cured by Seller or determined not to constitute a Title Defect.

Section 6.3 Determination of Title Defects. A portion of a Property Subdivision shall be deemed to have a “Title Defect” if Seller does not have Defensible Title thereto. Notwithstanding any other provision in this Agreement to the contrary, the following matters shall be deemed to be Permitted Liens and shall not be asserted as, and shall not constitute Title Defects: (a) defects in the early chain of the title consisting of the mere failure to recite marital status in a document or omissions of successions of heirship proceedings, unless Buyer provides affirmative evidence that such failure or omission results in another Person’s superior claim of title to the relevant Property Subdivision or portion thereof, (b) defects arising out of lack of survey, unless a survey is expressly required by applicable Law, (c) defects arising out of lack of corporate authorization, unless Buyer provides affirmative evidence that such corporate action was not authorized and results in another Person’s superior claim of title to the relevant Property Subdivision or portion thereof, (d) defects that have been cured by possession under the applicable statutes of limitations, (e) defects or irregularities resulting from or related to probate proceedings or the lack thereof, which defects or irregularities have been outstanding for four (4) years or more, (f) defects based solely on the existence of prior oil and gas leases relating to the Subject Interests that are expired and no longer in force and legal effect but not surrendered of record, (g) defects arising from a mortgage encumbering the oil, gas or mineral estate of any lessor (unless a complaint of foreclosure has been filed or any similar action taken by the mortgagee thereunder and in such case such mortgage has not been subordinated to the Subject Interests affected thereby), (h) defects based solely on lack of information in Seller’s files or references to documents if such documents are not in Seller’s files, unless records of the applicable county reflect that Seller does not have Defensible Title to the Property Subdivision in question, (i) defects in the chain of title prior to January 1, 1960, unless Buyer provides affirmative evidence that the defect results in another Person’s superior claim of title to the relevant Property Subdivision or portion thereof, and (j) defects based solely on a title requirement set forth in one or more title opinions or reports contained in the Oil and Gas Records (or any reference thereto in any other title opinion or report) without independent substantiation by Buyer that the title curative therefor is not contained in the Oil and Gas Records and is not deducible of record or in the appropriate filing records maintained by a Governmental Authority (access to which is available to the public).

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Section 6.4 Seller Title Credit. A “Seller Title Credit” shall mean, with respect to a Property Subdivision, the amount by which the value of such Property Subdivision is enhanced by virtue of (a) Seller having a greater Net Revenue Interest in such Property Subdivision than the Net Revenue Interest specified therefor in Part II of the Property Schedule, or (b) Seller having a lesser Working Interest in such Property Subdivision than the Working Interest specified therefor in Part II of the Property Schedule without a corresponding reduction in Net Revenue Interest with respect to such Property Subdivision specified therefor in Part II of the Property Schedule. The amount of Seller Title Credits shall be determined as follows:

(1)       If the Seller Title Credit results from Seller having a greater Net Revenue Interest in such Property Subdivision than the Net Revenue Interest specified therefor in Part II of the Property Schedule, the Seller Title Credit shall be equal to the product obtained by multiplying the portion of the Oil and Gas Base Purchase Price allocated to such Property Subdivision in Part II of the Property Schedule by a fraction, the numerator of which is the increase in the Net Revenue Interest and the denominator of which is the Net Revenue Interest specified for such Property Subdivision in Part II of the Property Schedule.

(2)       If the Seller Title Credit results from Seller having a lesser Working Interest in a Property Subdivision than the Working Interest specified therefor in Part II of the Property Schedule without a corresponding reduction in Net Revenue Interest with respect to such Property Subdivision specified therefor in Part II of the Property Schedule, the Seller Title Credit shall be equal to the present value (discounted at 10% compounded annually) of the decrease in the costs and expenses forecasted in the Reserve Analysis with respect to such Property Subdivision for the period from and after the applicable Effective Time which is attributable to such decrease in Seller’s Working Interest; provided, however, no Seller Title Credit shall be allowed on account of and to the extent that a decrease in Seller’s Working Interest in such a Property Subdivision has the effect of proportionately decreasing Seller’s Net Revenue Interest therein.

(3)       In determining the amount of Seller Title Credits, the principles and methodology set forth in paragraphs (5), (6), (7) and (9) of Section 6.2(d) shall be applied, mutatis mutandis.

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Section 6.5 Exclusion of Title Defect Properties; Indemnification. On or before the Closing Date, Seller may with respect to any Title Defect Property, (a) elect to retain and exclude such Title Defect Property from the Oil and Gas Assets to be conveyed by Seller to Buyer pursuant to the terms hereof so long as the Base Purchase Price is reduced by the portion of the Oil and Gas Base Purchase Price allocated (or deemed allocated pursuant to Section 6.2(d)(7)) to such Title Defect Property in Part II of the Property Schedule, or (b) with Buyer’s prior written consent (which consent may be withheld at Buyer’s sole discretion), indemnify Buyer from and against all liabilities, losses, costs and expenses resulting from each Title Defect affecting such Title Defect Property which do not exceed, in the aggregate, the portion of the Oil and Gas Base Purchase Price allocated to such Title Defect Property in Part II of the Property Schedule. In the event Seller exercises its right under Section 6.5(a) with respect to a Title Defect Property, said Title Defect Property, together with a pro rata share of all incidental rights, oil, gas and other hydrocarbons and other assets attributable or appurtenant thereto, shall be retained by Seller and excluded from the Oil and Gas Assets which are conveyed by Seller to Buyer pursuant to the Oil and Gas Assets Conveyance. In the event Seller and Buyer agree to proceed under Section 6.5(b) with respect to a Title Defect Property, the Base Purchase Price shall not be reduced on account of any Title Defect affecting such Title Defect Property.

Section 6.6 Deferred Title Claims and Disputes. In the event that Buyer and Seller have not agreed as of the Closing upon the existence of a Title Defect (or the cure thereof), the Title Defect Amount for a Title Defect Property, the existence of a Seller Title Credit or the amount attributable thereto claimed by Buyer or Seller pursuant to and in accordance with the requirements of this Article VI, any such claim (a “Deferred Title Adjustment Claim”) shall be settled pursuant to this Section 6.6 and, except as provided in Sections 10.1(e) and 10.2(e), shall not prevent or delay Closing. With respect to each potential Deferred Title Adjustment Claim, Buyer and Seller shall deliver to the other a written notice describing each such potential Deferred Title Adjustment Claim, the amount in dispute and a statement setting forth the facts and circumstances that support such Party’s position with respect to such Deferred Title Adjustment Claim. At Closing, the Base Purchase Price shall not be adjusted on account of, and, except as provided in Sections 10.1(e) and 10.2(e), no effect shall be given to, the Deferred Title Adjustment Claim. On or prior to the thirtieth (30th) consecutive calendar day following the Closing Date (the “Deferred Matters Date”), Seller and Buyer shall attempt in good faith to reach agreement on the Deferred Title Adjustment Claims and, ultimately, to resolve by written agreement all disputes regarding the Deferred Title Adjustment Claims. Any Deferred Title Adjustment Claims which are not so resolved on or before the Deferred Matters Date may be submitted by either Party to final and binding arbitration in accordance with the Arbitration Procedures; provided, however, that Seller may elect at any time to resolve all disputes relating to the Deferred Title Adjustment Claims by the payment to Buyer of the amount by which the Base Purchase Price would have been reduced at Closing on account of the Title Defects which constitute Deferred Title Adjustment Claims if same did not constitute Deferred Title Adjustment Claims. Notwithstanding anything herein provided to the contrary, including Section 6.2(c), Seller shall be entitled to cure any Title Defect which constitutes a Deferred Title Adjustment Claim at any time prior to the point in time when a final and binding written decision of the board of arbitrators is made with respect thereto in accordance with the Arbitration Procedures or when an agreement is reached by the Parties with respect thereto. The amount of any reduction in the Base Purchase Price to which Buyer becomes entitled under the final and binding written decision of the board of arbitrators shall be promptly refunded by Seller to Buyer together with interest thereon from the Closing Date until paid at the Agreed Rate. To the extent that the Parties reach agreement or the board of arbitrators makes a determination with respect to one or more Seller Title Credits that constitute Deferred Title Adjustment Claims, the amount attributable to such Seller Title Credits shall be used to offset the Title Defect Amounts with respect to any Title Defects constituting Deferred Title Adjustment Claims that have been resolved pursuant to this Section 6.6. Notwithstanding anything herein provided to the contrary, to the extent that the Parties reach agreement or the board of arbitrators makes a determination with respect to one or more Seller Title Credits that constitute Deferred Title Adjustment Claims and the amount or amounts attributable thereto exceed the Title Defect Amounts with respect to any Title Defects constituting Deferred Title Adjustment Claims that have been resolved pursuant to this Section 6.6 such that the resolved Seller Title Credit amounts exceed the resolved Title Defect Amounts, Buyer shall promptly pay to Seller an amount equal to such difference (together with interest thereon from the Closing Date until paid at the Agreed Rate) to the extent, but only to the extent, such amount is less than or equal to any adjustment to the Base Purchase Price that was made pursuant to Section 2.2(b).

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Section 6.7 Buyer’s Environmental Review.

(a)       Buyer’s Assertion of Environmental Defects. During the Examination Period, Buyer shall notify Seller in writing of any matters which, in Buyer’s reasonable opinion, constitute Environmental Defects and which Buyer intends to assert as an Environmental Defect with respect to any portion of an Oil and Gas Asset or Gathering Asset pursuant to this Article VI. For all purposes of this Agreement, Buyer shall be deemed to have waived any Environmental Defect which Buyer fails to assert as an Environmental Defect by written notice given to Seller on or before the expiration of the Examination Period. To be effective, Buyer’s written notice of an Environmental Defect must include (i) a description of the matter constituting the asserted Environmental Defect, (ii) the Remediation Amount claimed by Buyer in good faith as attributable thereto, and (iii) supporting documents reasonably necessary for Seller (as well as any consultant hired by Seller) to verify the existence of such asserted Environmental Defect and to provide reasonable substantiation of the claimed Remediation Amount. To give Seller an opportunity to commence reviewing and curing Environmental Defects, Buyer agrees to use good faith efforts to give Seller written notice of any Environmental Defect which Buyer determined to be existing during the immediately preceding calendar week by the close of business of each Monday during the Examination Period, which notice may be preliminary in nature and supplemented prior to the end of the Examination Period.

(b)       Seller’s Opportunity to Cure. Seller shall have the right until the Closing Date, at its cost and expense, if it so elects but without obligation, to cure all or a portion of such asserted Environmental Defects. If Seller within such time fails to cure any Environmental Defect of which Buyer has given timely written notice as required above and Buyer has not and does not waive same on or before the Closing Date, the Oil and Gas Asset that is the subject of such uncured and unwaived Environmental Defect shall be an “Environmental Defect Property.”

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(c)       Buyer’s Environmental Adjustments. Subject to Sections 6.8 and 6.9, as Buyer’s sole and exclusive remedy with respect to Environmental Defects asserted by Buyer pursuant to this Agreement, Buyer shall be entitled to reduce the Base Purchase Price by the amount, if any, by which the aggregate amount of Title Defect Amounts with respect to all Title Defect Properties conveyed to Buyer at the Closing (to the extent in excess of the aggregate amount of Seller Title Credits with respect to all Property Subdivisions), together with the aggregate amount of Remediation Amounts attributable to all Environmental Defect Properties conveyed to Buyer at the Closing, exceeds an amount equal to the Defect Deductible; provided, however, that if the Remediation Amount with respect to any Environmental Defect so asserted by Buyer that is (■) or less, then the Remediation Amount with respect thereto shall be deemed to be zero. As used herein, the term (i) “Environmental Defect” shall mean a condition, event or circumstance that causes an Oil and Gas Asset or Gathering Asset or the operations conducted with respect to an Oil and Gas Asset or Gathering Asset not to be in material compliance with, or to be subject to a remedial or corrective action obligation incurred pursuant to, any Environmental Laws, and (ii) “Remediation Amount” shall mean the estimated cost of eliminating, removing, or curing an Environmental Defect (net to Seller’s interest) in the most cost-effective manner reasonably available and that allows for the continuing safe and prudent operation of the Environmental Defect Property.

Section 6.8 Exclusion of Environmental Defect Properties; Indemnification. On or before the Closing Date or upon the resolution of the applicable Deferred Environmental Adjustment Claim pursuant to Section 6.9, Seller may with respect to any Environmental Defect Property that is an Oil and Gas Asset (a) elect to retain and exclude such Environmental Defect Property from the Oil and Gas Assets to be conveyed by Seller to Buyer pursuant to the terms hereof so long as the Base Purchase Price is reduced by the portion of the Oil and Gas Base Purchase Price allocated (or deemed allocated pursuant to Section 6.2(d)(7)) to such Environmental Defect Property in Part II of the Property Schedule, or (b) with Buyer’s prior written consent (which consent may be withheld at Buyer’s sole discretion), indemnify Buyer from and against all liabilities, losses, costs and expenses resulting from each Environmental Defect affecting such Environmental Defect Property. In the event Seller exercises its right under Section 6.8(a) with respect to an Environmental Defect Property that is an Oil and Gas Asset, said Environmental Defect Property, together with a pro rata share of all incidental rights, oil, gas and other hydrocarbons and other assets attributable or appurtenant thereto, shall be retained by Seller and excluded from the Oil and Gas Assets which are conveyed by Seller to Buyer pursuant to the Oil and Gas Assets Conveyance. In the event Seller and Buyer agree to proceed under Section 6.8(b) with respect to an Environmental Defect Property, the Base Purchase Price shall not be reduced on account of any Environmental Defect affecting such Environmental Defect Property.

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Section 6.9 Deferred Environmental Claims and Disputes. In the event that Buyer and Seller have not agreed as of the Closing upon the existence of an Environmental Defect, the Remediation Amount for an Environmental Defect Property, or the adequacy of any curative efforts, in any case claimed by Buyer or Seller pursuant to and in accordance with the requirements of this Article VI, any such claim (a “Deferred Environmental Adjustment Claim”) shall be settled pursuant to this Section 6.9 and, except as provided in Sections 10.1(e) and 10.2(e), shall not prevent or delay Closing. With respect to each potential Deferred Environmental Adjustment Claim, Buyer and Seller shall deliver to the other a written notice describing each such potential Deferred Environmental Adjustment Claim, the amount in dispute and a statement setting forth the facts and circumstances that support such Party’s position with respect to such Deferred Environmental Adjustment Claim. At Closing, unless otherwise agreed by the Parties, (i) the Environmental Defect Property affected by the Deferred Environmental Adjustment Claims shall be excluded from the Assets conveyed by Seller to Buyer at Closing, and (ii) the Base Purchase Price payable to Seller shall be reduced at Closing by the portion of the Oil and Gas Base Purchase Price allocated to such Environmental Defect Property in Part II of the Property Schedule. On or prior to the Deferred Matters Date, Seller and Buyer shall attempt in good faith to reach agreement on the Deferred Environmental Adjustment Claims and, ultimately, to resolve by written agreement all disputes regarding the Deferred Environmental Adjustment Claims. Any Deferred Environmental Adjustment Claims which are not so resolved on or before the Deferred Matters Date may thereafter be submitted by either Party to final and binding arbitration in accordance with the Arbitration Procedures. Notwithstanding anything herein provided to the contrary, including Section 6.7(b), Seller shall be entitled to cure any Environmental Defect which constitutes a Deferred Environmental Adjustment Claim at any time prior to the point in time when a final and binding written decision of the board of arbitrators is made with respect thereto in accordance with the Arbitration Procedures or when an agreement is reached by the Parties with respect thereto. Upon the board of arbitrators making the binding written decision or upon an agreement being reached by the Parties with respect to an asserted Environmental Defect which constitutes a Deferred Environmental Adjustment Claim, Seller shall promptly select the available remedies under Section 6.7(c) and Section 6.8 to apply to such Deferred Environmental Adjustment Claim, and if the remedy under Section 6.7(c) or Section 6.8(b) is so selected, Seller shall assign to Buyer such Environmental Defect Property pursuant to a conveyance, in a form substantially similar to the Oil and Gas Assets Conveyance, and (x) if the remedy provided in Section 6.7(c) is applicable and the Remediation Amount is (A) less than the portion of the Oil and Gas Base Purchase Price allocated to the Environmental Defect Property in Part II of the Property Schedule, Buyer shall promptly pay to Seller an amount equal to the positive difference between (i) the portion of the Oil and Gas Base Purchase Price allocated to such Environmental Defect Property in Part II of the Property Schedule and (ii) the Remediation Amount determined by the board of arbitrators or agreed to by the Parties, or (B) greater than the portion of the Oil and Gas Base Purchase Price allocated to the Environmental Defect Property in Part II of the Property Schedule, Seller shall promptly pay to Buyer an amount equal to the positive difference between (i) such Remediation Amount and (ii) such allocated value, and (y) if the remedy provided in Section 6.8(b) is applicable, then subject to Seller’s indemnities under Section 6.8(b), Buyer shall promptly pay to Seller an amount equal to the portion of the Oil and Gas Base Purchase Price allocated to such Environmental Defect Property in the Property Schedule.

Section 6.10 No Duplication. Notwithstanding anything herein provided to the contrary, if a Title Defect or an Environmental Defect, as applicable, results from any matter which could also result in the breach of any representation or warranty of Seller set forth in Articles III or IV, then Buyer shall only be entitled to assert such matter as a Title Defect or an Environmental Defect, as applicable, pursuant to this Article VI and shall be precluded from also asserting such matter as the basis of the breach of any such representation or warranty.

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Article VII
PREFERENCE RIGHTS AND SELLER APPROVALS

Section 7.1 Compliance. Buyer’s purchase of the Oil and Gas Assets and the Gathering Assets is expressly subject to all validly existing and applicable Preference Rights and Seller Approvals. No later than ten (10) Business Days following the date of this Agreement, Seller shall initiate all procedures required to comply with or obtain the waiver of all Preference Rights and Seller Approvals with respect to the transactions contemplated by this Agreement. Seller shall not be obligated to pay any consideration to (or incur any cost or expense for the benefit of) the holder of any Preference Right or Seller Approvals in order to obtain the waiver thereof or compliance therewith.

Section 7.2 Effect of Preference Rights. If a third party who has been offered a Preference Property pursuant to Section 7.1 elects prior to Closing to purchase such Preference Property in accordance with the terms of such Preference Right, and Seller receives written notice of such election prior to the Closing Date, such Preference Property will be eliminated from the Oil and Gas Assets and the Base Purchase Price shall be reduced by the portion of the Oil and Gas Base Purchase Price allocated to such Preference Property pursuant to the immediately following sentence. The portion of the Base Purchase Price to be allocated to any Oil and Gas Asset or portion thereof affected by a Preference Right (a “Preference Property”) shall be the portion of the Oil and Gas Base Purchase Price allocated thereto in Part II of the Property Schedule. If a Preference Right affects only a portion of a Property Subdivision and a portion of the Oil and Gas Base Purchase Price has not been allocated specifically to such portion of a Property Subdivision in Part II of the Property Schedule, then the portion of the Oil and Gas Base Purchase Price to be allocated to such Preference Property shall be determined in the same manner as provided in Section 6.2(d)(7) when a Title Defect affects only a portion of a Property Subdivision. If a third party who has been offered a Preference Property or who has been requested to waive its Preference Right pursuant to Section 7.1 does not elect to purchase such Preference Property or waive such Preference Right with respect to the transactions contemplated by this Agreement prior to the Closing Date, such Preference Property shall be conveyed to Buyer at Closing subject to such Preference Right, unless such Preference Property has been otherwise eliminated from the Oil and Gas Assets in accordance with other provisions of this Agreement. If a third party elects to purchase a Preference Property subject to a Preference Right and Closing has already occurred with respect to such Preference Property, Buyer shall be obligated to convey said Preference Property to such third party and shall be entitled to the consideration for the sale of such Preference Property.

Section 7.3 Seller Approvals. If a Seller Approval applicable to the transactions contemplated by this Agreement and the failure of which to satisfy would, by its express terms, render the assignment of an Oil and Gas Asset void, voidable or result in termination or the right to terminate thereof, is not obtained, complied with or otherwise satisfied prior to the Closing Date, then, unless otherwise mutually agreed in writing by Seller and Buyer, (i) any Oil and Gas Asset or portion thereof affected by such Seller Approval (a “Retained Asset”) shall be held back from the Oil and Gas Assets to be transferred and conveyed to Buyer at Closing and the Base Purchase Price to be paid at Closing shall be reduced by the portion of the Oil and Gas Base Purchase Price which would be allocated to such Retained Asset pursuant to Section 7.2 if such Retained Asset were a Preference Property. Any Retained Asset so held back at the Closing will be conveyed to Buyer within ten (10) days following the date on which Seller obtains, complies with or otherwise satisfies all Seller Approvals with respect to such Retained Asset for a purchase price equal to the amount by which the Base Purchase Price was reduced on account of the holding back of such Retained Asset, as adjusted pursuant to Section 2.6; provided, however, if all Seller Approvals with respect to any Retained Asset so held back at the Closing are not obtained, complied with or otherwise satisfied within one hundred eighty (180) days following the Closing Date, then such Retained Asset shall be eliminated from the Oil and Gas Assets and this Agreement unless Seller and Buyer mutually agree to proceed with a closing on such Retained Asset in which case Buyer shall be deemed to have waived any objection with respect to non-compliance with such Seller Approvals.

Section 7.4 Express Conditions on Sale. Buyer acknowledges that Seller desires to sell all of the Shares, Gathering Assets and Oil and Gas Assets and would not have entered into this Agreement but for Buyer’s agreement to purchase all of same as herein provided. Accordingly, it is expressly understood and agreed that Seller does not desire to sell any Preference Property unless the sale of all of the Shares, Gathering Assets, and Oil and Gas Assets is consummated by the Closing Date in accordance with the terms of this Agreement. In furtherance of the foregoing, Seller’s obligation hereunder to sell the Preference Properties is expressly conditioned upon the consummation by the Closing Date of the sale of all of the Shares, Gathering Assets, and Oil and Gas Assets in accordance with the terms of this Agreement, either by conveyance to Buyer or conveyance pursuant to an applicable Preference Right; provided that nothing herein is intended or shall operate to extend or apply any Preference Right to any portion of the Shares, Gathering Assets, and Oil and Gas Assets which is not otherwise burdened thereby. Time is of the essence with respect to the Parties’ agreement to consummate the sale of the Shares, Gathering Assets, and Oil and Gas Assets by the Closing Date.

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Article VIII
COVENANTS

Section 8.1 Conduct of Business. From the date of this Agreement through the Closing, except as set forth on Schedule 8.1, as contemplated by this Agreement, or as consented to by Buyer in writing (which consent shall not be unreasonably withheld, conditioned, or delayed), (a) Seller shall, with respect to the Oil and Gas Assets and the (■) Gathering Assets, Seller shall cause (■), with respect to the (■) Gathering Assets, and Seller shall cause the Company, with respect to the assets owned by it, to, operate its respective Business in the ordinary course, (b) Seller shall not permit the Company to (i) amend its Organizational Documents, (ii) liquidate, dissolve, recapitalize or otherwise wind up its business, (iii) change its accounting methods, policies or practices, except as required by GAAP or any other accounting principles applicable to the Company, (iv) merge or consolidate with, or purchase substantially all of the assets or business of, or equity interests in, or make an investment in any Person (other than extensions of credit to customers in the ordinary course of business), (v) issue or sell any equity interests, notes, bonds or other securities of the Company, or any option, warrant or right to acquire same, (vi) sell, assign, transfer, lease or otherwise dispose of any non-current assets except in the ordinary course of business or pursuant to the terms of a Material Contract, (vii) adopt or create any employee benefit plan, (viii) other than in the ordinary course of business, terminate (unless the term thereof expires pursuant to the provisions existing therein), materially amend, execute or extend any contracts, (ix) permit insurance coverage on the assets owned by the Company in the amounts and of the types currently in force to lapse or otherwise be terminated, (x) permit any Permit to lapse (other than pursuant to its terms if same is no longer needed), or otherwise be cancelled, (xi) waive, compromise, or settle any claim that would materially adversely affect ownership, operation or value of any of the assets of the Company, (xii) enter into any new Material Contract other than in the ordinary course of business, or (xiii) agree, whether in writing or otherwise, to do any of the foregoing, and (c) Seller shall not, with respect to the (■) Gathering Assets and the Oil and Gas Assets, and Seller shall cause (■) to not, with respect to the (■) Gathering Assets, (i) sell, assign, transfer or otherwise dispose of any (A) Gathering Asset except in the ordinary course of business or pursuant to the terms of a Gathering Contract, or (B) the Oil and Gas Assets except for (1) oil, gas and other hydrocarbons produced, saved and sold in the ordinary course of business, and (2) personal property or equipment which is replaced with personal property or equipment of comparable or better value and utility in connection with the maintenance and operation of the Oil and Gas Assets, (ii) other than in the ordinary course of business, terminate (unless the term thereof expires pursuant to the provisions existing therein), materially amend, execute or extend any contracts, (iii) permit insurance coverage on such assets in the amounts and of the types currently in force to lapse or otherwise be terminated, (iv) permit any Permit to lapse (other than pursuant to its terms if same is no longer needed) or otherwise be cancelled, (v) waive, compromise, or settle any claim that would materially adversely affect ownership, operation or value of any of the Oil and Gas Assets, the (■) Gathering Assets or the (■) Gathering Assets, (vi) enter into any new Material Contract other than in the ordinary course of business, or (vii) agree, whether in writing or otherwise, to do so.

Section 8.2 Access.

(a)       From the date hereof through the Closing (or earlier termination of this Agreement), Seller shall afford (and, with respect to the (■) Gathering Assets, shall cause (■) to afford) to Buyer and its authorized Representatives reasonable access, during normal business hours and in such manner as not to unreasonably interfere with the normal operation of the respective Businesses, to the Gathering Assets and the Oil and Gas Assets and to the assets, properties, books, contracts, records and appropriate officers and employees of the Company, Seller (with respect to the (■) Gathering Assets and the Oil and Gas Assets) and (■) (with respect to the (■) Gathering Assets), and Seller shall furnish such authorized Representatives with all financial and operating data and other information concerning the Company and the Company’s Business as Buyer and such Representatives may reasonably request; provided, however, in no event shall Buyer have the right to perform invasive or subsurface investigations of the Gathering Assets, the Oil and Gas Assets or the properties of the Company. Seller shall have the right to have a Representative present at all times during any such inspections, interviews, and examinations. Additionally, Buyer shall hold in confidence all such information on the terms and subject to the conditions contained in the Confidentiality Agreement. Notwithstanding the foregoing, Buyer shall have no right of access to, and neither Seller nor (■) shall have any obligation to provide to Buyer, (i) any information relating to bids received from others in connection with the transactions contemplated by this Agreement (or similar transactions) and information and analyses (including financial analyses) relating to such bids; (ii) any information the disclosure of which would jeopardize any privilege available to the Company, Seller or any Affiliate of Seller (including (■)) relating to such information or would cause the Company, Seller or any Affiliate of Seller (including (■)) to breach a confidentiality obligation to any third party, or (iii) any information the disclosure of which would result in a violation of Law.

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(b)       Buyer shall indemnify, defend and hold harmless the Seller Indemnified Parties from and against any and all Losses relating to, arising out of or resulting from any due diligence activity conducted by Buyer or its authorized Representatives EVEN IF SUCH LOSSES ARISE OUT OF OR RESULT FROM (IN WHOLE OR IN PART) THE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OR VIOLATION OF LAW OF OR BY SELLER, THE COMPANY, (■), ANY MEMBER OF THE SELLER INDEMNIFIED PARTIES OR ANY OTHER PERSON, EXCLUDING THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SELLER, THE COMPANY OR (■) . This indemnity shall survive any termination of this Agreement and the Closing.

Section 8.3 Third Party Approvals. From the date hereof through the Closing Date (or earlier termination of this Agreement), (a) Buyer shall (and shall cause each of its Affiliates to) obtain all of the Buyer Approvals and (b) Seller shall (and shall cause each of its Affiliates to) use Reasonable Efforts to obtain all of the Seller Approvals.

Section 8.4 Regulatory Filings. From the date of this Agreement until the Closing (or earlier termination of this Agreement), subject to the terms and conditions of this Agreement, each of Buyer and Seller shall, and shall cause their respective Affiliates to, undertake Reasonable Efforts to make or cause to be promptly made the filings required of such Party or any of its Affiliates under any Laws with respect to the transactions contemplated by this Agreement and to pay any fees due of it in connection with such filings.

Section 8.5 Books and Records.

(a)       From and after the Closing, Seller and its authorized Representatives may retain a copy of any or all of the books and records (other than Tax records which are addressed in Article IX) relating to the Gathering Assets or to the business or operations of the Company on or before the applicable Effective Time. Seller shall not use such books and records to compete with the Gathering Assets or the Company or in a manner that results in the violation of any Laws and shall keep such books and records confidential.

(b)       Except as otherwise contemplated by the Transition Services Agreement, within thirty (30) days after the Closing, Seller shall deliver to Buyer the Oil and Gas Records, the Gathering Records and all books and records (other than Tax records which are addressed in Article IX) relating to the business or operations of the Company. Buyer shall preserve and keep a copy of the Oil and Gas Records, the Gathering Records and all books and records (other than Tax records which are addressed in Article IX) relating to the business or operations of the Company on or before the applicable Effective Time in Buyer’s possession for a period of at least seven (7) years after the Closing Date. Buyer shall provide to Seller and its designees (including its Affiliates) and their respective Representatives, at no cost or expense to Seller or such designees, reasonable access to such books and records, including Tax records, as remain in Buyer’s possession and full access to the properties and employees of Buyer and the Company in connection with matters relating to the Oil and Gas Records, the Gathering Assets or to the business or operations of the Company on or before the applicable Effective Time and any disputes relating to this Agreement.

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Section 8.6 Excluded Assets. Buyer acknowledges and agrees that (a) the transactions contemplated by this Agreement exclude the Excluded Oil and Gas Assets, (b) neither Buyer nor the Company shall have any right to use the Excluded Oil and Gas Assets from and after the Closing Date and (c) Buyer shall be responsible for obtaining any and all licenses for computer and communications software that may be necessary for the ownership and operation of any of the respective Businesses from and after the Closing Date.

Section 8.7 Seller Marks. Buyer shall obtain no right, title, interest, license or any other right whatsoever to use the words “(■)”, “(■)”, “(■) Corporation”, or “(■) ” or any trademarks containing or comprising any of the foregoing, or any trademark confusingly similar thereto or dilutive thereof (collectively, the “Seller Marks”). From and after the Closing, Buyer agrees (a) to cease using, and to cause the Company to cease using, the Seller Marks in any manner, directly or indirectly, except for such limited uses as cannot be promptly terminated (e.g., signage, e-mail addresses, and as a referral or pointer to the acquired website), and to cease such limited usage of the Seller Marks as promptly as possible after the Closing and in any event within three (3) days following the Closing Date, (b) to remove, strike over or otherwise obliterate all Seller Marks from the Oil and Gas Assets, the Gathering Assets and from all assets and all other materials owned, possessed or used by the Company within forty-five (45) days after the Closing Date, and (c) to reasonably cooperate with Seller and (■) in their efforts to cause any third parties using or licensing Seller Marks in respect of the Oil and Gas Assets, the Gathering Assets or assets of the Company or on behalf of or with the consent of the Company, to remove, strike over or otherwise obliterate all Seller Marks from all materials owned, possessed or used by such third parties within forty-five (45) days after the Closing Date. The Parties agree, because damages would be an inadequate remedy, that a Party seeking to enforce this Section 8.7 shall be entitled to seek specific performance and injunctive relief as remedies for any breach thereof in addition to other remedies available at Law or in equity.

Section 8.8 Permits. Buyer shall provide all notices and otherwise take all actions required to transfer or reissue any Permits that are required to be transferred or reissued, including those required under Environmental Laws, as a result of or in furtherance of the transactions contemplated by this Agreement. Seller shall use Reasonable Efforts to cooperate with Buyer to provide information necessary to apply for such Permits.

Section 8.9 Insurance. Seller agrees to maintain the Seller’s Policies in full force and effect until Closing. All coverage and benefits under the Seller’s Policies and any other insurance policies of Seller or its Affiliates (subject to the terms thereof) relating to the Oil and Gas Assets, the Gathering Assets or the Company and the Businesses shall cease at the Closing. On and after the Closing Date, Buyer shall obtain and maintain any and all insurance coverage and protection relating to the Oil and Gas Assets, the Gathering Assets and the Company and the Businesses.

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Section 8.10 Supplements to Disclosure Schedules. From time to time until the Closing, Seller may supplement or amend the Disclosure Schedules with respect to any matter first existing or occurring following the date of this Agreement that (a) if existing or occurring at or prior to the date of this Agreement, would have been required to be set forth or described in the Disclosure Schedules, or (b) is necessary to correct any information in the Disclosure Schedules that has been rendered inaccurate thereby. No modification, supplement or amendment to the Disclosure Schedules shall affect the representations or warranties of Seller contained in Article III or Article IV, the conditions set forth in Section 10.1, or Buyer’s rights under Article X, Article XI (except as set forth herein) or Article XII, but if the condition in Section 10.1(b) shall fail to be satisfied as a result of a breach of a representation or warranty of Seller contained in Article III or Article IV caused by the failure of a Disclosure Schedule to contain any information added after the date of this Agreement pursuant to this Section 8.10 and Buyer waives such condition and effects the Closing, then (i) such modification, supplement or amendment shall, for all purposes of Article XI, amend and cure such breach for purposes of Article XI. References in this Agreement to the Disclosure Schedules shall be to the Disclosure Schedules as may be modified, supplemented, or amended from time to time in accordance with this Section 8.10, subject to the provisions of this Section 8.10.

Section 8.11 Recording. Immediately following the Closing, Buyer, at its cost and expense, shall record the Oil and Gas Assets Conveyance, the (■) Gathering Assets Conveyance and the (■) Gathering Assets Conveyance and any other instruments of assignment in the appropriate governmental offices of the jurisdictions in which the subject assets are located and in any other locations and records in which recordation is required or advisable. Promptly following such recording, Buyer shall advise Seller in writing of the pertinent recording data.

Section 8.12 Casualty and Condemnation. If after the date of this Agreement and prior to the Closing any part of the Oil and Gas Assets, the Gathering Assets or the assets of the Company shall be destroyed or damaged by fire or other casualty or if any part of such assets shall be taken in condemnation or under the right of eminent domain or if proceedings for such purposes shall be pending or threatened, this Agreement shall remain in full force and effect notwithstanding any such destruction, damage, taking or proceeding or the threat thereof. To the extent insurance proceeds, condemnation awards or other payments are not committed, used or applied by Seller, the Company, or (■), as applicable, prior to the Closing Date to repair, restore or replace such destroyed, damaged or taken assets, Seller shall (or, if applicable, shall cause (■) or the Company to) at the Closing (a) assign to Buyer Seller’s (or (■)’s or the Company’s, as applicable) right to receive all insurance or condemnation proceeds, awards or payments owed to Seller (or (■) or the Company, if applicable) by reason of such destruction or taking, less any reasonable costs and expenses incurred by Seller (or (■) or the Company, if applicable) in collecting same or in connection with such proceedings or the threat thereof, and (b) pay to Buyer all insurance or condemnation proceeds, awards or payments theretofore paid to Seller (or (■) or the Company, if applicable) by reason of such destruction, damage or taking, less any reasonable costs and expenses incurred by Seller (or (■) or the Company, if applicable) in collecting same or in connection with such proceedings or the threat thereof. Notwithstanding the foregoing, any insurance or condemnation proceeds, awards or payments (or any rights thereto) by reason of such destruction, damage or taking which are held by or owed to Seller (or (■) or the Company, if applicable) for the account or benefit of any third party joint interest owners shall not be paid or assigned by Seller (or (■) or the Company, if applicable) to Buyer pursuant to this Section 8.12 and shall instead be transferred to the successor operator or other Person responsible therefor pursuant to the terms of the applicable operating or other agreement.

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Section 8.13 Surety Bonds. On or before three (3) days following the Closing Date, Buyer will provide all required replacement bonds and other documentation necessary to accommodate Seller’s and its Affiliates’ release from any surety bonds of Seller, (■) or the Company set forth on Schedule 8.13. From and after the Closing, Buyer shall, and shall cause the Company to, indemnify the Seller Indemnified Parties from and against, and shall hold each of them harmless from, any and all Losses incurred or suffered by the Seller Indemnified Parties pursuant to or arising out of such surety bonds. Neither Seller nor its Affiliates shall have any obligation to keep such surety bonds in effect after three (3) days following the Closing Date.

Section 8.14 Office Lease. If requested by Buyer at the Closing, Seller shall request that the landlord under the Office Lease consent to the assignment of the Office Lease from Seller to Buyer. If the landlord consents to the assignment of the Office Lease from Seller to Buyer, all obligations and liabilities arising from and after the effective date of such assignment will be deemed to constitute Assumed Liabilities hereunder.

Section 8.15 Extension of Primary Lease Terms. The Parties acknowledge and agree that any costs and expenses incurred by Seller following the date hereof through the Closing to extend the primary term of any lease included in the Subject Interests located in West Virginia shall be borne equally by the Parties.

Article IX
TAX MATTERS

Section 9.1 Tax Returns.

(a)       Seller shall cause the Company to be included in the applicable Seller Affiliated Group for all periods or portions thereof ending on or before the Closing Date in each jurisdiction where such action is permitted under Law. Seller shall prepare and file all Tax Returns with respect to Pre-Closing Tax Periods for any Seller Affiliated Group required to be filed before, after or on the Closing Date. In addition, Seller shall prepare and file all Tax Returns with respect to the Oil and Gas Assets and (■) Gathering Assets, shall cause (■) to prepare and file all Tax Returns with respect to the (■) Gathering Assets, and shall cause the Company to prepare and file all Tax Returns with respect to the Company (taking into account any extensions), in each case, required to be filed on or before the Closing Date. Seller shall cause the Company to provide Buyer with at least a 15-day (or, in the case of income Tax Returns, 30-day) period prior to the due date (including any extensions) for filing any Tax Return of the Company covered by this Section 9.1(a), other than a Tax Return for a Seller Affiliated Group, to review and comment on such Tax Return prior to the filing of such Tax Return. Seller has caused or will cause to be paid to the appropriate Tax Authority the amount of Taxes shown to be due on each Tax Return covered by this Section 9.1(a).

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(b)       Except in the case of any Tax Return covered by Section 9.1(a), with respect to Tax Returns of the Company required to be filed after the Closing Date by the Company for any Pre-Closing Tax Period (other than a Straddle Period), Buyer shall prepare all such Tax Returns; provided, however, that Buyer shall provide Seller with at least a 15-day (or, in the case of income Tax Returns, 30-day) period prior to the due date (including any extensions) for filing any such Tax Return to review and comment on such Tax Return prior to the filing of such Tax Return.

(c)       Except in the case of any Tax Return covered by Section 9.1(a), with respect to Tax Returns required to be filed by the Company for a Straddle Period, Buyer shall cause the Company to prepare all such Tax Returns and shall determine in accordance with Section 9.4 the amount of Tax due with respect to the portion of such period ending on the Closing Date; provided, however, that Buyer shall provide Seller with at least a 15-day (or, in the case of income Tax Returns, 30-day) period prior to the due date (including any extensions) for filing any such Tax Return to review and comment on such Tax Return and determination prior to the filing of such Tax Return.

(d)       Any Tax Return prepared pursuant to the provisions of this Section 9.1 shall be prepared in a manner consistent with practices followed in prior years with respect to similar Tax Returns, except as otherwise required by Law.

(e)       Buyer and Seller shall attempt in good faith to reach agreement with respect to any issue resulting from any review of a Tax Return or determination described in Section 9.1(a), Section 9.1(b) or Section 9.1(c). Should Buyer and Seller fail to reach such an agreement within 15 days after delivery of such Tax Return and, if applicable, such determination, a determination with respect to the disputed issues shall be made by the Accountant, whose decision shall be final and binding upon the Parties. If the Accountant is unable to resolve any disputed items before the due date for such Tax Return, the Tax Return shall be filed as proposed by Buyer, but any amount due to or from Buyer or Seller by the other with respect to such Tax Return shall reflect the Accountant’s resolution. The costs, fees and expenses of the Accountant shall be borne equally by Buyer and Seller.

(f)       In the case of a Tax Return covered by Section 9.1(b) or Section 9.1(c), Seller shall pay to Buyer Seller’s share of any Taxes due with respect to such Tax Return, if any, as determined pursuant to Section 9.7.

Section 9.2 Transfer Taxes. All sales, use, fees, and other similar Taxes (“Transfer Taxes”) resulting directly from the sale and transfer by Seller to Buyer of the Shares, the Oil and Gas Assets and the Gathering Assets shall be borne equally by Buyer and Seller. The party required by applicable Law to file any Tax Return relating to any Transfer Taxes shall prepare and file such Tax Return, and Buyer and Seller shall each, and shall each cause their respective Affiliates to, cooperate (a) to minimize the incurrence of any such Transfer Taxes, and (b) with respect to any such Transfer Taxes due, in the timely preparation and filing of, and join in the execution of to the extent required by applicable Law, any such Tax Return.

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Section 9.3 Purchase Price Allocation.

(a)       Buyer and Seller agree that they will report, and cause their respective Affiliates to report, the Tax consequences of the purchase and sale hereunder in a manner consistent with the allocation of the Base Purchase Price among the Shares, the Oil and Gas Assets and the Gathering Assets set forth in Section 2.2 and that they will not take any positions inconsistent therewith in connection with the filing of any Tax Return.

(b)       Within a reasonable period of time after the Closing, Buyer and Seller shall consult with each other in good faith with respect to the allocation of the portion of the Base Purchase Price attributable to the Gathering Assets and the Oil and Gas Assets, as applicable, under Section 2.2 and the Assumed Liabilities, plus any other capitalized costs attributable to the Gathering Assets and the Oil and Gas Assets, as applicable, among the Gathering Assets and the Oil and Gas Assets, as applicable, in accordance with Section 1060 of the Code and the Treasury Regulations promulgated thereunder. If Buyer and Seller do not mutually agree upon such allocation, then such allocation shall be determined by the Accountant, and the costs, fees and expenses of the Accountant shall be borne equally by Buyer and Seller. Buyer and Seller will report, and cause their respective Affiliates to report, the Tax consequences of the purchase and sale of the Gathering Assets and the Oil and Gas Assets, as applicable, hereunder in a manner consistent with such allocation ( as mutually agreed by Buyer and Seller or as determined by the Accountant) and will not take any positions inconsistent therewith in connection with the filing of any Tax Return.

Section 9.4 Straddle Periods. For purposes of this Agreement, in the case of any taxable period (other than any taxable period covered by a Tax Return of any Seller Affiliates Group described in, or covered by, Section 9.1(a)) of the Company that includes (but does not end on) the Closing Date (a “Straddle Period”), the amount of any Taxes of the Company for the portion of such Straddle Period through the end of the Closing Date shall be determined based on an interim closing of the books as of the close of business on the Closing Date, except that the amount of any Property Taxes (as defined in Section 9.5) of the Company or franchise Taxes (which are measured solely by, or based solely upon, capital, debt or a combination of capital and debt) of the Company for the portion of such Straddle Period through the end of the Closing Date shall be determined on a per diem basis.

Section 9.5 Property Tax Allocation. With respect to any real property, personal property, ad valorem and other similar Tax (“Property Taxes”) assessed on any of the Oil and Gas Assets and the Gathering Assets for any taxable period that includes (but does not end on) April 1, 2017 (an “Asset Straddle Period”), the liability for such Property Tax shall be prorated on a daily basis between Buyer and Seller, with Seller being liable for the portion of such Property Taxes equal to the product of (i) the amount of such Property Taxes for the entirety of such Asset Straddle Period, multiplied by (ii) a fraction, the numerator of which is the number of days in such Asset Straddle Period ending on and including April 1, 2017 and the denominator of which is the total number of days in such Asset Straddle Period, and with Buyer being liable for the remainder of such Property Taxes. If the Closing Date shall occur before the applicable Tax rate or assessment is fixed for such Asset Straddle Period, the apportionment of such Property Taxes and payments at the Closing shall be based upon the most recently ascertainable Property Tax bills; provided, that Buyer and Seller shall recalculate and re-prorate such Property Taxes and payments and make the necessary cash adjustments promptly upon the issuance, and on the basis, of the actual Property Tax bills received for such Asset Straddle Period. All severance or production Taxes based on the production of hydrocarbons from any of the Oil and Gas Assets shall be allocated between Buyer and Seller based on the period during which such production occurred, and not on the period during which such Taxes are assessed, with Seller being liable for such Taxes imposed on such production occurring on or before the Effective Time applicable to the Oil and Gas Assets, and with Buyer being liable for such Taxes imposed on such production occurring after such Effective Time.

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Section 9.6 Tax Cooperation. Each of Buyer and Seller shall, and shall cause their respective Affiliates to, cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns with respect to the Company and any audit, litigation or other proceeding with respect to Taxes and Tax matters to which this Agreement applies. Such cooperation shall include the retention and (upon the request of the other Party) the provision of records and information that are reasonably relevant to any such Tax Returns or audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Buyer and Seller shall, and shall cause their respective Affiliates, (i) to retain all Tax Records and books and records with respect to Tax matters relating to the Oil and Gas Assets and the Gathering Assets for any taxable period beginning on or before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Buyer or Seller, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any Tax Authority, (ii) to provide copies of the Tax Records to the other Party, as requested, and (iii) to give the other Party reasonable written notice prior to transferring, destroying or discarding any such Tax Records and books and records and, if the other Party so requests, Buyer or Seller shall, and shall cause its Affiliates to, allow such Party to take possession of such Tax Records and books and records. Buyer and Seller further agree, upon request, to use, and to cause their respective Affiliates to use, their respective commercially reasonable efforts to obtain any certificate or other document from any Tax Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including with respect to any of the transactions contemplated by this Agreement). Any information obtained under this Section 9.6 or under any other section of this Agreement providing for the sharing of information or review of any Tax Return will be kept confidential by the Parties; provided that such information may be provided to a Party’s Affiliates, professional advisors, applicable Tax Authorities, or as may be required by Law or applicable stock exchange.

Section 9.7 Tax Indemnification.

(a)       Except as otherwise provided in Section 9.2 and Section 9.5, Seller will indemnify, defend and hold the Buyer Indemnified Parties harmless from and against all Losses relating to (i) Taxes of the Company that are attributable to Pre-Closing Tax Periods, (ii) Taxes of Seller or any other Person (other than the Company) which is or has ever been affiliated with the Company, or with whom the Company otherwise joins or has ever joined (or is or has ever been required to join) in filing any consolidated, combined, affiliated or unitary Tax Return for any period prior to the Closing Date, (iii) any breach of Seller’s representations and warranties contained in Section 4.10 or Seller’s covenants and agreements contained in this Article IX, (iv) all Excluded Tax Liabilities, and (v) reasonable legal, accounting and appraisal fees and expenses with respect to any item described in this Section 9.7(a); provided, however, that notwithstanding the foregoing, (x) in the case of clauses (i), (iii), (iv), and (v) above, Seller shall be liable only to the extent that the aggregate amount of such liabilities exceeds the Tax Accrual, and (y) Seller will not indemnify, defend or hold harmless any member of the Buyer Indemnified Parties from any liability for Taxes attributable to any action taken on the Closing Date (after the Closing) by Buyer, by any of its Affiliates (including the Company after the Closing), or by any transferee of Buyer or any of its Affiliates (other than any such action taken in the ordinary course of business or expressly required or otherwise expressly contemplated by this Agreement).

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(b)       The obligations of Seller to indemnify, defend and hold harmless the Buyer Indemnified Parties pursuant to Section 9.7(a), will terminate upon the expiration of all applicable statutes of limitations (giving effect to any extensions thereof); provided, however, that such obligations to indemnify, defend and hold harmless will not terminate with respect to any individual item as to which a Buyer Indemnified Party has, before the expiration of the applicable period, previously made a claim by delivering a notice (stating in reasonable detail the basis of such claim) to the applicable Indemnifying Party.

(c)       Any indemnity payment required to be made pursuant to this Section 9.7 will be paid within 30 days after the Indemnified Party makes written demand upon the Indemnifying Party, but in no case earlier than five (5) Business Days prior to the date on which the relevant Taxes are required to be paid (or would be required to be paid if no such Taxes are due) to the relevant Tax Authority.

(d)       Notwithstanding any provisions of this Agreement to the contrary, including Article XI, the indemnification obligations of Seller contained in this Section 9.7 represent Seller’s only indemnification obligations to Buyer with respect to Taxes and any Tax matter.

Section 9.8 Tax Contests.

(a)       If any Buyer Indemnified Party receives notice of a claim made by any Tax Authority which, if successful, might result in an indemnity payment to any member of the Buyer Indemnified Parties pursuant to Section 9.7, the Buyer Indemnified Party will promptly notify the Indemnifying Party of such claim (a “Tax Claim”); provided, however, that the failure to give such notice will not affect the indemnification provided hereunder except to the extent the Indemnifying Party has actually been prejudiced as a result of such failure.

(b)       With respect to any Tax Claim relating to Taxes of (i) any Seller Affiliated Group, (ii) Seller, (■) , or any of their respective Affiliates (other than the Company) with respect to the Gathering Assets or the Oil and Gas Assets, or (iii) the Company with respect to any Pre-Closing Tax Period, Seller will control all proceedings and may make all decisions in connection with such Tax Claim (including selection of counsel) and, without limiting the foregoing, may in its sole discretion pursue or forego any and all administrative appeals, proceedings, hearings and conferences with any Tax Authority with respect thereto, and may, in its sole discretion, either pay the Tax claimed and claim a refund where applicable Law permits such refund claims or contest the Tax Claim in any permissible manner; provided that the Seller shall not settle or compromise any such Tax Claim described in clause (iii) of this sentence without the written consent of Buyer (which consent shall not be unreasonably withheld, delayed, or conditioned) if such settlement or compromise would have the effect of increasing the Tax liability or reducing any Tax asset of Buyer or the Company in respect of any Tax period (or portion thereof) beginning after the Closing Date. Buyer will control all proceedings and may make all decisions in connection with any Tax Claim other than a Tax Claim described in the first sentence of this Section 9.8(b); provided that Buyer (x) shall not settle or compromise any such Tax Claim without the prior written consent of the Seller (which consent shall not be unreasonably withheld, conditioned or delayed), and (y) shall keep Seller informed of all substantive developments and written materials relating to such Tax Claim and Seller or its authorized representatives shall have the right to participate, at Seller’s sole cost and expense, in any conference, meeting or proceeding relating to such Tax Claim.

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(c)       Each of Buyer, the Company and their respective Affiliates, on the one hand, and the Seller and its respective Affiliates, on the other, will cooperate in contesting any Tax Claim, which cooperation will include the retention and (upon request) the provision to the requesting party of records and information that are reasonably relevant to such Tax Claim, and making employees available on a mutually convenient basis to provide additional information or explanation of any material provided hereunder or to testify at proceedings relating to such Tax Claim.

Section 9.9 Amended Tax Returns and Claims for Refund. Buyer shall not file, or permit the Company or any of Buyer’s Affiliates to file, any amended Tax Return or claim for refund with respect to the Company for any Pre-Closing Tax Period without the prior written consent of Seller. To the maximum extent permitted by applicable Law, Buyer shall elect, or shall cause the Company and Buyer’s Affiliates to elect, to carry forward any net operating loss or other Tax attribute arising after the Closing Date that could otherwise be carried back into a Pre-Closing Tax Period of the Company.

Section 9.10 Tax Refunds. The amount of any refund of any Tax received by Seller, Buyer, the Company or any of their respective Affiliates and attributable to any Pre-Closing Tax Period of the Company, Seller or any of Seller’s Affiliates shall be for the account of Seller, except to the extent such refund is included as an asset that increased Final Net Working Capital or is attributable to a required carry-back of a net operating loss or other Tax attribute from any period of the Company that is not a Pre-Closing Tax Period where no election is available under applicable Law to carry forward such net operating loss or other Tax attribute. The amount of any refund of any Tax received by Seller, Buyer, the Company or any of their respective Affiliates and attributable to any period of the Company that is not a Pre-Closing Tax Period shall be for the account of Buyer. In the case of a Straddle Period of the Company, the amount of any refund received by Seller, Buyer, the Company or any of their respective Affiliates shall be apportioned between Seller and Buyer in accordance with Section 9.4. The amount of any such refund (including any interest thereon) owing to Seller or Buyer, as applicable, as provided in this Section 9.10 shall be paid by Buyer or Seller, as applicable, net of any expenses (including Taxes) with respect thereto or incurred in connection therewith, within fifteen (15) days after such refund is received, credited or applied as an offset.

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Section 9.11 Termination of Tax Sharing Agreements. Any and all Tax allocation agreements, Tax sharing agreements, Tax indemnity agreements, intercompany agreements or other similar contracts or arrangements between the Company, on the one hand, and Seller or any of Seller’s Affiliates (other than the Company) or any other Person (excluding commercial agreements entered into in the ordinary course of business the primary purpose of which does not relate to Taxes), on the other hand, and relating to any Tax matters shall be terminated with respect to the Company as of the Closing Date, and after the Closing Date, the Company will have no further rights or liabilities thereunder, and any such agreements, contracts or arrangements will have no further force or effect whatsoever for any taxable period (whether past, current, or future taxable periods).

Section 9.12 Tax Treatment of Indemnity Payments. Seller and Buyer agree to treat any indemnity payment made pursuant to this Agreement as an adjustment to the Base Purchase Price for Tax purposes.

Section 9.13 Conflict. In the event of a conflict between the provisions of this Article IX and any other provision of this Agreement, the provisions of this Article IX shall control.

Section 9.14 Conduct of Business. From the date of this Agreement through the Closing, the Company shall not (i) make, change or rescind any Tax election, (ii) amend any Tax Return, (iii) settle or compromise any Tax claim or liability, (iv) change (or make a request to change) any method of accounting for Tax purposes, (v) waive or extend any statute of limitations in respect of Taxes, (vi) surrender any right to claim a refund of Taxes, or (vii) enter into any closing agreement with respect to Taxes.

Article X
CONDITIONS TO OBLIGATIONS

Section 10.1 Conditions to Obligations of Buyer. The obligation of Buyer to consummate the transactions contemplated by this Agreement is subject to the satisfaction of the following conditions, any one or more of which may be waived in writing by Buyer:

(a)       Each of the representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects (and in all respects, in the case of representations and warranties which are qualified by materiality or by Material Adverse Effect) on the Closing Date as though made on the Closing Date, except to the extent such representations or warranties expressly relate to an earlier date, in which case they shall be true and correct in all material respects (and in all respects, in the case of representations and warranties which are qualified by materiality or by Material Adverse Effect) as of such earlier date;

(b)       Seller shall have performed or complied in all material respects with all of the covenants and agreements required by this Agreement to be performed or complied with by it at or before the Closing;

(c)       Seller shall have delivered to Buyer a certificate executed by an officer of Seller, dated the Closing Date, certifying that the conditions specified in Section 10.1(a) and Section 10.1(b) have been fulfilled;

(d)       There shall not be in force any Order or proceeding (excluding any initiated by Buyer or its Affiliates) by or before any Governmental Authority of competent jurisdiction or arbitrator with binding authority to arbitrate the matter in question that restrains, enjoins, prohibits, invalidates or otherwise prevents the consummation of the transactions contemplated by this Agreement; and

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(e)       The sum of (i) the reduction in the Base Purchase Price on account of the aggregate amount of all Title Defect Amounts and the exclusion of Title Defect Properties pursuant to Section 6.5(a), (ii) the aggregate amount of Title Defect Amounts claimed by Buyer with respect to unresolved Deferred Title Adjustment Claims, (iii) the reduction in the Base Purchase Price on account of the aggregate amount of all Remediation Amounts pursuant to Section 6.7(c) and the exclusion of Environmental Defect Properties pursuant to Section 6.8(a), and (iv) the greater of the aggregate amount of (A) Remediation Amounts claimed by Buyer with respect to unresolved Deferred Environmental Adjustment Claims or (B) the portion of the Base Purchase Price allocated to the Environmental Defect Properties in the Part II of Property Schedule affected by the unresolved Deferred Environmental Adjustment Claims, shall not exceed $6,195,000.

Section 10.2 Conditions to the Obligations of Seller. The obligation of Seller to consummate the transactions contemplated by this Agreement is subject to the satisfaction of the following conditions, any one or more of which may be waived in writing by Seller:

(a)       Each of the representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects (and in all respects, in the case of representations and warranties which are qualified by materiality) on the Closing Date as though made on the Closing Date, except to the extent such representations or warranties expressly relate to an earlier date, in which case they shall be true and correct in all material respects (and in all respects, in the case of representations and warranties which are qualified by materiality) as of such earlier date;

(b)       Buyer shall have performed or complied in all material respects with all of the covenants and agreements required by this Agreement to be performed or complied with by Buyer on or before the Closing;

(c)       Buyer shall have delivered to Seller a certificate executed by an officer of Buyer, dated the Closing Date, certifying that the conditions specified in Section 10.2(a) and Section 10.2(b) have been fulfilled;

(d)       There shall not be in force any Order or proceeding (excluding any initiated by Seller or its Affiliates) by or before any Governmental Authority of competent jurisdiction or arbitrator with binding authority to arbitrate the matter in question that restrains, enjoins, prohibits, invalidates or otherwise prevents the consummation of the transactions contemplated by this Agreement; and

(e)       The sum of (i) the reduction in the Base Purchase Price on account of the aggregate amount of all Title Defect Amounts and the exclusion of Title Defect Properties pursuant to Section 6.5(a), (ii) the aggregate amount of Title Defect Amounts claimed by Buyer with respect to unresolved Deferred Title Adjustment Claims, (iii) the reduction in the Base Purchase Price on account of the aggregate amount of all Remediation Amounts pursuant to Section 6.7(c) and the exclusion of Environmental Defect Properties pursuant to Section 6.8(a), and (iv) the greater of the aggregate amount of (A) Remediation Amounts claimed by Buyer with respect to unresolved Deferred Environmental Adjustment Claims or (B) the portion of the Base Purchase Price allocated to the Environmental Defect Properties in the Part II of Property Schedule affected by the unresolved Deferred Environmental Adjustment Claims, shall not exceed $6,195,000.

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Article XI
INDEMNIFICATION

Section 11.1 Survival. The representations, warranties, covenants and agreements of the Parties contained in this Agreement shall survive the consummation of the transactions contemplated in this Agreement and shall continue after the Closing Date indefinitely; provided, however, that all (a) representations and warranties contained in this Agreement (other than those contained in Section 4.10 which shall terminate upon the expiration of all applicable statutes of limitation relating to the representations and warranties made in Section 4.10) shall survive the Closing only until twelve (12) months after the Closing Date and (b) covenants and agreements contained in Article II (other than Section 2.4, Section 2.6, and Section 2.7), Article VII (other than Section 7.2 through Section 7.4), Article VIII (other than Section 8.2(b) and Section 8.5 through Section 8.14), Article X and Article XII shall terminate upon Closing. Neither Party shall have any liability for indemnification claims made under this Article XI with respect to any such representation, warranty, covenant or agreement unless a written notice of claim (describing in reasonable detail the claim, including an estimate of Losses attributable to such claim to the extent then known) is provided by Buyer to Seller or Seller to Buyer, as applicable, prior to the expiration of the applicable survival period for such representation, warranty, covenant or agreement. If a written notice of claim has been timely given in accordance with this Agreement prior to the expiration of the applicable survival period for such representation, warranty, covenant or agreement, then the applicable representation, warranty, covenant or agreement shall survive as to such claim, until such claim has been finally resolved.

Section 11.2 Indemnification.

(a)       Subject to the provisions of this Article XI, from and after the Closing, Seller shall indemnify and hold harmless Buyer and its Affiliates and their respective Representatives (the “Buyer Indemnified Parties”) from and against all Losses that the Buyer Indemnified Parties suffer or incur arising from the Retained Liabilities, and any breach of any representation, warranty, covenant or agreement of Seller in this Agreement.

(b)       Subject to the provisions of this Article XI, from and after the Closing, Buyer does hereby assume the Assumed Liabilities and shall indemnify and hold harmless Seller and its Affiliates and their respective Representatives (the “Seller Indemnified Parties”) from and against all Losses that the Seller Indemnified Parties suffer or incur arising from (i) to the extent such Losses are not subject to the provisions of Section 11.2(a) and are not the subject of a claim notice delivered by Buyer by the date specified in Section 11.1, the Assumed Liabilities and the Company Liabilities and (ii) any breach of any representation, warranty, covenant or agreement of Buyer in this Agreement.

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(c)       Notwithstanding anything to the contrary herein, the Parties shall have a duty to use Reasonable Efforts to mitigate any Loss (which duty shall include the obligation to seek and collect available insurance proceeds and indemnification and reimbursement payments) arising out of or relating to this Agreement or the transactions contemplated hereby.

Section 11.3 Indemnification Procedures. Claims for indemnification under this Agreement shall be asserted and resolved as follows:

(a)       Any Buyer Indemnified Party or Seller Indemnified Party claiming indemnification under this Agreement (an “Indemnified Party”) with respect to any claim asserted against the Indemnified Party by a third party (“Third-Party Claim”) in respect of any matter that is subject to indemnification under Section 11.2 shall promptly (i) notify the other Party (the “Indemnifying Party”) of the Third-Party Claim and (ii) transmit to the Indemnifying Party a written notice (“Claim Notice”) describing in reasonable detail the nature of the Third-Party Claim, a copy of all papers served with respect to such claim (if any), the Indemnified Party’s reasonable estimate of the amount of Losses attributable to the Third-Party Claim and the basis of the Indemnified Party’s request for indemnification under this Agreement. Failure to timely provide such Claim Notice shall not affect the right of the Indemnified Party’s indemnification hereunder, except to the extent the Indemnifying Party is prejudiced by such delay or omission.

(b)       The Indemnifying Party shall have the right to defend the Indemnified Party against such Third-Party Claim. If the Indemnifying Party notifies the Indemnified Party that the Indemnifying Party elects to assume the defense of the Third-Party Claim (such election to be without prejudice to the right of the Indemnifying Party to dispute whether such claim is an indemnifiable Loss under this Article XI), then the Indemnifying Party shall have the right to defend such Third-Party Claim with counsel selected by the Indemnifying Party (who shall be reasonably satisfactory to the Indemnified Party), by all appropriate proceedings, to a final conclusion or settlement at the discretion of the Indemnifying Party in accordance with this Section 11.3(b). The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof; provided that the Indemnifying Party shall not enter into any settlement agreement without the written consent of the Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed); provided further, that such consent shall not be required if the settlement agreement (i) contains a complete and unconditional general release by the third party asserting the claim to all Indemnified Parties affected by the claim and (ii) does not contain any sanction or restriction upon the conduct of any business by the Indemnified Party or its Affiliates. If requested by the Indemnifying Party, the Indemnified Party agrees, at the sole cost and expense of the Indemnifying Party, to cooperate with the Indemnifying Party and its counsel in contesting any Third-Party Claim which the Indemnifying Party elects to contest, including the making of any related counterclaim against the Person asserting the Third-Party Claim or any cross complaint against any Person. The Indemnified Party may participate in, but not control, any defense or settlement of any Third-Party Claim controlled by the Indemnifying Party pursuant to this Section 11.3(b), and the Indemnified Party shall bear its own costs and expenses with respect to such participation.

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(c)       If the Indemnifying Party does not notify the Indemnified Party that the Indemnifying Party elects to defend the Indemnified Party pursuant to Section 11.3(b), then the Indemnified Party shall have the right to defend, and be reimbursed by the Indemnifying Party for its reasonable cost and expense (but only if the Indemnified Party is actually entitled to indemnification hereunder) in regard to the Third-Party Claim with counsel selected by the Indemnified Party (who shall be reasonably satisfactory to the Indemnifying Party), by all appropriate proceedings, which proceedings shall be prosecuted diligently by the Indemnified Party. In such circumstances, the Indemnified Party shall defend any such Third-Party Claim in good faith and have full control of such defense and proceedings; provided, however, that the Indemnified Party may not enter into any compromise or settlement of such Third-Party Claim if indemnification is to be sought hereunder, without the Indemnifying Party’s consent (which consent shall not be unreasonably withheld, conditioned or delayed). The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this Section 11.3(c), and the Indemnifying Party shall bear its own costs and expenses with respect to such participation.

(d)       Subject to the other provisions of this Article XI, a claim for indemnification for any matter not involving a Third-Party Claim may be asserted by notice to the Party from whom indemnification is sought.

(e)       In the event an Indemnified Party shall recover Losses in respect of a claim of indemnification under this Article XI, no other Indemnified Party shall be entitled to recover the same Losses in respect of a claim for indemnification.

Section 11.4 Limitations on Liability of Seller. Notwithstanding anything to the contrary herein:

(a)       Seller shall not be required to indemnify any Person under Section 11.2(a) with respect to a breach of any representation or warranty set forth in this Agreement unless the aggregate amount which would otherwise be payable by Seller thereunder exceeds an amount equal to three percent (3%) of the Adjusted Purchase Price, and in such event, Seller shall be responsible for only the amount in excess of such amount. Furthermore, notwithstanding anything to the contrary herein, in no event shall Seller’s indemnification obligation with respect to a breach of any representation or warranty set forth in this Agreement exceed an amount equal to twenty percent (20%) of the Adjusted Purchase Price and in no event shall Seller’s aggregate liability arising out of or relating to Section 11.2(a) exceed an amount equal to the Adjusted Purchase Price; provided that the foregoing limitations shall not apply to Seller’s representations and warranties provided in Section 4.10 or, for the sake of clarity, Seller’s indemnity obligations with respect to Retained Liabilities; and

(b)       no Buyer Indemnified Party shall be entitled to indemnification under Section 11.2(a) to the extent Buyer has otherwise been compensated by reason of adjustments (pursuant to Section 2.6) in the calculation of the Adjusted Purchase Price relative to what it would have been absent such Loss.

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Section 11.5 Waiver of Other Representations and Warranties.

(a)       NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY, AND THE PARTIES HEREBY AGREE, THAT NEITHER SELLER NOR ANY OF ITS AFFILIATES OR REPRESENTATIVES HAS MADE OR IS MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING ANY IMPLIED REPRESENTATION OR WARRANTY AS TO THE CONDITION, MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE SHARES, THE COMPANY, THE ASSETS OF THE COMPANY, THE GATHERING ASSETS, THE OIL AND GAS ASSETS, THE BUSINESSES OR ANY PART THEREOF, EXCEPT THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY CONTAINED IN THIS AGREEMENT, AND WITHOUT IN ANY WAY LIMITING THE FOREGOING, SELLER MAKES NO REPRESENTATION OR WARRANTY TO BUYER WITH RESPECT TO ANY FINANCIAL PROJECTIONS OR FORECASTS RELATING TO THE COMPANY, THE ASSETS OF THE COMPANY, THE GATHERING ASSETS, THE OIL AND GAS ASSETS OR THE BUSINESSES.

(b)       EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, THE COMPANY, THE ASSETS OF THE COMPANY, THE GATHERING ASSETS, THE OIL AND GAS ASSETS, AND THE BUSINESSES ARE BEING TRANSFERRED “AS IS, WHERE IS, WITH ALL FAULTS,” AND SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS, IMPLIED OR OTHERWISE, AS TO THE CONDITION, VALUE OR QUALITY OF THE COMPANY, THE ASSETS OF THE COMPANY, THE GATHERING ASSETS, THE OIL AND GAS ASSETS OR THE BUSINESSES, OR THE PROSPECTS (FINANCIAL OR OTHERWISE), RISKS AND OTHER INCIDENTS OF THE COMPANY, THE ASSETS OF THE COMPANY, THE GATHERING ASSETS, THE OIL AND GAS ASSETS, AND THE BUSINESSES.

(c)       Without limiting the generality of the foregoing, the representations and warranties contained in Section 4.11 shall be the exclusive representations and warranties with regard to Environmental Laws and related matters.

Section 11.6 Exclusive Remedy.

(a)       THE PARTIES ACKNOWLEDGE AND AGREE THAT, EXCEPT TO THE EXTENT CONTEMPLATED BY SECTION 8.7, EACH PARTY’S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT FOLLOWING CLOSING SHALL BE PURSUANT TO THE INDEMNIFICATION PROVISIONS SET FORTH IN THIS AGREEMENT.

(b)       NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, BUT WITHOUT LIMITING SECTION 8.7, NO PARTY SHALL BE LIABLE FOR SPECIAL, PUNITIVE, EXEMPLARY, INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES, LOST PROFITS OR LOST BENEFITS, LOSS OF ENTERPRISE VALUE, DIMINUTION IN VALUE OF ANY BUSINESS, DAMAGES TO REPUTATION OR LOSS TO GOODWILL, WHETHER BASED ON CONTRACT, TORT, STRICT LIABILITY, OTHER LAW OR OTHERWISE AND WHETHER OR NOT ARISING FROM ANY OTHER PARTY’S SOLE, JOINT OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT; PROVIDED, HOWEVER, THAT THIS SECTION 11.6(b) SHALL NOT LIMIT A PARTY’S RIGHT TO RECOVERY HEREUNDER FOR ANY SUCH DAMAGES TO THE EXTENT SUCH PARTY IS REQUIRED TO PAY SUCH DAMAGES TO A THIRD PARTY IN CONNECTION WITH A MATTER FOR WHICH SUCH PARTY IS OTHERWISE ENTITLED TO INDEMNIFICATION HEREUNDER.

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Section 11.7 Express Negligence. THE PAYMENT, DEFENSE, INDEMNIFICATION, HOLD HARMLESS AND RELEASE PROVISIONS AND THE ASSUMPTION OF THE ASSUMED LIABILITIES PROVISIONS (IN EACH CASE) PROVIDED FOR IN THIS AGREEMENT SHALL BE APPLICABLE WHETHER OR NOT THE LIABILITIES, LOSSES, COSTS, EXPENSES AND DAMAGES IN QUESTION AROSE OR RESULTED SOLELY OR IN PART FROM THE GROSS, SOLE, ACTIVE, PASSIVE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OR VIOLATION OF LAW OF OR BY ANY INDEMNIFIED PARTY. BUYER AND SELLER ACKNOWLEDGE THAT THIS STATEMENT COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND IS CONSPICUOUS.

Article XII
TERMINATION

Section 12.1 Termination. At any time prior to the Closing, this Agreement may be terminated and the transactions contemplated hereby abandoned:

(a)       by the mutual consent of Buyer and Seller as evidenced in a writing signed by each of Buyer and Seller;

(b)       by Buyer, (i) if there has been a breach by Seller of any representation, warranty, covenant or agreement contained in this Agreement which has prevented the satisfaction of any condition to the obligation of Buyer to consummate the transactions contemplated hereunder and, if such breach is of a character that it is capable of being cured, such breach has not been cured by Seller within thirty (30) days after written notice thereof from Buyer, provided that Buyer is not in material breach of any of its representations, warranties, covenants or agreements contained in this Agreement at such time or (ii) if the condition to Closing provided in Section 10.1(e) has not been satisfied;

(c)       by Seller, (i) if there has been a breach by Buyer of any representation, warranty, covenant or agreement contained in this Agreement which has prevented the satisfaction of any condition to the obligation of Seller to consummate the transactions contemplated hereunder and, if such breach is of a character that it is capable of being cured, such breach has not been cured by Buyer within thirty (30) days after written notice thereof from Seller, provided that Seller is not in material breach of any of its representations, warranties, covenants or agreements contained in this Agreement at such time or (ii) if the condition to Closing provided in Section 10.2(e) has not been satisfied;

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(d)       by either Buyer or Seller if any Governmental Authority having competent jurisdiction has issued a final, non-appealable order, decree, ruling or injunction (other than a temporary restraining order) or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement; or

(e)       by either Buyer or Seller, if the Closing has not occurred on or before September 29, 2017 (provided the Party seeking to terminate this Agreement is not in material breach of any of its representations, warranties, covenants or agreements contained in this Agreement at such time), or such later date as the Parties may agree upon.

Section 12.2 Effect of Termination. If this Agreement is terminated as provided in Section 12.1, this Agreement shall forthwith become void and, except as otherwise provided in Section 2.3 and as provided in this Section 12.2, there shall be no liability on the part of any Party hereto with respect thereto, but nothing herein shall relieve Seller from liability to Buyer if this Agreement is terminated by Buyer as provided in Section 12.1(b). If Seller terminates this Agreement pursuant to Section 12.1(c)(i), Seller shall be entitled to retain the Deposit together with all interest earned thereon as liquidated damages, as Seller’s sole and exclusive remedy for any such breach by Buyer hereunder. Seller and Buyer agree upon the amount of the Deposit and such interest as liquidated damages due to the difficulty and inconvenience of measuring actual damages and the uncertainty thereof, and Seller and Buyer agree that the amount of the Deposit and such interest is a reasonable estimate of Seller’s loss in the event of any such default by Buyer. Notwithstanding anything herein provided to the contrary, the provisions of Section 8.2(b) and Article XIII shall survive any termination of this Agreement. The Confidentiality Agreement shall not be affected by a termination of this Agreement.

Article XIII
MISCELLANEOUS

Section 13.1 Notices. All notices and other communications between the Parties shall be in writing and shall be deemed to have been duly given when (a) delivered in person, (b) one Business Day after delivery to an overnight delivery service (e.g., FedEx), freight prepaid, or (c) delivered by facsimile or e-mail and contemporaneously delivered in person or by overnight delivery service, freight prepaid, addressed as follows:

(i)           If to Seller, to:

(■)

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with a copy (which shall not constitute notice) to:

(■)

(ii)          If to Buyer, to:

Carbon West Virginia Company, LLC
c/o Carbon Natural Gas Company
1700 Broadway, Suite 1170
Denver, Colorado 80290

(■)

with a copy (which shall not constitute notice) to:

Welborn Sullivan Meck & Tooley, P.C.
1125 17th Street, Suite 2200
Denver, Colorado 80202

(■)

or to such other address or addresses as the Parties may from time to time designate in writing in accordance with this Section 13.1.

Section 13.2 Assignment. No Party shall assign this Agreement or any part hereof without the prior written consent of the other Party. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns.

Section 13.3 Rights of Third Parties. Nothing in this Agreement shall entitle any Person other than Buyer and Seller to any Losses, remedy or right of any kind, except as to those rights expressly provided to the Seller Indemnified Parties and the Buyer Indemnified Parties (provided, however, any claim for indemnity hereunder on behalf of a Seller Indemnified Party or a Buyer Indemnified Party must be made and administered by a Party).

Section 13.4 Expenses. Except as otherwise provided herein, each Party shall bear its own expenses incurred in connection with this Agreement and the transactions herein contemplated whether or not such transactions shall be consummated, including all fees of its legal counsel, financial advisers and accountants.

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Section 13.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Any facsimile or electronic copies hereof or signatures hereon shall, for all purposes, be deemed originals.

Section 13.6 Entire Agreement. This Agreement (together with the Disclosure Schedules and exhibits to this Agreement) and the Confidentiality Agreement constitute the entire agreement among the Parties and supersede any other agreements, whether written or oral, that may have been made or entered into by or among any of the Parties or any of their respective Affiliates relating to the transactions contemplated hereby.

Section 13.7 Disclosure Schedules. Unless the context otherwise requires, all capitalized terms used in the Disclosure Schedules shall have the respective meanings assigned in this Agreement. No reference to or disclosure of any item or other matter in a Disclosure Schedule shall be construed as an admission or indication that such item or other matter is material or that such item or other matter is required to be referred to or disclosed in such Disclosure Schedule. No disclosure in a Disclosure Schedule relating to any possible breach or violation of any agreement or Law shall be construed as an admission or indication that any such breach or violation exists or has actually occurred. The inclusion of any information in the Disclosure Schedules shall not be deemed to be an admission or acknowledgment by Seller, in and of itself, that such information is material to or outside the ordinary course of the applicable Business or required to be disclosed on the Disclosure Schedules.

Section 13.8 Amendments. This Agreement may be amended or modified in whole or in part, and terms and conditions may be waived, only by a duly authorized agreement in writing which makes reference to this Agreement executed by each Party.

Section 13.9 Publicity. All press releases or other public communications of any nature whatsoever relating to the transactions contemplated by this Agreement, and the method of the release for publication thereof, shall be subject to the prior written consent of Buyer and Seller, which consent shall not be unreasonably withheld, conditioned or delayed by any Party; provided, however, that a Party may publish such press releases or other public communications as such Party may consider necessary in order to satisfy such Party’s obligations at Law or under the rules of any stock or commodities exchange after consultation with the other Party as is reasonable under the circumstances and providing the other Party the opportunity to review such press release or other public communication.

Section 13.10 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement shall remain in full force and effect. The Parties further agree that if any provision contained herein is, to any extent, held invalid or unenforceable in any respect under the Laws governing this Agreement, they shall take any actions necessary to render the remaining provisions of this Agreement valid and enforceable to the fullest extent permitted by Law and, to the extent necessary, shall amend or otherwise modify this Agreement to replace any provision contained herein that is held invalid or unenforceable with a valid and enforceable provision giving effect to the intent of the Parties to the greatest extent legally permissible.

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Section 13.11 Governing Law; Jurisdiction.

(a)       This Agreement AND ANY DISPUTES OR CLAIMS HEREUNDER shall be governed and construed in accordance with the Laws of the State of Texas without regard to the Laws that might be applicable under conflicts of laws principles.

(b)       The Parties agree that the appropriate, exclusive and convenient forum for any disputes between any of the Parties arising out of this Agreement or the transactions contemplated hereby shall be in any state or federal court in Houston, Texas, and each of the Parties irrevocably submits to the jurisdiction of such courts solely in respect of any legal proceeding arising out of or related to this Agreement. The Parties further agree that the Parties shall not bring suit with respect to any disputes arising out of this Agreement or the transactions contemplated hereby in any court or jurisdiction other than the above specified courts; provided, however, that the foregoing shall not limit the rights of the Parties to obtain execution of judgment in any other jurisdiction. The Parties further agree, to the extent permitted by Law, that a final and unappealable judgment against a Party in any action or proceeding contemplated above shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a certified copy of which shall be conclusive evidence of the fact and amount of such judgment. Except to the extent that a different determination or finding is mandated due to the applicable law being that of a different jurisdiction, the Parties agree that all judicial determinations or findings by a state or federal court in Houston, Texas, with respect to any matter under this Agreement shall be binding.

(c)       To the extent that any Party has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, each such Party hereby irrevocably (i) waives such immunity in respect of its obligations with respect to this Agreement and (ii) submits to the personal jurisdiction of any court described in Section 13.11(b).

(d)       THE PARTIES AGREE THAT THEY HEREBY IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION TO ENFORCE OR INTERPRET THE PROVISIONS OF THIS AGREEMENT.

Section 13.12 Further Assurances. Seller will execute and deliver or cause to be executed and delivered to Buyer, and Buyer will execute and deliver or cause to be executed and delivered to Seller, such further instruments of transfer, assignment and conveyance and take such other action as the other Party may reasonably require to more effectively carry out the consummation of the transactions contemplated by this Agreement.

Section 13.13 Non-Recourse to Non-Parties. No past, present or future director, officer, employee, incorporator, member, manager, partner, stockholder, Affiliate, agent, attorney or other representative of a Party or any of its Affiliates shall have any liability for any obligations or liabilities of such Party under this Agreement or for any claim based on or in respect of this Agreement.

Section 13.14 Records. Buyer acknowledges and agrees that Seller shall be entitled to retain copies of the Oil and Gas Records and the Gathering Records.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF this Agreement has been duly executed and delivered by each Party as of the date first above written.

SELLER:
(■)
By:
	(■)
	(■)

BUYER:
CARBON WEST VIRGINIA COMPANY, LLC
By:	Carbon Natural Gas Company,
	its Manager

By:
	Patrick R. McDonald
	Chief Executive Officer

Signature Page to
Purchase and Sale Agreement

The following Exhibits and Schedules have been omitted. The Company agrees to furnish supplementally a copy of the omitted Exhibits to the Commission upon request.

Exhibits

Exhibit A-1	-	Arbitration Procedures
Exhibit A-2	-	Property Schedule
Exhibit 1.1(a)	-	Form of Assignment of Shares
Exhibit 1.1(b)	-	Form of (■) Gathering Assets Conveyance
Exhibit 1.1(c)	-	Form of (■) Gathering Assets Conveyance
Exhibit 1.1(d)	-	Form of Oil and Gas Assets Conveyance
Exhibit 1.1(e)	-	Form of Oil and Gas Lease
Exhibit 1.1(f)	-	Form of Transition Services Agreement
Exhibit 2.5(b)(ix)	-	Form of Non-Foreign Affidavit

Disclosure Schedules

Schedule 1.1(a)	-	Certain Excluded Oil and Gas Assets
Schedule 1.1(b)	-	(■) Gathering Contracts
Schedule 1.1(c)	-	(■)
Schedule 1.1(d)	-	(■) Gathering Surface Contracts
Schedule 1.1(e)	-	(■)
Schedule 1.1(f)	-	Gathering Systems
Schedule 1.1(g)	-	Buyer’s Knowledge Persons
Schedule 1.1(h)	-	Seller’s Knowledge Persons
Schedule 1.1(i)	-	Certain Permitted Liens
Schedule 2.6(a)	-	Net Working Capital Methodology
Schedule 3.4	-	Seller Litigation
Schedule 4.5	-	Certain Liabilities
Schedule 4.6	-	Certain Changes
Schedule 4.7(a)	-	Material Contracts
Schedule 4.7(c)	-	Material Contracts – Exceptions
Schedule 4.8	-	Company and Big Sandy Litigation
Schedule 4.10	-	Taxes
Schedule 4.11	-	Environmental Matters
Schedule 4.12	-	Legal Compliance
Schedule 4.13	-	Absence of Permits
Schedule 4.14	-	Title Exceptions
Schedule 4.15	-	Seller’s Policies
Schedule 4.16	-	Regulatory and Administrative Matters
Schedule 4.17(a)	-	Preference Rights
Schedule 4.17(b)	-	Seller Approvals
Schedule 4.18	-	Certain Wells
Schedule 4.19	-	Outstanding Commitments
Schedule 4.21	-	Prepayments; Hedging
Schedule 4.23	-	Suspense Amounts
Schedule 4.24		Payout Balances
Schedule 4.25		Current Bonds; Other Credit Support Instruments
Schedule 4.26		Gas Imbalances
Schedule 5.3	-	Buyer Approvals
Schedule 8.1	-	Conduct of Business
Schedule 8.13	-	Surety Bonds

EX-2.2

Exhibit 2.2

Portions of this document have been omitted as marked

and filed separately with the Commission.

Purchase and Sale Agreement

Dated as of May 25, 2017

Among

(■)

(■)

(■)

and

(■)

as Seller

and

Carbon West Virginia Company, LLC

as Buyer

Table of Contents

		Page
ARTICLE I PURCHASE AND SALE		1
Section 1.01	Purchase and Sale	1
Section 1.02	Assets	1
Section 1.03	Excluded Assets	4
Section 1.04	Effective Time	5
ARTICLE II PURCHASE PRICE		6
Section 2.01	Purchase Price	6
Section 2.02	Deposit.	6
Section 2.03	Adjustments and Credits to Purchase Price	6
Section 2.04	Payment of Purchase Price	8
ARTICLE III REPRESENTATIONS AND WARRANTIES		8
Section 3.01	Representations and Warranties of Seller	8
Section 3.02	Representation and Warranties of Operator	13
Section 3.03	Representations and Warranties of Buyer	13
Section 3.04	Disclaimer of Representations and Warranties	15
Section 3.05	Disclosure Schedules	16
ARTICLE IV COVENANTS		17
Section 4.01	General	17
Section 4.02	Records	17
Section 4.03	Access to Operated Assets	17
Section 4.04	Access to Non-Operated Assets	17
Section 4.05	Conduct of Seller’s Business	18
Section 4.06	Bonds	19
Section 4.07	Selection of Operator	19
Section 4.08	Employees	19
Section 4.09	Pre-Closing Covenants and Agreements of Buyer	20
Section 4.10	Preferential Rights and Consents	20
Section 4.11	Casualty Loss	22
Section 4.12	Names	22
Section 4.13	Transition Services	22
ARTICLE V TITLE MATTERS		22
Section 5.01	Definitions	22
Section 5.02	Title Defect Adjustments	24
Section 5.03	Title Benefit Offsets	26
Section 5.04	Limitations	26
ARTICLE VI ENVIRONMENTAL MATTERS		26
Section 6.01	Adverse Environmental Conditions	26
Section 6.02	Adverse Environmental Condition Adjustments	27
Section 6.03	Limitations	28
ARTICLE VII CONDITIONS TO CLOSING		28
Section 7.01	Seller’s Conditions	28
Section 7.02	Buyer’s Conditions	29

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ARTICLE VIII CLOSING		29
Section 8.01	Date of Closing	29
Section 8.02	Place of Closing	30
Section 8.03	Closing Obligations	30
ARTICLE IX OBLIGATIONS AFTER CLOSING		31
Section 9.01	Post-Closing Adjustment Procedure	31
Section 9.02	Allocation of Revenues	32
Section 9.03	Files and Records	32
Section 9.04	Buyer’s Assumed Obligations and Release	32
Section 9.05	Indemnification	33
Section 9.06	Survival; Limitations on Indemnification	34
Section 9.07	Indemnification Procedures	35
Section 9.08	Suspense Amounts	35
Section 9.09	Recordation and Post-Closing Consents	36
Section 9.10	Taxes	36
Section 9.11	Material Contracts	37
ARTICLE X TERMINATION OF AGREEMENT		37
Section 10.01	Termination	37
Section 10.02	Liabilities upon Termination or Breach	38
ARTICLE XI RESOLUTION OF CERTAIN TITLE AND ENVIRONMENTAL DISPUTES BY EXPERTS		39
Section 11.01	General	39
Section 11.02	Dispute Resolution by Independent Expert	39
ARTICLE XII MISCELLANEOUS		39
Section 12.01	Schedules and Exhibits	39
Section 12.02	Expenses	40
Section 12.03	Notices	40
Section 12.04	Amendments; Waiver	41
Section 12.05	Assignment	41
Section 12.06	Announcements	41
Section 12.07	Governing Law; Venue	41
Section 12.08	Entire Agreement	42
Section 12.09	Parties in Interest	42
Section 12.10	Further Assurances	42
Section 12.11	Severability	42
Section 12.12	Headings; Terminology; Defined Terms	42
Section 12.13	Not to Be Construed against Drafter	42
Section 12.14	Indemnities and Conspicuousness of Provisions	43
Section 12.15	Counterparts of Assignment	43
Section 12.16	Counterpart Execution	43
Section 12.17	Limited Participation of Operator	43
Section 12.18	Non-Recourse to Non-Parties	43
Section 12.19	Definitions	43

EXHIBIT A OWNERSHIP SHARES

EXHIBIT B FORM OF ESCROW AGREEMENT

EXHIBIT C FORM OF SPECIAL WARRANTY DEED – MINERAL ACRES

EXHIBIT D FORM OF SPECIAL WARRANTY DEED – SURFACE AND IMPROVEMENTS

EXHIBIT E FORM OF ASSIGNMENT AND BILL OF SALE

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SCHEDULES

Schedule 1.02(a)	Mineral Acres
Schedule 1.02(b)	Leases
Schedule 1.02(d)	Wells
Schedule 1.02(f-1)	Office
Schedule 1.02(f-2)	Equipment
Schedule 1.02(g-1)	Easements
Schedule 1.02(g-2)	FCC Licenses
Schedule 1.02(h)	Contracts
Schedule 1.02(k)	Permits
Schedule 1.03(m)	Excluded Equipment and Vehicles
Schedule 3.01(f)	Legal Proceedings
Schedule 3.01(i)	Compliance with Environmental Laws
Schedule 3.01(j)	Payout Balances
Schedule 3.01(k)	Material Contracts
Schedule 3.01(n)	Preferential Rights
Schedule 3.01(o)	Outstanding Capital Expenditures
Schedule 3.01(p)	Consents
Schedule 3.01 (q)	Gas Imbalances
Schedule 3.01(r)	Suspense Amounts
Schedule 3.01(s)	Coal Mining Activity
Schedule 3.01(aa)	Seller Party Persons
Schedule 4.06	Bonds, Letters of Credit and Guarantees
Schedule 5.01(a-1)	Allocated Values
Schedule 5.01(a-2)	Allocated Values – Deep Acreage
Schedule 12.19(xi)	NPORRI Recording Schedule

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PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement (this “Agreement”), dated May 25, 2017 (the “Execution Date”), is among (■) a Delaware limited partnership, whose mailing address is (■), (■), a Delaware limited partnership, whose mailing address is (■), and (■), a Delaware limited partnership, whose mailing address is (■), and for the limited purposes as provided herein, (■), a Delaware limited liability company (the “Operator”), whose mailing address is (■) (collectively, “Seller” and each singly, a “Seller Party”); and Carbon West Virginia Company, LLC, a Delaware limited liability company, whose address is 1700 Broadway, Suite 1170, Denver, Colorado 80290 (“Buyer”). Buyer and Seller are sometimes individually referred to herein as a “Party” and collectively referred to herein as the “Parties.”

WITNESSETH

WHEREAS, each Seller Party owns the respective proportionate interest set forth in Exhibit A attached hereto (each Seller Party’s “Ownership Share”) in and to certain oil and gas interests which, together with the properties appurtenant thereto, are more fully described and defined herein as the Assets; and

WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, the Assets, subject to the terms and conditions set forth herein.

Now, therefore, in consideration of the mutual promises contained herein, the benefits to be derived by each Party hereunder and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows:

ARTICLE I
PURCHASE AND SALE

Section 1.01 Purchase and Sale. Seller agrees to sell and convey, in accordance with their respective Ownership Shares, and Buyer agrees to purchase and pay for, the Assets, subject to the terms and conditions of this Agreement.

Section 1.02 Assets. Subject to Section 1.03, all of each Seller Party’s right, title and interest in and to the following shall be referred to herein as the “Assets”:

(a)       The oil, gas and minerals in place owned by each Seller Party in and underlying the various tracts in West Virginia, Kentucky and Virginia described in Schedule 1.02(a) (the “Mineral Acres”) including without limitation all coalbed methane, whether existing in coal seams or other strata, together with, and to the extent owned by each Seller Party: (i) all such Seller Party’s rights appurtenant to the oil, gas, coalbed methane and minerals in place, including the right to explore, drill, develop, operate, complete, stimulate, enhance, produce, transport, market and operate by whatever means available; (ii) all such Seller Party’s rights to use any subsurface strata for storage or injection purposes; and (iii) all such Seller Party’s reversionary interests, net profits interests, royalty interests and overriding royalty interests;

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(b)       the leasehold estates created by the oil, gas and/or mineral leases described in Schedule 1.02(b) (collectively, the “Leases”) and all other rights in and to the lands covered by the Leases (the “Lands”), together with all other interests of each Seller Party in the Leases, including overriding royalty interests, production payments and other payments out of or measured by the value of oil and gas production from or attributable to the Leases;

(c)       any pools or units including all or part of any of the Mineral Acres or the Leases (the “Units”);

(d)       any and all oil and gas wells, salt water disposal wells, injection wells, and other wells and wellbores of each Seller Party located on the Mineral Acres, the Leases or the Units, whether producing, operating, unplugged, shut in, or temporarily abandoned, including but not limited to those described in Schedule 1.02(d) (the “Wells”) and the proration units associated therewith;

(e)       all natural gas, casinghead gas, drip gasoline, natural gas liquids, condensate, products, crude oil and other hydrocarbons, whether gaseous or liquid (“Products”) produced from or attributable to the Mineral Acres, the Leases or the Units from and after the Effective Time, as well as water produced from or attributable to the Mineral Acres or the Leases from and after the Effective Time, or, with respect to the Products described in Section 2.03(a)(i), prior to the Effective Time, and the accounts and proceeds from the sale thereof (collectively, the “Production”);

(f)       the office described in Schedule 1.02(f-1) and all of the equipment, equipment parts, yards, rigs, other operational equipment, materials, machinery, vehicles, and compressors described in Schedule 1.02(f-2), scanners, other personal property, fixtures and improvements appurtenant to the Wells or the Mineral Acres or the Leases or used solely in connection with the ownership or operation of the Wells or the Mineral Acres or the Leases or with the production, treatment, storage, sale or disposal of the Production, to the extent transferrable, including, without limitation, the Supervisory Control and Data Acquisition (SCADA) system (including transmitters, telecommunications equipment, field radio telemetry and associated frequencies and licenses, pressure transmitters and central processing equipment that is used primarily in connection with the ownership or operation of the Wells or the Mineral Acres or the Leases), and all pipelines, flow lines, plants, gathering and processing systems, and compression facilities appurtenant to or located upon the Mineral Acres, the Leases or the Units (the “Offices and Equipment”);

(g)       all rights-of-way, easements, servitudes, subsurface leases, other surface rights, permits and licenses, to the extent they are transferable and are appurtenant to or useful in connection with the Mineral Acres, the Leases, the Units, the Wells, or the Offices and Equipment, including the easements and other items described in Schedule 1.02(g-1) (the “Easements”) and the FCC licenses descried in Schedule 1.02(g-2);

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(h)       to the extent transferable, all agreements, product purchase and sale contracts, gas gathering contracts, salt water disposal leases, processing agreements, production handling agreements, facilities sharing agreements, compression agreements, equipment leases, farm-outs and farm-ins, options, orders, pooling, spacing or consolidation agreements and operating agreements and all other agreements relating to the Mineral Acres, the Leases, the Units, the Wells, the Production, the Offices and Equipment, and the Easements, including the contracts and other items described in Schedule 1.02(h) (the “Contracts”);

(i)       to the extent transferable at no cost to Seller or at additional cost that Buyer agrees to undertake or pay, each Seller Party’s proprietary and licensed geological, geophysical and seismic data relating to the Assets;

(j)       all unitization, communitization and pooling declarations, orders and agreements (including all units formed by voluntary agreement and those formed under the rules, regulations, orders or other official acts of Governmental Authorities) to the extent they relate to the Mineral Acres, Leases, Lands and Wells, or the production of hydrocarbons therefrom;

(k)       to the extent transferable, all environmental and other governmental (whether federal, state, local or tribal) certificates, consents, permits, licenses, orders, authorizations, franchises and related instruments or rights directly relating to the ownership, operation or use of the Mineral Acres, Leases, Lands and Wells, or the production of hydrocarbons therefrom all as described in Schedule 1.02(k) (the “Permits”);

(l)       to the extent transferable, all rights to indemnities (except with respect to Seller’s retained liabilities) and releases from third parties relating to the Easements, Offices and Equipment, Contracts, Mineral Acres, Leases, Lands and Wells, but only to the extent that such benefits relate to liabilities for which Buyer is to be responsible;

(m)       to the extent assignable, except with respect to Casualty Losses as provided in Section 4.11, all insurance proceeds under existing policies of insurance issued by a third party, if any, relating to the Mineral Acres, Leases, Lands, Wells Easements, and Offices and Equipment, but only to the extent that such benefits relate to liabilities for which Buyer may be responsible or Casualty Losses occurring from and after the Effective Time;

(n)       all intangibles and operating revenues and accounts receivable relating to the period after the Effective Time, in each case associated with the Mineral Acres, Leases, Lands, Wells or the production of hydrocarbons attributable thereto;

(o)       all leases or subleases of tangible personal property as to which Seller is (i) lessor or sublessor or (ii) lessee or sublessee, to the extent transferrable, together with any options to purchase the underlying property associated with the Mineral Acres, Leases, Lands, Wells or the production of hydrocarbons attributable thereto;

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(p)       records, files and data in the possession of each Seller Party relating to any of the Assets, including, without limitation: (i) lease, division order, contract and land files and title opinions; (ii) operations, production, environmental and engineering records; (iii) facility and well records; (iv) cuttings and cores, (v) accounting, gas and/or oil imbalance files, well payout files and lease operating statements and files; and (vi) any other records, files and data in the possession of each Seller Party relating to the Assets or the operation thereof (collectively, the “Records”), save and except for, in respect of each such category, (A) records that Seller is prohibited from disclosing under confidentiality agreements with third parties, (B) information entitled to legal privilege, including, without limitation, attorney work product and attorney-client communications (except for title opinions, which shall be included in the Records), (C) economic projections and (D) records of offers from, or negotiations with, Buyer or third parties with respect to the sale of the Assets and economic analyses associated therewith; and

(q)       all other assets and properties of Seller used or held for use primarily in connection with the Mineral Acres, Leases, Lands, Wells or the production of Products attributable thereto located in the States of West Virginia, Kentucky and Virginia.

Section 1.03 Excluded Assets(a) . The Assets do not include, and there is expressly excepted therefrom and reserved to each Seller Party the following (the “Excluded Assets”):

(a)       all of such Seller Party’s corporate minute books and corporate financial records that relate to such Seller Party’s business generally (including the ownership and operation of the Assets);

(b)       all trade credits, all accounts, receivables and all other proceeds, income or revenues attributable to the Mineral Acres, the Leases or the Wells with respect to any period of time prior to the Effective Time;

(c)       all claims and causes of action of any Seller Party arising under or with respect to any Contracts that are attributable to periods of time prior to the Effective Time (including claims for adjustments or refunds);

(d)       all rights and interests of any Seller Party (i) under any policy or agreement of insurance, (ii) under any bond or (iii) to any insurance proceeds or awards pertaining to the Mineral Acres, the Leases or the Wells for the period prior to the Effective Time;

(e)       all of such Seller Party’s proprietary computer software, patents, trade secrets, copyrights, names, trademarks, logos and other intellectual property, including any interpretation of data and information, whether geophysical, seismic, technical or otherwise;

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(f)       all documents and instruments of such Seller Party that are protected by an attorney-client privilege (except for title opinions);

(g)       all data and Contracts that cannot be disclosed to Buyer as a result of confidentiality arrangements under agreements with third parties (provided that Seller shall use commercially reasonable efforts to obtain a waiver from such third party to disclose such data or Contract);

(h)       all audit rights arising under any of the Contracts or otherwise with respect to any period prior to the Effective Time;

(i)       all third party geophysical and other seismic and related technical data and information relating to the Assets to the extent that such geophysical and other seismic and related technical data and information is not transferable without payment of a fee or other penalty (unless Buyer agrees to pay such fee or penalty, in which event the foregoing shall be included as Assets);

(j)       documents prepared or received by Seller or Affiliates of Seller with respect to (i) lists of prospective purchasers for the Assets compiled by Seller or Affiliates of Seller, (ii) bids submitted by other prospective purchasers of the Assets or any interest in the Assets, (iii) analyses by Seller or Affiliates of Seller of any bids submitted by any prospective purchaser, (iv) correspondence between or among Seller or its Affiliates or their respective representatives, and any prospective purchaser other than Buyer that relate to the proposed purchase of the Assets and (v) correspondence between Seller or its Affiliates or any of their respective representatives with respect to any of the bids, the prospective purchasers or the transactions contemplated by this Agreement;

(k)       all swaps, derivatives or other hedge Contracts;

(l)       any and all claims of any Seller Party for refunds of, credits attributable to, loss carry forwards with respect to, or similar items relating to (i) taxes attributable to any period (or portion thereof) prior to the Effective Time, (ii) income taxes, and (iii) taxes relating to the ownership or operation of the Assets that are attributable to any period (or portion thereof) prior to the Effective Time;

(m)       the equipment and vehicles described in Schedule 1.03(m); and

(n)       the Records relating solely to the items described in clauses (a) through (m) above maintained by or in the possession of each Seller Party.

Section 1.04 Effective Time. The purchase and sale of the Assets shall be effective as of May 1, 2017, at 12:01 a.m., at the location of the Assets (the “Effective Time”).

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ARTICLE II
PURCHASE PRICE

Section 2.01 Purchase Price. The purchase price for the Assets shall be Twenty-one Million Five Hundred Thousand Dollars ($21,500,000.00), payable as provided in Section 2.04 below (the “Purchase Price”), subject to adjustment and credit as set forth in Section 2.03. The Purchase Price will be allocated among the Properties as set forth on Schedule 5.01(a-1) and Schedule 5.01(a-2) (such amount being referred to herein as the “Allocated Value” with respect to each line item on Schedule 5.01(a-1) or Schedule 5.01(a-2) (each, a “Property” and together, the “Properties”)).

Section 2.02 Deposit. Contemporaneously with the execution of this Agreement, Buyer has deposited with Escrow Agent an amount equal to (■) of the Purchase Price (the “Deposit”). The Deposit, plus any interest accrued thereon, shall be held and distributed by Escrow Agent in accordance with the Escrow Agreement attached hereto as Exhibit B for purposes of effectuating the other provisions of this Agreement pertaining to the Deposit. In the event that the transaction contemplated hereby is not consummated in accordance with the terms hereof, then the Deposit, plus any interest accrued thereon, shall be applied in accordance with the provisions of Section 10.02(b) and Section 10.02(c). In the event that the transaction contemplated hereby is consummated in accordance with the terms hereof, then the Deposit, plus any interest accrued thereon, shall be delivered by the Escrow Agent to the Seller and the aggregate amount thereof applied as a credit to the Purchase Price to be paid by Buyer at Closing.

Section 2.03 Adjustments and Credits to Purchase Price.

(a)       The Purchase Price shall be adjusted upward by the following:

(i)       an amount equal to the posted price in the relevant field as of the Effective Time of all merchantable liquid Products produced from or attributable to the Assets which are in storage above the pipeline connection as of the Effective Time and which have not been sold by Seller prior to the Closing, less an amount equal to all royalties, overriding royalties, taxes, gravity adjustments and other amounts deducted in the ordinary course and consistent with past practices;

(ii)       the amount of all ad valorem, property, production, excise, severance and similar taxes based upon or measured by the ownership of the Assets or the production of Products or the receipt of proceeds therefrom, expenditures and other charges (excluding delay rentals), including, without limitation, prepaid expenses and expenses billed under applicable operating agreements (and, in the absence of an operating agreement, expenses of the sort customarily billed under such agreements), that are paid by or on behalf of Seller and that, in accordance with generally accepted accounting principles, are attributable to the ownership or operation of the Assets from and after the Effective Time;

(iii)      without duplication of adjustments made in accordance with Section 2.03(a)(i) above, net proceeds received by Buyer from the sale of Products produced from or attributable to the Assets prior to the Effective Time and other proceeds received by Buyer relating to the ownership or operation of the Assets that, in accordance with generally accepted accounting principles, are attributable to periods prior to the Effective Time;

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(iv)       overhead charges applicable to the operation of the Assets during the period from the Effective Time to the Closing Date, which shall be Fifty Thousand Dollars ($50,000) per month (which shall be prorated for partial months based on the number of days elapsed);

(v)       the amount, if any, by which the Gas Imbalance Adjustment is more than zero; and

(vi)      any other amount agreed upon by the Parties in writing or set forth in this Agreement as an upward adjustment to the Purchase Price.

(b)       The Purchase Price shall be adjusted downward by the following:

(i)       the amount of all ad valorem, property, production, excise, severance and similar taxes based upon or measured by the ownership of the Assets or the production of Products or the receipt of proceeds therefrom, expenditures and other charges (excluding delay rentals), including, without limitation, expenses billed under applicable operating agreements (and, in the absence of an operating agreement, expenses of the sort customarily billed under such agreements), that are paid by or on behalf of Buyer and that, in accordance with generally accepted accounting principles, are attributable to the ownership or operation of the Assets prior to the Effective Time;

(ii)       net proceeds received by Seller from the sale of Products produced from or attributable to the Assets from and after the Effective Time and other proceeds received by Seller relating to the ownership or operation of the Assets that, in accordance with generally accepted accounting principles, are attributable to periods from and after the Effective Time;

(iii)      an amount equal to unpaid ad valorem, property and similar taxes based upon or measured by the ownership of the Assets that are attributable to periods of time prior to the Effective Time, which amounts shall, to the extent not actually assessed, be computed based on such taxes for the production year of 2016 (such amount to be prorated for the period of Seller’s ownership before and Buyer’s ownership after the Effective Time);

(iv)       an amount equal to the sum of all adjustments to the Purchase Price:

(1)       pursuant to Section 4.10 in respect of preferential purchase rights and consents;

(2)       pursuant to Section 5.02 in respect of Title Defects;

(3)       pursuant to Section 6.02 in respect of Adverse Environmental Conditions;

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(v)       the amount, if any, by which the Gas Imbalance Adjustment is less than zero; and

(vi)       any other amount agreed upon by the Parties in writing or set forth in this Agreement as a downward adjustment to the Purchase Price.

(c)       At least five (5) Business Days prior to the Closing, Seller shall prepare and submit to Buyer a settlement statement (the “Preliminary Settlement Statement”) setting forth each adjustment and credit to the Purchase Price pursuant to this Section 2.03, using for such adjustments and credits the best information then reasonably available. Prior to the Closing, Buyer may notify Seller of any objections to the Preliminary Settlement Statement; provided, however, that Buyer’s failure to notify Seller of objections prior to the Closing shall not be deemed a waiver thereof for the purposes of post-Closing adjustments. The Parties shall use their reasonable efforts to agree on a final Preliminary Settlement Statement no later than one (l) Business Day prior to the Closing. The Purchase Price, adjusted and credited as provided in the final Preliminary Settlement Statement, is referred to herein as the “Preliminary Purchase Price.” If Buyer and Seller are unable to agree upon the final Preliminary Settlement Statement, then the Preliminary Purchase Price shall be as provided in a final Preliminary Settlement Statement reasonably acceptable to Seller, and such dispute shall be resolved in the course of the post-Closing adjustments pursuant to Section 9.01.

Section 2.04 Payment of Purchase Price. The Preliminary Purchase Price (after giving effect to the Deposit, plus any interest accrued thereon, which shall be retained by Seller and applied to the Preliminary Purchase Price in accordance with Section 2.02) shall be payable at the Closing in cash by wire transfer in accordance with such wire transfer instructions as Seller may deliver to Buyer at least two (2) Business Days prior to the Closing.

ARTICLE III
REPRESENTATIONS AND WARRANTIES

Section 3.01 Representations and Warranties of Seller. Each Seller Party, as applicable, represents and warrants severally, not jointly, to Buyer solely as to such Seller Party and such Seller Party’s Ownership Share in the Assets, as of the Execution Date and as of the Closing Date, as follows:

(a)       Organization and Good Standing. Each Seller Party is duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified to carry on its business and to own and operate oil and gas properties in each jurisdiction in which the Assets are located. The general partner of each Seller Party is duly organized, validly existing and in good standing under the laws of the State of Texas, and is duly qualified to carry on its business and to own and operate oil and gas properties in each jurisdiction in which the Assets are located.

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(b)       Authorization and No Conflict. Each Seller Party has all requisite power and authority to carry on its business as presently conducted, to enter into this Agreement and each other document executed in connection herewith and to perform its obligations under this Agreement and each other document executed in connection herewith. The Seller Parties’ execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement and each other document executed in connection herewith will not (i) violate, or require any consent or approval under any laws applicable to Seller (except for consents and approvals of Governmental Authorities customarily obtained subsequent to transfer) (ii) be in conflict with, result in a breach of, constitute a default under or constitute an event that with notice or lapse of time, or both, would constitute a default under, or give rise to a right of termination, cancellation or acceleration of any obligation or creation of a lien under: (i) any provision of the certificate of limited partnership or limited partnership agreements or similar organizational or formation documents of a Seller Party; (ii) any provision of any agreement or instrument to which a Seller Party is a party or by which it is bound (other than this Agreement and any other document executed in connection herewith); or (iii) any judgment, decree, order, statute, rule or regulation applicable to Seller Party or the Assets.

(c)       Enforceability. This Agreement has been, and, if the Closing occurs, the documents to be executed and delivered by Seller Party at the Closing will be, duly authorized, executed and delivered on behalf of Seller Party, and this Agreement constitutes, and, if the Closing occurs, the documents to be executed and delivered by Seller Party at the Closing will be, the legal, valid and binding obligation of Seller Party, enforceable in accordance with their respective terms, subject, however, to the effects of bankruptcy, insolvency, reorganization and other laws for the protection of creditors.

(d)       Brokerage. Seller Party has not incurred any liability, contingent or otherwise, for brokers’ or finders fees’ relating to the transactions contemplated by this Agreement for which Buyer shall have any responsibility whatsoever.

(e)       Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or, to Seller Party’s knowledge, threatened against Seller Party or otherwise affecting the Assets.

(f)       Legal Proceedings. Except as set forth on Schedule 3.01(f), there are no lawsuits, actions, proceedings or governmental investigations or inquiries pending or, to Seller Party’s knowledge, threatened in writing against Seller Party that materially affect the ownership or operation of the Assets.

(g)       Taxes.

(i)       To Seller Party’s knowledge, all Asset Taxes that have become due and payable have been properly paid.

(ii)       To Seller Party’s knowledge, all tax returns with respect to Asset Taxes that are required to be filed have been duly and timely filed, and all such tax returns are correct and complete in all material respects.

(iii)      To Seller Party’s knowledge, there are no encumbrances for taxes (including any interest, fine, penalty or additions to tax imposed by a Governmental Authority in connection with such taxes) on the Assets, other than Permitted Encumbrances.

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(iv)       Seller has not received any written notice of any pending claim (which remains outstanding) from any applicable Governmental Authority for assessment of Asset Taxes and no such claim has been made or threatened.

(v)       No audit, administrative, judicial or other proceeding with respect to Asset Taxes is presently pending with respect to the Assets.

(h)       Compliance with Laws. To Seller Party’s knowledge, the Assets have been owned and operated in compliance with all applicable laws, rules and regulations (excluding, however, Environmental Laws, which are addressed in Section 3.01(i)), except for any nonmaterial noncompliance therewith that would not reasonably be expected to have a Material Adverse Effect.

(i)       Environmental Matters. Except as set forth on Schedule 3.01(i), to Seller Party’s knowledge, Seller Party (i) is in material compliance with all Environmental Laws applicable to the Assets, (ii) has received no notice of any violation of, or investigation relating to, any federal, state or local laws with respect to pollution or protection of the environment relating to the Assets and (iii) has obtained and maintained all environmental permits required in connection with the ownership and operation of the Assets, and has complied with and is in material compliance with all such permits.

(j)       Payout Balances. Except as set forth on Schedule 3.01(j), there are no Assets that are subject to a payout schedule or payout balance that may impact Buyer’s Working Interest or Net Revenue Interest as set forth on Schedule 5.01(a-1) or Schedule 5.01(a-2) after the Effective Time.

(k)       Contracts. To Seller Party’s knowledge, all Contracts constituting a part of and material to the ownership and operation of the Assets (the “Material Contracts”), as described in Schedule 3.01(k), are in full force and effect. To Seller Party’s knowledge, neither Seller nor any other party to the Material Contracts (i) is in breach of or default, or with the lapse of time or the giving of notice, or both, would be in breach or default, with respect to any of its obligations thereunder or (ii) has given or threatened to give written notice of any default under or inquiry into any possible default under, or action to alter, terminate, rescind or procure a judicial reformation of any Material Contract.

(l)       Leases and Royalties. (i) To Seller Party’s knowledge, all Leases are in full force and effect, and Seller Party is not in default with respect to any of its material obligations thereunder, and (ii) all rentals, royalties, overriding royalty interests and other payments due and owing by Seller Party under each of the Leases have been timely and accurately paid, except amounts that are being held in suspense as a result of title issues and issues relating to the location of owners.

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(m)       Liens and Encumbrances. Except for the Permitted Encumbrances, the Assets will be conveyed to Buyer free and clear of all liens, mortgages, claims and encumbrances arising by, through and under Seller, but not otherwise, and at or prior to the Closing, Seller shall cause Seller Party’s lenders or other third parties with liens or encumbrances on the Assets to execute and deliver all documentation necessary to release all such liens and encumbrances.

(n)       Preferential Rights to Purchase. Except as set forth on Schedule 3.01(n), there are no preferential rights to purchase or options to purchase attributable or with respect to any of the Assets that are applicable to the transactions contemplated hereby.

(o)       AFEs. Except as set forth in Schedule 3.01(o), there are no outstanding calls or payments under authorities for expenditures for payments or other capital commitments relating to the Assets which exceed Twenty-five Thousand Dollars ($25,000.00) which are due or which Seller Party has committed to make but which have not been made as of the Effective Time.

(p)       Consents. Except as set forth on Schedule 3.01(p), to Seller Party’s knowledge, none of the Assets, or any portion thereof, is subject to any required third party consents to assignment which may be applicable to the transactions contemplated by this Agreement, except consents and approvals of assignments by third parties or Governmental Authorities that (i) are customarily obtained after Closing, (ii) are not to be unreasonably withheld, or (iii) even if not obtained will not have a Material Adverse Effect.

(q)       Gas Imbalances. Except as set forth on Schedule 3.01(q), (i) there are no aggregate production, pipeline, transportation or processing imbalances existing with respect to the Assets (“Gas Imbalances”) and (ii) Seller has not received any deficiency payments under gas contracts for which any party has a right to take deficiency gas from Seller, nor has Seller received any payments for production which are subject to refund or recoupment out of future production.

(r)       Suspense Amounts. Except for the monies held in suspense and for the account of third parties as set forth on Schedule 3.01(r) (“Suspense Amounts”), there are no monies held in suspense and for the account of third parties as of the Closing Date.

(s)       No Active Coal Mining. Except as set forth on Schedule 3.01(s), to Seller Party’s knowledge, as of the Effective Time, there are no active coal mining permits or coal mining activities affecting the Assets.

(t)       Permits and Licenses. With respect to Assets for which Seller is the operator, Seller or to Seller Party’s knowledge, its predecessor (i) has acquired all material permits, licenses, approvals and consents from appropriate Governmental Authorities to conduct operations on the Assets in compliance with applicable laws, rules, regulations, ordinances and orders, and (ii) is in material compliance with all such permits, licenses, approvals and consents. To Seller Party’s knowledge with respect to the Assets not operated by Operator, the operator thereof (x) has acquired all material permits, licenses, approvals and consents from appropriate Governmental Authorities to conduct operations on the Properties in compliance with applicable laws, rules, regulations, ordinances and orders and (y) is in material compliance with all such permits, licenses, approvals and consents.

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(u)       Take-or-Pay or Bonus Payments. Seller is not obligated, under a take-or-pay or similar arrangement, or by virtue of an election to non-consent or not participate in a past or current operation on an Asset pursuant to the applicable operating agreement, to produce Products, or allow Products to be produced, without receiving full payment at the time of delivery in an amount that corresponds to the Net Revenue Interest in the Production attributable to an Asset. No third party has any right, retained, springing or otherwise, to production, cash bonus payments or profits or other rights in the Assets including rights retained by prior owners at the time of the sale of the Assets to Seller to receive production, cash bonus payments or profits from the Assets if the price of oil exceeds a threshold amount.

(v)       Receipt of Revenues. To Seller Party’s knowledge, Seller is timely receiving, in all material respects, its share of proceeds from the sale of Production from the Assets without suspense, counterclaim or set-off.

(w)       Fair Market Value. In preparing to dispose of the Assets in this Agreement, Seller engaged in an auction sale customary with industry practice. As a result of the process, Seller selected Buyer’s bid, which Seller recognizes as a commercially fair offer. Neither the Seller, nor its Affiliates, has any information, and will not assert, that the Purchase Price does not reflect a purchase of the Assets at fair market value.

(x)       Labor Matters. With respect to the Relevant Employees, (i) no labor union or labor organization represents or claims to represent any Relevant Employees and no union organizational activity affecting the Relevant Employees is presently being made or, to Seller Party’s knowledge, threatened, and (ii) no collective bargaining agreements are in effect with respect to any Relevant Employees and there is not presently pending, or to Seller Party’s knowledge, threatened any application for certification of a collective bargaining agent with any Governmental Authority.

(y)       Current Bonds. Schedule 4.06 lists all bonds, letters of credit and other similar instruments maintained by Operator or any Seller Party or any of its respective Affiliates with respect to the Assets.

(z)       Plugging and Abandonment Obligations. To Seller Party’s knowledge, neither Operator nor such Seller Party is currently obligated by a consent order (or by any written instruction of a Governmental Authority) to plug and abandon any of the Wells. With respect to the Wells that have been plugged and abandoned by a Seller Party, all of such Wells have been plugged or reclaimed in accordance with all applicable requirements of each Governmental Authority having jurisdiction over the Assets.

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(aa) As used herein, “Seller Party’s knowledge” or words of similar import mean the actual knowledge (after reasonable due inquiry) of any of the persons identified on Schedule 3.01(aa). With respect to any representation or warranty pertaining to any Asset not operated by Seller Party, such representation or warranty shall be deemed to be limited to Seller Party’s knowledge with respect to such non-operated Asset (unless such representation or warranty is already qualified by knowledge).

(bb) As used herein, “Material Adverse Effect” means an event or circumstance that, individually or in the aggregate, results in a material adverse effect on the ownership, operation or value of the Assets taken as a whole and as currently operated as of the Execution Date or a material adverse effect on the ability of Seller Party to consummate the transactions contemplated by this Agreement and perform its obligations hereunder; provided, however, that the term “Material Adverse Effect” shall not include any material adverse effect resulting from: (a) entering into this Agreement or the announcement of the transactions contemplated by this Agreement; (b) any action or omission of a Seller Party taken in accordance with the terms of this Agreement or with the prior consent of Buyer; (c) changes in general market, economic, financial or political conditions or the price of Products; (d) changes in conditions or developments generally applicable to the oil and gas industry; (e) acts of God, including hurricanes, storms or other naturally occurring events; (f) acts or failures to act or requirements of a Governmental Authority; (g) civil unrest, any outbreak of disease or hostilities, terrorist activities or war or any similar disorder; (h) matters that are cured or no longer exist by the earlier of Closing and the termination of this Agreement; (i) any reclassification or recalculation of reserves in the ordinary course of business; (j) a change in laws and any interpretations thereof from and after the Execution Date; (k) changes in service costs generally applicable to the oil and gas industry in the United States; (l) strikes and labor disturbances; and (m) natural declines in well performance.

Section 3.02 Representation and Warranties of Operator. Operator represents and warrants to Buyer as of the date hereof and as of the Closing Date as follows:

(a)       Agent of Seller. To the extent that Operator has entered into any Material Contracts or other agreements with a third party as the “operator” of the Assets or performed any other actions related thereto, it did so only in its capacity as an agent of each other Seller Party and not otherwise.

Section 3.03 Representations and Warranties of Buyer. Buyer represents and warrants to Seller as of the date hereof and as of the Closing Date as follows:

(a)       Organization and Good Standing. Buyer is duly organized, validly existing and in good standing under the laws of the State of Delaware, and is or, as of Closing, will be duly qualified to carry on its business and to own and operate oil and gas properties in each jurisdiction in which the Assets are located.

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(b)       Authorization and No Conflict. Buyer has all requisite power and authority to carry on its business as presently conducted and has all requisite power and authority to enter into this Agreement and each other document executed in connection herewith, to purchase the Assets on the terms described in this Agreement and to perform its other obligations under this Agreement and each other document executed in connection herewith. The consummation of the transactions contemplated by this Agreement will not violate, or be in conflict with or give rise to a right of termination, cancellation or acceleration of any obligation or creation of a lien under: (i) any provision of the organizational or formation documents of Buyer; (ii) any provision of any agreement or instrument to which Buyer is a party or by which it is bound (other than this Agreement); or (iii) any judgment, decree, order, statute, rule or regulation applicable to Buyer.

(c)       Enforceability. This Agreement has been, and, if the Closing occurs, the documents to be executed and delivered by Buyer at the Closing will be, duly authorized, executed and delivered on behalf of Buyer, and this Agreement constitutes, and, if the Closing occurs, the documents to be executed and delivered by Buyer at the Closing will be, the legal, valid and binding obligation of Buyer, enforceable in accordance with their respective terms, subject, however, to the effects of bankruptcy, insolvency, reorganization and other laws for the protection of creditors.

(d)       Brokerage. Buyer has not incurred any liability, contingent or otherwise, for brokers’ or finders fees’ relating to the transactions contemplated by this Agreement for which Seller shall have any responsibility whatsoever.

(e)       Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or, to the knowledge of Buyer, threatened against Buyer.

(f)       Experience and Sophistication; Independent Investigation; Own Account. Buyer is an experienced oil and gas company and experienced in oil and gas operations. Buyer has entered into this Agreement on the basis of its own independent judgment and analysis. Buyer is in the business of purchasing and owning oil and gas properties. The Assets to be acquired by Buyer pursuant to this Agreement are being acquired by it for its own account for investment purposes and not for distribution within the meaning of any securities law. In acquiring the Assets, Buyer is acting in the conduct of its own business and not under any specific contractual commitment to any third party, or any specific nominee agreement with any third party, to transfer to, or to hold title on behalf of, such third party, with respect to all or any part of the Assets.

(g)       No Financing Required. Buyer will have at the Closing all funds necessary to pay the Preliminary Purchase Price and any other amounts contemplated by this Agreement to be paid at Closing. Buyer’s ability to consummate the transactions contemplated hereby is not contingent on its ability to secure financing or to complete any public or private placement of securities prior to or upon Closing.

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Section 3.04 Disclaimer of Representations and Warranties.

(a)       BUYER ACKNOWLEDGES THAT SELLER HAS NOT MADE, AND SELLER HEREBY EXPRESSLY DISCLAIMS AND NEGATES, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED OTHER THAN AS SPECIFICALLY SET FORTH IN THIS AGREEMENT or any document executed in connection herewith INCLUDING, BUT NOT LIMITED TO, RELATING TO THE CONDITION OF ANY REAL OR IMMOVABLE PROPERTY, PERSONAL OR MOVABLE PROPERTY, EQUIPMENT, INVENTORY, MACHINERY AND FIXTURES CONSTITUTING PART OF THE ASSETS INCLUDING, WITHOUT LIMITATION: (i) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY; (ii) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE; (iii) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS; (iv) ANY RIGHTS OF BUYER UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR RETURN OF THE PURCHASE PRICE; (v) ANY IMPLIED OR EXPRESS WARRANTY, INCLUDING WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT; OR (vi) ANY IMPLIED OR EXPRESS WARRANTY REGARDING ENVIRONMENTAL LAWS, THE RELEASE OF MATERIALS INTO THE ENVIRONMENT, INCLUDING, WITHOUT LIMITATION, NATURALLY OCCURRING RADIOACTIVE MATERIAL OR ASBESTOS, OR PROTECTION OF THE ENVIRONMENT OR HEALTH. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT OR ANY DOCUMENT EXECUTED IN CONNECTION HEREWITH, IT IS THE EXPRESS INTENTION OF BUYER AND SELLER THAT THE REAL OR IMMOVABLE PROPERTY, PERSONAL OR MOVABLE PROPERTY, EQUIPMENT, INVENTORY, MACHINERY AND FIXTURES SHALL BE CONVEYED TO BUYER AS IS AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR. BUYER REPRESENTS TO SELLER THAT BUYER WILL MAKE OR CAUSE TO BE MADE SUCH INSPECTIONS WITH RESPECT TO THE REAL OR IMMOVABLE PROPERTY, PERSONAL OR MOVABLE PROPERTY, EQUIPMENT, INVENTORY, MACHINERY AND FIXTURES AS BUYER DEEMS APPROPRIATE AND, EXCEPT FOR BUYER’S REMEDIES WITH RESPECT TO ADVERSE ENVIRONMENTAL CONDITIONS AS PROVIDED IN ARTICLE VI HEREIN OR CLAIM FOR INDEMNIFICATION FOR BREACH OF A REPRESENTATION OR WARRANTY PROVIDED IN Section 9.05(b) HEREOF, BUYER WILL ACCEPT THE REAL OR IMMOVABLE PROPERTY, PERSONAL OR MOVABLE PROPERTY, EQUIPMENT, INVENTORY, MACHINERY AND FIXTURES AS IS, IN THEIR PRESENT CONDITION AND STATE OF REPAIR.

(b)       EXCEPT AS PROVIDED IN Section 3.01, SELLER HEREBY EXPRESSLY NEGATES AND DISCLAIMS, AND BUYER HEREBY WAIVES AND ACKNOWLEDGES THAT SELLER HAS NOT MADE, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING TO: (i) THE ACCURACY, COMPLETENESS OR MATERIALITY OF ANY INFORMATION, DATA OR OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED TO BUYER BY OR ON BEHALF OF SELLER; OR (ii) PRODUCTION RATES, RECOMPLETION OPPORTUNITIES, DECLINE RATES, GEOLOGICAL OR GEOPHYSICAL DATA OR INTERPRETATIONS, OR THE QUALITY, QUANTITY, RECOVERABILITY OR COST OF RECOVERY.

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(c)       EXCEPT AS PROVIDED IN Section 3.02, OPERATOR HEREBY EXPRESSLY NEGATES AND DISCLAIMS, AND BUYER HEREBY WAIVES AND ACKNOWLEDGES THAT OPERATOR HAS NOT MADE, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING TO: (i) THE ACCURACY, COMPLETENESS OR MATERIALITY OF ANY INFORMATION, DATA OR OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED TO BUYER BY OR ON BEHALF OF OPERATOR; OR (ii) PRODUCTION RATES, RECOMPLETION OPPORTUNITIES, DECLINE RATES, GEOLOGICAL OR GEOPHYSICAL DATA OR INTERPRETATIONS, OR THE QUALITY, QUANTITY, RECOVERABILITY OR COST OF RECOVERY.

Section 3.05 Disclosure Schedules.

(a)       Any fact, circumstance or matter disclosed on any of the schedules to this Agreement shall be deemed to qualify each and all of Seller Party’s representations and warranties to the extent that it is readily apparent that such fact, circumstance, or matter disclosed on such schedule is applicable to such other representation or warranty and, if such requirement is satisfied, Buyer shall not be entitled to claim that any such fact, circumstance or matter constitutes a breach of any of Seller Party’s representations or warranties contained herein.

(b)       On one or more occasions but not later than three (3) days prior to the Closing Date, Seller may prepare and deliver to Buyer revised schedules to this Agreement relating to the representations and warranties set forth in Section 3.01(i), which revised Schedules may include new Schedules to the extent that any of the representations and warranties set forth in Section 3.01(i) do not provide for schedules, reflecting events or changes in circumstances occurring after the date of this Agreement; provided, however, that Seller shall notify Buyer as soon as reasonably practicable of any such events or changes in circumstances requiring such revisions. In the event that Seller revises or supplements the schedules prior to the Closing, any such revised or supplemental schedules shall be for informational purposes only and of no force or effect in connection with determining whether the condition to Buyer’s obligation to consummate the Closing set forth in Section 7.02(a) has been satisfied. In the event that the Closing occurs, then for the sole purposes of the indemnification provisions set forth in in Section 3.01(i), any representations and warranties of Seller as set forth in Section 3.01(i) shall be subject to, and modified by, any such timely delivered revisions or supplements to the schedules to this Agreement to the extent any such events or changes in circumstances arose or occurred solely after the date of this Agreement.

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ARTICLE IV
COVENANTS

Section 4.01 General. Each of Buyer and Seller shall use its reasonable efforts in good faith to take all actions and to do all things necessary or advisable in order to consummate and make effective the purchase and sale of the Assets contemplated by this Agreement, including satisfaction of the closing conditions set forth in ARTICLE VII.

Section 4.02 Records. From and after the date of this Agreement and until the Closing Date, Seller will make the Records available to Buyer for examination at a location designated by Seller and subject to such other reasonable limitations as Seller may require.

Section 4.03 Access to Operated Assets. From and after the date of this Agreement and until the Closing Date, Seller shall permit Buyer’s officers, employees, agents and advisors, at Buyer’s sole risk and expense, to (i) have reasonable access to the operated Assets (so long as such access occurs during normal business hours or at mutually agreeable times and does not unreasonably interfere with the operation of the Assets) to observe the condition, use and operation of the Assets and to facilitate the transactions contemplated by this Agreement and (ii) otherwise perform due diligence activities, including title searches and physical and environmental investigations and inspections of the Assets to the extent reasonably necessary to conduct and prepare a Phase I Environmental Site Assessment in accordance with the American Society for Testing and Materials (A.S.T.M.) Standard Practice Environmental Site Assessments: Phase I Environmental Site Assessment Process (Publication Designation: E1527-05) covering such Assets (“Phase I”); provided, however, that Buyer shall not conduct any other physical environmental examination (including, but not limited to a Phase II Environmental Site Assessment in accordance with the American Society for Testing and Materials (A.S.T.M.) Standard Practice Environmental Site Assessments: Phase II Environmental Site Assessment Process (Publication Designation: E1903-97) (“Phase II”)) or any other soil or water tests or borings or other invasive tests or examinations with respect to the Assets without the prior written consent of Seller. Notwithstanding the foregoing, if Buyer has support in the form of written documentation from a third party environmental consulting firm or similar advisor to conduct and prepare a Phase II, and Seller does not consent, Buyer will have the option to exclude the affected Assets from this Agreement and the Purchase Price shall be reduced by the Allocated Value of any such excluded Assets. Buyer agrees to maintain the confidentiality of all information acquired by Buyer pursuant to this Section 4.03 in accordance with the terms of the Confidentiality Agreement, the terms of which, the Parties agree, shall be applicable to Seller and Buyer under this Agreement, as if Seller and Buyer were the parties thereto instead of (■) and Carbon Natural Gas Company, an Affiliate of Buyer. Buyer agrees to indemnify, defend and hold harmless the Seller Indemnified Parties from and against any and all Damages arising out of or relating to access to the Assets prior to the Closing by Buyer, even if caused in whole or in part by the negligence (whether sole, joint or concurrent), strict liability or other legal fault of any Seller Indemnified Parties (but excluding gross negligence or willful misconduct on the part of any Seller Indemnified Parties).

Section 4.04 Access to Non-Operated Assets. From and after the date of this Agreement and until the Closing Date, with respect to non-operated Assets, subject to any necessary third party operator approval and Buyer’s execution of any agreement required by such third party operator, Seller shall permit Buyer and its representatives at reasonable times and at Buyer’s sole risk, cost and expense, to conduct reasonable inspections of the Assets (including an environmental assessment); provided, however, Buyer acknowledges and agrees that (i) Seller does not control and cannot be responsible for securing Buyer access to any non-operated Assets, (ii) Buyer must arrange access to the non-operated Assets through the operator thereof, (iii) Buyer shall repair any damage to the Assets resulting from such inspections, and (iv) Buyer agrees to indemnify, defend and hold harmless the Seller Indemnified Parties from and against any and all Damages arising out of or relating to access to such non-operated Assets prior to the Closing by Buyer, even if caused in whole or in part by the negligence (whether sole, joint or concurrent), strict liability or other legal fault of any Seller Indemnified Parties (but excluding gross negligence or willful misconduct on the part of any Seller Indemnified Parties).

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Section 4.05 Conduct of Seller’s Business. From and after the date of this Agreement and until the Closing Date, Seller agrees, unless specifically waived by Buyer in writing, as follows:

(a)       Subject to the provisions of applicable operating and other agreements, Seller shall cause (■) to operate, maintain and administer the Assets in a good and workmanlike manner, consistent with its past practices as a reasonably prudent operator and shall maintain, or cause to be maintained, the existing insurance with respect to the Assets;

(b)       Except for emergency action taken in the face of risk to life, property or the environment (in which case Seller shall promptly notify Buyer of the cause, the amount expended and contracts and commitments relating to same), Seller shall submit to Buyer for prior written approval, which approval shall not be unreasonably withheld, all requests for capital expenditures and all proposed new contracts and agreements relating to the Assets that involve individual commitments of more than Seventy-five Thousand Dollars ($75,000.00), net to Seller’s interest;

(c)       Seller will not sell, farmout, encumber or dispose of any of the Assets, except pursuant to existing preferential purchase rights that are exercised prior to the Closing;

(d)       Seller will not enter into any material new contract affecting the Assets or modify, amend in any material respect or terminate any Lease or existing Contract or enter into any new sales contracts or supply contracts with a term of more than thirty (30) calendar days;

(e)       Seller will not settle any claim, action or proceeding relating to the Assets that is in excess of Seventy-five Thousand Dollars ($75,000.00), net to Seller’s interest, without Buyer’s written consent, which consent shall be timely and shall not be unreasonably withheld;

(f)       Seller will not plug any Well capable of production of Products in commercial quantities; and

(g)       Buyer acknowledges that Seller owns an undivided interest in certain of the Assets, and Buyer agrees that the acts or omissions of the other working interest owners who are not affiliated with Seller shall not constitute a violation of the provisions of this Section 4.05, nor shall any action required by a vote of working interest owners constitute such a violation so long as Seller has voted its interest in a manner that complies with the provisions of this Section 4.05 and Section 4.07.

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Section 4.06 Bonds. The Parties understand that no bonds, letters of credit and guarantees relating to the Assets are to be transferred to Buyer. On or before Closing, Buyer shall obtain, or cause to be obtained in the name of Buyer, replacements for the bonds, letters of credit and guarantees set forth on Schedule 4.06 (but only to the extent such replacements are necessary or required under the Contracts or by applicable laws and regulations).

Section 4.07 Selection of Operator. If requested by Buyer, Seller will poll the parties to applicable joint operating agreements or plans of unitization before the Closing to select a successor Operator and will recommend and shall vote in favor of the selection of Buyer as successor Operator (to the extent authorized under the applicable joint operating agreement or plan of unitization). The form of such poll must be approved by Buyer. The poll may stipulate that Seller will not resign as Operator unless and until the Closing occurs. Regardless of whether a successor Operator has been selected, at the Closing, Seller may resign as Operator under all applicable joint operating or similar agreements. Buyer’s selection as Operator, whether under a joint operating or similar agreement or pursuant to applicable laws and regulations, is not a condition of Buyer’s performance under this Agreement.

Section 4.08 Employees.

(a)       At the sole discretion of Buyer, Buyer shall have the opportunity to interview and retain or make offers of employment to any members of Seller’s workforce with respect to the Assets who are discharged by Seller prior to or after the Closing (the “Relevant Employees”). Within five (5) Business Days of the Execution Date, Seller shall deliver to Buyer a true, correct and complete list of the names of all Relevant Employees, the rates of pay for each, and all commission, bonus, benefits or other compensation or expense reimbursement or allowance arrangements between Seller and any of the Relevant Employees.

(b)       Upon the Execution Date, Seller shall provide Buyer with access to and an opportunity to interview all of the Relevant Employees upon advance written notice to Seller. Such interviews shall be conducted at a mutually convenient place, during normal business hours.

(c)       Upon the completion of the interviews set forth in Section 4.08(b), but in any event at least fourteen (14) days prior to the Closing Date, Buyer or its Affiliate shall have the right but not the obligation to issue written offers of employment to those Relevant Employees selected by Buyer or its Affiliates in their sole and exclusive discretion, with such employment offers to be conditioned on the Closing and effective from and after the Closing Date (or, if any Relevant Employee who receives such an offer is on a leave of absence, effective from and after the date such Relevant Employee returns to active employment). Not less than five (5) days before the Closing Date, Buyer shall provide written notice to Seller as to the identities of each Relevant Employee that has accepted an offer of employment from Buyer or its Affiliate (the “Continuing Employees”). Seller or its Affiliate shall continue the employment of the Continuing Employees until the Closing Date and will accept the resignation or terminate the employment of the Continuing Employees effective as of immediately before the Closing Date (or such later date with respect to a Continuing Employee on a leave of absence). On or before the Closing Date, Seller may terminate the employment of all such other Relevant Employees who do not receive and accept a written offer of employment from Buyer and who are not Continuing Employees.

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(d)       Buyer shall provide or cause its Affiliate to provide to each Continuing Employee the same base salary and bonus and incentive opportunities, and other employee benefits that are substantially comparable in the aggregate to the compensation and benefits provided to employees holding similar positions with Buyer or such Affiliate.

(e)       Buyer shall have no liability for any Relevant Employee who does not receive an offer of employment and Seller shall be responsible for and shall retain sole liability for any and all severance payments or other termination benefits or compensation, if any, due to such Relevant Employees.

Section 4.09 Pre-Closing Covenants and Agreements of Buyer. Buyer covenants and agrees with Seller that Buyer shall maintain its status as a limited liability company and shall assure that as of the Closing Date it will not be under any material limited liability company or contractual restriction that would prohibit or delay the timely consummation of the transaction contemplated herein.

Section 4.10 Preferential Rights and Consents.

(a)       Within five (5) Business Days after execution of this Agreement, Seller shall send notices to the holders of preferential rights or consents to assign under joint operating agreements (which consents, for purposes of this Agreement, shall be treated as preferential rights under Section 4.10(b) through (d) below) applicable to the transactions contemplated hereby. The form and content of all solicitations for the waivers affecting the Assets shall be determined by Seller, after consultation with Buyer, and shall not be inconsistent with any of the terms of this Agreement.

(b)       In the event a third party exercises an applicable preferential right to purchase any of the Assets prior to the Closing Date (and does not, prior to the Closing, subsequently waive such preferential purchase right) or a preferential right has not expired prior to the Closing Date, the affected Assets shall be removed from this Agreement and the Purchase Price shall be reduced by the Allocated Value of such Assets. For a period of ninety (90) days after the Closing Date, Seller may, from time to time, notify Buyer in writing if the holder of such exercised preferential right has withdrawn its exercise thereof or has failed to close or the applicable preferential right has expired (without challenge or comment from the holder of such preferential right). Within ten (10) Business Days after Buyer’s receipt of such notice, Seller shall sell, assign and convey to Buyer, and Buyer shall purchase and accept from Seller, the affected Assets pursuant to the terms of this Agreement and for the Allocated Value thereof (as adjusted pursuant to Section 2.03).

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(c)       Subject to Section 4.10(b), if on the Closing Date preferential purchase rights applicable to any of the Assets have not expired or been waived, the affected Assets shall be excluded from the Assets delivered at the Closing and the Purchase Price shall be reduced by the Allocated Value of such Assets. The Parties shall conduct a subsequent closing ninety (90) days after the Closing Date (the “Second Closing”) with respect to each of the excluded Assets for which the applicable preferential purchase rights have expired or been waived. If any preferential purchase rights have neither expired nor been waived within ninety (90) days after the Closing Date, the affected Assets, automatically and without need to amend this Agreement, shall be removed from this Agreement and the Parties shall have no further obligations to each other with respect to the same, unless Seller and Buyer agree in writing to proceed with a closing on such Assets.

(d)       If more than ninety (90) days after the Closing, a third party exercises an applicable preferential right to purchase any of the Assets of which Seller and Buyer were not aware prior to the expiration of such period, then Buyer shall sell, assign and convey the affected Asset to such third party and Buyer shall be entitled to receive and collect the proceeds of the purchase, either from such third party directly or from any Seller Party that receives and collects such proceeds. This provision shall survive the Closing for the statute of limitations.

(e)       Seller will use reasonable efforts to obtain any other required consents (other than third party or Governmental Authority consents customarily obtained post-Closing, consents under joint operating agreements described in Section 4.10(a) or other approvals customarily obtained post-Closing) for the valid assignment of any Asset with an Allocated Value of greater than zero prior to the Closing. If on the Closing Date any such consents have not been obtained, and the failure to obtain such consent could reasonably be expected (A) to cause the assignment of the Assets affected thereby to Buyer to be void or voidable, (B) to cause the termination or loss of a contract or an Asset under the express terms thereof or (C) to result in a Material Adverse Effect, then Buyer shall have the right to elect that any such affected Asset (a “Hard Consent Asset”) not be transferred to Buyer at Closing. In such cases, such Hard Consent Asset shall be retained by Seller and the Purchase Price shall be reduced by the Allocated Value of such Hard Consent Asset. If an unsatisfied consent requirement with respect to a Hard Consent Asset for which an adjustment is made to the Purchase Price is subsequently satisfied prior to the date that is ninety (90) days after the Closing, the Parties shall include such Hard Consent Asset in the Second Closing at which (y) Seller shall convey such Hard Consent Asset to Buyer in accordance with this Agreement, and (z) Buyer shall pay an amount equal to the Allocated Value of such Hard Consent Asset to Seller. If such consent requirement is not satisfied within ninety (90) days after the Closing, the affected Hard Consent Assets, automatically and without need to amend this Agreement, shall be removed from this Agreement and the Parties shall have no further obligations to each other with respect to the same, unless Seller and Buyer agree in writing to proceed with a closing on such Hard Consent Assets. If on the Closing Date any other consents (other than consents relating to Hard Consent Assets) have not been obtained the affected Assets nevertheless shall be delivered at the Closing and the Allocated Value therefor shall be included in the Purchase Price, but after the Closing Seller shall continue its efforts to obtain such consents on a case by case basis as agreed upon by Buyer and Seller.

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Section 4.11 Casualty Loss. If, subsequent to the date of this Agreement and prior to the Closing, all or any portion of the Assets are (i) destroyed by fire or other casualty or (ii) are taken in condemnation or under the right of eminent domain (or proceedings for such purposes are pending or threatened) (collectively, “Casualty Loss”), Buyer shall purchase the affected Assets notwithstanding any such Casualty Loss and the Purchase Price shall not be adjusted. At the Closing Seller shall pay to Buyer all sums paid to Seller by third parties by reason of the Casualty Loss, and shall assign, transfer and set over or subrogate unto Buyer all of the right, title and interest of Seller in and to any unpaid awards or other payments from third parties arising out of the Casualty Loss. Seller shall not voluntarily compromise, settle or adjust any amounts payable by reason of any Casualty Loss without first obtaining the written consent of Buyer, such consent not to be unreasonably withheld.

Section 4.12 Names. As soon as reasonably possible after the Closing, but in no event later than sixty (60) days after the Closing, Buyer shall remove the names of Seller, including “(■)” and all variations thereof, from all of the Assets and make the requisite filings with, and provide the requisite notices to, the appropriate Governmental Authorities to place the title or other indicia of ownership, including operation of the Assets, in a name other than any name of Seller or any variations thereof.

Section 4.13 Transition Services. If after the Execution Date Buyer and Seller determine that Buyer requires transition services after the Closing, the Parties shall negotiate in good faith to enter into a transition services agreement pursuant to which Seller shall provide certain services to Buyer.

ARTICLE V
TITLE MATTERS

Section 5.01 Definitions.

(a)       The term “Good and Defensible Title” shall mean such title held by each Seller Party on the Effective Time which, except for and subject to the Permitted Encumbrances: (i) entitles each Seller Party to receive its Ownership Share as to each Property of not less than the Net Revenue Interest set forth on Schedule 5.01(a-1) or Schedule 5.01(a-2) of the Products produced and saved from such Property for the life of such Property; (ii) obligates each Seller Party to bear its Ownership Share of costs and expenses relating to the drilling, maintenance, development, operation and plugging and abandonment of a Property (or the Wells located thereon) in an amount not greater than the Working Interest set forth in Schedule 5.01(a-1) or Schedule 5.01(a-2) for such Property (unless there is a proportionate increase in the corresponding Net Revenue Interest) for the life of such Property; (iii) is free and clear of liens, mortgages, charges, encumbrances, security agreements, interests, claims, defects and similar burdens; and (iv) with respect to each Property on Schedule 5.01(a-2), entitles each Seller Party to the number of Net Acres set forth on Schedule 5.01(a-2), with respect to such Property. With respect to the Lender Liens and the NPORRI, Buyer and Seller acknowledge and agree that (xi) the Lender Liens and the NPORRI are not Permitted Encumbrances, (xii) prior to or at Closing, Seller shall deliver to Buyer releases of the Lender Liens, (xiii) prior to or at Closing, Seller shall deliver evidence reasonably satisfactory to Buyer that the NPORRI Holder has re-conveyed prior to Closing the NPORRI burdening the Assets, and (xiv) provided that Seller discharges its obligation under Section 5.01(a)(xii) and Section 5.01(a)(xiii), the Lender Liens and the NPORRI shall not serve as a basis for a Title Defect on which Seller may rely for any purpose under this ARTICLE V.

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(b)       The term “Permitted Encumbrances,” as used herein, means:

(i)       lessors’ royalties, overriding royalties (other than the NPORRI), unitization and pooling designations and agreements, reversionary interests and similar burdens that do not reduce the Net Revenue Interest for any Property below that shown on Schedule 5.01(a-1) or Schedule 5.01(a-2) for such Property or increase the Working Interest for any Property above that set forth on Schedule 5.01(a-1) or Schedule 5.01(a-2) for such Property without a proportionate increase in the corresponding Net Revenue Interest;

(ii)       third party consents required for the transfer of any of the Assets which (i) are obtained prior to the Closing, (ii) if not obtained do not cause the affected Asset to be a Hard Consent Asset, or (iii) are required consents, notices to, filings with, or other actions by Governmental Authorities which are customarily obtained post-Closing;

(iii)       preferential rights to purchase all or any portion of the Assets that are set forth on Schedule 3.01(n);

(iv)       easements, rights-of-way, servitudes, licenses and permits on, over, across or in respect of any of the Assets not materially interfering with the operation, exploration, development, value or use of any Assets;

(v)       materialmen’s, mechanics’, repairmen’s, employees’, contractors’, operators’, tax and other similar liens or charges arising in the ordinary course of business incidental to the construction, maintenance or operation of any of the Assets: (A) that are not delinquent; or (B) if delinquent, are being contested in good faith by appropriate action and for which Seller indemnifies Buyer subsequent to Closing;

(vi)       any rights related to coal, coal seams or coal mining, whether statutory or otherwise, other than rights to explore for, develop and produce coalbed methane and associated Products and rights attendant thereto;

(vii)       any claim or potential claim that results from the ambiguity and lack of definitive case law surrounding which estate in land owns the right to develop the coalbed methane under applicable law in the jurisdiction in which the Asset in question is located; and

(viii)       any other liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects or irregularities of any kind whatsoever affecting the Assets that, individually or in the aggregate, (i) do not materially reduce the value of or materially interfere with the use, ownership or operation of the Assets subject thereto or affected thereby, (ii) would be accepted by a reasonably prudent purchaser engaged in the business of owning and operating oil and gas properties, (iii) do not prevent Seller from receiving the proceeds of production, and (iv) do not operate to: (A) reduce the Net Revenue Interest for any Property below that set forth on Schedule 5.01(a-1) or Schedule 5.01(a-2) for such Property; or (B) increase the Working Interest for any Property above that set forth on Schedule 5.01(a-1) or Schedule 5.01(a-2) for such Property without a proportionate increase in the corresponding Net Revenue Interest.

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(c)       The term “Title Defect” as used herein shall mean any encumbrance or defect in Seller’s title to the Mineral Acres or the Leases that renders a Seller Party’s title to the Mineral Acres or the Leases to be less than Good and Defensible Title.

(d)       The term “Title Benefit” as used herein shall mean any condition that (i) entitles a Seller Party (and the Buyer, after Closing) to receive as to a Property set forth in Schedule 5.01(a-1) or Schedule 5.01(a-2) a greater Net Revenue Interest than that set forth on Schedule 5.01(a-1) or Schedule 5.01(a-2) for such Property; or (ii) obligates a Seller Party (and the Buyer, after Closing) to bear costs and expenses relating to the drilling, maintenance, development and operation and plugging and abandonment of a Property in an amount less than the Working Interest set forth in Schedule 5.01(a-1) or Schedule 5.01(a-2) for such Property, unless there is a proportionate decrease in the corresponding Net Revenue Interest.

Section 5.02 Title Defect Adjustments.

(a)       No action (including no adjustment to the Purchase Price) shall be required under Section 5.02(c) below in respect of any individual Title Defect unless the value of such Title Defect equals or exceeds a threshold of (■) with respect to a Property. With respect to all Title Defects meeting such threshold, no action (including no adjustment to the Purchase Price) shall be required under Section 5.02(c) except and only to the extent that the aggregate value of all such Title Defects and all timely asserted Adverse Environmental Conditions meeting the individual claim threshold set forth in Section 6.02(a), net of all Title Benefit Offsets, exceeds a deductible equal to one and (■) of the Purchase Price as to all Seller Parties.

(b)       Buyer shall give Seller written notice of any Title Defects alleged by Buyer within forty-five (45) days after the Execution Date. Such notice (a “Defect Notice”) shall be in writing and shall include: (i) a description of each Title Defect; (ii) the Allocated Value of the Properties affected by each Title Defect; (iii) the amount by which Buyer believes the Allocated Value of each of such Properties has been reduced because of each Title Defect, and (iv) documentation or other evidence reasonably supporting Buyer’s assertion of each Title Defect and the reduction in Allocated Value asserted pursuant to the preceding clause (iii) with respect thereto, including the specific computations on which Buyer is relying for such reduction. For the purposes of this Section 5.02(b), Buyer shall be deemed to have waived all Title Defects of which Seller has not been given timely notice and all Title Defects that do not meet the requirements set forth in Section 5.02(a). All adjustments to the Purchase Price based on Title Defects will be based on the Allocated Values attributable to the affected Properties. Upon timely delivery of a Defect Notice under this Section 5.02, Buyer and Seller Party will in good faith negotiate the validity of the Title Defect and the amount of any adjustment to the Purchase Price using the following criteria:

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(i)       If the alleged Title Defect is based on owning a Net Revenue Interest in a Property which is less than the Net Revenue Interest percentage necessary for the Seller Party to have had Good and Defensible Title in such Property, then a downward adjustment to the Purchase Price shall be calculated by multiplying the Allocated Value set forth on Schedule 5.01(a-1) or Schedule 5.01(a-2) for such Property by a fraction, the numerator of which is an amount equal to the Net Revenue Interest percentage necessary for the Seller Party to have had Good and Defensible Title to such Property, less the Net Revenue Interest to which the Seller Party is actually entitled taking such Title Defect into account, and the denominator of which is the Net Revenue Interest percentage necessary for the Seller Party to have had Good and Defensible Title to such Property.

(ii)       If the Title Defect is based on a lien upon a Property that is liquidated in amount, then the adjustment is the lesser of the amount necessary to remove such lien from the affected Property or the Allocated Value of the affected Property.

(iii)       If the Title Defect is based on an obligation, burden or liability upon a Property for which the Buyer’s economic detriment is not liquidated but can be estimated with reasonable certainty, then, subject to the other provisions hereof, the adjustment is the lesser of the amount necessary to compensate Buyer for the adverse economic effect on the affected Property or the Allocated Value of the affected Property.

(iv)       If the Title Defect is based on owning fewer Net Acres in a Property that is identified on Schedule 5.01(a-2) than those represented on Schedule 5.01(a-2), then the adjustment shall be calculated by multiplying the Allocated Value set forth for such Property on Schedule 5.01(a-2) by a fraction, the numerator of which is the number of Net Acres shown on Schedule 5.01(a-2) for such Property minus the actual number of Net Acres owned within such Property taking into account such Title Defect, and the denominator of which is the number of Net Acres shown on Schedule 5.01(a-2) for such Property.

(c)       Subject to the limitations contained in Section 5.02(a), a Property affected by a Title Defect shall be excluded from the Assets to be purchased by Buyer hereunder and the Purchase Price shall be reduced by an amount equal to the Allocated Value of such Property unless, prior to one (1) day before the Closing Date, either: (i) the Title Defect has been cured by Seller to the reasonable satisfaction of Buyer; (ii) Buyer agrees to waive the relevant Title Defect and purchase the affected Asset(s) notwithstanding such Title Defect; or (iii) if such Title Defect is described in Section 5.02(b), Buyer and Seller agree upon a reduction of the Purchase Price with respect to such Title Defect in accordance with the provisions thereof.

(d)       With respect to any Property affected by a Title Defect which is excluded from the Assets pursuant to Section 5.02(c), Seller shall have ninety (90) days after the Closing to cure any such Title Defect, and to the extent that such Title Defect is cured to Buyer’s reasonable satisfaction or waived by Buyer, the Parties shall include in the Second Closing each of the excluded Assets for which the Title Defects have been cured or waived. If any Title Defects have not been cured by Seller or waived by Buyer by the date of the Second Closing, then either Party shall have the right to elect to have the validity of such Title Defect and the amount of any adjustment to the Purchase Price determined by an Independent Expert pursuant to ARTICLE XI.

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Section 5.03 Title Benefit Offsets. Buyer shall promptly notify each Seller Party of any Title Benefits identified by Buyer prior to the Closing, such notice to include a description of the Title Benefit and the Properties affected. Each Seller Party shall give Buyer written notice of any Title Benefits alleged by each Seller Party at least ten (10) days prior to the Closing Date. Such notice (a “Benefit Notice”) shall be in writing and shall include: (i) a description of each Title Benefit; (ii) the Allocated Value of the Properties affected by each Title Benefit; (iii) the amount by which each Seller Party believes the value of each of such Properties has been increased because of each Title Benefit; and (iv) documentation or other evidence reasonably supporting each Seller Party’s assertion of each Title Benefit and the increase in value asserted pursuant to the preceding clause (iii) with respect thereto. The upward adjustment to the Purchase Price in respect of each Title Benefit shall be determined in the same manner as provided in Section 5.02 with respect to Title Defects (in each case, a “Title Benefit Offset”). Each Seller Party shall be deemed to have waived all Title Benefits of which Buyer has not been given timely notice. All Title Benefit Offsets shall be netted against the value of Title Defects and Adverse Environmental Conditions as provided in Section 5.02(c) and Section 6.02(c). Upon a timely delivery of a Benefit Notice under this Section 5.03, Buyer and Seller will in good faith negotiate the validity of the claim and the amount of any adjustment to the Purchase Price.

Section 5.04 Limitations. THIS ARTICLE V AND Section 9.05(b) SHALL BE THE SOLE AND EXCLUSIVE REMEDY AND RIGHT OF RECOVERY THAT BUYER SHALL HAVE AGAINST ANY SELLER PARTY WITH RESPECT TO ANY TITLE DEFECT OR OTHER MATTER OR CIRCUMSTANCE WITH RESPECT TO A SELLER PARTY’S TITLE TO THE ASSETS. UNLESS BUYER ASSERTS A TITLE DEFECT IN ACCORDANCE WITH THIS ARTICLE V, BUYER WAIVES AND FOREVER RELEASES ANY AND ALL CLAIMS RELATED TO A SELLER PARTY’S TITLE TO THE ASSETS.

ARTICLE VI
ENVIRONMENTAL MATTERS

Section 6.01 Adverse Environmental Conditions. An “Adverse Environmental Condition” means any condition or circumstance of the Assets which is not in compliance with, or requires remediation under, applicable Environmental Law. “Environmental Law” means all laws, statutes, ordinances, rules and regulations of any Governmental Authority pertaining to protection of the environment in effect as of the Effective Time and as interpreted by court decisions or administrative orders as of the Effective Time in the jurisdiction in which such Asset is located. Environmental Law does not include good or desirable operating practices or standards that may be employed or adopted by other oil or gas well operators or merely recommended, but not required, by a Governmental Authority.

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Section 6.02 Adverse Environmental Condition Adjustments.

(a)       No action (including no adjustment to the Purchase Price) shall be required under this Section 6.02 in respect of any individual Adverse Environmental Condition existing on a Property unless the value of such Adverse Environmental Condition equals or exceeds a threshold of (■) with respect to a Property. With respect to all Adverse Environmental Conditions meeting such threshold, no action (including no adjustment to the Purchase Price) shall be required under Section 6.02 except and to the extent that the aggregate value of all such Adverse Environmental Conditions and all timely asserted Title Defects meeting the individual claim threshold set forth in Section 5.02(a), net of all Title Benefit Offsets, exceeds a deductible equal to one and one-half percent (1.5%) of the Purchase Price as to all Seller Parties.

(b)       Buyer shall give each Seller Party written notice of any Adverse Environmental Conditions alleged by Buyer within forty-five (45) days after the Execution Date. Such notice shall be in writing and shall include: (i) a description of each Adverse Environmental Condition; (ii) the Allocated Value of the Properties affected by each Adverse Environmental Condition; (iii) the expenditures that Buyer estimates will be required to place the Assets affected by each Adverse Environmental Condition into compliance with applicable Environmental Law, and (iv) documentation or other evidence reasonably supporting Buyer’s assertion of each Adverse Environmental Condition and the expenditures provided pursuant to the preceding clause (iii) with respect thereto. For the purposes of this Section 6.02(b), Buyer shall be deemed to have waived all Adverse Environmental Conditions of which Seller has not been given timely notice hereunder and all Adverse Environmental Conditions that do not meet the requirements set forth in Section 6.02(a).

(c)       Subject to the limitations contained in Section 6.02(a), a Property affected by an Adverse Environmental Condition shall be excluded from the Assets to be purchased by Buyer hereunder and the Purchase Price shall be reduced by an amount equal to the Allocated Value of such Property unless, prior to one (1) day before the Closing Date, either: (i) the Adverse Environmental Condition has been cured by Seller to the reasonable satisfaction of Buyer; (ii) Buyer agrees to waive the relevant Adverse Environmental Condition and purchase the affected Assets notwithstanding the Adverse Environmental Condition; or (iii) Buyer and Seller agree upon a reduction of the Purchase Price with respect to such Adverse Environmental Condition. If Seller and Buyer agree to a downward adjustment to the Purchase Price pursuant to clause (iii) above, said adjustment shall not reflect any costs to remediate to a more stringent remediation standard than is required by Environmental Laws.

(d)       With respect to any Property affected by an Adverse Environmental Condition which is excluded from the Assets pursuant to Section 6.02(c), Seller shall have ninety (90) days after the Closing to cure any such Adverse Environmental Condition, and to the extent that such Adverse Environmental Condition is cured to Buyer’s reasonable satisfaction or waived by Buyer, the Parties shall include in the Second Closing each of the excluded Assets for which the Adverse Environmental Condition has been cured or waived. If any Adverse Environmental Condition has not been cured by Seller or waived by Buyer by the date of the Second Closing, then either Party shall have the right to elect to have the validity of such Adverse Environmental Condition and the amount of any adjustment to the Purchase Price determined by an Independent Expert pursuant to ARTICLE XI.

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Section 6.03 Limitations. THIS ARTICLE VI AND Section 9.05(b) SHALL BE THE SOLE AND EXCLUSIVE REMEDY AND RIGHT OF RECOVERY THAT BUYER SHALL HAVE AGAINST SELLER WITH RESPECT TO ANY ADVERSE ENVIRONMENTAL CONDITIONS OR OTHER MATTER OR CIRCUMSTANCE WITH RESPECT TO THE ASSETS RELATING TO ENVIRONMENTAL LAWS, THE RELEASE OF MATERIALS INTO THE ENVIRONMENT OR PROTECTION OF THE ENVIRONMENT OR HEALTH.

ARTICLE VII
CONDITIONS TO CLOSING

Section 7.01 Seller’s Conditions. The obligations of Seller to consummate the transactions contemplated by this Agreement at the Closing are subject to the satisfaction at or prior to the Closing, or waiver in writing by Seller, of the following conditions:

(a)       All representations and warranties of Buyer contained in this Agreement, to the extent qualified with respect to materiality, shall be true and correct in all respects, and to the extent not so qualified, shall be true and correct in all material respects, in each case as if such representations and warranties were made at and as of the Closing, and Buyer shall have performed and satisfied in all material respects all covenants and agreements required to be performed and satisfied by it under this Agreement at or prior to the Closing;

(b)       Buyer and Seller shall each be in compliance with all material regulatory requirements of all applicable Governmental Authorities necessary to consummate the transactions contemplated herein (all of which shall be in full force and effect as of the Closing);

(c)       no order or proceeding shall be outstanding or pending that restrains, enjoins or otherwise prohibits, or could reasonably be expected to restrain, enjoin or otherwise prohibit, the consummation of the transactions contemplated by this Agreement;

(d)       there shall be no bankruptcy, reorganization, receivership or arrangement proceedings pending against Buyer or any Affiliate of Buyer;

(e)       Buyer shall have provided Seller evidence reasonably satisfactory to Seller that Buyer, as of the Closing is qualified to do business and to own and operate the Assets in the jurisdictions in which the Assets are located; and

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(f)       Buyer shall have delivered (and, immediately prior to Closing, Buyer shall be ready, willing and able to deliver), to Seller at Closing, all Closing deliveries described in Section 8.03.

Section 7.02 Buyer’s Conditions. The obligations of Buyer to consummate the transactions contemplated by this Agreement at the Closing are subject to the satisfaction at or prior to the Closing, or waiver in writing by Buyer, of the following conditions:

(a)       All representations and warranties of each Seller Party contained in this Agreement, to the extent qualified with respect to materiality, shall be true and correct in all respects, and to the extent not so qualified, shall be true and correct in all material respects, in each case as if such representations and warranties were made at and as of the Closing, and Seller shall have performed and satisfied in all material respects all covenants and agreements required to be performed and satisfied by it under this Agreement at or prior to the Closing;

(b)       Seller and Buyer shall each be in compliance with all material regulatory requirements of all applicable Governmental Authorities necessary to consummate the transactions contemplated herein (all of which shall be in full force and effect as of the Closing);

(c)       no order or proceeding shall be outstanding or pending that restrains, enjoins or otherwise prohibits, or could reasonably be expected to restrain, enjoin or otherwise prohibit, the consummation of the transactions contemplated by this Agreement;

(d)       there shall be no bankruptcy, reorganization, receivership or arrangement proceedings pending against Seller or any Affiliate of Seller; and

(e)       Seller shall have delivered (and, immediately prior to Closing, Seller shall be ready, willing and able to deliver), to Buyer at Closing, all Closing deliveries described in Section 8.03.

ARTICLE VIII
CLOSING

Section 8.01 Date of Closing. Unless the Parties agree otherwise in writing and subject to the conditions stated in this Agreement, the consummation of the transactions contemplated hereby (the “Closing”) shall be held on or before July 31, 2017 (the “Target Closing Date”). The date on which the Closing occurs shall be referred to herein as the “Closing Date.” The consummation of the transactions contemplated in Section 4.10(c), Section 4.10(e), Section 5.02(d) and Section 6.02(d) for the Second Closing shall be held within ten (10) Business Days after the expiration of the ninety (90) day cure period set forth in Section 5.02(d). Unless the context requires otherwise, when used in Section 7.01 and Section 7.02 and Section 8.02 and Section 8.03, the terms “Closing” and “Closing Date” shall mean and refer to the Closing and the Second Closing, as applicable.

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Section 8.02 Place of Closing. The Closing shall be held at the offices of (■) in Houston, Texas, or such other location as the Parties mutually agree, on the Closing Date. Except in the case of documents that are specified as being recordable in form (for which originally signed copies must be delivered), the Closing may occur by facsimile or electronic transmission exchange of portable document format “pdf” executed documents or signature pages followed by the exchange of originals as soon thereafter as practicable.

Section 8.03 Closing Obligations. At the Closing, the following events shall occur, each being a condition precedent to the others and each being deemed to have occurred simultaneously with the others:

(a)       Seller and Buyer shall execute, acknowledge and deliver Special Warranty Deeds and Assignments and Bills of Sale, in sufficient counterparts to facilitate recording, substantially in the form of Exhibit C, Exhibit D and Exhibit E attached hereto, assigning the Assets to Buyer;

(b)       After giving effect to the Deposit, plus any interest accrued thereon (which shall be retained by Seller and applied to the Preliminary Purchase Price in accordance with Section 2.02), Buyer shall deliver to Seller the Preliminary Purchase Price by wire transfer in immediately available federal funds;

(c)       Seller and Buyer shall execute, acknowledge and deliver transfer orders or letters in lieu thereof directing all purchasers of Production to make payment to Buyer of proceeds attributable to Production from the Assets assigned to Buyer;

(d)       Seller and Buyer shall execute, acknowledge and deliver any required change of operator forms and similar forms necessary to transfer the operatorship of the Assets from Seller or (■) to Buyer or its designated operator;

(e)       Seller and Buyer shall execute, acknowledge and deliver such assignments and consents necessary to transfer to Buyer all Permits which are transferable to Buyer under applicable laws and regulations;

(f)       Each Party shall deliver a certificate executed by an authorized officer or representative of such Party certifying on behalf of such Party that, to the best of such officer’s knowledge, the representations and warranties of such Party set forth in Section 3.01, Section 3.02 and Section 3.03 as the case may be, hereof, to the extent qualified with respect to materiality, are true and correct in all respects, and to the extent not so qualified, are true and correct in all material respects, at and as of the Closing and that all obligations of such Party hereunder that are required to be performed at or prior to the Closing have been performed in all material respects;

(g)       Each Party shall deliver a certificate duly executed by an authorized officer or representative of such Party, dated as of the Closing, (i) attaching and certifying on behalf of such Party those instruments authorizing the execution, delivery and performance by such Party of this Agreement and the transactions contemplated hereby; and (ii) certifying on behalf of such Party the incumbency of each officer or authorized representative of such Party executing this Agreement or any document delivered at the Closing;

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(h)       Each Seller Party shall deliver a certificate duly executed by an authorized officer or representative of such Seller Party, dated as of the Closing, certifying as to such Seller Party’s non-foreign status pursuant to, and in conformity with the requirements of, Treasury Regulation Section 1.1445-2 of the Internal Revenue Code of 1986, as amended;

(i)       Each Seller Party shall deliver to Buyer a release of all liens and encumbrances from the lenders under any credit facilities of such Seller Party and from the holders of any other mortgages, deeds of trust, security agreements or comparable security interests on title created by, through, or under such Seller Party (other than with respect to Permitted Encumbrances) (the “Lender Liens”);

(j)       Seller shall deliver evidence reasonably satisfactory to Buyer that the NPORRI Holder has re-conveyed prior to Closing the NPORRI burdening the Assets; and

(k)       Each Party shall execute and deliver any and all other original instruments, documents and other items reasonably necessary to effectuate the terms of this Agreement, as may be reasonably requested by another Party.

ARTICLE IX
OBLIGATIONS AFTER CLOSING

Section 9.01 Post-Closing Adjustment Procedure. As soon as reasonably practicable, but no later than ninety (90) days after the Closing Date, Seller shall deliver to Buyer a final settlement statement (the “Final Settlement Statement”) setting forth each adjustment to the Purchase Price required under Section 2.03. Seller shall make available the necessary records to permit Buyer to conduct an audit of the Final Settlement Statement during the forty-five (45) day period commencing on the date the Final Settlement Statement is delivered to Buyer (the “Audit Period”). As soon as reasonably practicable, but no later than the end of the Audit Period, Buyer may deliver to Seller a written report containing any changes Buyer proposes to such statement. Any matters covered by the Final Settlement Statement as delivered by Seller to which Buyer fails to object in the written report shall be deemed correct and shall be final and binding on the Parties and not subject to further review, audit or arbitration. The undisputed amounts (net of any amounts in dispute) will be paid or collected promptly in cash only. The Parties agree to negotiate in good faith to resolve any disputes relating to items in the Final Settlement Statement and shall meet no later than fifteen (15) days after Seller receives Buyer’s written report to attempt to agree on any adjustments to the Final Settlement Statement. If the Parties fail to agree on final adjustments within that fifteen (15) day period, either Party may submit the disputed items, no later than the thirtieth (30th) day following the expiration of such fifteen (15) day period, to KPMG or another nationally-recognized, United States-based accounting firm on which the Parties agree in writing (the “Accounting Referee”). The Parties shall direct the Accounting Referee to resolve the disputes within thirty (30) days after its receipt of relevant materials pertaining to the dispute. The Accounting Referee shall act as an expert for the limited purpose of determining the specific disputed matters submitted by either Party and may not award damages or penalties to either Party with respect to any matter. Seller and Buyer shall share equally the Accounting Referee’s fees and expenses. The Final Settlement Statement, whether as agreed between the Parties or as determined by a decision of the Accounting Referee, shall be binding on and non-appealable by the Parties and not subject to further review, audit or arbitration. Payment by Buyer or Seller, as applicable, for any disputed amount on the Final Settlement Statement shall be made within five (5) Business Days after the earlier of (i) the date such amount is agreed, or deemed agreed, by the Parties and (ii) the date the Parties receive the Accounting Referee’s decision (such earlier date being the “Final Settlement Date”).

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Section 9.02 Allocation of Revenues. Seller shall be entitled to all operating revenues (and related accounts receivable) attributable to the Assets to the extent the foregoing relate to the period of time prior to the Effective Time and Buyer shall be entitled to all operating revenues (and related accounts receivable) attributable to the Assets to the extent the foregoing relate to the period of time from and after the Effective Time. Except for amounts accounted for in connection with the Preliminary Settlement Statement or the Final Settlement Statement, (a) if Buyer receives any funds to which Seller is entitled pursuant to the preceding sentence, then Buyer shall promptly, and in no event more than thirty (30) days after receipt, deliver such funds to Seller and (b) if Seller receives any funds to which Buyer is entitled pursuant to the preceding sentence, then Seller shall promptly, and in no event more than thirty (30) days after receipt, deliver such funds to Buyer.

Section 9.03 Files and Records. As soon as practicable, but in any event within ten (10) days after the Closing Date, Seller shall deliver the Records to Buyer (other than division order files, which will be delivered within thirty (30) days following the Closing). Seller shall furnish originals of paper files to the extent they are maintained in the normal course of business. If any related file information is maintained as imaged documents, this data will be delivered to Buyer in digital format for Buyer to print the documents or load to an imaging system. Seller, at its sole cost, shall have the right to make copies of all Records delivered to Buyer. Buyer shall retain, or shall cause its assigns to retain, the Records and make them available to Seller for seven (7) full calendar years following the Closing Date, in Buyer’s office during normal business hours. If Buyer desires to destroy any portion of the Records within such seven (7) year period, it shall notify Seller prior to such destruction and provide Seller an opportunity to take possession of the Records to be destroyed, at Seller’s expense.

Section 9.04 Buyer’s Assumed Obligations and Release. If Closing occurs, subject to Seller’s indemnification obligations under Section 9.05(b):

(a)       BUYER EXPRESSLY AGREES TO ASSUME RESPONSIBILITY FOR AND AGREES TO PAY, PERFORM, FULFILL AND DISCHARGE ALL CLAIMS, COSTS, EXPENSES, LIABILITIES AND OBLIGATIONS ACCRUING OR RELATING TO OWNING, DEVELOPING, EXPLORING, OPERATING AND MAINTAINING THE ASSETS, WHETHER RELATING TO PERIODS BEFORE OR AFTER THE EFFECTIVE TIME, INCLUDING, WITHOUT LIMITATION, ALL ENVIRONMENTAL CLAIMS, WHETHER ARISING OR ACCRUING BEFORE OR AFTER THE EFFECTIVE TIME, REGARDLESS OF THE NEGLIGENCE OR STRICT LIABILITY OF SELLER (THE “ASSUMED OBLIGATIONS”). AS USED HEREIN, “ENVIRONMENTAL CLAIMS” MEANS ALL CLAIMS OR DEMANDS, INCLUDING, WITHOUT LIMITATION, CLAIMS FOR PROPERTY DAMAGE, PERSONAL INJURY, WRONGFUL DEATH, AND NATURAL RESOURCE DAMAGE ARISING (OR ALLEGED TO ARISE) FROM OR RELATED TO ADVERSE ENVIRONMENTAL CONDITIONS WITH RESPECT TO THE ASSETS OR OTHERWISE RELATING TO THE DISPOSAL, RELEASE, DISCHARGE OR EMISSION IN, ON, UNDER OR FROM THE ASSETS OF PRODUCTS, HAZARDOUS SUBSTANCES, HAZARDOUS WASTES, HAZARDOUS MATERIALS, SOLID WASTES, OR POLLUTANTS.

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(b)       BUYER HEREBY RELEASES AND DISCHARGES ANY AND ALL CLAIMS AT LAW OR IN EQUITY, KNOWN OR UNKNOWN, WHETHER NOW EXISTING OR ARISING IN THE FUTURE, CONTINGENT OR OTHERWISE, AGAINST SELLER WITH RESPECT TO ANY OF THE ASSUMED OBLIGATIONS, INCLUDING, WITHOUT LIMITATION, ANY ENVIRONMENTAL CLAIMS OR ADVERSE ENVIRONMENTAL CONDITIONS, INCLUDING, BUT NOT LIMITED TO, MATTERS OR CIRCUMSTANCES RELATING TO ENVIRONMENTAL LAWS, THE DISPOSAL, RELEASE, DISCHARGE OR EMISSION OF PRODUCTS, HAZARDOUS SUBSTANCES, HAZARDOUS WASTES, HAZARDOUS MATERIALS, SOLID WASTES, OR POLLUTANTS INTO THE ENVIRONMENT OR PROTECTION OF THE ENVIRONMENT OR HEALTH. BUYER EXPRESSLY ASSUMES THE RISK THAT THE ASSETS MAY CONTAIN WASTE MATERIALS, INCLUDING NATURALLY OCCURRING RADIOACTIVE MATERIALS, PRODUCTS, HAZARDOUS SUBSTANCES, HAZARDOUS WASTES, HAZARDOUS MATERIALS, ASBESTOS, SOLID WASTES, OR POLLUTANTS, AND THAT ADVERSE PHYSICAL CONDITIONS, INCLUDING, BUT NOT LIMITED TO, THE PRESENCE OF UNKNOWN ABANDONED OIL AND GAS WELLS, WATER WELLS, SUMPS AND PIPELINES MAY NOT HAVE BEEN REVEALED BY BUYER’S INVESTIGATION.

(c)       WITHOUT LIMITING THE GENERALITY OF ANY OF THE FOREGOING, IF CLOSING OCCURS, BUYER, FROM AND AFTER CLOSING, ACCEPTS SOLE RESPONSIBILITY FOR AND AGREES TO PAY ALL COSTS AND EXPENSES ASSOCIATED WITH PLUGGING AND ABANDONMENT OF ALL WELLS, DECOMMISSIONING OF ALL FACILITIES, AND CLEARING AND RESTORATION OF SITES ASSOCIATED WITH THE ASSETS.

Section 9.05 Indemnification. From and after Closing:

(a)       BUYER SHALL DEFEND, INDEMNIFY, RELEASE AND HOLD HARMLESS SELLER, ITS OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS (“SELLER INDEMNIFIED PARTIES”) AGAINST ALL LOSSES, DAMAGES, CLAIMS, DEMANDS, SUITS, COSTS, EXPENSES, LIABILITIES AND SANCTIONS OF EVERY KIND AND CHARACTER, INCLUDING WITHOUT LIMITATION REASONABLE ATTORNEYS’ FEES, COURT COSTS AND COSTS OF INVESTIGATION, WHICH ARISE FROM OR IN CONNECTION WITH (i) ANY ASSUMED OBLIGATION, OR (ii) BUYER’S BREACH OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR COVENANTS HEREIN.

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(b)       SELLER SHALL DEFEND, INDEMNIFY, RELEASE AND HOLD HARMLESS BUYER, ITS OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS (“BUYER INDEMNIFIED PARTIES”) AGAINST ALL LOSSES, DAMAGES, CLAIMS, DEMANDS, SUITS, COSTS, EXPENSES, LIABILITIES AND SANCTIONS OF EVERY KIND AND CHARACTER, INCLUDING WITHOUT LIMITATION REASONABLE ATTORNEYS’ FEES, COURT COSTS AND COSTS OF INVESTIGATION, WHICH ARISE FROM OR IN CONNECTION WITH (i) SELLER’S BREACH OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR COVENANTS HEREIN, (ii) ANY FEDERAL, STATE, AND LOCAL ASSET TAXES TO THE EXTENT ATTRIBUTABLE TO PERIODS PRIOR TO THE EFFECTIVE TIME, (iii) CLAIMS RELATED TO OR ARISING OUT OF THE DEATH OR PHYSICAL INJURY TO ANY PERSON TO THE EXTENT ATTRIBUTABLE TO PERIODS PRIOR TO THE EFFECTIVE TIME, OR (iv) THE EXCLUDED ASSETS.

Section 9.06 Survival; Limitations on Indemnification.

(a)       The representations and warranties of Buyer contained in Section 3.03(f) shall survive the Closing indefinitely. The representations and warranties of Seller contained in Section 3.01(f) and Section 3.01(h) through Section 3.01(z) shall survive the Closing for twelve (12) months. The remainder of Seller’s representations, warranties, covenants and agreements shall survive the Closing for the period of the statute of limitations unless expressly stated to survive for a shorter period of time. Representations, warranties, covenants and agreements shall be of no further force and effect after the date of their expiration.

(b)       The indemnification obligations of Seller under Section 9.05 shall terminate as of the termination date of each respective representation, warranty, covenant or agreement that is subject to indemnification, except in each case as to claims with respect to which a Claim Notice has been delivered in accordance with Section 9.07 prior to such termination date. Buyer’s indemnification obligations under Section 9.05 shall continue without time limit.

(c)       Notwithstanding anything to the contrary contained herein, Seller shall have no obligation to indemnify Buyer under this Agreement, unless, and then only to the extent that, (i) individual losses, damages, claims, demands, suits, costs, expenses, liabilities and sanctions to which Buyer would be entitled to indemnification (but for the provision of this Section 9.06(c)(i)) exceed a threshold equal to (■) and (ii) aggregate losses, damages, claims, demands, suits, costs, expenses, liabilities and sanctions to which Buyer would be entitled to indemnification (but for the provision of this Section 9.06(c)(ii)) in excess of the individual threshold in Section 9.06(c)(i) exceed a deductible equal to one and one half percent (1.5%) of the Purchase Price.

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(d)       Notwithstanding anything to the contrary contained herein, Seller’s aggregate liability under this Agreement in respect of all breaches of its representations, warranties and covenants contained herein shall not exceed (■) of the Purchase Price.

(e)       Neither Party shall have any obligation under Section 9.05 with respect to any amount finally agreed in the Final Settlement Statement pursuant to Section 9.01, provided such Party has paid all amounts due from it in accordance therewith.

Section 9.07 Indemnification Procedures. All claims for indemnification under this Agreement shall be asserted and resolved pursuant to this Section 9.07. Any person claiming indemnification hereunder is hereinafter referred to as the “Indemnified Party” and any person against whom such claims are asserted hereunder is hereinafter referred to as the “Indemnifying Party.” In the event that any claims are asserted against or sought to be collected from an Indemnified Party by a third party, and a Party wishes to assert a claim for indemnity hereunder such Party shall with reasonable promptness provide to the Indemnifying Party a written notice of the indemnity claim it wishes to assert on behalf of itself or another Indemnified Party, including the specific details of and specific basis under this Agreement for its indemnity claim (a “Claim Notice”). A Party seeking indemnity by an Indemnifying Party hereunder shall provide its Claim Notice promptly after such Party has actual knowledge of the claim for which it seeks indemnification and shall enclose a copy of all papers (if any) served by a third party on the applicable Indemnified Party with respect to the claim; provided that the failure of any Party to give notice of a claim as provided in this Section 9.07 shall not relieve the Indemnifying Party of its obligations under this Agreement except to the extent such failure results in insufficient time being available to permit the Indemnifying Party to effectively defend against the claim or otherwise prejudices the Indemnifying Party’s ability to defend against the claim. If requested by the Indemnifying Party, the Indemnified Party agrees to cooperate with the Indemnifying Party and its counsel in contesting any claims that the Indemnifying Party elects to contest. Such cooperation shall include, without limitation, the retention and provision to the Indemnifying Party of all records and other information that are reasonably relevant to the claims at issue. No claim may be settled or otherwise compromised without the prior written consent of the Indemnifying Party. No claim may be settled or compromised by the Indemnifying Party without the prior written consent of the Indemnified Party unless such settlement or compromise (i) entails a full and unconditional release of the Indemnified Party (and any other members of the Indemnified Party’s group, i.e., all Seller Indemnified Parties or all Buyer Indemnified Parties) without any admission or finding of fault or liability and (ii) does not impose on the Indemnified Party any material non-financial obligation or any financial obligation that is not fully paid by the Indemnifying Party.

Section 9.08 Suspense Amounts. The responsibility for payment of and escheat actions and obligations related to the Suspense Amounts held in suspense by Seller for periods prior to the Effective Time as to any of the Assets (such as suspended royalties held in the ordinary course of business as a result of title defects or changes of ownership) and the Suspense Amounts so held shall be transferred to Buyer at the Closing Date (along with all reasonable supporting documentation to the extent in Seller’s possession). After such time, the Suspense Amounts and any items accruing to suspense on account of production from the Assets shall be the responsibility of Buyer. From and after the Closing Date, Buyer shall assume all responsibility for the Suspense Amounts and the escheat actions and obligations related thereto, and shall indemnify and hold Seller harmless from any claim or liability with respect thereto.

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Section 9.09 Recordation and Post-Closing Consents. After the Closing, Buyer shall be responsible for filing and recording the documents associated with transfer and assignment of the Assets to Buyer and for all costs and fees associated therewith, including filing the deeds and assignments with appropriate federal, state and local authorities as required by law and in all applicable counties. As soon as practicable after recording or filing, Buyer shall furnish Seller all recording data and evidence of all required filings. Buyer shall be responsible for obtaining all consents and approvals of Governmental Authorities customarily obtained subsequent to transfer of title and all costs and fees associated therewith.

Section 9.10 Taxes.

(a)       Real and Personal Property Taxes. Pursuant to Section 2.03, all ad valorem taxes, real property taxes and personal property taxes (“Real and Personal Property Taxes”) for the year in which the Effective Time occurs shall be apportioned as of the Effective Time between Seller and Buyer. For any year in which an apportionment is required, Buyer shall file all required reports and returns incident to these taxes assessed for the year in which the Effective Time occurs that are not paid by Seller as of the Closing Date. All taxes based on the production of Products shall be deemed attributable to the period during which such production occurred, and not to the period during which such taxes are assessed.

(b)       Sales and Other Transfer Taxes. The Purchase Price does not include any sales taxes or other transfer taxes imposed in connection with the sale of the Assets. Buyer shall pay any sales tax or other transfer tax, as well as any applicable conveyance, transfer and recording fee and real estate transfer stamps or taxes imposed on the transfer of the Assets pursuant to the Agreement. If Buyer is of the opinion that it is exempt from the payment of any such sales tax or transfer tax, Buyer shall furnish to Seller the appropriate tax exemption certificate.

(c)       Tax Proceedings. In the event Buyer receives notice of any examination, claim, adjustment or other proceeding relating to the liability for taxes with respect to any period prior to the Effective Time, Buyer shall notify Seller in writing within thirty (30) days of receiving notice thereof. The Parties shall cooperate with each other and with their respective Affiliates in the negotiations and settlement of any proceeding described in this Section 9.10.

(d)       Purchase Price Allocation. Buyer and Seller shall use commercially reasonable efforts to agree to an allocation of the amount properly treated as consideration for the Assets (or the property otherwise treated as being purchased hereunder) for U.S. federal income tax purposes, among such property in accordance with Section 1060 of the Code and the Treasury Regulations promulgated thereunder and, to the extent allowed under applicable U.S. federal income tax law, in a manner consistent with the Allocated Values and this Agreement, within thirty (30) days after the Closing Date (the “Tax Allocation”). In the event the Parties agree to a Tax Allocation, Buyer and Seller shall (i) use commercially reasonable efforts to update the Tax Allocation in accordance with Section 1060 of the Code following any adjustment to the Purchase Price pursuant to this Agreement, and (ii) report the purchase and sale of the Assets on all tax returns (including IRS Form 8594) consistently with the Tax Allocation and shall not take any position that is inconsistent therewith unless otherwise required by applicable law; provided, however, that no Party shall be unreasonably impeded in its ability and discretion to negotiate, compromise and/or settle any tax audit, claim or similar proceedings in connection with such allocation.

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Section 9.11 Material Contracts. After the Closing, Seller shall take all commercially reasonable and necessary steps (including the execution of any required documents) to cause Buyer to become a party to and/or a participant in all of the Material Contracts or to cause the counterparty(ies) to such Material Contracts to consent to the assignment of such Material Contracts to Buyer. To the extent that any such joinder or consent cannot be obtained, Seller will use its commercially reasonable efforts and take such actions as may be reasonably possible without violation or breach of any such Material Contract to effectively grant to Buyer the economic benefits of, and impose upon Buyer the economic burdens of such Material Contract.

ARTICLE X
TERMINATION OF AGREEMENT

Section 10.01 Termination. This Agreement and the transactions contemplated hereby may be terminated prior to the Closing as follows:

(a)       By Seller if any of the conditions set forth in Section 7.01 are not satisfied in all material respects or waived as of the Target Closing Date;

(b)       By Buyer if the conditions set forth in Section 7.02 are not satisfied in all material respects or waived as of the Target Closing Date;

(c)       By Seller if the Closing has not occurred by August 15, 2017 (provided that Seller is not at the time of such termination in material breach of any of its representations, warranties, or covenants under this Agreement);

(d)       By Buyer if the Closing has not occurred August 15, 2017 (provided that Buyer is not at the time of such termination in material breach of any of its representations, warranties, or covenants under this Agreement);

(e)       By Buyer or Seller if the aggregate of all Title Defects meeting the individual claim threshold set forth in Section 5.02(a), all timely asserted Adverse Environmental Conditions meeting the individual claim threshold set forth in Section 6.02(a), net of all Title Benefit Offsets as set forth in Section 5.03, the Allocated Value of all Properties affected by Casualty Loss, the Allocated Value of all Properties removed from the Assets at the Closing as a result of the Buyer’s exercise of its right to exclude certain Assets in accordance with Section 4.03, the Allocated Value of all Properties removed from the Assets at the Closing as a result of the exercise of preferential rights and the Allocated Value of all Properties that are Hard Consent Assets exceeds fifteen percent (15%) of the Purchase Price; or

(f)       At any time by the mutual written agreement of Buyer and Seller.

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Section 10.02 Liabilities upon Termination or Breach.

(a)       In the event that the Closing does not occur as a result of a Party exercising its right to terminate pursuant to Section 10.01, then except as set forth in Section 10.02(b), this Agreement shall become null and void and no Party shall have any further rights or obligations hereunder; provided that, the provisions of Section 12.02 (Expenses), Section 12.03 (Notices), Section 12.04 (Amendments; Waiver), Section 12.06 (Announcements), Section 12.07 (Governing Law; Venue), Section 12.09 (Parties in Interest) and this Section 10.02 shall survive any such termination.

(b)       If all of the conditions precedent to the obligations of Buyer hereunder have been met, the transactions contemplated hereby are not consummated on or before the Target Closing Date because of Buyer’s failure to perform any of its material obligations hereunder or Buyer’s breach of any representation herein, Seller has performed all of its material obligations hereunder and has not breached any of its representations herein, and Seller is ready, willing and able to close the transactions contemplated hereby, then Seller shall have the option to terminate this Agreement, in which case, Seller shall retain the Deposit, plus any interest accrued thereon, free of any claims by Buyer with respect thereto, as liquidated damages on account of Buyer’s failure to perform its obligations hereunder, which remedy shall be the sole and exclusive remedy available to Seller for Buyer’s failure to perform. Buyer and Seller acknowledge and agree that (i) Seller’s actual damages upon the event of such a termination are difficult to ascertain with any certainty, (ii) the Deposit, plus any interest accrued thereon, is a reasonable estimate of such actual damages and (iii) such liquidated damages do not constitute a penalty.

(c)       If all of the conditions precedent to the obligations of Seller hereunder have been met, the transactions contemplated hereby are not consummated on or before the Target Closing Date because of Seller’s failure to perform any of its material obligations hereunder or Seller’s breach of any representation herein, Buyer has performed all of its material obligations hereunder and has not breached any of its representations herein, and Buyer is ready, willing and able to close the transactions contemplated hereby, then Buyer shall have the option to (i) terminate this Agreement, in which case, within three (3) Business Days after the event giving rise to such termination, Seller shall return the Deposit, plus any interest accrued thereon, free of any claims by Seller with respect thereto, or (ii) seek specific performance.

(d)       If this Agreement is terminated for any reason other than as set forth in Section 10.02(b) or Section 10.02(c), then within three (3) Business Days after the event giving rise to such termination, Buyer shall be entitled to receive the Deposit, plus any interest accrued thereon, from Seller, free of any claims by Seller with respect thereto.

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ARTICLE XI
RESOLUTION OF CERTAIN TITLE AND ENVIRONMENTAL DISPUTES BY EXPERTS

Section 11.01 General. Any and all claims, disputes, controversies or other matters in question arising out of or relating to title issues or environmental issues (all of which are referred to herein as “Expert Disputes” which term shall not include any other disputes claims, disputes, controversies or other matters in question arising under this Agreement) shall be resolved in the manner prescribed by this ARTICLE XI.

Section 11.02 Dispute Resolution by Independent Expert. Seller or Buyer shall have the right, to the extent but only to the extent such right is created under other provisions of this Agreement, to submit Expert Disputes to an independent expert appointed in accordance with this Section 11.02 (each, an “Independent Expert”) with respect to such Expert Dispute. The Independent Expert shall be appointed by mutual agreement of the Parties from among candidates with experience and expertise in the area that is the subject of such Expert Dispute, and failing such agreement, such Independent Expert for such Expert Dispute shall be selected by the Houston office of the American Arbitration Association. Any Independent Expert appointed pursuant to this Agreement shall not have worked as an employee of or performed other material work for any Party or its Affiliates within the preceding five (5) year period or have any financial interest in the Expert Dispute or (except publicly traded securities with respect to either party or its Affiliates). The cost and expenses of an Independent Expert shall be paid fifty percent (50%) by Seller and fifty percent (50%) by Buyer. Seller and Buyer shall each present to the Independent Expert, with a simultaneous copy to the other Party, a single written statement of its position on the issue in question, together with a copy of this Agreement and any supporting material that such Party desires to furnish, not later than ten (10) Business Days after appointment of the Independent Expert. In making determinations hereunder, the Independent Expert shall be bound by the terms of this Agreement and, without any additional or supplemental submittals by either Party, may consider available legal and industry matters as in their opinion are necessary or appropriate to make a proper determination. Additionally, any Independent Expert may consult with and engage disinterested third parties to advise him. Within ninety (90) days following the submission of such written statements to the Independent Expert, the Independent Expert shall make a determination of the matter submitted based solely on the single written statement of each Party. The Independent Expert may not select a valuation for any matter that exceeds the higher valuation proposed by the Parties, or that is less than the lower valuation proposed by the Parties. The decision of the Independent Expert shall be in writing and conclusive and binding on the Parties and shall be enforceable against the Parties in any court of competent jurisdiction. The Independent Expert shall act as an expert for the limited purpose of determining the matter presented to it, shall not act as an arbitrator, and may not award damages, interest, costs, or penalties to either Party.

ARTICLE XII
MISCELLANEOUS

Section 12.01 Schedules and Exhibits. All schedules and exhibits to this Agreement are hereby incorporated by reference herein and constitute a part of this Agreement.

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Section 12.02 Expenses. All fees, costs and expenses incurred by Buyer or Seller in negotiating this Agreement or in consummating the transactions contemplated by this Agreement shall be paid by the Party incurring the same, including, without limitation, legal and accounting fees, costs and expenses.

Section 12.03 Notices. All notices and communications required or permitted under this Agreement shall be in writing and any communication or delivery hereunder shall be deemed to have been duly made when (a) personally delivered to the individual indicated below, (b) if delivered by facsimile transmission to the individual indicated below, then on the day of transmission if received during business hours or on the next Business Day after transmission if received after business hours, (c) if emailed to the individual indicated below, when the individual confirms receipt of the email and its attachments by return email, or (d) if mailed to the individual indicated below, when received. Addresses for all such notices and communication shall be as follows:

If to Seller:	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
with a copy to:	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	(■)
	AND
	(■)
	(■)
	(■)
	(■)
	(■)

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If to Buyer:	Carbon West Virginia Company, LLC
	1700 Broadway, Suite 1170
	Denver, Colorado  80290
	(■)
	(■)
	(■)
	(■)
with a copy to:	(■)
	(■)
	(■)
	(■)
	(■)

Any Party may, by written notice so delivered to the other Party, change the address or individual to which delivery shall thereafter be made.

Section 12.04 Amendments; Waiver. This Agreement may only be amended by a written instrument executed by all of the Parties. Any agreement on the part of a Party to any extension or waiver of any provision hereof shall be valid only if set forth in an instrument in writing signed on behalf of such Party. A waiver by a Party of the performance of any covenant, agreement, obligation, condition, representation or warranty shall not be construed as a waiver of any other covenant, agreement, obligation, condition, representation or warranty. A waiver by any Party of the performance of any act shall not constitute a waiver of the performance of any other act or an identical act required to be performed at a later time.

Section 12.05 Assignment. Neither Party may assign all or any portion of its rights or delegate all or any portion of its duties hereunder unless it continues to remain liable for the performance of its obligations hereunder and obtains the prior written consent of the other Party, which consent shall not be unreasonably withheld.

Section 12.06 Announcements. Except as may be required by applicable laws or the applicable rules and regulations of any governmental agency or stock exchange, neither Buyer nor Seller shall, prior to the Closing, issue any press release or other public disclosure concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other Party, which consent shall not be unreasonably withheld.

Section 12.07 Governing Law; Venue. This Agreement and the transactions contemplated hereby shall be construed in accordance with, and governed by, the laws of the State of Texas, without giving effect to its conflicts of law provisions. The Parties stipulate and agree to submit to the jurisdiction and venue of the United States District Court and the Texas State District Courts sitting in Harris County, Texas with respect to all disputes in any way relating to, arising under, connected with, or incident to this Agreement.

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Section 12.08 Entire Agreement. This Agreement (including the Exhibits hereto) constitutes the entire understanding among the Parties with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior agreements and understandings relating to such subject matter.

Section 12.09 Parties in Interest. This Agreement shall be binding upon, and shall inure to the benefit of, the Parties hereto, and their respective successors and assigns, and, except as expressly provided in the indemnity provisions hereof with respect to the Buyer Indemnified Parties and the Seller Indemnified Parties, nothing contained in this Agreement, express or implied, is intended to confer upon any other person or entity any benefits, rights or remedies.

Section 12.10 Further Assurances. After the Closing, Seller and Buyer shall execute, acknowledge and deliver or cause to be executed, acknowledged and delivered such instruments, and shall take such other action as may be necessary or advisable to carry out their obligations under this Agreement and under any document, certificate or other instrument delivered pursuant hereto.

Section 12.11 Severability. Invalidity of any provisions in this Agreement shall not affect the validity of this Agreement as a whole, and in case of such invalidity, this Agreement shall be construed as if the invalid provision has not been included herein.

Section 12.12 Headings; Terminology; Defined Terms. Titles and headings in this Agreement have been included solely for ease of reference and shall not be considered in interpretation or construction of this Agreement. All article, section, subsection, clause, schedule and exhibit references used in this Agreement are to articles, sections, subsections, clauses, schedules and exhibits to this Agreement unless otherwise specified. All schedules and exhibits attached to this Agreement constitute a part of this Agreement and are incorporated herein for all purposes. Unless the context of this Agreement clearly requires otherwise (a) the singular shall include the plural and the plural shall include the singular wherever and as often as may be appropriate, (b) the words “includes” or “including” shall mean “includes without limitation” and “including without limitation,” (c) the words “hereof,” “hereby,” “herein,” “hereunder” and similar terms in this Agreement shall refer to this Agreement as a whole and not any particular section or article in which such words appear and (d) any reference to a statute, regulation, or law shall include any amendment thereof or any successor thereto. All capitalized terms (including all terms included in ALL CAPS in any portion of this Agreement) shall have the meaning assigned thereto herein.

Section 12.13 Not to Be Construed against Drafter. Each Party has had an adequate opportunity to review each and every provision of this Agreement and to submit the same to legal counsel for review and advice. Based on the foregoing, the rule of construction, if any, that a contract be construed against the drafter shall not apply to interpretation or construction of this Agreement.

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Section 12.14 Indemnities and Conspicuousness of Provisions. Except as expressly provided otherwise in this Agreement, the release, defense, indemnification and hold harmless provisions provided for in this Agreement shall be applicable whether or not the claims, demands, suits, causes of action, losses, damages, liabilities, fines, penalties and costs (including attorneys’ fees and costs of litigation) in question arose solely or in part from the active, passive or concurrent negligence, strict liability, breach of duty (statutory or otherwise), violation of law, or other fault of any indemnified party, or from any pre-existing defect. The Parties agree that provisions of this Agreement in “ALL CAPS” or “bold” type satisfy any requirement of the “express negligence rule” and other requirement at law or in equity that provisions be conspicuously marked or highlighted.

Section 12.15 Counterparts of Assignment. The Special Warranty Deed in the form attached as Exhibit C, the Special Warranty Deed in the form attached as Exhibit D and the Assignment and Bill of Sale in the form attached as Exhibit E are intended to assign all of the Assets being assigned pursuant to this Agreement.

Section 12.16 Counterpart Execution. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument.

Section 12.17 Limited Participation of Operator. Operator is included as a Seller Party in this Agreement for the limited purpose of transferring any interest it has in the Assets, as described in Schedule 1.02(f). Subject to the provisions of Section 3.02 of this Agreement, Operator does not make any representations or warranties, either express or implied, and hereby expressly excludes same. The representations, warranties, covenants and agreements of each other Seller Party shall be unaffected by the limitations included herein.

Section 12.18 Non-Recourse to Non-Parties. No past, present or future director, officer, employee, incorporator, member, manager, partner, stockholder, Affiliate, agent, attorney or other representative of a Party or any of its Affiliates shall have any liability for any obligations or liabilities of such Party under this Agreement or for any claim based on or in respect of this Agreement.

Section 12.19 Definitions.

(a)       Certain Definitions. The following terms, as used herein, have the meanings set forth below:

(i)       “Affiliate” means, with respect to any specified person, any other person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such specified person.  For purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise. 

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(ii)       “Asset Taxes” shall mean ad valorem, property, excise, severance, production or similar taxes (including any interest, fine, penalty or additions to tax imposed by a Governmental Authority in connection with such taxes) based upon operation or ownership of the Assets or the production of Products therefrom but excluding, for the avoidance of doubt, (a) income, capital gains, franchise taxes and similar taxes, and (b) sales taxes.

(iii)       “Business Day” means a day, other than Saturday or Sunday, on which commercial banks are open for commercial business with the public in Houston, Texas.

(iv)       “Confidentiality Agreement” means that certain Confidentiality Agreement dated March 14, 2017 between EnergyNet, Inc. and Carbon Natural Gas Company, an Affiliate of Buyer.

(v)       “Escrow Agent” means Wells Fargo Bank, National Association.

(vi)       “Escrow Agreement” means that certain agreement by and among Buyer, Seller and Escrow Agent of even date herewith.

(vii)       “Gas Imbalance Adjustment” means the positive or negative amount, if any, equal to (i)(A) all Gas Imbalances owed to Seller minus (B) all Gas Imbalances owed by Seller, in each case, existing with respect to the Assets at the Effective Time (expressed in Mcf), multiplied by (ii) the Columbia Gas Appalachia index as published in the first issue of the month of the Inside FERC Gas Market Report.

(viii)       “Governmental Authority” means any federal, state, local, municipal, tribal or other government, any governmental, regulatory or administrative agency, commission, body or other authority exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power, other public or quasi-public entity (e.g., utility), or any court or government tribunal.

(ix)       “Net Acres” means, as computed separately with respect to each Property, (a) the number of gross acres in the lands covered by such leasehold interest, multiplied by (b) lessor’s interest in the Products covered by such Property, multiplied by (c) the Seller’s undivided interest in such Property, provided that if items (b) and/or (c) vary as to different areas of such lands covered by such leasehold interests, a separate calculation shall be done for each such area.

(x)       “Net Revenue Interest” means the percentage share in all Products produced from a Lease after the satisfaction of applicable lessor royalties, overriding royalties, oil payments and other payments out of or measured by the production of Products from or under such Lease.

(xi)       “NPORRI” means any net profits overriding royalty interest or similar interest burdening the Assets owned by the NPORRI Holders including, without limitation, that certain Net Profits Overriding Royalty Interest created by (i) Conveyance of Net Profits Overriding Royalty Interest dated January 1, 2012 from (■) to (■) the recording schedule for which is attached as Schedule 12.19(xi), and (ii) Conveyance of Net Profits Overriding Royalty Interest dated January 1, 2012 from (■) to (■) the recording schedule for which is attached as Schedule 12.19(xi).

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(xii)       “NPORRI Holder” means (■)., both Delaware limited partnerships, whose addresses are (■)

(xiii)       “Working Interest” means the percentage interest in a Lease and all rights and obligations of every kind and character pertinent thereto or arising therefrom, without regard to any valid lessor royalties, overriding royalties and other burdens against production, insofar as said interest in such Lease is burdened with the obligation to bear and pay the cost of exploration, development and operation.

(b)       Other Definitions. The following terms shall have the meanings ascribed to them in the body of this Agreement as set forth below:

Term	Section
Accounting Referee	§9.01
Adverse Environmental Condition	§6.01
Agreement	Preamble
Allocated Value	§2.01
Assets	§1.02
Assumed Obligations	§9.04(a)
Benefit Notice	§5.03
Audit Period	§9.01
Buyer	Preamble
Buyer Indemnified Parties	§9.05(b)
Casualty Loss	§4.11
Claim Notice	§9.07
Closing .	§8.01
Closing Date	§8.01
Continuing Employees	§4.08(c)
Contracts	§1.02(h)
Defect Notice	§5.02(b)
Easements	§1.02(g)
Deposit	§2.02
Effective Time	§1.04
Environmental Claims	§9.04(a)
Environmental Law	§6.01
Excluded Assets	§1.03
Execution Date	Preamble

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Expert Disputes	§11.01
Final Settlement Date	§9.01
Final Settlement Statement	§9.01
Gas Imbalance	§3.01(q)
Good and Defensible Title	§5.01(a)
Hard Consent Asset	§4.10(e)
Indemnified Party	§9.07
Indemnifying Party	§9.07
Independent Expert	§11.02
Lands	§1.02(b)
Leases	§1.02(b)
Lender Liens	§8.03(i)
Material Adverse Effect	§3.01(bb)
Material Contracts	§3.01(k)
Mineral Acres	§ 1.02(a)
Offices and Equipment	§1.02(f)
Operator	Preamble
Ownership Share	Recitals
Parties	Preamble
Party	Preamble
Permits	§1.02(k)
Permitted Encumbrances	§5.01(b)
Phase I	§4.03
Phase II	§4.03
Preliminary Purchase Price	§2.03(c)
Preliminary Settlement Statement	§2.03(c)
Production	§1.02(e)
Products	§1.02(e)
Property	§2.01
Properties	§2.01
Purchase Price	§2.01
Real and Personal Property Taxes	§9.10(a)
Records	§1.02(p)
Relevant Employees	§4.08(a)
Second Closing	§4.10(c)
Seller Indemnified Parties	§9.05(a)
Seller Party	Preamble
Seller Party’s knowledge	§3.01(aa)
Suspense Amounts	§3.01(r)
Target Closing Date	§8.01
Tax Allocation	§ 9.10(d)
Title Benefit	§ 5.01(d)
Title Benefit Offset	§5.03
Title Defect	§5.01(c)
Units	§1.02(c)
Wells	§1.02(d)

[Signature Page Follows]

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IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be duly executed as of the date first written above.

SELLER:
(■)
(■)
(■)
By:	(■)
	(■)
By:	(■)
	(■)
By:
	(■)
	(■)
(■)
By:
	(■)
	(■)
BUYER:
CARBON WEST VIRGINIA COMPANY, LLC
By:	Carbon Natural Gas Company,
	Its Manager
By:
	Patrick R. McDonald,
	Chief Executive Officer

Signature Page to (■) Purchase and Sale Agreement

The following Exhibits and Schedules have been omitted. The Company agrees to furnish supplementally a copy of the omitted Exhibits to the Commission upon request.

EXHIBIT A OWNERSHIP SHARES

EXHIBIT B FORM OF ESCROW AGREEMENT

EXHIBIT C FORM OF SPECIAL WARRANTY DEED – MINERAL ACRES

EXHIBIT D FORM OF SPECIAL WARRANTY DEED – SURFACE AND IMPROVEMENTS

EXHIBIT E FORM OF ASSIGNMENT AND BILL OF SALE

Schedule 1.02(a)	Mineral Acres
Schedule 1.02(b)	Leases
Schedule 1.02(d)	Wells
Schedule 1.02(f-1)	Office
Schedule 1.02(f-2)	Equipment
Schedule 1.02(g-1)	Easements
Schedule 1.02(g-2)	FCC Licenses
Schedule 1.02(h)	Contracts
Schedule 1.02(k)	Permits
Schedule 1.03(m)	Excluded Equipment and Vehicles
Schedule 3.01(f)	Legal Proceedings
Schedule 3.01(i)	Compliance with Environmental Laws
Schedule 3.01(j)	Payout Balances
Schedule 3.01(k)	Material Contracts
Schedule 3.01(n)	Preferential Rights
Schedule 3.01(o)	Outstanding Capital Expenditures
Schedule 3.01(p)	Consents
Schedule 3.01 (q)	Gas Imbalances
Schedule 3.01(r)	Suspense Amounts
Schedule 3.01(s)	Coal Mining Activity
Schedule 3.01(aa)	Seller Party Persons
Schedule 4.06	Bonds, Letters of Credit and Guarantees
Schedule 5.01(a-1)	Allocated Values
Schedule 5.01(a-2)	Allocated Values – Deep Acreage
Schedule 12.19(xi)	NPORRI Recording Schedule

EX-10.1

Exhibit 10.1

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

OF

CARBON APPALACHIAN COMPANY, LLC

(A Delaware limited liability company)

Dated as of August 15, 2017

THE INTERESTS REPRESENTED BY THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY OTHER APPLICABLE FEDERAL OR STATE SECURITIES LAWS. SUCH INTERESTS MAY NOT BE SOLD, ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED AT ANY TIME WITHOUT EFFECTIVE REGISTRATION UNDER SUCH ACT AND LAWS OR EXEMPTION THEREFROM, AND COMPLIANCE WITH THE OTHER RESTRICTIONS ON TRANSFER SET FORTH HEREIN.

TABLE OF CONTENTS

	Page
ARTICLE I  GENERAL	1
Section 1.1   Formation and Organization	1
Section 1.2   Name	2
Section 1.3   Principal Office	2
Section 1.4   Registered Office and Registered Agent	2
Section 1.5   Term	2
Section 1.6   Purposes	2
Section 1.7   Qualification in Other Jurisdictions	2
Section 1.8   Title to Property	3
Section 1.9   Payments of Individual Obligations	3
ARTICLE II  MANAGEMENT	3
Section 2.1   Management of the Company by the Board of Directors	3
Section 2.2   Election of Directors	5
Section 2.3   Duties of the Board of Directors	6
Section 2.4   Approval of the Board of Directors	7
Section 2.5   Services Agreement	11
Section 2.6   Performance of Duties; Liability of Manager and Officers	11
Section 2.7   Payment of Certain General and Administrative Expenses of Carbon	11
Section 2.8   Budget	12
Section 2.9   Conflict Activities	13
Section 2.10   Fair Market Value	14
ARTICLE III  MEMBERS	15
Section 3.1   Members, Interests and Unit Classes; Voting Rights	15
Section 3.2   No Liability for Company Obligations	16
Section 3.3   Meeting of Members	17
Section 3.4   Duties of Directors and Members	18
Section 3.5   Other Investments of Member Related Parties; Waiver of Conflicts of Interest and Negation of Duties and Obligations	20
Section 3.6   Carbon Non-Compete	21
Section 3.7   No Resignation or Withdrawal by Members	22
Section 3.8   Certain Representations and Warranties of the Members	22
ARTICLE IV  CAPITAL	24
Section 4.1   Capital Contributions	24
Section 4.2   Key Man Event	26
Section 4.3   Capital Accounts	27
Section 4.4   Preemptive Rights	28
Section 4.5   Unit Certificates	28
Section 4.6   Defaulting Members	29
Section 4.7   Optional Contribution	30
Section 4.8   No Return of Capital Contributions	30

i

	Page
ARTICLE V  ALLOCATIONS; DISTRIBUTIONS	31
Section 5.1   Allocations of Net Income or Net Loss	31
Section 5.2   Special Allocations	31
Section 5.3   Allocations of Taxable Income or Loss	33
Section 5.4   Distributions	34
Section 5.5   Tax Distributions	36
Section 5.6   Liability of Members; Return of Class A Distributions and Class C Distributions	36
Section 5.7   Return of Class B Distributions	37
ARTICLE VI  TRANSFER; WITHDRAWAL; SALE RIGHTS; EXIT EVENTS	37
Section 6.1   Transfers	37
Section 6.2   Drag-Along Rights	38
Section 6.3   Tag-Along Rights	41
Section 6.4   Indirect Transfer	43
Section 6.5   Liquidity Event	45
Section 6.6   Buy/Sell Rights	48
Section 6.7   Assumption of Assignee	50
Section 6.8   Allocations to Member’s Transferee	51
Section 6.9   Internal Restructure	51
Section 6.10   Other Assignment Void	52
Section 6.11   Allocation and Distribution of Consideration	52
Section 6.12   Yorktown-Carbon Assignment	54
ARTICLE VII  DISSOLUTION; WINDING UP	54
Section 7.1   Dissolution	54
Section 7.2   Winding Up	55
Section 7.3   Application and Distribution of Proceeds of Liquidation	55
Section 7.4   Certificate of Cancellation	55
ARTICLE VIII  LIABILITY AND INDEMNIFICATION	56
Section 8.1   No Liability for Company Debts	56
Section 8.2   Indemnification	56
Section 8.3   Advance Payment and Appearance as a Witness	56
Section 8.4   Insurance	57
Section 8.5   Non-exclusivity of Rights; Company as Indemnitor of First Resort	57
Section 8.6   Savings Clause	57
ARTICLE IX  CERTAIN TAX MATTERS	58
Section 9.1   Partnership Classification	58
Section 9.2   Tax Returns and Tax Information	58
Section 9.3   Tax Elections	58
Section 9.4   Election by Members	58
Section 9.5   Tax Matters Representative	58
Section 9.6   Withholding	59

ii

	Page
ARTICLE X  BOOKS AND RECORDS; REPORTS	59
Section 10.1   Maintenance of and Access to Books and Records	59
Section 10.2   Bank Accounts	59
Section 10.3   Reports	60
Section 10.4   Fiscal Year	61
ARTICLE XI  DEFINITIONS	61
Section 11.1   Definitions	61
Section 11.2   Other Defined Terms	74
Section 11.3   Construction	76
ARTICLE XII  MISCELLANEOUS	76
Section 12.1   Notices	76
Section 12.2   Confidentiality	76
Section 12.3   Expenses	77
Section 12.4   Entire Agreement	77
Section 12.5   Waiver or Consent	78
Section 12.6   Amendment	78
Section 12.7   Choice of Law	78
Section 12.8   Public Announcement	78
Section 12.9   Availability of Equitable Relief	79
Section 12.10   Binding Agreement	79
Section 12.11   Benefit of Agreement	79
Section 12.12   Further Assurances	79
Section 12.13   Counterparts	79

EXHIBITS

Exhibit A	–	Members	A-1
Exhibit B	–	Board of Directors	B-1
Exhibit C	–	Insurance	C-1
Exhibit D	–	AMI	D-1
Exhibit E	–	Initial Budget	E-1

iii

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

OF

CARBON APPALACHIAN COMPANY, LLC

This AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this “Agreement”) of Carbon Appalachian Company, LLC (the “Company”), dated as of August 15, 2017 (the “Effective Date”), is entered into by and among Carbon Natural Gas Company, a Delaware corporation (“Carbon”), Yorktown Energy Partners XI, L.P., a Delaware limited partnership (“Yorktown”), Old Ironsides Fund II-A Portfolio Holding Company, LLC, a Delaware limited liability company (“OIE Fund II-A”) and Old Ironsides Fund II-B Portfolio Holding Company, LLC, a Delaware limited liability company (“OIE Fund II-B” and, together with OIE Fund II-A, “Old Ironsides”). Capitalized terms used herein without definition shall have the respective meanings assigned to such terms in Article XI.

W I T N E S S E T H:

WHEREAS, the Members entered into the Prior Agreement as of February 23, 2017;

WHEREAS, the Members desire to amend and restate the Prior Agreement to reflect (i) $14,000,000 of additional Capital Contributions by the Class A Members to the Company on the Effective Date, (ii) the adjustment of the Capital Commitments of the Class A Members, (iii) the modification of certain other rights and obligations of the Class A Members and (iv) the other amendments set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises of the Members, and of other good and valuable mutual consideration, the receipt and sufficiency of which are hereby acknowledged, the Members agree on the following terms and conditions:

ARTICLE I
GENERAL

Section 1.1 Formation and Organization.

(a) The Company has been formed as a Delaware limited liability company by the filing of the Certificate of Formation of the Company (the “Certificate of Formation”) in the office of the Secretary of State of the State of Delaware under and pursuant to the Act.

(b) The Members hereby agree that during the term of the Company, the rights and obligations of the Members with respect to the Company will be determined in accordance with the terms and provisions of this Agreement and, except where the Act provides that such rights and obligations specified in the Act shall apply “unless otherwise provided in a limited liability company agreement” or words of similar effect and such rights and obligations are set forth in this Agreement, the Act. Notwithstanding anything herein to the contrary, Section 18-210 of the Act, entitled Contractual Appraisal Rights, shall not apply or be incorporated into this Agreement.

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Section 1.2 Name. The name of the Company shall be “Carbon Appalachian Company, LLC.” The business of the Company shall be conducted under the name “Carbon Appalachian Company, LLC” or such other name or names as the Board may determine from time to time.

Section 1.3 Principal Office. The principal office of the Company shall be located at 1700 Broadway, Suite 1170, Denver, Colorado 80290, or such other place as the Board shall determine from time to time.

Section 1.4 Registered Office and Registered Agent. The registered office of the Company required by law to be maintained in the State of Delaware shall be the initial registered office named in the Certificate of Formation or such other office (which need not be a place of business of the Company) as the Board may designate from time to time in the manner provided by law. The registered agent of the Company in the State of Delaware shall be the initial registered agent named in the Certificate of Formation or such other person or persons as the Board may designate from time to time.

Section 1.5 Term. The existence of the Company commenced as of the date upon which the Certificate of Formation was filed in the office of the Secretary of State of the State of Delaware, and the Company shall continue in existence until it is dissolved in accordance with the provisions of this Agreement, and to the extent provided under the Act, until its affairs are wound up and the Company is terminated in accordance with the provisions of this Agreement and the Act.

Section 1.6 Purposes. The purposes of the Company, whether carried out in its own name or through its Subsidiaries, are as follows:

(a) to engage in the evaluation, acquisition, exploration, drilling, development and production of or for oil, gas and other hydrocarbons within the AMI;

(b) to engage in all other necessary and appropriate activities incidental to the foregoing business that may be lawfully conducted by a limited liability company under the Act; and

(c) to engage in or perform any and all activities otherwise authorized by the Board in accordance with the terms of this Agreement.

Section 1.7 Qualification in Other Jurisdictions. The Company shall execute and cause to be filed original or amended articles and/or certificates and shall take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Company as a limited liability company or similar type of entity under the laws of any other jurisdictions in which the Company engages in business. At the request of the Manager, each Member agrees to execute, acknowledge, swear to, and deliver all certificates and other instruments conforming with this Agreement that are necessary or appropriate to qualify, continue, and terminate the Company as a foreign limited liability company in all such jurisdictions in which the Company may conduct business.

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Section 1.8 Title to Property. All property owned by the Company shall be owned by the Company as an entity or by its Subsidiaries and no Member shall have any ownership interest in such property in its individual capacity, and each Member’s Interests in the Company shall be personal property for all purposes. The Company shall hold title to all of its property in the name of the Company or one or more of its Subsidiaries, not in the name of any Member.

Section 1.9 Payments of Individual Obligations. The Company’s credit and assets shall be used solely for the benefit of the Company, and no asset of the Company shall be Transferred or encumbered for, or in payment of, any individual obligation of any Member.

ARTICLE II
MANAGEMENT

Section 2.1 Management of the Company by the Board of Directors.

(a) Management by the Board of Directors. Subject to the terms hereof and except as the Manager and/or the other officers are permitted hereby, the business, property and affairs of the Company shall be managed and all powers of the Company shall be exercised by or under the direction of a board of directors (the “Board of Directors” or the “Board”). The members of the Board of Directors as of the Effective Date shall be those Persons set forth on Exhibit B hereto. Each member of the Board of Directors is referred to herein as a “Director.”

(b) Place of Meetings. Meetings of the Board of Directors, regular or special, will be held at such places, either within or without the State of Delaware, as may be specified by the person calling the meeting. In the absence of specific designation, meetings of the Board of Directors shall be held at the principal office of the Company.

(c) Regular Meetings. The Board of Directors shall meet on a quarterly basis at such times and places as may be fixed from time to time by the Board and communicated to all Directors. Any and all business may be transacted at any regular meeting.

(d) Special Meetings. Special meetings of the Board of Directors shall be held at any time upon the call of any Director or the Manager. If the Manager desires to take or have authorized any action that requires approval of the Board, the Manager shall request that the Board of Directors take action with respect thereto by so notifying the Board of Directors in writing and describing in such notification (i) the nature of the transaction or business and (ii) the proposed course of action recommended by the Manager. The Manager shall deliver the notification referred to above, together with any available information that is reasonably necessary to enable the Board of Directors to consider the advisability of the proposed course of action, to the Board of Directors a reasonable period of time prior to the dates by which action is to be taken as specified therein. Notice of any such special meeting shall be in writing and shall be given personally or by facsimile or Electronic Transmission to each member of the Board of Directors at least three Business Days prior to the date of the meeting.

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(e) Attendance at and Notice of Meetings. Attendance at a meeting of the Board of Directors shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened, not authorized by the Agreement or impermissible as a matter of Law.

(f) Quorum. A quorum shall exist when a number of Directors representing at least a Majority of the Voting Power is present in person or by proxy. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. At any such adjourned meeting any business may be transacted that might have been transacted at the meeting as originally convened.

(g) Voting. For purposes of any vote, approval, consent or other action to be taken by the Board, each Director shall possess one (1) vote. As used in this Agreement, a “Majority of the Voting Power” means the affirmative votes of those Directors whose aggregate votes equal or exceed a majority of the number of Directors comprising the full Board. As used in this Agreement, a “Supermajority of the Voting Power” means the affirmative votes of those Directors whose aggregate votes equal or exceed a majority of the number of Directors comprising the full Board, provided that at least one (1) such vote is the affirmative vote of a Carbon Designee for so long as Carbon is entitled to designate Directors and is not a Defaulting Member.

(h) Proxy. Each Director entitled to vote at a meeting of the Board of Directors may authorize another Director to act for such Director by proxy, but no such proxy shall be voted or acted upon after 11 months from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in an Interest itself or an interest in the Company generally.

(i) Action by the Board of Directors Without a Meeting. Action required or permitted to be taken at a meeting of Directors may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by at least a Majority of the Voting Power (if the action requires approval of a Majority of the Voting Power) or signed by at least a Supermajority of the Voting Power (if the action requires approval of a Supermajority of the Voting Power). Action taken under this Section 2.1(i) is effective when the requisite number of Directors have signed the consent, unless the consent specifies a different effective date. The Board of Directors shall promptly provide a copy of such adopted written consent to all Directors.

(j) Telephonic Meetings. The Board of Directors may hold meetings by means of conference telephone or similar communications equipment by means of which all of the Directors participating in the meeting can hear each other, and participation in such meeting shall constitute attendance and presence in person at such meeting.

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(k) Minutes. All decisions and resolutions of the Board of Directors shall be reported in the minutes of its meetings, which shall state the date, time and place of the meeting (or the date of the written consent in the case of a consent executed in lieu of a meeting), the persons present at the meeting, the resolutions put to a vote (or the subject of a written consent) and the results of such voting (or written consent). The minutes of all meetings of the Board of Directors shall be circulated to all Directors as soon as practical after each meeting and shall be kept at the principal office of the Company.

(l) Additional Information. Upon request from time to time by any Director, the Manager or other officer shall promptly provide to such Director any and all documents and information requested by such Director relating to the business, operations, prospects, properties, liabilities, financial condition or results of operations of the Company, including (i) the Records of the Company, (ii) any contracts or agreements to which the Company is a party and (iii) documents and information relating to or evidencing any claim or liability to which the Company or its assets are subject.

Section 2.2 Election of Directors.

(a) Qualifications. Each Director shall be a natural person. A Director need not be a resident of the State of Delaware, a Member or an officer of the Company.

(b) Number. The Board of Directors shall be comprised of four (4) Directors and the Directors shall be the persons whose names are set forth on Exhibit B attached hereto. Each Director shall hold office until a successor shall have been designated in accordance with the terms of this Agreement. The number of Directors may be increased or decreased from time to time by a Supermajority of the Voting Power. Upon the removal of any Director pursuant to Section 2.2(e) or mandatory resignation pursuant to Section 2.2(g), the number of Directors shall be automatically reduced.

(c) Designees.

(i) Old Ironsides Designees. Old Ironsides shall be entitled to appoint three (3) persons to serve on the Board (each, an “Old Ironsides Designee”). The current Old Ironsides Designees are identified on Exhibit B attached hereto.

(ii) Carbon Designee. Carbon shall be entitled to appoint one (1) person to serve on the Board (“Carbon Designee”). The current Carbon Designee is identified on Exhibit B attached hereto.

(iii) The right of Old Ironsides to appoint Directors is transferable in whole (and not in part), and may be transferred by such Member to any transferee of such Member’s Class A Units to the extent such Transfer of Class A Units is permitted pursuant to Section 6.1, provided such transferee (after giving effect to such Transfer) holds twenty percent (20%) or more of the outstanding Class A Units. The right of Carbon to appoint Directors is not transferable.

(iv) If Old Ironsides, or any Member to which such Member has transferred rights to appoint Directors, shall at any time own less than twenty percent (20%) of the outstanding Class A Units, such Member shall no longer be entitled to appoint any Directors, all of its appointed Directors shall be deemed to have concurrently resigned as a Director of the Company and all references and provisions in this Agreement requiring the vote of or granting rights to any Directors appointed by such Member shall be inapplicable and disregarded, in each case with no further action required by any such Director, the Company or any other Member.

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(d) Vacancies. If any member of the Board of Directors appointed by a party (the “Designating Party”) pursuant to Section 2.2(c) (each, a “Board of Directors Designee”) shall cease to serve as a member of the Board of Directors for any reason, the vacancy resulting thereby shall be filled by another individual to be appointed by the Designating Party.

(e) Removal. No members of the Board of Directors shall be removed from office without the consent of the applicable Designating Party; provided, however, that if a party is no longer entitled to appoint a Board of Directors Designee or Designees pursuant to Section 2.2(c), the members of the Board of Directors other than those appointed by such party shall be entitled to remove the Board of Directors Designee or Designees appointed by such party with or without cause. Any member of the Board of Directors may be removed from office at any time, with or without cause, if the Designating Party that appointed such Director delivers to the Board of Directors a written notice requesting the removal of such member of the Board of Directors.

(f) Resignation. A Director may resign from the Board of Directors at any time by giving written notice to the Company. Such resignation shall take effect three Business Days following receipt of that notice or at such later time as shall be specified in the notice. Unless otherwise specified in the notice, the acceptance of a resignation shall not be necessary to make it effective.

(g) Mandatory Resignation. Unless otherwise approved by the Designating Party who appointed such Director, if any Director who is an Affiliate of any Member ceases to be an Affiliate of such Member or such Member ceases to be a Member of the Company for any reason, such Director shall be deemed to have immediately resigned as a Director and shall not be entitled to be re-appointed as a Director.

(h) Compensation. No Director is entitled to remuneration for services rendered or goods provided to the Company in his or her capacity as a Director.

Section 2.3 Duties of the Board of Directors.

(a) To the fullest extent permitted by the Act, a person, in performing his duties and obligations as a Director under this Agreement, shall be entitled to act or omit to act at the direction of the Member, if any, that designated such person to serve on the Board of Directors, considering only such factors, including the separate interests of the Designating Party, as such Director or Designating Party chooses to consider, and any action of such Person or failure to act, taken or omitted in good faith reliance on the foregoing provisions shall not, as between the Company and any other Member, on the one hand, and such Person or Designating Party, on the other hand, constitute a breach of any duty (including any fiduciary or other similar duty, to the extent such exist under the Act or any other applicable Law) on the part of such Person or Member to the Company or any other Director or Member of the Company.

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(b) The Members (in their own names and in the name and on behalf of the Company) hereby:

(i) agree that (A) the terms of this Section 2.3, to the extent that they modify or limit a duty or other obligation, if any, that a Director may have to the Company or any Member under the Act or other applicable Law, are reasonable in form, scope and content; and (B) the terms of this Section 2.3 shall control to the fullest extent possible if it is in conflict with a duty, if any, that a Director may have to the Company or any Member, under the Act or any other applicable Law; and

(ii) waive to the fullest extent permitted by the Act, any duty (including any fiduciary duty) or other obligation, if any, that a Director may have to the Company or a Member, pursuant to the Act or any other applicable law.

(c) Each Member (in its own name and in the name and on behalf of the Company), acknowledges, affirms and agrees that (i) the Member would not be willing to make an investment in the Company, and no person designated by such Member to serve on the Board of Directors would be willing to so serve, in the absence of this Section 2.3, and (ii) it has reviewed and understands the provisions of Section 18-1101(c) of the Act.

Section 2.4 Approval of the Board of Directors. Except for those matters requiring approval of a Supermajority of the Voting Power pursuant to Section 2.4(b), approval by a Majority of the Voting Power shall be the act and approval of the Board.

(a) Majority of the Voting Power. Notwithstanding anything to the contrary contained in this Agreement, but subject to Section 2.4(b), the Company shall not take (or, with respect to any Subsidiary of the Company, approve or cause to occur) any of the following actions without the approval of the Majority of the Voting Power:

(i) establish and maintain any Budget or amend a Budget in any material respect, which amendment for the purposes of this provision means (A) the modification or reallocation of (I) the aggregate amount provided in the Budget by more than five percent (5%), or (II) any particular line item of the Budget by more than ten percent (10%), or (B) making expenditures for any proposed Project not currently in the Budget requiring capital expenditures in excess of $1,000,000 (any deviation from the Budget not in excess of the thresholds described in the foregoing clauses (A) or (B), a “Permitted Variance”);

(ii) incur any expenditure or series of related expenditures not otherwise a part of an approved Budget, except any expenditure or series of related expenditures (x) as required under Section 2.7, (y) as permitted under Section 2.8 or (z) that constitute a Permitted Variance;

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(iii) sell, transfer, farm out or otherwise dispose of (directly or indirectly) any property or assets of the Company (including, without limitation, any of its Subsidiaries) having a value in excess of $1,000,000;

(iv) except in accordance with a hedge policy or guideline approved by a Majority of the Voting Power, enter into or become obligated under any swap, collar, floor, cap or other derivative contract or any option, forward sale, exchange-traded contract or other hedging contract with respect to interest rates or commodity prices or basis differentials;

(v) enter into any marketing arrangements or commitments for midstream services, other than such agreements or commitments that have a term of 180 days or less;

(vi) amend or modify, or compromise or waive any rights under, or exercise any rights of the Company or any Subsidiary of the Company to terminate, any operating agreement, development agreement, operator agreement or similar agreement to which the Company or any of its Subsidiaries is a party or their assets are bound;

(vii) except consistent with the then current Budget, elect or make a determination to consent to or elect to participate with respect to any new well or any Drilling and Completion Activities or other material operation (including any re-entry, sidetracking or recompletion) with respect to any well under the Participation Agreement, the Primary JOA, or any other operating, participation or similar agreement to which the Company or any of its Subsidiaries is a party or their assets are bound;

(viii) elect to exercise tag-along rights or preferential rights to purchase under any operating agreement, participation agreement or similar agreement;

(ix) amend, modify or supplement, or waive any rights under, or exercise any rights of the Company or any Subsidiary of the Company to terminate, the Participation Agreement, the Primary JOA or the Contract Operating Agreement;

(x) reduce the coverage or amount of coverage for insurance as reflected on Exhibit C;

(xi) authorize the issuance of or issue any additional Units or other Interests of the Company (other than pursuant to the terms of this Agreement), and any amendment to this Agreement to reflect the creation of such Units if of an additional or different classes or series of Units;

(xii) subject to Section 3.1(b) and Section 3.1(c), authorize the admission of any new Member to the Company;

(xiii) effect any change (whether by conversion, recapitalization, Internal Restructure or otherwise) in the legal form of the Company from a limited liability company to any other type of legal entity;

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(xiv) except as provided for in a Budget, borrow any money or otherwise incur, guarantee or otherwise become liable for any Indebtedness;

(xv) mortgage, pledge, assign in trust or otherwise encumber any property or assets of the Company or any of its Subsidiaries, or assign any monies owed or to be owed to the Company or any of its Subsidiaries, except for customary Liens contained in or arising under operating or similar agreements executed by or binding on the Company or any of its Subsidiaries or to secure Indebtedness;

(xvi) initiate, compromise or settle any lawsuit, administrative matter or other dispute where the amount the Company or any Subsidiary of the Company may recover or might be obligated to pay, as applicable, is in excess of $100,000, or to repair or replace property or assets of the Company or any Subsidiary of the Company damaged or destroyed as a result of an accident or other occurrence when the Company’s or such Subsidiary’s share of the costs of repair or replacement (either individually or in the aggregate, but net of insurance proceeds) is in excess of $50,000;

(xvii) subject to Section 4.2(c), exercise the rights of the Company under the Services Agreement to terminate the Services Agreement or, at any time after the termination of the Services Agreement, to remove any Manager or designate any Person other than Carbon as Manager;

(xviii) voluntarily file a petition in bankruptcy for the Company, make an assignment for the benefit of creditors of the Company, file a petition or answer seeking, consenting to or acquiescing in any reorganization, arrangement, readjustment, liquidation, dissolution or similar relief with respect to the Company under any statute, law or regulation or take any action seeking, consenting to or acquiescing in the appointment of a trustee, receiver or liquidator of the Company or any substantial part of the properties and assets of the Company;

(xix) liquidate or dissolve the Company or any of its Subsidiaries;

(xx) change in the number of Directors comprising the full Board;

(xxi) approve a Capital Call (or issue a Capital Call Notice);

(xxii) approve of a Transfer of Interests by Carbon or Yorktown pursuant to Section 6.1(a)(i), other than a Yorktown-Carbon Assignment;

(xxiii) enter into any contract providing for (or committing to provide for), or delegating authority to any Person (including any subcommittee of the Board for) decisions on, any of the foregoing transactions or matters, or the delegation of authority to any Person to approve any of the foregoing transactions or matters;

(xxiv) make (A) any determination of Available Cash or (B) any distributions to the Members pursuant to Section 5.4 or Section 5.5;

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(xxv) select, engage or dismiss the Company’s independent certified public accountants, which accounting firm as of the Effective Date is EKS&H LLLP;

(xxvi)  authorize or permit the Company to form any Subsidiary (other than OpCo);

(xxvii) approve or consummate any acquisition of assets by the Company or any of its Subsidiaries or series of such acquisitions which individually or in the aggregate exceeds $1,000,000 in any six-month period, or approve any investment in or acquisition of any ownership interest in Restricted Interest offered by Carbon to the Company;

(xxviii) set or adjust the compensation or benefits of any manager, officer or employee of the Company; or

(xxix) take any action, authorize or approve, or enter into any binding agreement with respect to or otherwise commit to do any of the foregoing.

(b) Supermajority of the Voting Power. Notwithstanding anything to the contrary contained in this Agreement, the Company shall not take (or, with respect to any Subsidiary of the Company, approve or cause to occur) any of the following actions without the approval of the Supermajority of the Voting Power:

(i) make any distributions or other payments to the Members other than in accordance with the terms of this Agreement and the Services Agreement;

(ii) redeem or repurchase any Units or other Interest;

(iii) engage in any activities or make any investment other than as permitted under Section 1.6(a) and Section 1.6(b), including without limitation any activity authorized pursuant to Section 1.6(c), or otherwise take any action outside of the Company’s purpose as set forth in Section 1.6(a) and Section 1.6(b);

(iv) increase any Member’s Capital Commitment (subject to the consent of any Member whose Capital Commitment is increased);

(v) engage in any transactions with any Member, Director, officer, employee or other Affiliate of the Company, or their respective Affiliates, except (A) pursuant to a written employment agreement with such person, (B) this Agreement, (C) the Participation Agreement; (D) the Management Services Agreement; (E) the Contract Operating Agreement, (F) for reimbursement of reasonable business expenses of employees or contractors incurred in the ordinary course of the Company’s business, and (G) for payment of a portion of Carbon’s general and administrative expenses in accordance with Section 2.7;

(vi) any amendment to the Company’s organizational documents that adversely affects in any material respect the rights of Carbon with respect to its Class A Units or Class C Units in a manner disproportionate to the rights of the other Class A Members or Class C Members or adversely affects the economic rights of the Class B Units to receive distributions relative to the Class A Units or Class C Units;

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(vii) except in connection with a Liquidity Event approved as provided in Section 6.5 or a Third Party Sale pursuant to Section 6.6, authorize or effect any Internal Restructure, Liquidity Event or other consolidation of the Company with another Person or any merger of the Company with or into another Person;

(viii) except in connection with a Liquidity Event approved as provided in Section 6.5, authorize or effect the sale of all or substantially all of the Company’s assets in a single or series of related transactions, including in connection with a liquidation of the Company; or

(ix) take any action, authorize or approve, or enter into any binding agreement with respect to or otherwise commit to do any of the foregoing.

(c) The Members acknowledge and agree, notwithstanding anything to the contrary in this Agreement or in the Act, that the matters described in Section 2.4(a) and Section 2.4(b) require only the requisite Director approval contemplated therein and that no separate or additional Member vote, consent or approval shall be required in order for the Company to undertake such action. Any consolidation or merger of the Company approved by a Supermajority of the Voting Power in accordance with Section 2.4(b)(vii) shall not be deemed to cause an assignment or other Transfer of the Interests under this Agreement.

Section 2.5 Services Agreement. The Manager’s responsibilities may be performed in whole or in part pursuant to a master services or similar contract (“Services Agreement”). On and effective as of February 23, 2017, the Company has entered into the Management Services Agreement, which shall constitute the initial Services Agreement.

Section 2.6 Performance of Duties; Liability of Manager and Officers. The Manager or any officer shall not be liable to the Company or to any Member for any loss or damage sustained by the Company or any Member as a result of it carrying out its duties as Manager or officer in good faith, unless the loss or damage shall have been the result of fraud, deceit, gross negligence, reckless or intentional misconduct, or a knowing violation of Law by the Manager or officer.

Section 2.7 Payment of Certain General and Administrative Expenses of Carbon. Until the Termination Date (as defined in the Management Services Agreement):

(a) For the period commencing on February 23, 2017 and ending on the day immediately prior to the Effective Date, the Company shall pay or reimburse Carbon for a portion of its aggregate general and administrative expenses in the amount of $300,000 per year payable in four (4) equal quarterly installments of $75,000.

(b) From and after the Effective Date, the Company shall pay or reimburse to Carbon for each Fiscal Quarter an amount equal to (x) $1,000,000.00, multiplied by (y) a fraction, (i) the numerator of which shall be the volume of oil and gas produced by the Company and its Subsidiaries during such Fiscal Quarter and (ii) the denominator of which will be the sum of (A) the volume of oil and gas produced by the Company and its Subsidiaries during such Fiscal Quarter plus (B) the volume of oil and gas produced by Carbon and its Subsidiaries (other than the Company or its Subsidiaries) during such Fiscal Quarter in each of the following States: Ohio, Kentucky, Tennessee, West Virginia and Virginia. Such volumes of oil and gas shall be calculated using the ratio of one barrel of oil as an equivalent to six thousand cubic feet of natural gas.

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(c) Such payments or reimbursements described in Section 2.7(a) and Section 2.7(b) shall be paid to Carbon within 30 days of the end of each Fiscal Quarter (or, in the case of the last Fiscal Quarter with respect to which payment or reimbursement is due, within 30 days of the Termination Date (as defined in the Management Services Agreement). With respect to the first Fiscal Quarter with respect to which payment or reimbursement is due, such payment or reimbursement shall be pro-rated by multiplying the gross amount of the payment or reimbursement by a fraction, the numerator of which is the number of days from and after February 23, 2017 through the end of the Fiscal Quarter and the denominator of which is the number of days in the Fiscal Quarter. With respect to the Fiscal Quarter ending September 30, 2017, such payment or reimbursement shall be an amount equal to (i) the gross amount of the payment or reimbursement under clause (a) above (for a full Fiscal Quarter) multiplied by a fraction, the numerator of which is the number of days from and after July 1, 2017 through the day immediately prior to the Effective Date and the denominator of which is 92 days plus (ii) the gross amount of the payment or reimbursement under clause (b) above (for a full Fiscal Quarter) multiplied by a fraction, the numerator of which is the number of days from and after the Effective Date through September 30, 2017 and the denominator of which is 92 days. With respect to the last Fiscal Quarter with respect to which payment or reimbursement is due, such payment or reimbursement shall be pro-rated by multiplying the gross amount of the payment or reimbursement by a fraction, the numerator of which is the number of days from and after the first day of the Fiscal Quarter through the Termination Date (as defined in the Management Services Agreement) and the denominator of which is the number of days in the Fiscal Quarter.

Section 2.8 Budget.

(a) The Budget for the period through December 31, 2017, as approved as of the date of this Agreement, is attached hereto as Exhibit E (the “Initial Budget”), which is hereby approved for all purposes of this Agreement without the need for further approval by the Board.

(b) The Board shall review each Budget, including the Initial Budget, from time to time as requested by the Manager during the capital year to which such Budget relates and the Budget shall be amended or modified to reflect any amendments or modifications thereto approved by the Board and as so modified or amended shall thereafter constitute the Budget for the remainder of the calendar year to which such Budget relates. Each Budget, including the Initial Budget, shall be divided into at least two sections as follows: (i) a section setting forth expenditures which are fundamental to the operation of the Company and its Subsidiaries and continuing and ongoing operation of their producing assets (the “Baseline Budget”) and (ii) a section setting forth expenditures related to the development of and growth or development capital expenditures related to the assets of the Company and its Subsidiaries (the “Development Budget”).

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(c) The officers of the Company shall prepare or cause to be prepared and present to the Board not later than December 1 of each calendar year (beginning December 1, 2017 (for calendar year 2018)) a draft Budget for the next succeeding calendar year (the “Proposed Budget”) setting forth the anticipated revenues and expenses of the Company for such calendar year in a format consistent with the Initial Budget, which shall include such information requested by the Board.

(d) Expenditures in a Budget may extend over more than one calendar year because such expenditures represent activities or operations that require commitments in excess of one calendar year. Once such expenditures have been approved by the Board as part of a Budget, unless the Board determines otherwise in accordance with its review of a Budget pursuant to Section 2.8(b), such expenditures shall not be required to be resubmitted for approval on an annual or other periodic basis, but instead all such items, until completed, automatically shall be included in future Budgets (subject to limits and amounts as previously approved) as items which have already been approved.

(e) If the Board does not approve a Proposed Budget for a calendar year on or prior to the December 20 preceding January 1 of the calendar year to which such Proposed Budget relates, the officers shall use good faith efforts to prepare or to cause to be prepared a revised Proposed Budget for approval by the Board. Each Proposed Budget approved hereunder by the Board in accordance with Section 2.4(a)(i) shall be deemed a “Budget.”

(f) To the extent that any Proposed Budget is not approved by the Board in accordance with Section 2.4(a)(i) by the first day of the calendar year to which such Proposed Budget relates, then, until a Proposed Budget for such calendar year is approved by the Board in accordance with Section 2.4(a)(i), the Baseline Budget for such calendar year shall be equal to the Baseline Budget for the immediately preceding calendar year (excluding non-recurring items but including recurring maintenance capital expenditures).

(g) The Company shall not incur expenses or capital expenditures in excess of amounts set forth in the Budget without prior approval of the Board in accordance with Section 2.4(a)(ii), except (i) Permitted Variances and (ii) as set forth in Section 2.8(h).

(h) Notwithstanding anything to the contrary in this Agreement, the Company is expressly authorized to make Emergency Expenditures without prior authorization or approval of the Board when necessary or advisable, in the judgment of the officers of the Company or the Manager, pursuant to Prudent Industry Practices, to deal with emergencies, including explosions, fires, spills, or any other similar event, which may endanger property, lives, or the environment. The officers of the Company or the Manager shall as soon as practicable report to the Board the nature of any such emergency which arises, the measures he intends to take in respect of such emergency and the estimated related expenditures.

Section 2.9 Conflict Activities.

(a) Notwithstanding anything to the contrary in this Agreement, any Conflict Activity shall be conducted by and under the direction of, and subject to the sole approval by, the Directors that have been appointed by a Non-Conflicted Member and neither the Conflicted Member nor the Directors appointed by the Conflicted Member shall have the right to vote or participate in any meeting of the Board regarding such Conflict Activity or any approval in connection with any action by the Board in respect of such Conflict Activity and the presence of any Directors appointed by the Conflicted Member shall not be required for purposes of determining the presence of a quorum in connection with any such action.

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(b) No officer of the Company that is also an officer, director, member, manager, stockholder, partner or employee of a Conflicted Member (or one of its Affiliates) shall have any obligation to take or refrain from taking any action on behalf of the Company with respect to such Conflict Activity except to provide information, documents and other related items reasonably requested by the Company or the Board in connection with such Conflict Activity (provided that such Person shall not be required to provide such information, documents or other items if doing so would require such Person to violate any applicable confidentiality restrictions (following a request of the waiver thereof) or waive or violate any legal professional privilege or similar duty of confidentiality). Except with respect to such Person’s failure to provide information, documents or other related items requested by the Company in connection with such Conflict Activity in violation of the foregoing or to provide testimony, give evidence or otherwise participate in any suit, litigation, arbitration or other dispute resolution proceeding involving the Conflicted Member, any such Person’s failure or refusal to take or refrain from taking any such action shall not constitute (i) a breach of any duty, fiduciary or otherwise, if any, owed by such Person to the Company or (ii) gross negligence or willful misconduct on the part of such Person.

(c) Notwithstanding anything to the contrary in this Agreement, at any time that a Member is a Defaulting Member, this Section 2.9 shall not apply for the benefit of such Member, the Directors that have been appointed by such Defaulting Member shall have no rights under this Section 2.9 with respect to any Conflict Activity, and the Directors appointed by the Non-Defaulting Member shall have authority to act on behalf of the Company with respect to such Conflict Activity.

Section 2.10 Fair Market Value. All determinations of Fair Market Value and Company Sale Value required by this Agreement, other than pursuant to Section 6.6, shall be made by a Supermajority of the Voting Power; provided, however, that if the approval of a Supermajority of the Voting Power cannot be obtained in connection with any such determination, such disputed determination shall be submitted to, and resolved by, Ernst & Young LLP or, if such Person is unable or unwilling to serve in such capacity, by any replacement approved by a Supermajority of the Voting Power (the “Independent Appraiser”); provided, however, that in the event a Supermajority of the Voting Power cannot agree on a replacement Independent Appraiser within five (5) Business Days after any Director has proposed a replacement for approval, within seven (7) days after the end of such five (5) Business Day period, each of the applicable Parties unable to agree on a replacement Independent Appraiser shall submit the names of three (3) Qualified Appraisers, and each such Party shall be entitled to strike one (1) name from the other party’s list of firms, and the Qualified Appraiser shall be selected by lot from the remaining firms. The Independent Appraiser shall submit to the Board a written report within 30 days of its engagement setting forth such determination. The expenses of the Independent Appraiser shall be borne by the Company. The determination of the Independent Appraiser as to Fair Market Value or Company Sale Value shall be final and binding upon the Company, the Board and all Members. The matter dependent on such determination of Fair Market Value or Company Sale Value with respect to which such determination is to be made by an Independent Appraiser pursuant to this Section 2.10 shall be deferred until the determination pursuant to this Section 2.10.

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ARTICLE III
MEMBERS

Section 3.1 Members, Interests and Unit Classes; Voting Rights.

(a) The Company shall have one or more Members with Interests designated as Units. Initially there shall be three classes of Units, designated “Class A Units”, “Class B Units” and “Class C Units”. The names, addresses and number and class of Units of each of the initial Members are set forth in Exhibit A attached hereto. To the extent of their holdings of Class A Units, Members holding Class A Units shall be referred to as “Class A Members” and to the extent of their holdings of Class B Units, Members holding Class B Units shall be referred to as “Class B Members” and to the extent of their holdings of Class C Units, Members holding Class C Units shall be referred to as “Class C Members.”

(b) Subject to Section 2.4(a)(xi), Section 2.4(a)(xii) and Article VI, any Person to which Units are issued by the Company after the Effective Date shall be admitted to the Company as a Member on the date of issuance of such Units.

(c) Any Person to which Units are Transferred as permitted by Article VI shall be admitted to the Company as a Member with respect to the Units acquired on the date upon which such Transfer has been effected and the requirements set forth in Section 6.1 and Section 6.7 have been satisfied.

(d) Class A Units shall be issued from time to time as provided in this Article III and be the only Interests entitled to vote and each Class A Member shall have a number of votes equal to the number of Class A Units it holds.

(e) Class B Units.

(i) The class of Units designated as Class B Units shall consist solely of one thousand (1,000) Class B Units, all of which currently are issued and held by Carbon as the Class B Member.

(ii) The Class B Member shall have no obligation to make any capital contributions to the Company in exchange for or on account of the Class B Units.

(iii) Subject to Section 12.6, the Class B Units shall have no voting rights on any matter, including amendments to this Agreement.

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(iv) The Company and each Member agree to treat each Class B Unit as a separate “profits interest” within the meaning of Rev. Proc. 93-27, 1993-2 C.B. 343. Notwithstanding anything herein to the contrary, distributions to each Class B Member pursuant to Section 5.4 hereof (solely with respect to such Class B Units) shall be limited to the extent necessary so that each Class B Unit qualifies as a “profits interest” under Rev. Proc. 93-27, and this Agreement shall be interpreted accordingly. In the event that distributions to a Class B Member pursuant to Section 5.4 hereof are limited as a result of the preceding sentence of this Section 3.1(e)(iv), the Manager is authorized to adjust future distributions to the Members in whatever manner it deems appropriate so that, after such adjustments are made, each Member receives, to the maximum extent possible, an amount of distributions equal to the amount of distributions such Member would have received were such sentence not part of this Agreement; provided, that any such adjustment to distributions shall be consistent with the treatment of the Class B Units as “profits interests.” Additionally, in accordance with Rev. Proc. 2001-43, 2001-2 C.B. 191, the Company shall treat each Class B Member as the owner of a Class B Unit from the date it is granted, and shall file its IRS Form 1065, and issue appropriate Schedule K-1s to such Class B Members, allocating to such Class B Members their distributive shares of all items of income, gain, loss, deduction and credit associated with such Class B Units. Each Class B Member agrees to take into account such distributive share in computing its U.S. federal income tax liability for the entire period during which it holds the Class B Unit. The Company and each Member agree not to claim a deduction (as wages, compensation or otherwise) for the Fair Market Value of such Class B Units issued to Class B Members at any time. The undertakings contained in this Section 3.1(e)(iv) shall be construed in accordance with Section 4 of Rev. Proc. 2001-43. The provisions of this Section 3.1(e)(iv) shall apply regardless of whether or not a Class B Member files an election pursuant to Section 83(b) of the Code.

(f) Class C Units.

(i) The class of Units designated as Class C Units shall consist solely of 121.21212 Class C Units, all of which currently are issued and held by Carbon as the sole Class C Member.

(ii) Other than the Class C Non-Cash Capital Contribution, the Class C Member shall have no right or obligation to make any capital contributions to the Company in exchange for or on account of the Class C Units.

(iii) Subject to Section 12.6, the Class C Units shall have no voting rights on any matter, including amendments to this Agreement.

(g) Old Ironsides as Class A Member. Notwithstanding anything herein to the contrary, with respect to OIE Fund II-A and/or OIE Fund II-B in its or their capacity as Class A Member, any right, approval, consent, vote or similar action of Old Ironsides contemplated under this Agreement may be exercised by either OIE Fund II-A or OIE Fund II-B acting unilaterally or by OIE Fund II-A and OIE Fund II-B acting jointly.

Section 3.2 No Liability for Company Obligations. Without limiting the generality of Article VIII, a Member is not liable for the debts, obligations and liabilities of the Company, including under a judgment, decree or order of a court.

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Section 3.3 Meeting of Members.

(a) Place of Meetings. Meetings of Members may be held at any such place within or without the State of Delaware as may be designated by the Board of Directors.

(b) Meetings. Meetings of the Members may be called from time to time by the Board of Directors or by the Manager. Only business within the purpose or purposes described in the notice of meeting referred to in paragraph (c) below may be conducted at a meeting of Members.

(c) Notice of Meeting. Written or printed notice of all meetings of the Members stating the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered personally or by facsimile or Electronic Transmission not less than five (5) Business Days before the date of the meeting by or at the direction of the Manager to each Member entitled to vote at such meeting.

(d) Quorum. A quorum shall exist if Members are present holding at least a majority of the then outstanding Class A Units.

(e) Required Vote. Unless otherwise expressly required by this Agreement, including Section 2.4, any matter brought before any meeting of the Members shall be decided by a Majority Vote.

(f) Conduct of Meetings of Members. At each meeting of the Members, the Person designated by the Manager or, in such Person’s absence, a chairman chosen by a Majority Vote of the Members present in person or represented by proxy and entitled to vote thereat, shall preside and act as chairman of the meeting. A Person appointed by the Manager, shall act as secretary of such meeting and keep the minutes thereof. The Board of Directors may adopt such rules and regulations as it determines are reasonably necessary or appropriate in connection with the organization and conduct of any meeting of the Members.

(g) Proxies. Each Member entitled to vote at a meeting of the Members may authorize another person or persons to act for such Member by proxy, but no such proxy shall be voted or acted upon after 11 months from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in an Interest itself or an interest in the Company generally.

(h) Written Consent. Any action required or permitted to be taken at any meeting of Members may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall have been delivered to each Member at least twenty-four hours prior to being executed and shall be signed by Members holding the minimum number of Class A Units to take such action at a meeting of Members. Every written consent shall bear the date of signature of each Member that signs the consent. Notice of any such action taken shall be provided to those Members who have not consented in writing promptly following the taking of such action. Delivery shall be by hand or certified or registered mail, return receipt requested, to the Company’s principal office and shall be addressed to the Board of Directors.

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(i) Telephonic Meetings. Members may participate in and hold a meeting by means of conference telephone or similar communications equipment by means of which all Members participating in the meeting can hear each other, and participation in such meeting shall constitute attendance and presence in person at such meeting.

(j) Minutes. All decisions and resolutions of the Members shall be reported in the minutes of the meetings, which shall state the date, time and place of the meeting (or the date of the written consent in the case of a written consent in lieu of a meeting), the persons present at the meeting, the resolutions put to a vote (or the subject of a written consent) and the results of such voting (or written consent). The minutes of all meetings of the Members shall be circulated to all Members as soon as practical after each meeting and shall be kept at the principal office of the Company.

Section 3.4 Duties of Directors and Members.

(a) Except as otherwise provided in Section 3.4(b), Section 3.4(c) and Section 3.6:

(i) no Member or any of its present or future Affiliates or any of their respective stockholders, partners, members, directors, managers, officers or employees (each a “Member Related Party”) shall be expressly or impliedly restricted or prohibited by virtue of this Agreement or the relationships created hereby from engaging in other activities or business ventures of any kind or character whatsoever;

(ii) each Member and any Member Related Party shall have the right to conduct, or to possess a direct or indirect ownership interest in, activities and business ventures of every type and description;

(iii) no Member or any Member Related Party shall be obligated by virtue of this Agreement to present any particular business opportunity to the Company;

(iv) each Member and Member Related Party shall have the right to take or pursue any such opportunity for its own account (individually or as a partner, member, stockholder, fiduciary or otherwise) or to present or recommend it to any third party; and

(v) neither the Company nor any Member shall have any rights or claims by virtue of this Agreement or the relationships created hereby in any activities or business ventures of (i) in the instance of the Company, a Member or any Member Related Party, or (ii) in the instance of a Member, another Member or such other Member’s Member Related Party (it being expressly understood and agreed that any and all such rights and claims are hereby irrevocably waived by each Member on its behalf and on behalf of the Company).

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(b) The Members (in their own names and in the name and on behalf of the Company), subject to and except as provided in Section 3.6:

(i) agree that (A) the terms of this Section 3.4, to the extent that they modify or limit a duty or other obligation, if any, that a Member Related Party may have to the Company or any other Member under the Act or other applicable law are reasonable in form, scope and content; (B) the terms of this Section 3.4 are expressly intended to restrict the duties, including any fiduciary or similar duties, of a Member Related Party to the Company and the Members, as permitted by the Act and applicable law; and (C) the terms of this Section 3.4 shall control to the fullest extent possible if it is in conflict with a duty, if any, that a Member Related Party may have to the Company or another Member, under the Act or any other applicable law;

(ii) waive to the fullest extent permitted by the Act and other applicable law, any duty or other obligation, if any, that a Member Related Party may have to the Company or another Member, pursuant to the Act or any other applicable law; and

(iii) agree that (A) the legal doctrines of “corporate opportunity,” “business opportunity” and similar doctrines will not be applied to any ventures or activities of the Member Related Party (including those serving as Director or an officer of the Company), (B) none of the Member Related Party (including those serving as Director) will have any obligation to the Company or its other Members with respect to any opportunity to expand the Company’s business, whether geographically, or otherwise, (C) the Company and each Member hereby renounces any interest or expectancy in any business opportunity, transaction or other matter in which any Member Related Party (including those serving as Director or an officer of the Company) participates or desires or seeks to participate (each, a “Business Opportunity”), (D) no Member Related Party (including those serving as Director or an officer of the Company) shall have any obligation to communicate or offer any Business Opportunity to the Company or any other Member, and each may pursue for itself or direct, sell, assign or transfer to any other Person any such Business Opportunity and (E) each Member Related Party (including those serving as Director or an officer of the Company) shall be entitled to and may have business interests and activities that are in direct competition with the Company or a Member or that are enhanced by the activities of the Company, and neither the Company nor any Member shall have any rights by virtue of this Agreement in any business venture of the Company or any Member.

(c) The Members (in their own names and in the name and on behalf of the Company), acknowledge, affirm and agree that (i) no Member would be willing to make an investment in the Company, and (ii) no Director appointed to serve on the Board or a Member Related Party appointed as an officer of the Company or any Subsidiary of the Company would be willing to so serve, in the absence of this Section 3.4.

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Section 3.5 Other Investments of Member Related Parties; Waiver of Conflicts of Interest and Negation of Duties and Obligations.

(a) Each Member acknowledges and affirms that the Member Related Parties:

(i) (A) have participated (directly or indirectly) and will continue to participate (directly or indirectly) in venture capital, private equity and other direct investments in corporations, joint ventures, limited liability companies and other entities (the “Other Investments”), including Other Investments engaged in various aspects of the United States “upstream,” “downstream” and “midstream” oil and gas business that may, are or will be competitive with the Company’s business or that could be suitable for the Company, (B) have interests in, participate with, aid and maintain seats on the board of directors or similar governing bodies of, Other Investments, and (C) may develop or become aware of business opportunities for Other Investments: and

(ii) may or will, as a result of or arising from the matters referenced in clause (i) above, the nature of the Member Related Parties’ businesses and other factors, have conflicts of interest or potential conflicts of interest with the Company and/or other Members.

(b) The Members (individually and on behalf of the Company), subject to and except as provided in Section 3.6, expressly (i) waive any such conflicts of interest or potential conflicts of interest and agree that no Member Related Party or its respective representatives shall have any liability to any Member or any Affiliate thereof, or the Company with respect to such conflicts of interest or potential conflicts of interest and (ii) acknowledge and agree that the Member Related Parties and their respective representatives will not have any duty to disclose to the Company, any other Member or the Board or any Directors any such business opportunities, whether or not competitive with the Company’s business and whether or not the Company might be interested in such business opportunity for itself. The Members (for themselves and on behalf of the Company) also acknowledge that the Member Related Parties and their representatives have duties not to disclose confidential information of or related to the Other Investments. Notwithstanding the foregoing, each Member agrees that it will disclose to the other Members if such Member or an Affiliate has an interest in another entity that proposes to engage in a transaction with the Company, which disclosure shall be made as promptly as reasonably possible after such Member becomes aware of the proposed transaction.

(c) The Members (individually and on behalf of the Company) hereby:

(i) agree that (A) the terms of this Section 3.5, to the extent that they modify or limit any duty of loyalty or other similar obligation, if any, that a Member Related Party may have to the Company or another Member under the Act or other applicable law, are reasonable in form, scope and content; and (B) the terms of this Section 3.5 shall control to the fullest extent possible if it is in conflict with any duty of loyalty or similar obligation, if any, that a Member Related Party or its representatives may have to the Company or another Member, under the Act or any other applicable law; and

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(ii) subject to and except as provided in Section 3.6, waive any duty of loyalty or other fiduciary duty or similar obligation, if any, that a Member Related Party or its representatives may have to the Company, any Director or another Member, pursuant to the Act or any other applicable law.

(d) Whenever in this Agreement a Member or any representative thereof (which shall include for purposes of this Agreement a Director appointed by such Member or instructed to act by such Member) is permitted or required to make a decision (i) in its “sole discretion” or “discretion” or under a grant of similar authority or latitude, the Member or the representative thereof, as the case may be, shall be entitled to consider only such interests and factors as such Member or representative desires, including such Member’s own interests, and shall have no duty or obligation to give any consideration to any interests of or factors affecting the Company or any other Member, or (ii) in its “good faith” or under another expressed standard, a Member or the representative thereof, as the case may be, shall act under such express standard and shall not be subject to any other or different standard imposed by this Agreement or any other agreement contemplated herein or by relevant provisions of law or in equity or otherwise; provided, however, that no Member or its appointed Director may disapprove of any proposed asset acquisition or expenditure relating to any proposed asset acquisitions solely on the grounds that an Affiliate of such Member (x) has made, or intends to make, a competing offering for the purchase of the assets which are the target of such proposed asset acquisitions (the “Subject Assets”) or (y) is participating or intends to participate in any auction or other sales process relating to the Subject Assets.

(e) The Members (individually and on behalf of the Company) acknowledge, affirm and agree that (i) the execution and delivery of this Agreement by the Members is of material benefit to the Company and the Members, and that the Members would not be willing to (x) execute and deliver this Agreement, and (y) make their agreed Capital Contributions to the Company, without the benefit of this Section 3.5 and the agreement of the parties, including the Members, thereto.

Section 3.6 Carbon Non-Compete. Notwithstanding anything herein to the contrary:

(a) Prior to Carbon or any of its Affiliates (excluding, for the avoidance of doubt, Yorktown and any of its Affiliates), or any of its or their respective officers or directors (in their capacities as such), making any investment in, acquiring any ownership interest in, or participating in the development of any oil and gas properties (e.g., working interests or royalty interests), operations or prospects or any rights and interests therein or relating thereto (e.g., carried interests, profits interests or participations) that are located in the AMI (including acquiring any interest in (i) any new oil and gas lease covering any unleased mineral interest within the AMI, (ii) any interest in an existing oil and gas lease covering any lands within the AMI, (iii) the right to acquire any oil and gas lease covering any lands within the AMI or (iv) any mineral interest, fee interest, royalty interest, overriding royalty interest or other right or interest covering any lands or interests within the AMI), in each case other than Existing Assets (any such investment, acquisition or participation, a “Restricted Interest”), Carbon shall offer such proposed Restricted Interest to the Company by giving written notice to the Board of such Restricted Interest and furnishing to the Board a reasonably detailed description of such Restricted Interest containing all material terms thereof, including, to the extent applicable, a schedule of the oil and gas leases, lands and/or interests proposed to be acquired, copies of any leases, agreements or other instruments proposed to be acquired or entered into in connection therewith, the price of the interests to be acquired and/or any other relevant pricing information relating thereto, all diligence materials prepared by or on behalf of Carbon relating thereto and any other documents necessary for the Board’s evaluation of the proposed Restricted Interest. If an oil and gas lease or interest covers lands or interests both inside and outside of the AMI, only the portion inside the AMI will be deemed a Restricted Interest. The Board shall have fifteen (15) days after receipt of such notice, together with the supporting information and documentation required by the first sentence of this Section 3.6(a), within which to elect, by written notice delivered by the Company to Carbon within such fifteen (15) day period, to cause the Company to undertake any investment in or acquisition of any ownership interest in such Restricted Interest. If the Board elects to cause the Company to undertake any investment in or acquisition of any ownership interest in a Restricted Interest, the Company and Carbon shall each use their commercially reasonable efforts, including cooperating with one another vis-à-vis the applicable counterparties involved in the Restricted Interest, to complete the investment in or acquisition of any ownership interest in such Restricted Interest for the Company’s account on terms acceptable to the Company.

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(b) If (i) the Board elects not to cause the Company to undertake an investment in or acquisition of any ownership interest in a Restricted Interest or the Board fails to reply to Carbon within the applicable fifteen (15) day period for its response with respect to a Restricted Interest offered by Carbon to the Company pursuant to Section 3.6(a) and (ii) the Board approves Carbon and its Affiliates, or its or their respective officers or directors (in their capacities as such), as applicable, to undertake any investment in or acquisition of any ownership interest in such Restricted Interest, such investment in or acquisition of any ownership interest in such Restricted Interest (subject to any terms or conditions regarding such investment or acquisition imposed by the Board) will be deemed a “Permitted Investment”.

(c) Carbon agrees that neither it nor any of its Affiliates, nor any of its or their respective officers or directors (in their capacities as such), shall make any investment in, acquire any ownership interest in, or participate in the development of any Restricted Investment other than (i) Carbon’s investment in the Company, (ii) the Existing Assets and (iii) any Permitted Investments.

(d) Carbon hereby represents and warrants to the Company and each other Member that, except for the Existing Assets, neither it nor any of its Affiliates hold or have an investment or ownership interest in any oil and gas properties, operations or prospects or any rights and interests therein or relating thereto in the AMI.

Section 3.7 No Resignation or Withdrawal by Members. Except in connection with a Transfer of all of its Interest as permitted under Article VI, no Member shall be entitled to resign or withdraw from the Company.

Section 3.8 Certain Representations and Warranties of the Members. Each Member hereby represents and warrants to the Company and each other Member as of the Effective Date and as of each date after the Effective Date such Member makes an additional Capital Contribution in exchange for additional Units or other Interests that:

(a) such Member has full power and authority to enter into this Agreement and to perform its obligations hereunder;

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(b) the execution, delivery and performance of this Agreement do not conflict with any other agreement or arrangement to which such Member is a party or by which it is or its assets are bound;

(c) all property contributed to the Company by such Member, and any property thereafter to be contributed to the Company by such Member, has been or will be duly and lawfully acquired and will be contributed to the Company without any liens or encumbrances (other than statutory liens for taxes not yet due or owing);

(d) such Member is and will be acquiring its interest in the Company for investment purposes only for his or its own account and not with a view to the distribution, reoffer, resale, or other disposition not in compliance with the Securities Act and applicable state securities laws;

(e) such Member alone or together with his or its representatives, possesses such expertise, knowledge, and sophistication in financial and business matters generally, and in the type of transactions in which the Company proposes to engage in particular, that such Member is capable of evaluating the merits and economic risks of acquiring and holding an Interest, and that such Member is able to bear all such economic risks now and in the future;

(f) such Member has had access to all of the information with respect to his or its Interest that such Member deems necessary to make a complete evaluation thereof;

(g) such Member’s decision to acquire an Interest for investment has been based solely upon the evaluation made by such Member;

(h) such Member is aware that he, she or it may have to bear the economic risk of such Member’s investment in the Company for an indefinite period of time because Interests have not been registered under the Securities Act or under the securities laws of any state, and, therefore, such Interests cannot be sold unless they are subsequently registered under the Securities Act and any applicable state securities laws or an exemption from registration is available;

(i) such Member is aware that only the Company can take action to register Interests in the Company and that the Company is under no such obligation and does not propose or intend to attempt to do so other than pursuant to the terms of this Agreement;

(j) such Member is aware that this Agreement provides restrictions on the ability of a Member to Transfer its Interests, and such Member will not seek to effect any Transfer of his, her or its Interests other than in accordance with such restrictions;

(k) such Member is an “accredited investor” within the meaning ascribed to such term under Regulation D of the Securities Act; and

(l) such Member is not a registered investment company under the Investment Company Act and is not required to register as an investment company under the Investment Company Act.

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ARTICLE IV
CAPITAL

Section 4.1 Capital Contributions.

(a) As of February 23, 2017, pursuant to and subject to the terms of the Participation Agreement, Nytis LLC assigned to OpCo 75% of Nytis LLC’s undivided interest in the Tennessee Mining Tract properties. For purposes of this Agreement, a portion of such assignment shall be deemed a Capital Contribution to the Company by Carbon of non-cash property (such Capital Contribution, the “Class C Non-Cash Capital Contribution”) and the agreed Book Basis of such Class C Non-Cash Capital Contribution is $121,212. In exchange for the Class C Non-Cash Capital Contribution, Carbon received the Class C Units reflected on Exhibit A.

(b) At or before the closing of the CNX Acquisition, Carbon made a Capital Contribution of cash to the Company of $240,000.00 in exchange for 240 Class A Units, Yorktown made a Capital Contribution of cash to the Company of $2,940,000.00 in exchange for 2,940 Class A Units, OIE Fund II-A made a Capital Contribution of cash to the Company of $7,334,169.57 in exchange for 7,334.16957 Class A Units, and OIE Fund II-B made a Capital Contribution of cash to the Company of $1,485,830.43 in exchange for 1,485.83043 Class A Units (such Capital Contributions, the “Initial Contributions”); all amounts contributed by Carbon, Yorktown, OIE Fund II-A and OIE Fund II-B pursuant to this Section 4.1(b) at or before the closing of the CNX Acquisition as the Initial Contributions will be deemed contributed to the Company (regardless of the date actually contributed), including for purposes of calculating the IRR and Priority Amounts of each holder of Class A Units, as of the date the first of such Initial Contributions were made to the Company.

(c) Capital Contributions in excess of each Class A Member’s Initial Class A Funding Percentage of the Initial Contribution shall be made only upon delivery to the Class A Members of a written notice (each a “Capital Call Notice”) requesting such Class A Members to make additional Capital Contributions (each a “Capital Call”); provided no Capital Call Notice shall be issued (and no Capital Contributions shall be made) other than (i) to fund an approved Budget (and Permitted Variances thereto), (ii) to fund a Capital Call for a matter approved by the Board of Directors or (iii) to pay Company Expenses. Each Capital Call Notice shall state the purpose of the capital requested.

(d) Notwithstanding anything to the contrary contained herein, no Capital Call Notice shall require (or permit) any Class A Member to contribute Capital Contributions, in the aggregate together with all prior Capital Contributions of such Class A Member, in excess of the amount set forth opposite the name of such Class A Member under the column headed “Capital Commitment” on Exhibit A (the “Capital Commitment”).

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(e) Subject to Section 4.1(d), each Class A Member’s share of any Capital Call shall be equal to (i) its Initial Class A Funding Percentage of the aggregate amount called pursuant to a Capital Call Notice until the Commitment Release Point and (ii) after the Commitment Release Point, each Class A Member’s then current Class A Sharing Percentage of the aggregate amount called pursuant to a Capital Call Notice.

(f) Capital Calls shall be due and payable within fifteen (15) Business Days of the date of receipt by a Class A Member of the Capital Call Notice pertaining to such Capital Call. Upon the receipt of any Capital Contribution and in consideration of such additional Capital Contribution made by any Member pursuant to this Section 4.1, there shall be issued to such Class A Member a number of Class A Units equal to the quotient of (x) the amount of such Capital Contribution, divided by (y) the Class A Unit Price.

(g) In the event that the Company has not received Capital Contributions from the Class A Members which in the aggregate are equal to the Capital Commitments of the Class A Members on or before the earlier of February 23, 2022 and a Public Offering (the “Commitment Reduction Date”), each Class A Member’s Capital Commitment may be permanently reduced to an amount not less than the sum of such Class A Member’s Capital Contributions made to the Company prior to the Commitment Reduction Date plus such Class A Member’s Initial Class A Funding Percentage Interest of the Capital Calls for which a Capital Call Notice shall have been delivered pursuant to Section 4.1(c) prior to the Commitment Reduction Date.

(h) Each Class A Member shall be required to contribute to the Company its Initial Class A Funding Percentage of each Capital Call amount until the earlier of (i) the Commitment Reduction Date or (ii) an aggregate amount equal to $100,000,000 in cash has been funded to the Company as Capital Contributions (including the Initial Contributions), subject to Section 4.6 (the earlier of (i) and (ii), the “Commitment Release Point”).

(i) From and after the Commitment Release Point, each Class A Member shall be entitled (but not required) to contribute its Class A Sharing Percentage of each Capital Call amount (as provided in Section 4.1(c)). If any Class A Member (a “Shortfall Member”) fails to timely contribute its full Class A Sharing Percentage of a Capital Call amount after the Commitment Release Point and one or more other Class A Members timely contributes its full Class A Sharing Percentage of such Capital Call amount (the “Non-Shortfall Member”), then the Company or the Non-Shortfall Member shall deliver a written notice (a “Shortfall Notice”) to the Shortfall Member setting forth the amount such Shortfall Member failed to timely fund. If the Shortfall Member’s full Class A Sharing Percentage of such Capital Call Amount is not received by the Company from such Shortfall Member within ten (10) Business Days after delivery of the Shortfall Notice (the “Shortfall Cure Period”), then the Non-Shortfall Member may, in its discretion, (x) fund all or a portion of the Shortfall Member’s Unfunded Amount as a Capital Contribution or (y) by delivery of written notice to the Company and the Shortfall Member within twenty (20) Business Days after the date the Shortfall Notice is delivered to the Shortfall Member, require the Company to return to the Non-Shortfall Member up to 100% of the amount contributed by the Non-Shortfall Member to the Company in connection with such Capital Call. A Shortfall Member’s failure to timely fund its Class A Sharing Percentage of any Capital Call after the Commitment Release Point will result in proportionate dilution of the Class A Sharing Percentage of such Shortfall Member and adjustment of the Class A Sharing Percentage of each Class A Member to equal an amount, expressed as a percentage, equal to the number of Class A Units held by such Class A Member divided by the total number of Class A Units held by all Class A Members after giving effect to such Capital Contribution and the issuance of additional Class A Units in respect of such Capital Contribution. Notwithstanding anything in this Agreement to the contrary, the proportionate dilution provided for in this Section 4.1(i) and the option of the Non-Shortfall Member to (x) fund all or a portion of the Shortfall Member’s Unfunded Amount as a Capital Contribution or (y) receive the return of its funded portion of the applicable Capital Call shall be the sole remedies for the failure of any Shortfall Member to timely contribute its full Class A Sharing Percentage of any Capital Call after the Commitment Release Point, and neither the Company nor any Class A Member shall have any other rights or remedies against a Shortfall Member with respect thereto.

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(j) No Capital Contribution to the Company may be required or permitted from any Person other than in accordance with this Section 4.1 or Section 4.7, and no Person shall be issued or granted any Class A Units or any other Interest by the Company other than as provided in this Section 4.1 or Section 4.7, in each case without prior approval of the Board pursuant to Section 2.4(a)(xi).

(k) Exhibit A shall be amended upon the occurrence of any additional Capital Contributions to reflect such additional Capital Contributions, the issuance of Class A Units in exchange therefor and the Class A Sharing Percentage of each Class A Member after giving effect to such additional Capital Contributions.

(l) If a Capital Call relates to amounts above and below the Commitment Release Point (as determined under clause (ii) of Section 4.1(h)), such Capital Call shall be treated as two separate Capital Calls, one for the remaining amount required to be funded to achieve the Commitment Release Point and one for the balance of the amount of such Capital Call.

Section 4.2 Key Man Event. Notwithstanding anything herein to the contrary, in the event Patrick R. McDonald no longer serves as Chief Executive Officer of the Company and/or Mark Pierce no longer serves as President of the Company for any reason (in each case, whether due to resignation, termination, death, disability or otherwise) (the “Key Man Event”), then:

(a) the Company shall, as soon as reasonably practicable but in any event within three (3) Business Days following the Key Man Event, deliver a written notice to the Members informing the Members of the Key Man Event;

(b) if the Key Man Event involves the loss of the Chief Executive Officer, from and after the Key Man Event, no Class A Member shall be required to make any additional Capital Contributions to the Company and no Class A Member shall be a Defaulting Member as a result of failing to fund any additional Capital Contribution due on or after the Key Man Event, provided that any Defaulting Member as of the Key Man Event shall continue to be a Defaulting Member from and after the Key Man Event; and

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(c) if the Key Man Event involves the loss of the Chief Executive Officer and the President, from and after the Key Man Event, in addition to the consequences provided in clause (b) above, Old Ironsides may replace Carbon (or cause Carbon to be replaced) as the Manager and/or cause the Company to effect a Liquidity Event pursuant to Section 6.5.

Section 4.3 Capital Accounts.

(a) A separate Capital Account for each Member shall be established and maintained on the books of the Company in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv) and, to the extent not in conflict with such Treasury Regulations, the provisions of this Agreement. Each Member shall have a single Capital Account that reflects all of its Interests, regardless of class or the time or manner in which acquired. Upon a Transfer of all or part of any Units, the Capital Account, Capital Contributions, and Priority Amount, if any, of the transferor attributable to the Transferred Units shall carryover to the transferee.

(b) There will be credited to the Capital Account of each Member (i) the amount of cash and the initial Book Basis of any property contributed by such Member to the Company, (ii) such Member’s share of Net Income (as determined in accordance with Section 5.1) and any items of income or gain allocated to such Member pursuant to Section 5.2, and (iii) the amount of any liabilities of the Company assumed by such Member or that are secured by any property distributed to such Member.

(c) There will be debited to the Capital Account of each Member (i) the amount of any cash and the Book Basis of any property distributed by the Company to such Member, (ii) such Member’s share of Net Loss (as determined in accordance with Section 5.1, and any items of loss or deduction allocated to such Member pursuant to Section 5.2, and (iii) the amount of any liabilities of such Member assumed by the Company or that are secured by any property contributed by such Member to the Company.

(d) Simulated Basis shall be allocated among the Members in accordance with each Member’s Capital Interest Percentage as of the time such Oil and Gas Property is contributed to or acquired by the Company (and any additions to such Simulated Basis resulting from expenditures required to be capitalized in such Simulated Basis shall be allocated among the Members in a manner designed to cause the Members’ proportionate shares of such Simulated Basis to be in accordance with their Capital Interest Percentages as determined at the time of any such additions), and shall be reallocated among the Members in accordance with the Members’ Capital Interest Percentages as determined immediately following the occurrence of an event giving rise to an adjustment to the Book Basis of the Company’s Oil and Gas Properties pursuant to clause (ii) of the definition of Book Basis.

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Section 4.4 Preemptive Rights. At any time that the Company proposes to sell Interests to any Person other than Class A Units issued in accordance with Section 4.1 or Section 4.7, each Member other than a Defaulting Member (each, a “Preemptive Rights Member”) shall have the preemptive right to purchase its Class A Sharing Percentage share of the Interests. Any participation pursuant to this Section 4.4 shall be on the same terms and conditions as applied to all offerees in the respective offering. In the event of a proposed transaction or transactions giving rise to preemptive rights of Preemptive Rights Members, the Company shall provide notice (“Preemptive Right Notice”) to the Preemptive Rights Members, which Preemptive Rights Notice shall contain the price at which the Interests will be offered and the other material terms of the offering and such Interests, no later than ten (10) Business Days prior to the expected consummation of such transaction or transactions. Each Preemptive Rights Member shall provide notice of its election to exercise its preemptive rights within five (5) Business Days after delivery of the Preemptive Right Notice from the Company (each Preemptive Rights Member electing to exercise its preemptive right in such instances is referred to as an “Electing Party”). The failure of a Preemptive Rights Member to respond to the Preemptive Right Notice and affirmatively exercise its preemptive right in accordance with the terms of this Agreement shall be deemed as an election of the Preemptive Rights Member not to exercise its preemptive right in connection with the proposed transaction. If a Preemptive Rights Member shall elect not to exercise its respective preemptive right or fails to timely exercise, the Electing Parties who timely exercise shall have the right to purchase the Interests (a “Subsequent Purchase”) as to which no such right was exercised (based on the ratio that the Class A Sharing Percentage of each Electing Party desiring to purchase the additional Interests bears to the sum of the Class A Sharing Percentages of all Electing Parties desiring to purchase the additional Interests) insofar as more than one such Electing Party desires to so purchase additional Interests. In the event of a situation described in the preceding sentence in which a Preemptive Rights Member does not exercise its preemptive right, the Company shall provide notice (the “Subsequent Notice”) of such fact within three (3) Business Days following expiration of the deadline for submission of notices concerning such elections from the parties possessing preemptive rights. Each Electing Party that desires to purchase the additional Interests shall respond to the Subsequent Notice by sending a response notice with respect thereto within three (3) Business Days after delivery of the Subsequent Notice. The failure of an Electing Party to respond to a Subsequent Notice and affirmatively exercise its preemptive right in accordance with the terms of this Agreement shall be deemed an election not to exercise its preemptive right in connection with the Subsequent Purchase. If the number of Interests proposed to be offered as described in the Preemptive Rights Notice exceeds the sum of the Interests for which the Preemptive Rights Members timely elected to exercise their preemptive rights (including with respect to any Subsequent Notice), the Company may offer and issue such excess Interests or any portion thereof (at a price and on other terms and conditions not more favorable to any proposed offeree or purchaser of such Interests than those set forth in the Preemptive Rights Notice) to any purchaser of such Interests within one-hundred-twenty (120) days after the date the Preemptive Rights Notice (or, if applicable, the Subsequent Notice) was delivered. If such issuance is not made within such one-hundred twenty (120) day period, the Company shall not thereafter issue or sell any of such Interests without first re-offering such securities in the manner provided above; provided, that if such issuance or sale is subject to regulatory approval, such one-hundred-twenty (120) day period shall be extended until the expiration of ten (10) Business Days after all such approvals have been received, but in no event later than one-hundred-eighty (180) days from the date the Preemptive Rights Notice (or, if applicable, the Subsequent Notice) was delivered.

Section 4.5 Unit Certificates.

(a) The Units initially shall be uncertificated, provided that the Board may, in its sole discretion, elect to cause the Company to evidence ownership of Units by issuing a certificate (each, a “Unit Certificate”) executed by appropriate officers of the Company certifying the number of Units owned by each Member.

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(b) Notwithstanding anything to the contrary contained in this Agreement, in order to effect a valid Transfer of Units for which a Unit Certificate has been issued, prior to the effectiveness of such Transfer, the transferring Member, as applicable, shall surrender the subject Unit Certificate to the Company together with a transfer power duly executed by the transferring Member, as applicable, with the transferring Member’s signature thereon guaranteed by a medallion stamp upon the Board’s request. Upon such compliance, surrender and delivery, the Company shall execute and deliver a new Unit Certificate in the name of the assignee(s) and in the denominations specified in the Transfer documentation, and shall issue to the transferring Member, as applicable, a new Unit Certificate evidencing the portion of the surrendered Unit Certificate, if any, not so Transferred, and the surrendered Unit Certificate shall promptly be cancelled.

(c) The Company shall issue a new Unit Certificate in place of any Unit Certificate theretofore issued by it that is alleged to have been lost, stolen or destroyed, provided that as a condition precedent thereto the Board may in its discretion require the Member that is the record owner of any allegedly lost, stolen or destroyed Unit Certificate to deliver to the Company a duly executed affidavit of loss and an agreement and/or a bond sufficient to indemnify the Company against any adverse claim in connection with the issue of a new Unit Certificate.

(d) Notwithstanding anything to the contrary contained in this Agreement, the Board and the Company shall be entitled to rely exclusively on record ownership of Units for which a Unit Certificate has been issued as evidenced by outstanding Unit Certificates and the Company’s records thereof. The Company shall treat the record owner of a Unit Certificate as the holder of the Units evidenced thereby unless and until such Units have been Transferred in accordance with this Agreement.

Section 4.6 Defaulting Members. If any Class A Member fails to timely contribute its full Initial Class A Funding Percentage of a Capital Call that such Class A Member is required to contribute pursuant to Section 4.1(e)(i) and at least one other Class A Member timely contributes its full Class A Sharing Percentage of such Capital Call amount (the “Non-Defaulting Member”), then the Company or a Non-Defaulting Member shall deliver a written notice of default (a “Default Notice”) to the Defaulting Member setting forth the amount such Defaulting Member failed to timely fund. If the Defaulting Member’s full Initial Class A Funding Percentage of such Capital Call amount is not received by the Company from such Class A Member within ten (10) Business Days after delivery of the Default Notice (the “Default Cure Period”), then:

(a) such Class A Member shall be deemed a “Defaulting Member” and

(i) if the Defaulting Member is Carbon, then Supermajority of the Voting Power shall not require the affirmative vote of a Carbon Designee; and

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(ii) if the Defaulting Member is Old Ironsides, then a Majority of the Voting Power shall not require the affirmative vote of an Old Ironsides Designee;

(b) the Defaulting Member shall not be entitled to participate in any future Capital Calls pursuant to Section 4.1 or as a Preemptive Rights Member pursuant to Section 4.4;

(c) each Non-Defaulting Member shall have the option, exercisable in its sole and absolute discretion to either (A) fund all or a portion of the Defaulting Member’s Unfunded Amount and to treat such funding of the Unfunded Amount as either an additional Capital Contribution, subject to Section 4.7 (an “Optional Contribution”), or (B) by delivery of written notice to the Company and the Defaulting Member within twenty (20) Business Days after the date the Default Notice is delivered to the Defaulting Member, require the Company to return to the Non-Defaulting Member up to 100% of the amount contributed by the Non-Defaulting Member to the Company in connection with such Capital Call;

(d) the Non-Defaulting Member(s) may fund the Defaulting Member’s Initial Class A Funding Percentage of all subsequent Capital Call amounts as Optional Contributions until the Defaulting Member’s Capital Commitment has been fully funded; and “Class A Sharing Percentage” for purposes of Section 4.1(i) and Section 4.4 shall be calculated without giving effect to Units held by the Defaulting Member; and

(e) if more than one Non-Defaulting Member elects to fund the Unfunded Amount or the Defaulting Member’s Class A Sharing Percentage of all subsequent Capital Call amounts, then each Non-Defaulting Member so electing shall be entitled to fund its portion of such Unfunded Amount or the Defaulting Member’s Class A Sharing Percentage of all subsequent Capital Call amounts based on the relative Class A Sharing Percentage of each such Non-Defaulting Member, unless otherwise agreed to among such Non-Defaulting Members.

Section 4.7 Optional Contribution. If a contribution with respect to an Unfunded Amount is treated as an Optional Contribution pursuant to Section 4.6, upon the receipt of any such Optional Contribution and in consideration of such additional Optional Contribution made by any Member pursuant to Section 4.1, there shall be issued to such Member a number of Class A Units equal to the quotient of (x) the amount of such Optional Contribution, divided by (y) the Class A Unit Price, and the Class A Sharing Percentage of each Class A Member will be adjusted to equal an amount, expressed as a percentage, equal to the number of Class A Units held by such Class A Member divided by the total number of Units held by all Class A Members after giving effect to such Optional Contribution and the issuance of additional Class A Units in respect of such Optional Contribution.

Section 4.8 No Return of Capital Contributions. Except as expressly provided in this Agreement, a Member shall not be entitled to the return of any part of its Capital Contributions or to be paid any interest, salary or draw in respect of its Capital Contributions. A Capital Contribution that has not been repaid is not a liability of the Company or any Member.

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ARTICLE V
ALLOCATIONS; DISTRIBUTIONS

Section 5.1 Allocations of Net Income or Net Loss. After giving effect to the allocation in Section 5.2 for purposes of maintaining the Capital Accounts the Company’s items of Net Income and Net Loss shall be allocated among the Members in a manner such that the Capital Account of each Member, immediately after making such allocations is, as nearly as possible, equal (proportionately) to the distributions that would be made to such Member pursuant to Section 5.4 if the Company and each of its Subsidiaries were dissolved, their respective affairs wound up and their respective assets sold for cash equal to their Book Basis, all of the liabilities of the Company and its Subsidiaries were satisfied (limited with respect to each nonrecourse liability to the Book Basis of the asset securing such liability), and the net assets of the Company were distributed in accordance with Section 5.4 less (ii) the Member’s share of Company Minimum Gain, share of Member Nonrecourse Debt Minimum Gain, and the amount, if any, which such Member is obligated to contribute to the capital of the Company.

Section 5.2 Special Allocations. Notwithstanding Section 5.1, for each taxable year or other relevant period, the following special allocations will be made in the following order and priority:

(a) Minimum Gain Chargeback. If there is a net decrease in Company Minimum Gain for the taxable year or other relevant period, then, to the extent required by the Treasury Regulations, items of income (determined in accordance with the provisions of Treasury Regulations Section 1.704-2(f)(6)) shall be specially allocated to the Members in an amount equal to each Member’s share of the net decrease in Company Minimum Gain (determined in accordance with the provisions of Treasury Regulations Section 1.704-2(g)). This Section 5.2(a) shall be interpreted consistently with, and subject to the exceptions contained in, Treasury Regulations Section 1.704-2(f).

(b) Member Minimum Gain Chargeback. If there is a net decrease in Member Nonrecourse Debt Minimum Gain for the taxable year or other relevant period, then, to the extent required by Treasury Regulations, items of income (determined in accordance with the provisions of the Treasury Regulations Section 1.704-2(i)(4)) shall be specially allocated to the Members in an amount equal to each Member’s share of the net decrease in Member Nonrecourse Debt Minimum Gain (determined in accordance with the provisions of Treasury Regulations Section 1.704-2(i)(5)). This Section 5.2(b) shall be interpreted consistently with, and subject to the exceptions contained in, Treasury Regulations Section 1.704-2(i)(4).

(c) Qualified Income Offset. If any Member unexpectedly receives any adjustment, allocation or distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), which causes or increases such Member’s Adjusted Capital Account Deficit, such Member will be allocated items of income (including gross income), gain and Simulated Gain in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Member’s Adjusted Capital Account Deficit as quickly as possible; provided that an allocation pursuant to this Section 5.2(c) shall be made only to the extent that the Member has an Adjusted Capital Account Deficit after all other allocations provided for in Section 5.1 and this Section 5.2 have been tentatively made as if this Section 5.2(c) was not in this Agreement.

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(d) Deficit Capital Accounts Generally. If any Member has an Adjusted Capital Account Deficit at the end of any Fiscal Year, such member will be allocated items of income (including gross income), gain and Simulated Gain in an amount and manner sufficient to eliminate the Member’s Adjusted Capital Account Deficit as quickly as possible; provided that an allocation pursuant to this Section 5.2(d) shall be made only to the extent that the Member has an Adjusted Capital Account Deficit after all other allocations provided for in Section 5.1 and this Section 5.2 have been tentatively made as if Section 5.2(c) and this Section 5.2(d) were not in this Agreement.

(e) Nonrecourse Deductions. Nonrecourse Deductions shall be allocated among the Members pro rata in accordance with their A/C Sharing Percentage.

(f) Member Nonrecourse Deductions. Member Nonrecourse Deductions shall be specially allocated to the Members who bear the economic risk of loss for the liability to which the deductions are attributable, determined in accordance with the principles of Treasury Regulations Section 1.704-2(i).

(g) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Sections 734(b) or 743(b) is required to be taken into account in determining Capital Accounts under Treasury Regulations Section 1.704-1(b)(2)(iv)(m), the amount of the adjustment shall be included as an item of gain (if positive) or loss (if negative) and shall be specially allocated to the Members consistent with the manner in which their Capital Accounts are required to be adjusted by such Treasury Regulation.

(h) The Company’s “excess nonrecourse liabilities” (as defined in Treasury Regulations Section 1.752-3(a)(3)) for a particular Fiscal Year shall be allocated among the Members pro rata in accordance with their A/C Sharing Percentage

(i) Simulated Depletion Deductions and Simulated Loss with respect to each Oil and Gas Property shall be allocated in proportion to the manner in which the Simulated Basis of such property is allocated between the Members pursuant to Section 4.3(d), provided, however, if the percentage depletion method is used, any excess percentage depletion shall be allocated in accordance with Treasury Regulations Section 1.704-1(b)(4)(iii). Simulated Gain shall be included in Net Income or Net Loss and allocated pursuant to Section 5.1.

(j) For purposes of Treasury Regulations Sections 1.704-1(b)(2)(iv)(k)(2) and 1.704-1(b)(4)(v), the amount realized on the disposition of any Oil and Gas Property shall be allocated (i) first to the Members in an amount equal to the remaining Simulated Basis of such property in the same proportions as the Simulated Basis of such property was allocated to the Members pursuant to Section 4.3(d), and (ii) any remaining amount realized shall be allocated to the Members in the same ratio as the Simulated Gain.

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Section 5.3 Allocations of Taxable Income or Loss.

(a) Except as provided in Section 5.3(b), (c), or (d) or as otherwise required by the Code or Treasury Regulations, solely for U.S. federal income tax purposes, items of Company taxable income, gain, loss and deduction for each Fiscal Year shall be allocated among the Members in the same manner as each correlative item of income, gain, loss and deduction, as determined for Capital Account purposes, is allocated pursuant to Section 5.1 and Section 5.2.

(b) If property contributed to the Company by a Member has an adjusted U.S. federal income tax basis that differs from its initial Book Basis on the date of contribution or if the Book Basis of property is adjusted upon the occurrence of a Revaluation Event, income, gain, loss and deductions with respect to such property will, solely for tax purposes, be allocated among the Members so as to take account of such difference. Such allocations will be made among the Members in the manner provided in Section 704(c) of the Code, pursuant to the remedial allocation method described in Treasury Regulations Section 1.704-3(d), or such other reasonable method determined by the Board of Directors.

(c) Depreciation, depletion, intangible drilling cost, and amortization recapture amounts under Sections 1245, 1250 or 1254 of the Code and the Treasury Regulations thereunder, if any, resulting from any sale or disposition of tangible or intangible depreciable, depletable or amortizable property shall be allocated to the Members in the same proportions that the depreciation, depletion, intangible drilling cost or amortization being recaptured was allocated.

(d) Pursuant to Section 613A(c)(7)(D) of the Code and the Treasury Regulations promulgated thereunder, cost and percentage depletion deductions with respect to any Oil and Gas Property shall be computed separately by the Members rather than the Company. For purposes of such computations, the U.S. federal income tax basis of each Oil and Gas Property shall be allocated to each Member in accordance with such Member’s Capital Interest Percentage as of the time such Oil and Gas Property is contributed to or acquired by the Company (and any additions to such U.S. federal income tax basis resulting from expenditures required to be capitalized in such basis shall be allocated among the Members in a manner designed to cause the Members’ proportionate shares of such adjusted U.S. federal income tax basis to be in accordance with their respective Capital Interest Percentages as determined at the time of any such additions), and shall be reallocated among the Members in accordance with the Members’ respective Capital Interest Percentages as determined immediately following the occurrence of an event giving rise to an adjustment to the Book Basis of the Company’s Oil and Gas Properties pursuant to clause (ii) of the definition of Book Basis. The Company shall include in the information provided to each Member pursuant to this Agreement such Member’s allocable share of the U.S. federal income tax basis of each Oil and Gas Property, any adjustment resulting from expenditures required to be capitalized in such basis, and any reallocation of such basis as provided in the previous sentence. The allocations described in this Section 5.3 are intended to be applied in accordance with the Members’ “interests in partnership capital” under Section 613A(c)(7)(D) of the Code; provided that the Members may, in good faith, authorize special allocations of U.S. federal income tax basis, income, gain, deduction or loss, as computed for U.S. federal income tax purposes, in order to eliminate differences between Simulated Basis and adjusted U.S. federal income tax basis with respect to Oil and Gas Properties, in such manner as determined consistent with the principles outlined in Section 5.3(b). The provisions of this Section 5.3 and the other provisions of this Agreement relating to allocations under Section 613A(c)(7)(D) of the Code are intended to comply with Treasury Regulations Section 1.704–1(b)(4)(v) and shall be interpreted and applied in a manner consistent with such Treasury Regulations. Each Member, with the assistance of the Company, shall separately keep records of its share of the adjusted tax basis in each Oil and Gas Property, adjust such share of the adjusted tax basis for any cost or percentage depletion allowable with respect to such property and use such adjusted tax basis in the computation of its cost depletion or in the computation of its gain or loss on the disposition of such property by the Company. Upon the request of the Company, each Member shall advise the Company of its adjusted tax basis in each Oil and Gas Property and any depletion computed with respect thereto, both as computed in accordance with the provisions of this subsection. The Company may rely on such information and, if it is not provided by the Member, may make such reasonable assumptions as it shall determine with respect thereto. The Company shall provide each Member with information reasonably requested by such Member to comply with this Section 5.3 and other tax reporting obligations.

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Section 5.4 Distributions. Distributions from the Company will be made from Available Cash or pursuant to Section 5.4(d), as provided in this Section 5.4:

(a) Distributions of Available Cash and pursuant to Section 5.4(d) shall be made upon the occurrence of any of a Liquidity Event or as otherwise determined by the Board from time to time, and all such distributions shall be allocated and distributed as follows:

(i) first, until the Priority Amount of each Class A Unit has been reduced to zero, (A) an amount equal to the A/C Sharing Percentage of the holder of Class C Units shall be allocated and distributed to the holder of Class C Units and (B) the remaining amount shall be allocated to the holders of Class A Units and distributed to each such holder of Class A Units in proportion to the respective aggregate Priority Amount of the Class A Units held by such holders of Class A Units;

(ii) thereafter (subject to the following paragraph), (A) eighty percent (80%) shall be allocated among the holders of Class A Units and the holder of Class C Units in proportion to their respective A/C Sharing Percentages at such time and (x) such amount allocated to the holders of Class A Units shall be distributed to the holders of Class A Units in proportion to their respective Class A Sharing Percentage at such time and (y) such amount allocated to the holder of Class C Units shall be distributed to such holder of Class C Units and (B) twenty percent (20%) shall be allocated and distributed to the holder of Class B Units.

If, after any distributions are made pursuant to this Section 5.4, additional Capital Contributions are made on account of or in exchange for Class A Units, then (x) subsequent distributions under this Section 5.4 shall be made giving effect to such additional Capital Contributions and the effect of such additional Capital Contributions on the distributions to be made pursuant to Section 5.4 to each holder of Class A Units and the amount required to be distributed to each holder of Class A Units pursuant to each of Section 5.4(a)(i) and (ii), and (y) any amount that otherwise would be distributable to the holders of Class B Units on account of their Class B Units shall instead be paid to the holders of Class A Units on account of their Class A Units until the holders of Class A Units shall have received on account of their Class A Units the amount that they would have received on account of their Class A Units pursuant to this Agreement based on the total amount that has been distributed by the Company.

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(b) All distributions, including tax distributions treated as advances of such distributions pursuant to Section 5.4, shall be credited towards or applied against the return calculations in clause (a) above. For the avoidance of doubt, no distributions will be made under this Agreement other than distributions made pursuant to this Section 5.4 and Section 5.5. In the event that a reassignment to Nytis LLC occurs pursuant to Section 2.4 of the Participation Agreement, such reassignment amounts shall not be treated as a distribution under this Agreement.

(c) Prior to the dissolution of the Company in accordance with Article VII, distributions pursuant to Section 5.4 may only be made of cash and Marketable Securities without the approval of a Supermajority of the Voting Power. In connection with a dissolution of the Company in accordance with Article VII, the Company may distribute property other than cash and Marketable Securities with the approval of a Majority of the Voting Power.

(d) Cash and Non-Cash Distributions.

(i) Subject to Section 5.4(d)(ii), if any distribution consists of both cash and non–cash property, then unless otherwise determined by a Supermajority of Voting Power the cash and non–cash property shall be distributed on a pro rata basis such that the total amount of property distributed on account of each Unit shall contain the same percentage of cash and the same percentage of non–cash property (based on the Fair Market Value of such non–cash property), and, to the extent the non–cash distributable property shall consist of more than one item of non–cash property, the Board shall, to the extent practicable, allocate to each Unit receiving a distribution the same percentage (as a percentage of the total value of cash and non–cash property distributed) of each item or type of non–cash property.

(ii) If any distribution consists of both cash and non–cash property and such distribution is allocated among more than one class of Units, then the cash and non–cash property shall be distributed on a pro rata basis such that the total amount of property distributed to each class of Units receiving a distribution shall contain the same percentage of cash and the same percentage of non–cash property (based on the Fair Market Value of such non–cash property), and, to the extent the non–cash distributable property shall consist of more than one item of non–cash property, the Board shall, to the extent practicable, allocate to each class of Units receiving a distribution the same percentage (as a percentage of the total value of cash and non–cash property distributed) of each item or type of non–cash property.

(iii) The amount of any non-cash property to be distributed in accordance with Section 5.4 shall be its Fair Market Value.

(e) Any distributions pursuant to this Section 5.4 made in error or in violation of Section 18-607(a) of the Act, will, upon demand by the Board, be returned to the Company.

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Section 5.5 Tax Distributions. Subject to the Act, the Company may, to the extent of Available Cash and in proportion to their respective allocations of taxable income of the Company for the taxable year, distribute to the Members an amount up to the aggregate amount equal to the Tax Liability Deficiency. The distributions pursuant to this Section 5.5 shall be made in quarterly installments on an estimated basis on or before the 10th day of each March, June, September and December. The amount to be distributed to a Member pursuant to this Section 5.5 in respect of any taxable year shall be computed as if any distributions made to such Member pursuant to Section 5.4 during such taxable year were a distribution under this Section 5.5 in respect of such taxable year.

(a) All distributions made to a Member pursuant to this Section 5.5 on account of the taxable income allocated to such Member shall be treated as advance distributions under Section 5.4 and shall be taken into account in determining the amount of future distributions to such Member, and for purposes of determining the amount of distributions to be made to the Members pursuant to Section 5.4, distributions made pursuant to this Section 5.5 shall be taken into account at such time as they are being made pursuant to this Section 5.4.

Section 5.6 Liability of Members; Return of Class A Distributions and Class C Distributions.

(a) Except as explicitly provided in the Act, no Member shall be liable for any debts, liabilities, contracts or obligations of the Company whatsoever.

(b) (i) Except as required by the Act, other applicable law or as otherwise expressly set forth herein, no Member shall be required to repay to the Company, any Member or any creditor of the Company all or any part of the distributions made to such Member pursuant hereto; provided, however, that, subject to the limitations set forth in Section 5.6(c) hereof, the Board may require a Class A Member and a Class C Member to return distributions made to such Class A Member on account of their Class A Units and Class C Member on account of its Class C Units for the purpose of meeting such Member’s pro rata share of any Company Expenses (as determined by the Board based on distributions received from the Company by each Class A Member on account of its Class A Units and Class C Member on account of its Class C Units relative to all distributions received from the Company by all Class A Members on account of their Class A Units and Class C Member on account of its Class C Units); provided, however, that in no event shall the Board require any Class A Member or Class C Member to return any distributions unless the Board requires each Class A Member and the Class C Member to return a proportionate share (as determined on the same basis as above) of distributions.

(ii) If, notwithstanding anything to the contrary contained herein, it is determined under applicable law that any Class A Member or Class C Member has received a distribution which is required to be returned to or for the account of the Company or Company creditors, then the obligation under applicable law of any Class A Member or Class C Member to return all or any part of a distribution made to such Class A Member or Class C Member shall be the obligation of such Class A Member or Class C Member and not of any other Class A Member or Class C Member.

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(iii) Any amount returned by a Class A Member or Class C Member pursuant to this Section 5.6(b) shall be treated as a Capital Contribution to the Company.

(c) The obligation of a Class A Member and a Class C Member to return distributions pursuant to this Section 5.6 shall survive the termination of the Company and this Agreement and be subject to the following limitations:

(i) no Class A Member or Class C Member shall be required to return a distribution after the earlier to occur of (x) the third anniversary of the date of termination of the Company, and (y) the third anniversary of the date of the applicable distribution; provided, however, that if at such applicable anniversary, there are any legal proceedings then pending or any other liability (whether contingent or otherwise) or claim then outstanding, then, the obligation of such Class A Member or Class C Member to return such distribution for the purpose of meeting such Member’s pro rata share of any Company Expenses shall survive with respect to each such legal proceeding, liability and claim set forth in such notice (or any related legal proceeding, liability or claim based upon the same or a similar claim) until the date that such legal proceeding, liability or claim is ultimately resolved and satisfied;

(ii) the aggregate amount of distributions which a Class A Member or Class C Member may be required to return hereunder shall not exceed an amount equal to the aggregate amount of distributions made to them on account of their Class A Units or Class C Units, as applicable (net of taxes actually paid on account of such distributions by any such holder of Class A Units or Class C Units, its Affiliates or direct or indirect members or equity owners).

Section 5.7 Return of Class B Distributions. If, upon the dissolution by the Company pursuant to Article VII and the final distribution of all assets of the Company pursuant to Section 5.4, the amount distributed on account of the Class B Units exceeds the aggregate amount distributable on account of the Class B Units pursuant to Section 5.4 after giving effect to all distributions pursuant to Section 5.4 and Section 5.5 (the amount of such excess, the “Excess Class B Distribution Amount”) then the Class B Member shall return to the Company an amount equal to the Excess Class B Distribution Amount, and the amount returned to the Company shall be allocated among and distributed to the holders of Class A Units and Class C Units in accordance with Section 5.4 and Section 5.5, as applicable.

ARTICLE VI
TRANSFER; WITHDRAWAL; SALE RIGHTS; EXIT EVENTS

Section 6.1 Transfers.

(a) No Transfer of all or part of a Member’s Interest may be made except (i) in the case of Yorktown or Carbon, with the approval of a Majority of the Voting Power (provided that approval of a Majority of the Voting Power is not required for a Yorktown-Carbon Assignment), (ii) to a Permitted Transferee of such Member, (iii) in accordance with Section 6.2, Section 6.3, Section 6.5, Section 6.6 or Section 6.9, or (iv) Transfers to or from a Subject Company pursuant to Section 6.4, and then only if a counterpart of the instrument of Transfer, executed and acknowledged by or on behalf of the parties thereto (provided if a holder of Units fails to execute any such instrument in breach of its obligations under this Agreement, the signature of such Person shall not be required) is delivered to the Company. Notwithstanding the foregoing, no Indirect Parent Transfer may be made without first obtaining approval of a Supermajority of the Voting Power. A permitted Transfer will be effective as of the date specified in the instruments of assignment or conveyance, subject to applicable law, provided that an assignee will not be admitted as a Member except in accordance with Section 6.7. Notwithstanding the foregoing, the Class B Units and Class C Units shall not be Transferable except as expressly provided in this Article VI.

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(b) In no event shall a Transfer be permitted if (i) such Transfer would cause interests in the Company to be traded on an established securities market, secondary market or substantial equivalent thereof within the meaning of Treasury Regulations Sections 1.7704-1 or (ii) such Transfer would cause the Company to become subject to regulation under either the Investment Company Act or the Investment Advisers Act.

Section 6.2 Drag-Along Rights.

(a) In the event Old Ironsides or its Permitted Transferees propose to Transfer all or any portion of its Interests other than to a Permitted Transferee of such Member and such Interests constitute more than 50% of the outstanding Class A Units (a “Drag-Along Sale”), Old Ironsides and its Permitted Transferees effecting such Transfer (collectively, the “Dragging Member”) shall have the right to require each other Member (each, a “Drag-Along Member”) to sell their Interests in such Drag-Along Sale by Transferring up to a proportion (based on the percentage of the Class A Units being Transferred by the Dragging Member relative to the number of Class A Units owned by the Dragging Member) of the Class A Units held by each Drag-Along Member at the purchase price and upon the other terms and subject to the conditions of the Drag-Along Sale (all of which shall be set forth in the Drag-Along Notice).

(b) The Dragging Member shall provide each Drag-Along Member written notice of the terms and conditions of such proposed Transfer (the “Drag-Along Notice”) not later than 15 Business Days prior to the closing of the proposed Drag-Along Sale. The Drag-Along Notice shall contain a true and complete copy of any and all available documents constituting the agreement to transfer and, to the extent not set forth in the accompanying documents, the price offered for the Interests, all information reasonably available to the Dragging Member regarding the acquirer, all other material terms and conditions of the proposed Drag-Along Sale and, in the case of a proposed Drag-Along Sale in which the consideration payable for the Interests consists in whole or in part of consideration other than cash, such information relating to such other consideration as is reasonably available to the Dragging Member. Each Drag-Along Member shall be required to participate in the Drag-Along Sale on the terms and conditions set forth in the Drag-Along Notice and this Section 6.2. No Member shall have any dissenters’ or appraisal rights in connection with the Drag-Along Sale, and each Member hereby releases, and will execute such further instrument as the Company reasonably requests to further evidence the waiver of, such rights.

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(c) Within 10 Business Days following receipt of the Drag-Along Notice (the “Drag-Along Notice Period”), each Drag-Along Member must deliver to such Dragging Member (i) wire transfer instructions for payment of the purchase price for the Interests to be sold in such Drag-Along Sale, and (ii) all other documents required to be executed in connection with such Drag-Along Sale. Each Member makes, constitutes, and appoints the Manager (or its chief executive officer, in his official corporate capacity) as its true and lawful attorney-in-fact for such person and in its name, place, and stead and for its use and benefit, to sign, execute, certify, acknowledge, swear to, file, and record any instrument that is now or may hereafter be deemed necessary by the Company in its reasonable discretion to carry out fully the provisions and the agreement, obligations, and covenants of such Member in this Section 6.2 in the event that such Member is or becomes a Drag-Along Member pursuant to this Section 6.2. Each Member hereby gives such attorney-in-fact full power and authority to do and perform each and every act or thing whatsoever requisite or advisable to be done in connection with such Member’s obligations and agreements as a Drag-Along Member pursuant to this Section 6.2 as fully as such Member might or could do personally, and hereby ratifies and confirms all that any such attorney-in-fact shall lawfully do or cause to be done by virtue of the power of attorney granted hereby. The power of attorney granted pursuant hereto is a special power of attorney, coupled with an interest, and is irrevocable, and shall survive the bankruptcy, insolvency, dissolution or cessation of existence of the applicable Member.

(d) If, at the end of the 90-day period after the date on which the Dragging Member gives the Drag-Along Notice (which 90-day period shall be extended if any of the transactions contemplated by the Drag-Along Sale are subject to regulatory approval until the expiration of five Business Days after all such approvals have been received, but in no event later than 120 days following the delivery of the Drag-Along Notice), the Drag-Along Sale has not been completed on substantially the same terms and conditions set forth in the Drag-Along Notice, the Drag-Along Members shall no longer be obligated to sell their Interests pursuant to such Drag-Along Notice and the Dragging Member shall return to each Drag-Along Member any documents in the possession of the Dragging Member executed by or on behalf of such Drag-Along Member in connection with the proposed Drag-Along Sale.

(e) Concurrently with the consummation of the Drag-Along Sale, Dragging Member shall (i) notify the Drag-Along Members thereof, (ii) remit to the Drag-Along Members the total consideration for the Interests of the Drag-Along Members Transferred pursuant thereto, and (iii) promptly after the consummation of the Drag-Along Sale, furnish such other evidence of the completion and the date of completion of such Transfer and the terms thereof as may be reasonably requested by the Drag-Along Members.

(f) Notwithstanding anything contained in this Section 6.2, there shall be no liability on the part of the Dragging Member to the Drag-Along Members if the Transfer of the Interests pursuant to this Section 6.2 is not consummated for whatever reason.

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(g) Notwithstanding anything contained in this Section 6.2, the obligations of the Drag-Along Members to participate in a Drag-Along Sale are subject to the following conditions:

(i) upon consummation of such Drag-Along Sale, (A) all of the Members participating therein will receive the same form of consideration, and (B) the aggregate consideration received by the Members will be paid to the Members subject to the allocation provisions set forth in Section 5.4;

(ii) no Drag-Along Member participating therein shall be obligated to pay any expenses incurred in connection with any unconsummated Drag-Along Sale, and each Drag-Along Member shall be obligated to pay only its pro rata share (based on the amount of the purchase price received) of expenses incurred in connection with a consummated Drag-Along Sale to the extent such expenses are incurred for the benefit of all Members and are not otherwise paid by the Company or another person;

(iii) without the written consent of a Drag-Along Member, such Drag-Along Member shall not be obligated with respect to (A) any representation or warranty other than (I) a representation and warranty that relates solely to such Drag-Along Member’s title to its Interest, and its authority and capacity to execute and deliver the subject purchase and sale agreement or (II) a representation and warranty that relates to the Company and its operations which each Member is severally making to the buyer, or (B) any indemnity obligation beyond a pro rata portion (based on and limited to the value of consideration received by such Drag-Along Member in the Drag-Along Sale) of the indemnity obligations which obligate the Dragging Member and all Drag-Along Members and then, such indemnity obligations shall be several and not joint, or (C) any other continuing obligation on such Drag-Along Member in favor of any other person following the Disposition of such Drag-Along Member’s Interests (other than obligations relating to representations and warranties that relate solely to such Drag-Along Member and not to any other Member or the indemnification obligation provided for in clause (B) above);

(iv) no Drag-Along Member shall be obligated to consummate such Drag-Along Sale contemplated by the Drag-Along Notice with respect to its Interests unless the Dragging Member consummates such Drag-Along Sale with respect to all (but not less than all) of their Interests on the terms and conditions contemplated by the Drag-Along Notice; and

(v) no Drag-Along Member shall be obligated to participate in a Drag-Along Sale that is an Excluded Affiliate Transfer.

(h) If a Member whose Class A Units are Transferred pursuant to this Section 6.2 also holds Class B Units or Class C Units and all of such Member’s Class A Units are Transferred pursuant to this Section 6.2, then all Class B Units and all Class C Units held by such Member shall be Transferred together with such Member’s Class A Units in the Drag-Along Sale. If a Member whose Class A Units are Transferred pursuant to this Section 6.2 also holds Class B Units or Class C Units and less than all of such Member’s Class A Units are Transferred pursuant to this Section 6.2, then all Class B Units and all Class C Units held by such Member shall be retained by such Member and not included in the Drag-Along Sale.

(i) In any Drag-Along Sale in which a Drag-Along Member participates pursuant to this Section 6.2, the aggregate consideration to be paid by the acquiring party shall be allocated among each class of Units included in such Drag-Along Sale and the holders of Class A Units (with respect to their Class A Units), the holders of Class B Units (with respect to their Class B Units) and the holder of Class C Units (with respect to the Class C Units) included in the Drag-Along Sale as provided in Section 6.11.

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Section 6.3 Tag-Along Rights.

(a) In the event Old Ironsides or its Permitted Transferees propose to Transfer any of its Interests other than to a Permitted Transferee of such Member and such Interests constitute more than 50% of the outstanding Class A Units, then Old Ironsides and its Permitted Transferees effecting such Transfer (collectively, the “Tag-Along Transferring Member”) shall permit Yorktown and Carbon (each, a “Tag-Along Participant”) to participate in such Transfer (a “Tag-Along Sale”) by Transferring (at each Tag-Along Participant’s election) up to a proportion (based on the percentage of the Class A Units being Transferred by the Tag-Along Transferring Member relative to the number of Class A Units owned by the Tag-Along Transferring Member) of the Class A Units held by each Tag-Along Participant at the purchase price and upon the other terms and subject to the conditions of the Tag-Along Sale (all of which shall be set forth in the Tag-Along Notice).

(b) At least twenty (20) Business Days prior to the date on which the Tag-Along Transferring Member expects to consummate the Transfer, the Tag-Along Transferring Member shall deliver a written notice (“Tag-Along Notice”) to the Tag-Along Participants, which shall set forth all relevant information with respect to the proposed Transfer, including the identity of the buyer, the proposed purchase price, the Interests that are the subject of the sale, the expected closing date of the Transfer, and any other terms and conditions of the proposed Transfer (including copies of all available and relevant proposed purchase and sale documents). Any Tag-Along Participant electing to participate in the Transfer shall provide the Tag-Along Transferring Member with written notice thereof within ten (10) Business Days prior to the date on which the Tag-Along Transferring Member expects to consummate the Transfer (or if the Tag-Along Transferring Member delivers an amended Tag-Along Notice, within 10 days after the delivery of such amended Tag-Along Notice (and the closing of the Transfer shall not occur prior to the expiration of 10 days after such amended Tag-Along Notice has been delivered to each Tag-Along Participant)). Each Tag-Along Participant electing to Transfer its Interests shall execute such documents, as are executed by the Tag-Along Transferring Member with respect to the Transfer; provided, however, that any representations and warranties relating specifically to any Member shall only be made by that Member and any indemnification provided by the Members shall be made on a several, not joint, basis (provided each Tag-Along Transferring Member and Tag-Along Participant shall be required to provide proportionate (based on the amount of consideration to be received) indemnification with respect to any representations and warranties related to the Company and its Subsidiaries); provided further, however, that each Tag-Along Participant shall be required to represent and warrant with respect to the Required Representations. In no event shall the amount of any indemnity obligation of any Tag-Along Participant exceed the amount of cash and the Fair Market Value of any non-cash consideration received by such Tag-Along Participant in such Transfer, except in the case of fraud by such Tag-Along Participant. Any indemnification or other obligation assumed or incurred in connection with a Transfer shall be allocated among the Persons Transferring Units in connection with such Transfer in the same proportion as the consideration received by such Persons in connection with such Transfer, in each case other than with respect to the Required Representations.

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(c) After the consummation of the Transfer pursuant to this Section 6.3, the Tag-Along Transferring Member shall give notice thereof to the Tag-Along Participants, shall remit to each such Tag-Along Participant any funds due to such Tag-Along Participant and held by the Tag-Along Transferring Member, and shall furnish such other evidence of the completion of such Transfer and the terms thereof as may be reasonably requested by such Tag-Along Participant. If within ninety (90) days after the Tag-Along Transferring Member gives the Tag-Along Notice (or the amended Tag-Along Notice, if applicable), which 90-day period shall be extended if any of the transactions contemplated by the Tag-Along Sale are subject to regulatory approval until the expiration of five Business Days after all such approvals have been received, but in no event later than 120 days following the delivery of the Tag-Along Notice (or the amended Tag-Along Notice, if applicable), the Tag-Along Transferring Member has not completed the Transfer, it shall return to each Tag-Along Participant any documents in possession of the Tag-Along Transferring Member executed by such Tag-Along Participant in connection with such proposed Transfer.

(d) Each Member selling any Units pursuant to any Transfer pursuant to this Section 6.3 in which less than all of the outstanding Class A Units are sold (a “Tag-Along Partial Sale”) shall, prior to the consummation of such sale, notify the Board of which Class A Units are being sold by such Member (including any Capital Contributions and distributions previously made in respect of such Class A Units) pursuant to such Tag-Along Partial Sale. The transferee of such Class A Units shall succeed to the portion of the Capital Account and characteristics associated with such Class A Units.

(e) If a Tag-Along Participant also holds Class B Units or Class C Units and such Tag Along Participant is disposing of all of its Class A Units in such Tag-Along Sale, then all Class B Units and all Class C Units held by such Tag-Along Participant shall be Transferred in such Tag-Along Sale together with such Tag-Along Participant’s Class A Units. If a Tag-Along Participant also holds Class B Units or Class C Units and such Tag Along Participant is disposing of less than all of its Class A Units in such Tag-Along Sale, then all Class B Units and all Class C Units held by such Tag-Along Participant shall be retained by such Member and not included in such Tag-Along Sale.

(f) In any Tag-Along Sale in which a Tag-Along Participant participates pursuant to this Section 6.3, the aggregate consideration to be paid by the acquiring party shall be allocated among each class of Units included in such Tag-Along Sale and among the holders of Class A Units (with respect to their Class A Units), the holders of Class B Units (with respect to their Class B Units) and the holder of Class C Units (with respect to the Class C Units) included in such Tag-Along Sale as provided in Section 6.11.

(g) For purposes of this Section 6.3, “Old Ironsides” shall mean Old Ironsides and each transferee of Class A Units from Old Ironsides and “Carbon” shall mean Carbon and each transferee of Class A Units from Carbon.

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Section 6.4 Indirect Transfer.

(a) If any holder of Class A Units or any Parent of a holder of Class A Units proposes to effect a transaction or series of transactions that would result in a Change in Control of such holder of Class A Units or any such Parent (such transaction, an “Indirect Parent Transfer”), then such holder of Class A Units (the “Subject Company”) or its Parent shall give written notice to the other Class A Members (“IPT Notice”) at least twenty (20) days prior to the consummation of such Indirect Parent Transfer (or such shorter period as is agreed by the relevant parties), stating the desire of such holder of Class A Units or such Parent to effect such Indirect Parent Transfer, the identity of the other party to such transaction (the “Offeror”), the interest to be Transferred, and all other material terms and conditions of such transaction, including a description of purchase price allocation.

(b) Upon an Indirect Parent Transfer consummated without the approval of the IPT Eligible Member, (i) each IPT Eligible Member shall have the right to, each at its own option, purchase all, but not less than all, of the Units held by the Subject Company for an amount in cash equal to the implied value per Unit allocated to such Units by the Offeror, or if no such allocation is made by the Offeror, the fair market value of such Units (such implied value or fair market value per Unit the “IPT Transaction Value”) (provided more than one IPT Eligible Member exercises its right to purchase, each exercising IPT Eligible Member will have the right to purchase its pro rata portion of the Units being sold in the proportion that the relative Class A Sharing Percentage of the exercising Members) or (ii) if the IPT Eligible Member does not exercise its rights under clause (i) above, then each IPT Eligible Member, each at its own option, may sell to the Subject Company, and the Subject Company shall have the obligation to purchase, all, but not less than all, of the Units held by each exercising IPT Eligible Member for an amount in cash equal to the IPT Transaction Value of such Units. Such rights may be exercised by written notice to the Subject Company given within twenty (20) days of receipt of the IPT Notice, or, if an IPT Notice is not delivered to a IPT Eligible Member in violation of this Section 6.4(b) or an Indirect Parent Transfer otherwise occurs with respect to a IPT Eligible Member, then such right may be exercised by the applicable IPT Eligible Member(s) providing written notice to the Subject Company within one hundred twenty (120) days after such IPT Eligible Member obtains actual knowledge of such Indirect Parent Transfer (any such notice, and “IPT Exercise Notice”). The failure of a recipient of an IPT Notice or any other IPT Eligible Member to notify the Subject Company within such applicable time period provided above of any election under this Section 6.4(b) shall be deemed an election by such IPT Eligible Member not to exercise its right to acquire or sell Units pursuant to this Section 6.4 in connection with such Indirect Parent Transfer.

(c) For purposes of this Section 6.4, the “fair market value” of any Units shall be the fair market value of such Units, as agreed to by the Subject Company and the holders of each Class of Units electing to purchase or sell such Units (such holders electing to purchase or sell Units, collectively as to each class of Units, the “Exercising Member”) that collectively hold a majority of such class of Units held by all Exercising Members of such class of Units (as to each class of Units, the “Primary Exercising Members”) or, in the event the Subject Company and the Primary Exercising Member fail to agree within fifteen (15) days after the Exercising Member has delivered a IPT Exercise Notice to the Subject Company in accordance with Section 6.4(b), the fair market value of such Units as determined by a Qualified Appraiser which has not had any material engagement with the Subject Company or the Primary Exercising Members or any of their respective Affiliates in the preceding two years selected by the Primary Exercising Member. Any such Qualified Appraiser so appointed shall be deemed the “Initial Appraiser.”

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(d) In the event that the Subject Company objects to the fair market value determination made by the Initial Appraiser, then the Subject Company may, within thirty (30) days after receipt of the Initial Appraiser’s determination of fair market value, select a Qualified Appraiser which has not had any material engagement with the Subject Company or the Primary Exercising Member or any of their respective Affiliates in the preceding two years (the “Second Appraiser”). The Initial Appraiser and the Second Appraiser shall thereupon select a third Qualified Appraiser (the “Neutral Appraiser”). The Subject Company and the Exercising Member shall execute such engagement and indemnity agreements as the Neutral Appraiser shall require as a condition to engagement and each shall be responsible for all fees and expenses of the investment bank selected by it and for its one–half of all fees and expenses of the Neutral Appraiser. The Subject Company and the Exercising Member shall, and shall cause their respective Affiliates to, make available to the other and the investment banks such information as is reasonably necessary to reach a fair market value determination. Each of the Initial Appraiser, Second Appraiser, and Neutral Appraiser shall independently determine its proposed fair market value of the Units, and “fair market value” shall thereupon mean the average of the two such proposed fair market values that are nearest to one another. The following principle shall apply generally to any determination of fair market value under this Section 6.4: fair market value shall mean the cash price at which the Units would change hands between a willing buyer and a willing seller, neither being under any compulsion and both having a reasonable knowledge of the relevant facts including the application of Section 5.4 and without reduction based upon any lack of control, minority ownership, marketability or other similar discounts. If the Subject Company fails to select the Second Appraiser within the 30 day period provided above, such Subject Company shall be deemed to have waived such objection and the fair market determination by the Initial Appraiser shall be deemed final.

(e) Notwithstanding anything in this Section 6.4, within fifteen (15) days after receipt of an IPT Exercise Notice by a Subject Company such Subject Company may deliver written notice (a “Cure Notice”) to the Person who delivered such IPT Exercise Notice that the Indirect Parent Transfer was inadvertent and such Subject Company may, during the thirty (30) days immediately following delivery of a Cure Notice (the “Cure Period”), effect such actions to cause the Change in Control giving rise to the Indirect Parent Transfer to cease to exist such that there shall no longer exist a Change in Control of such Subject Company, and the time periods for actions to occur after delivery of an IPT Exercise Notice (other than the Cure Period) shall be tolled during such Cure Period. If the Subject Company successfully takes such action within such Cure Period to cause the Change in Control giving rise to such Indirect Parent Transfer to cease to exist such that there shall no longer exist a Change in Control of the Subject Company upon the expiration of such Cure Period, then this Section 6.4 shall no longer apply with respect to such previous Indirect Parent Transfer.

(f) Notwithstanding anything in this Section 6.4, a Change in Control of the Ultimate Parent of Old Ironsides shall not constitute a Change in Control of Old Ironsides or any Permitted Transferee of Old Ironsides, a Change in Control of the Ultimate Parent of Yorktown shall not constitute a Change in Control of Yorktown or any Permitted Transferee of Yorktown, a Change in Control of the Ultimate Parent of Carbon shall not constitute a Change in Control of Carbon or any Permitted Transferee of Carbon, and a Change in Control of the Ultimate Parent of any other Member shall not constitute a Change in Control of such Member or any Permitted Transferee of such Member for purposes of this Section 6.4.

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Section 6.5 Liquidity Event.

(a) Notwithstanding anything to the contrary set forth herein:

(i) So long as the Company has not effected a Public Offering, at any time following February 23, 2024, Carbon (if Carbon is not a Defaulting Member) and Old Ironsides (if Old Ironsides is not a Defaulting Member) shall each have the right, at each of their express direction and in each of their sole discretion, to direct the Board to take such actions to effect a Liquidity Event upon delivering a written notice thereof to the Board of such direction (a “Liquidity Event Notice”).

(ii) (A) At any time Yorktown or Carbon is a Defaulting Member, (B) following a Key Man Event pursuant to Section 4.2(c) or (C) if the Services Agreement is terminated, so long as the Company has not effected a Public Offering, Old Ironsides shall have the right, at its express direction and in its sole discretion, to direct the Board to take such actions to effect a Liquidity Event upon delivering a Liquidity Event Notice.

(b) Upon receipt of a Liquidity Event Notice, the Company shall use commercially reasonable efforts to consummate a Liquidity Event as soon as practicable and shall diligently pursue the consummation of a Liquidity Event in good faith and the Board shall manage the business and affairs of the Company primarily with a view toward the consummation of such Liquidity Event as soon as reasonably practicable following the exercise of such right, and the approval of a Liquidity Event by an Old Ironsides Designee or a Carbon Designee shall be deemed approval of such Liquidity Event by the Board, subject to any approval required by Section 2.4(b)(v). Each Member shall, and shall cause its Affiliates to, take all actions, including those set forth in Section 6.5(c), if applicable, reasonably necessary or appropriate to (i) cooperate with the Company in working toward the consummation of a Liquidity Event and (ii) cause its Board appointees to act in accordance with this Section 6.5 (including replacing its Board appointees, if necessary).

(c) If the Board approves (or is deemed to have approved) a Liquidity Event (an “Approved Exit”), each Member shall raise no objections against such Approved Exit and, to the extent necessary to effect the consummation of such Approved Exit, vote for and consent to such Approved Exit; provided, however, that any such vote, consent or approval by a Member shall not constitute a waiver or otherwise affect any rights or obligations of any Member under this Section 6.5, or Section 6.6 of this Agreement with respect to such Approved Exit or any rights of a Member with respect to or arising as a result of such Approved Exit under any agreement to which such Member is a party. If the Approved Exit is structured as a (i) merger, consolidation or sale of assets, each Member shall waive any dissenters’ rights, appraisal rights or similar rights in connection with such merger, consolidation or sale of assets or (ii) sale of Units, each Member shall agree to sell all of his, her or its Units or rights to acquire Units on the terms and conditions approved by the Board (subject to Section 6.11). Each Member shall take all necessary or desirable actions in connection with the consummation of the Approved Exit as reasonably requested by the Board.

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(d) In any Approved Exit, the consideration received by the Company shall be allocated and distributed to each Member in accordance with Section 5.4 after all the liabilities of the Company have been satisfied in full or provided for.

(e) Members shall bear their pro rata share (based upon the allocation set forth in Section 6.5(d)) of the costs of any sale of Interests pursuant to an Approved Exit to the extent such costs are incurred for the benefit of all Members and are not otherwise paid by the Company or the acquiring party. For purposes of this Section 6.5, costs incurred by Members in exercising reasonable efforts to take all actions in connection with the consummation of an Approved Exit in accordance with this Section 6.5 shall be deemed to be for the benefit of all Members. Costs incurred by Members solely on their own behalf will not be considered costs of the transaction hereunder.

(f) If the Board determines that the Liquidity Event shall be a Public Offering:

(i) each Member agrees that it will, and will cause its Affiliates and any Director appointed by such Member to, and the Company shall:

(A) if the underwriters in any Public Offering request that all Members hold their Interest (or any equity securities of any Entity effecting such Public Offering) for a period of time following the Public Offering, do so and enter into a customary lock-up agreement;

(B) complete and execute all consents, questionnaires, powers of attorney, indemnities, underwriting agreements and other documents as may reasonably be required or advisable in connection with a Public Offering; provided that no such Person shall be required to make any representations or warranties in connection with a Public Offering other than representations and warranties regarding such Person and, if applicable, such Person’s intended method of distribution;

(C) if determined by the Board to be reasonably necessary or appropriate in connection with a Public Offering, do all things reasonably necessary or advisable to effect any Internal Restructure in accordance with Section 6.9;

(D) consent to certain additional restrictions on the Transfer of Interests (or any equity securities of any Entity effecting such Public Offering) which the Board determines may be required in order to permit compliance with the Securities Act or other applicable law;

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(E) use commercially reasonable efforts to accommodate any such other reasonable actions required by the United States Securities and Exchange Commission or similar governmental authority to effect the Public Offering; and

(F) make modifications to this Agreement (or any other agreement then governing the rights and obligations of the Members with respect to the Company or any successor to the Company) as are customary and appropriate for companies that conduct a Public Offering, such modifications to be in form and substance reasonably satisfactory to Carbon and Old Ironsides.

(ii) The Company shall be responsible for its own costs, fees and expenses in connection with a Public Offering and shall reimburse the Members and their Affiliates for the reasonable out-of-pocket costs, fees and expenses (excluding underwriting discounts, selling commissions and similar fees) incurred by them in connection with a Public Offering, including the reasonable costs, fees and expenses of one outside counsel for each Member.

(iii) Each of the Members shall be granted customary demand and piggyback registration rights effective from and after the Public Offering, as well as the right to include their Interests (or any securities for which such Interests are exchanged or into which such Interests are converted) in the Public Offering on a pro rata basis (based on the relative percentages of securities of this type to be included in the Public Offering held by the Members immediately prior to the Public Offering); provided that if the managing underwriter or the placement agent advises the Company or the Board that the inclusion of securities of the Members in the Company or any Affiliate of the Company requested to be included for sale in a secondary offering in connection with the Public Offering would materially and adversely affect the price, distribution or timing of the offering, then the Company shall have the right to exclude all or any portion of such securities of the Company or any Affiliate of the Company from sale in connection with the Public Offering, with such exclusions applied to the Members’ pro rata share of such securities (based on the relative percentages of securities to be included in the Public Offering held by the Members immediately prior to the Public Offering).

(g) Notwithstanding anything to the contrary contained herein, if a Liquidity Event is not consummated during the period beginning as of the date a Liquidity Event Notice is delivered to the Board through the first anniversary of such date and a Member thereafter seeks to Transfer of its Interests, Board approval for such Transfer shall not be required pursuant to Section 6.1.

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Section 6.6 Buy/Sell Rights.

(a) If a Liquidity Event is not consummated during the period beginning as of the date of Liquidity Event Notice is delivered to the Board through the first anniversary of such date, either Carbon (if Carbon is not a Defaulting Member) or Old Ironsides (if Old Ironsides is not a Defaulting Member) (the “Initiating Member”) may initiate the buy sell procedure set forth in this Section 6.6 by delivering to the other (the “Non-Initiating Member”) written notice specifying such Member’s determination of the Company Sale Value and the amount that would be distributable to each holder of Units by applying Section 5.4 based on an amount equal to the Company Sale Value as determined by such Member (giving effect to all distributions actually made pursuant to this Agreement through the date of the transaction for purposes of allocations under Section 5.4) (such aggregate amount as would be distributable to each Member, the “Buy/Sell Unit Price”), and the other terms and conditions pursuant to which the Initiating Member proposes to purchase all of the Units held by the Non-Initiating Member (the “Offer”). If either Carbon or Old Ironsides has transferred all or a portion of its Units then Carbon or Old Ironsides, as the case may be, and such transferee (whether or not the transferee has been admitted as a Member or is only an assignee) will collectively be considered as Carbon or Old Ironsides, respectively, for purposes of this Section 6.6 and all Units held by Carbon or Old Ironsides (including all such transferees), as the case may be, shall be subject to purchase by the Initiating Member under the provisions of this Section 6.6.

(b) No later than thirty (30) days following receipt of the Offer, the Non-Initiating Member must notify (a “Buy/Sell Election Notice”) the Initiating Member of its election to either:

(i) sell all Units held by the Non-Initiating Member and its Affiliates to the Initiating Member for a price equal to the applicable Buy/Sell Unit Price and on such other terms specified in the Offer; or

(ii) purchase all Units held by the Initiating Member and its Affiliates for a price equal to the applicable Buy/Sell Unit Price; provided that if the Initiating Member has transferred all or a portion of its Units, then the Units held by the Initiating Member and such transferees (whether or not the transferee has been admitted as a Member or is only an assignee) will collectively be considered as held by the Initiating Member for purposes of this Section 6.6(b)(ii) and Section 6.6(c) and Section 6.6(d) and the Units held by the Initiating Member (including all such transferees) shall be subject to purchase by the Non-Initiating Member under this Section 6.6.

(c) If the Non-Initiating Member fails to deliver a Buy/Sell Election Notice to the Initiating Member within the thirty (30) day period (or fails to close the purchase in accordance with Section 6.6(d) within the time period set forth therein), then the Non-Initiating Member will conclusively be deemed for all purposes to have elected to sell all Units held by the Non-Initiating Member as set forth in Section 6.6(b)(i), and this deemed election will be treated as having occurred on the last day of the thirty (30) day period (or ninety (90) day period under Section 6.6(d), if applicable).

(d) If the Non-Initiating Member elects to purchase all Units held by the Initiating Member pursuant to Section 6.6(b)(ii), then the closing of any sale under Section 6.6(b)(ii) to the Non-Initiating Member will be held at the principal office of the Company, unless otherwise mutually agreed, on a mutually acceptable date not more than ninety (90) days after receipt by the Initiating Member of the Non-Initiating Member’s Buy/Sell Election Notice electing to purchase the Units held by the Initiating Member.

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(e) If the Non-Initiating Member elects to sell all of the Units held by the Non-Initiating Member pursuant to Section 6.6(b)(i) or is deemed to have so elected pursuant to Section 6.6(c), then the Initiating Member may elect:

(i) to purchase such Units for the applicable Buy/Sell Unit Price with the closing of any sale to be held at the principal office of the Company unless otherwise mutually agreed, on a mutually acceptable date not more than ninety (90) days after receipt by the Initiating Member of the Buy/Sell Election Notice; provided that the Initiating Member may elect to assign its rights to purchase such Units to any one or more other Persons (which assignment shall not relieve the Initiating Member of its obligations under this Section 6.6); or

(ii) The Initiating Member may seek a third party purchaser for one hundred percent (100%) of the Units whether through an equity sale or a sale in any other form or a sale of the assets of the Company and/or its Subsidiaries (“Third Party Sale”).

(f) The Initiating Member must notify the Non-Initiating Member of its election of Section 6.6(e)(i) or Section 6.6(e)(ii) within thirty (30) days after the Initiating Member’s receipt of the Buy/Sell Election Notice. If the Initiating Member fails to timely notify the Non-Initiating Member of its election, then the Initiating Member shall be deemed to have made an election of Section 6.6(e)(i).

(g) If the Initiating Member pursues a Third Party Sale:

(i) The Non-Initiating Member and the Company shall cooperate in the Initiating Member’s Third Party Sale process in any manner reasonably requested by the Initiating Member. The Initiating Member will bear all costs and fees incurred in connection with the Third Party Sale (including without limitation all reasonable and necessary third party costs and fees, including attorneys’ fees, incurred by the Non-Initiating Member in cooperating in such Third Party Sale process), except each Member will bear the costs and fees of its own independent advisors.

(ii) The Initiating Member will have the requisite authority to negotiate and approve the Third Party Sale (which Third Party Sale will be conditioned on the consummation of the purchase or redemption of the Units of the Non-Initiating Member at the applicable Buy/Sell Unit Price); and to this end the Initiating Member will have exclusive authority during this period to approve such a sale and any related agreements without the necessity of obtaining the consent or approval of the Board or the other Member; provided, however, that any representations and warranties relating specifically to any Member shall only be made by that Member and any indemnification provided by the Members shall be made on a several, not joint, basis; provided further, however, that the Non-Initiating Member shall be required to make only the Required Representations. In no event shall (A) the consideration to be received by any Transferring Person in connection with a Third Party Sale consist of any form of non-cash consideration other than freely tradable publicly traded securities (subject to any customary lockup not to exceed 90 days) or (B) the amount of any indemnity obligation of any Transferring Person exceed the amount of cash and the fair market value of any non-cash consideration received by such Transferring Person in such Third Party Sale, except in the case of fraud by such Transferring Person. Any indemnification or other obligation assumed or incurred in connection with a Transfer shall be allocated among the Transferring Persons in the same proportion as the consideration received by the Transferring Persons, in each case other than with respect to the Required Representations.

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(iii) If the Initiating Member successfully negotiates a Third Party Sale (other than as a sale of assets), then prior to or upon consummation of the Third Party Sale, the Initiating Member will purchase the Units held by the other Members at the applicable Buy/Sell Unit Price, or cause the purchaser in such Third Party Sale to purchase such Units at the applicable Buy/Sell Unit Price. The purchase of such Units will be held at such time and place as will be elected by the Initiating Member but in any event not more than one hundred twenty (120) days after the Initiating Member’s receipt of the Buy/Sell Election Notice, subject to extension for such period of time (not to exceed thirty (30) days) as necessary to permit the Initiating Member or the third party purchaser to obtain any required governmental approvals but in any event will occur no later than upon the consummation of the Third Party Sale.

(iv) If the Initiating Member is unsuccessful in completing a Third Party Sale or the redemption or purchase of the Units held by the other Members is not consummated within the time period specified in Section 6.6(g)(iii), then Initiating Member will purchase the Units held by the Non-Initiating Member pursuant to Section 6.6(e)(i) within thirty (30) days after the one hundred twenty (120) day period set forth in Section 6.6(g)(iii).

(h) It is expressly agreed that the remedy at law for breach of any of the obligations set forth in this Section 6.6 is inadequate in view of (i) the complexities and uncertainties in measuring the actual damages that would be sustained by reason of the failure of a Member to comply with each of said obligations, and (ii) the uniqueness of the Company’s business and the Company’s relationship with the Members. Accordingly, each of the aforesaid obligations will be, and are hereby expressly made, enforceable by specific performance.

(i) Notwithstanding anything contained in this Section 6.6, each transferee of a Member’s Units or any interest therein shall be subject to the terms of this Section 6.6 (whether or not such transferee has been admitted as a Member) but a Member who has transferred its Units or any interest therein to any Person shall not be liable or responsible for any noncompliance or compliance, respectively, with this Section 6.6, by any such transferee of such Member who is not an Affiliate of such Member.

Section 6.7 Assumption of Assignee. Any Transfer of an Interest in the Company permitted under this Article VI must be in writing, and the assignee must expressly, in a written joinder executed by the assignee, (a) agree to be bound by the terms of this Agreement, (b) assume and agree to perform all of the Transferring Member’s agreements and obligations existing or arising with respect to the assigned Interest after the Transfer and (c) make the representations and warranties set forth in Section 3.8 to the Company and to the other Members effective as of the date of Transfer. Upon such Transfer and joinder, (i) the Transferring Member will be relieved of its agreements and obligations arising under this Agreement after the date of the Transfer (but not before) to the extent of the Interest assigned, and if one hundred percent (100%) of that Member’s Interest is Transferred, such Member will be deemed to have withdrawn from the Company and (ii) the assignee shall be admitted as a Member with respect to the Interests acquired upon consummation of such Transfer and compliance with this Section 6.7. An executed copy of each assignment of an Interest in the Company and the assignee’s joinder must be delivered to each Member and to the Company. Except as otherwise expressly provided herein, no permitted Transfer of any Interests will cause a termination or winding-up of the Company.

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Section 6.8 Allocations to Member’s Transferee. Upon the Transfer of all or any part of the Interest of a Member, the profits, distributions, net losses, net gains and credits attributable to the Interest Transferred will be allocated, at the sole cost and expense of the transferee and/or transferor, between the transferee and transferor as of the date set forth in the instrument of transfer, based upon a manner that complies with Section 706 of the Code and the Treasury Regulations thereunder, as determined by the Board of Directors.

Section 6.9 Internal Restructure.

(a) Subject to the consent of the Board of Directors in accordance with Article II, the Company may effect an Internal Restructure on such terms as the Board of Directors in the exercise of its reasonable discretion deems advisable. Each Member agrees that it will consent to and raise no objections to an Internal Restructure; provided that (i) the Internal Restructure is undertaken in a manner that results in the Members continuing to have substantially the same direct or indirect ownership of the Company’s assets in place prior to the Internal Restructure, (ii) the Internal Restructure preserves the relative economic interests, preferences, priorities and designations of the Members in the Company or any entity that succeeds to the Company in such Internal Restructure transaction, and (iii) such Member does not determine, based on written advice of counsel, that the Internal Restructure has a reasonable risk of having an adverse legal, regulatory, tax or accounting effect on such Member. Each Member hereby agrees that it will execute and deliver all agreements, instruments and documents as are required, in the reasonable judgment of the Board of Directors to be executed by such Member in order to consummate the Internal Restructure while continuing in effect, to the extent consistent with such Internal Restructure, the terms and provisions of this Agreement, including those provisions granting the Board authority to manage the affairs of the Company, granting certain persons the right to nominate and cause the election of Directors, governing Transfers of Interests in the Company or other equity securities and indemnification.

(b) The Members acknowledge that an Internal Restructure may be undertaken in connection with other events, such as a public offering of the Company or an acquisition of another business or entity and, if so determined by the Board of Directors, such Internal Restructure shall be deemed completed immediately before any such event.

(c) The Members acknowledge that, to engage in an initial public offering, it may be necessary or advisable for the Company to merge or convert into a Delaware corporation (a “Conversion”). Accordingly, if the Board of Directors determines it to be in the best interests of the Company to engage in an initial public offering and to effect a Conversion, the Members agree that the Company’s capital structure shall be restructured in the manner described in this Section 6.9 and the Members shall vote and take all other action necessary in order to effect such Conversion. In connection with a Conversion, all Interests in the Company (the “Old Interests”) will be exchanged for common stock of the surviving corporation (the “Conversion Consideration”). In determining the portion of the Conversion Consideration to be exchanged for the Old Interests, the Company shall determine what portion of the Conversion Consideration would have been distributed among all of the holders of the Old Interests if the Company’s sole asset consisted of the Conversion Consideration and the Company distributed the Conversion Consideration in the same manner distributions would have been made in a complete liquidation of the Company taking into account the various rights, preferences and designations governing the Old Interests (which rights, preferences and designations are set forth in this Agreement, each as they may exist before the Conversion). Once the Company determines the portion of the Conversion Consideration that would have been distributed to each class or series of Old Interests if the Company had been liquidated immediately before the Conversion, the Board of Directors will then determine the exchange ratio of the Old Interest into common shares of the surviving corporation.

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(d) Upon the consummation of an Internal Restructure, the surviving entity or entities shall assume or succeed to all of the outstanding debt and other liabilities and obligations of the Company. To the extent practicable, the governing instruments of the surviving entity shall incorporate the governance provisions of this Agreement. All Members shall take such actions as may be reasonably required and otherwise cooperate in good faith with the Company in connection with consummating an Internal Restructure including a Conversion including voting for or consenting thereto.

Section 6.10 Other Assignment Void. Any purported Transfer of an Interest in the Company not permitted by this Article VI is null and void ab initio and of no effect whatsoever.

Section 6.11 Allocation and Distribution of Consideration. Upon any Transfer of Units in which two or more holders of Units Transfer Units pursuant to a Liquidity Event, Internal Restructure or pursuant to Section 6.2 or Section 6.3:

(a) The Fair Market Value of any non-cash property included in the consideration for such Transfer shall be added to the aggregate cash proceeds included in the consideration for such Transfer to determine the aggregate proceeds of such Transfer (the “Disposition Proceeds”). Each holder of Units included in such Transfer shall receive such holder’s (i) proportionate share of the aggregate non-cash consideration comprising the Disposition Proceeds and (ii) proportionate share of the aggregate cash consideration comprising the Disposition Proceeds, in each case determined in accordance with Section 6.11(b) below.

(b) For purposes of determining the proportionate share of the Disposition Proceeds to be delivered to each holder whose Units are included in such Transfer, the following provisions shall apply:

(i) with respect to a Transfer in which all outstanding Units are Transferred (A) the Company shall be deemed to have distributed pursuant to Section 5.4 an amount equal to the Disposition Proceeds (giving effect to all prior distributions under Section 5.4 and Section 5.5) and (B) the amount that would be distributable to each holder of Units pursuant to the hypothetical distribution in accordance with Section 6.11(b)(i)(A) on account of such holder’s Units shall be the amount of such Disposition Proceeds to be paid to such holder;

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(ii) with respect to any Drag-Along Sale or Tag-Along Sale that includes less than all outstanding Class A Units and in which Class B Units are included pursuant to Section 6.2(h) or Section 6.3(e), (A) the Board shall determine a Company Sale Value based on the purchase price offered for the Class A Units as set forth in the Tag-Along Notice, (B) the Board shall assume that an amount of cash equal to such Company Sale Value was distributed pursuant to Section 5.4 (giving effect to all prior distributions under Section 5.4 and Section 5.5 through the date of the Tag-Along Sale for purposes of determining the appropriate distributions under Section 5.4), (C) each holder of Class B Units whose Class B Units are included in such Tag-Along Sale shall be allocated a portion of the Disposition Proceeds with respect to such holder’s Class B Units equal to the amount that would be distributable on account of such holders’ Class B Units by applying Section 5.4 to a distribution amount equal to such Company Sale Value in accordance with Section 6.11(b)(ii)(B), and (D) each holder of Class A Units and each holder of Class C Units participating in such Tag-Along Sale shall be allocated, with respect to such holder’s Class A Units and Class C Units included in such Tag-Along Sale, a portion of the balance of the Disposition Proceeds remaining after giving effect to clause (C) above (the “Remaining Tag Balance”), equal to the Remaining Tag Balance multiplied by a fraction, (x) the numerator of which is the amount that would be distributable to such holder in the hypothetical distribution in accordance with Section 6.11(b)(ii)(B) on account of such holder’s Class A Units and/or Class C Units being included in such Tag-Along Sale and (y) the denominator of which is the amount that would be distributable to all holders of Class A Units and Class C Units participating in such Tag-Along Sale on account of such holders’ Class A Units and Class C Units being included in such Tag-Along Sale by applying Section 5.4 to a distribution amount equal to such Company Sale Value in accordance with Section 6.11(b)(ii)(B) (subject to any adjustment as necessary to give effect to any different economic attributes of the Class A Units being Transferred if such Class A Units being Transferred by a holder of Class A Units have different economic attributes relative to Class A Units being Transferred by other holders of Class A Units).

(iii) with respect to any Drag-Along Sale or Tag-Along Sale that includes less than all outstanding Class A Units and in which Class B Units are not included pursuant to Section 6.2(h) or Section 6.3(e), (A) the Company shall be deemed to have distributed pursuant to Section 5.4 an amount equal to the Disposition Proceeds on account of the Class A Units and Class C Units being Transferred in such Tag-Along Sale (giving effect to all prior distributions under Section 5.4 and Section 5.5 but assuming that no proceeds are distributable on account of the Class B Units) and (B) the amount that would be distributable to each holder pursuant to the hypothetical distribution in accordance with Section 6.11(b)(iii)(A) on account of such holder’s Class A Units and Class C Units being Transferred in such Tag-Along Sale shall be the amount of such Disposition Proceeds to be paid to such holder (subject to any adjustment as necessary to give effect to any different economic attributes of the Class A Units being Transferred if such Class A Units being Transferred by a holder of Class A Units have different economic attributes relative to Class A Units being Transferred by other holders of Class A Units); and

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(iv) for purposes of determining the amount of the Disposition Proceeds to be allocated among and/or delivered for the Class A Units, Class B Units and Class C Units pursuant to an Internal Restructure or Transferred in a Liquidity Event, other than as described in Section 6.11(b)(i), the methodology set forth in Section 6.11(b)(ii) and Section 6.11(b)(iii) shall apply, mutatis mutandis.

Section 6.12 Yorktown-Carbon Assignment.

(a) Yorktown may assign all or any portion of its Interests to Carbon in exchange for shares of common stock of Carbon, subject to Section 6.1(b) and Section 6.7 (such assignment, the “Yorktown-Carbon Assignment“). Effective upon any Yorktown-Carbon Transfer, Carbon shall succeed to the rights of Yorktown with respect to the Interests assigned by Yorktown to Carbon. In the event that Yorktown assigns all of its Interests to Carbon pursuant to a Yorktown-Carbon Transfer, Yorktown shall be deemed withdrawn as a Member of the Company and Carbon shall succeed to the rights and obligations of Yorktown under this Agreement with respect to the Interests assigned by Yorktown to Carbon (including the right to appoint Board designees and the obligation to make Capital Contributions under Article IV).

(b) If the Yorktown-Carbon Assignment occurs, the terms agreed to by Yorktown and Carbon with respect to the Yorktown-Carbon Assignment shall not be taken into account for purposes of Company Sale Value or otherwise with respect to the value of the Company or its assets.

(c) If the Yorktown-Carbon Assignment occurs, the Members will act in good faith to amend and restate the Agreement to give effect to the Yorktown-Carbon Assignment and the purpose and intent of this Section 6.12.

ARTICLE VII
DISSOLUTION; WINDING UP

Section 7.1 Dissolution. The Company shall be dissolved only upon the first to occur of any of the following events (“Dissolution Events”):

(a) the election by the Supermajority of the Voting Power to dissolve the Company;

(b) February 23, 2027, unless extended upon Majority of the Voting Power for up to two successive one year terms; or

(c) the entry of a decree of judicial dissolution under Section 18-802 of the Act.

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Section 7.2 Winding Up. Upon the occurrence of a Dissolution Event, the business of the Company shall be wound up and shall, except to the extent consistent with such winding up, cease. The Board of Directors shall act as liquidator unless it elects to appoint one or more other Persons, who may or may not be Members, to act as liquidator. The liquidator shall proceed diligently to wind up the business and affairs of the Company and may determine all matters in connection with the winding up of the Company, including any arrangements to be made with creditors, the amount or necessity of reserves to cover contingent or unforeseen liabilities, and whether, to what extent, for what consideration, and on what terms any or all of the assets of the Company are to be sold. The liquidator may in its discretion retain any obligations due to the Company and distribute (or apply in satisfaction of Company obligations) the proceeds thereof as collected. The costs and expenses of the winding up and liquidation of the Company shall be borne by the Company. Until final distribution, the liquidator shall continue to manage the Company’s affairs and, if the liquidator is a Person other than the Board of Directors, shall, to the extent consistent with the liquidator’s obligations, have all of the power and authority of the Board of Directors and be entitled to indemnification and advance payment of expenses in accordance with the provisions of this Agreement as if the liquidator were the Board of Directors. The liquidator shall give or cause to be given all notices to creditors required by applicable Law and, in addition to any reports otherwise required by this Agreement to be given to the Members, shall cause a proper accounting of the Company’s assets, liabilities and operations to be made and furnished to the Members as of the date all assets of the Company are finally distributed to the Members or applied in payment of Company liabilities.

Section 7.3 Application and Distribution of Proceeds of Liquidation. During or upon completion of the winding up of the Company, the assets of the Company shall be applied and distributed by the liquidator, in one or more installments, in the following order and priority:

(a) to the payment, or provision for payment, of the costs and expenses of the winding up;

(b) to the payment, or provision for payment, of creditors of the Company (including Members, other than in respect of Distributions) in the order of priority provided by Law;

(c) to the establishment of any reserves deemed necessary or appropriate by the liquidator to provide for contingent or unforeseen liabilities of the Company; and

(d) the balance shall be distributed to the Members in accordance with Section 5.4.

All Distributions to the Members pursuant to Section 7.3(d) above shall be in the form of cash, unless the Board of Directors otherwise determines.

Section 7.4 Certificate of Cancellation. On completion of the distribution of Company assets as provided herein, the liquidator (or such other Person or Persons as the Act may require or permit) shall file a Certificate of Cancellation with the Secretary of State of the State of Delaware, cancel any other filings as necessary and take such other actions as may be necessary to terminate the existence of the Company.

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ARTICLE VIII
LIABILITY AND INDEMNIFICATION

Section 8.1 No Liability for Company Debts. The debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Covered Person shall be liable for any such debts, obligations or liabilities. Additionally, except as otherwise expressly required by Law, no Member, in its capacity as a Member, shall have any liability in excess of (a) the amount of its Capital Contributions, (b) its share of any assets and undistributed profits of the Company, (c) its obligation to make other payments expressly provided for in this Agreement and (d) the amount of any Distributions wrongfully distributed to it.

Section 8.2 Indemnification. To the fullest extent permitted by Law, the Company shall indemnify each Covered Person from and against any and all Covered Losses arising from any and all claims, demands, causes of action, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which such Covered Person may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as such, regardless of whether any of the foregoing arise from the sole, partial or concurrent negligence of such Covered Person; provided, however, that the Company shall not indemnify a Covered Person for Covered Losses arising directly from fraud, intentional or willful misconduct, gross negligence or a knowing violation of the Law or a breach of the terms of any Transaction Agreement that is materially related to the claim giving rise to the Covered Losses, for which the Covered Person is seeking indemnification. The termination of any action, suit or proceeding by judgment, order, settlement or upon a plea of nolo contendere, or its equivalent shall not, of itself, create a presumption that the Covered Person failed to meet the standards for indemnification set forth in the immediately preceding sentence. Any indemnification hereunder shall be satisfied solely out of the assets of the Company (subject to Section 5.6(b)). In no event may a Covered Person subject the Members to personal liability by reason of these indemnification provisions. The indemnification provided by this Section 8.2 shall be in addition to, but not duplicative of, any other rights to which a Covered Person or any other Person may be entitled under any agreement to which the Company is a party, pursuant to any vote of the Members, as a matter of Law or otherwise, and shall continue as to a Covered Person who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Covered Person.

Section 8.3 Advance Payment and Appearance as a Witness. To the fullest extent permitted by applicable Law, expenses (including legal fees) incurred by a Covered Person in defending any claim, demand, cause of action, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, cause of action, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in Section 8.2. The Company shall pay or reimburse expenses incurred by a Person who is or was a Member, Manager, officer or employee of the Company in connection with their appearance as a witness or other participant in a proceeding at a time when they are not a named defendant or respondent in the proceeding.

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Section 8.4 Insurance. The Company shall procure and maintain insurance, to the extent and in such amounts as approved by the Board of Directors, in its sole discretion, on behalf of Covered Persons and such other Persons as the Board of Directors shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the activities of the Company or such indemnities, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement. The Company may enter into indemnity contracts with Covered Persons and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under Section 8.3 and containing such other procedures regarding indemnification as are appropriate. The insurance as in effect for the Company as of the Effective Date is set forth on Exhibit C, and any reduction in the amount of insurance coverage from as set forth on Exhibit C shall require approval of a Supermajority of the Voting Power.

Section 8.5 Non-exclusivity of Rights; Company as Indemnitor of First Resort. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of, and shall not limit, any other rights or remedies to which any Covered Person may be entitled or which may otherwise be available to any Covered Person at Law or in equity. The Company hereby acknowledges that the Covered Persons may have certain rights to indemnification, advancement of expenses and/or insurance provided by the Members and certain of their Affiliates (collectively, the “Member Indemnitors”). The Company hereby agrees that (a) the Company is the indemnitor of first resort for matters covered by this Article VIII (i.e., its obligations to the Covered Persons under Article VIII are primary and any obligation of the Member Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by the Covered Persons are secondary), (b) the Company shall be required to advance the full amount of expenses incurred by the Covered Persons and shall be liable for all expenses, liabilities, judgments, penalties, fines and amounts paid in settlement to the extent legally permitted and as required by the terms of Article VIII (or any other agreement between the Company and the Covered Persons), without regard to any rights the Covered Persons may have against the Member Indemnitors, and (c) the Company irrevocably waives, relinquishes and releases the Member Indemnitors from any and all claims against the Member Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Member Indemnitors on behalf of a Covered Person with respect to any claim for which the Covered Person has sought indemnification from the Company pursuant to Article VIII shall affect the foregoing and the Member Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of the Covered Persons against the Company. The Company agrees that the Member Indemnitors who are not Members are express third party beneficiaries of the terms of this Section 8.5.

Section 8.6 Savings Clause. If all or any part of this Article VIII shall be invalidated for any reason by any court of competent jurisdiction, the Company shall nevertheless indemnify and hold harmless each Covered Person, and may indemnify and hold harmless any other Person, for costs, charges, expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement, in connection with any claim, to the fullest extent permitted by any portion of this Article VIII not invalidated and to the fullest extent otherwise permitted by applicable Law.

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ARTICLE IX
CERTAIN TAX MATTERS

Section 9.1 Partnership Classification. The Company will be treated as a partnership for U.S. federal (and applicable state and local) income tax purposes and, except with the prior written consent of all Members shall not (i) convert or reorganize into any other legal form or take any action that would result in the Company no longer being taxed as a partnership for U.S. federal income tax purposes, (ii) elect under Treasury Regulations Section 301.7701-3 or otherwise to be taxed other than as a partnership, or (iii) elect to exclude the Company from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state law and no Member shall take any action inconsistent with such limitations.

Section 9.2 Tax Returns and Tax Information. The Manager shall cause all required federal, state, local and foreign tax returns of the Company to be prepared and timely filed. Each Member shall furnish to the Company all pertinent information in its possession relating to the Company, its assets and operations necessary to enable the Company’s tax returns to be prepared and timely filed.

Section 9.3 Tax Elections. Except as provided otherwise in this Agreement, the Board of Directors shall have the authority to make all tax elections required or permitted to be made by the Company; provided, however, that no election shall be made to classify the Company as an association taxable as a corporation without the consent of all the Members. The Board of Directors shall, at the request of any Member, cause the Company to make an election under Section 754 of the Code.

Section 9.4 Election by Members. In the event any Member makes any tax election that requires the Company to furnish information to such Member to enable such Member to compute its own tax liability, or requires the Company to file any tax return or report with any tax authority, in either case that would not be required in the absence of such election made by such Member, the Manager may, as a condition to furnishing such information or filing such return or report, require such Member to pay to the Company any incremental expenses incurred in connection therewith.

Section 9.5 Tax Matters Representative.

(a) Designation of Tax Matters Representative. The Manager is hereby designated as the “tax matters partner”, “partnership representative” or any similar role, as applicable within the meaning of the Code and applicable state, local or foreign tax law, and shall have all of the rights, authority and power and shall be subject to all of the obligations associated therewith to the extent provided in the Code, the Treasury Regulations and applicable state, local or foreign tax law (the “Tax Matters Representative”). The Tax Matters Representative shall carry out the duties and responsibilities of such status in good faith and to the extent that any such duties or responsibilities are not routine, ministerial functions, the Tax Matters Representative shall obtain the consent of the Board of Directors before taking (or refraining from taking) any actions or making any decisions in respect of such duties or responsibilities.

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(b) Expenses of the Tax Matters Representative. Expenses incurred by the Tax Matters Representative or in a similar capacity as set forth in this Section 9.5, shall be borne by the Company. Such expenses shall include, without limitation fees of attorneys and other tax professionals, accountants, appraisers and experts, filing fees and reasonable out-of-pocket costs.

Section 9.6 Withholding. The Company may withhold and shall timely remit to any applicable tax authority all amounts required by any Law to be withheld by the Company from or with respect to Distributions to a Member or from or with respect to a Member’s distributive share of Company taxable income or loss (or item thereof). Each Member shall timely provide to the Company upon request all information, forms and certifications reasonably necessary or appropriate to enable the Company to comply with any such withholding obligation, or to establish the Company’s legal entitlement to an exemption from, or reduction of, withholding or other taxes or similar payments, including U.S. federal withholding tax under Sections 1471 and 1472 of the Code or the Treasury Regulations thereunder. Further, each Member covenants to the Company that the information, forms and certifications furnished by it shall be true and accurate in all respects. Each Member shall, upon demand by the Company, indemnify the Company for the indemnifying Member’s share of any such withholding and all related costs and expenses of the Company. Any amounts so withheld in respect of a Member shall be treated as a distribution to such Member for all purposes of this Agreement.

ARTICLE X
BOOKS AND RECORDS; REPORTS

Section 10.1 Maintenance of and Access to Books and Records. At all times until the dissolution and termination of the Company, the Company shall maintain separate books of account that show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received and all income derived in connection with the conduct of the business of the Company in accordance with this Agreement. In addition, the Company shall keep and maintain at its principal office all Records and information required to be kept and maintained in accordance with the Act and shall make such information available to any Member or representative requesting the same within five (5) days after receipt of a written request by the Company. The Board of Directors shall permit each of the Members, from time to time and at reasonable intervals, (i) to examine, audit and make copies of the Records of the Company as well as all such other data and information in the possession or control of the Board of Directors concerning the Company, Company properties and the ownership and operation thereof, which Records shall be available to the Members or their representatives at all reasonable times at the principal office of the Company, or at such other office where such information is maintained, upon the written request of any Member, and (ii) to discuss the business, financial condition and results of operations of the Company with officers, accountants, and other representatives of the Company.

Section 10.2 Bank Accounts. The Board of Directors shall cause to be established and maintained for and in the name of the Company one or more bank or investment accounts or arrangements. All Company funds shall be deposited in such account(s) and shall not be commingled with funds of any other Person. All deposits to and disbursements from such account(s) shall be made only for proper Company purposes and shall be signed by one or more authorized signatories designated by the Board of Directors.

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Section 10.3 Reports. The Company shall furnish the following to the Members:

(a) Within 45 days after the end of each calendar month: (i) a written report by the Company’s management describing the results of operations of the Company, including any applicable qualitative analysis comparing the Company’s performance with prior periods, for such calendar month; and (ii) a report of the Manager with respect to the operational status of the Company and each of its Subsidiaries for such monthly period, including progress on capital projects included in the Budget for such calendar month, and a Budget to actual variance analysis;

(b) Within 60 days after the end of each Fiscal Quarter: (i) an unaudited consolidated balance sheet as of the end of such Fiscal Quarter and unaudited related statement of operations and statement of cash flows for such Fiscal Quarter including any footnotes thereto (if any) prepared in accordance with GAAP, consistently applied; (ii) a written report by the Company’s management describing the results of operations of the Company, including any applicable qualitative analysis comparing the Company’s performance with prior periods, for such Fiscal Quarter; and (iii) a report of the Manager with respect to the operational status of the Company and each of its Subsidiaries for such quarterly period, including progress on capital projects included in the Budget for such calendar quarter, and a Budget to actual variance analysis;

(c) (i) Within 60 days after the end of each Fiscal Year, an estimated Schedule K-1, and (ii) within 90 days after the end of each Fiscal Year, a final Schedule K-1;

(d) Within 90 days after the end of each Fiscal Year (beginning with the 2017 Fiscal Year) (i) an audited consolidated balance sheet as of the end of such Fiscal Year and the related consolidated statement of operations, statement of members’ equity and statement of cash flows for such Fiscal Year prepared in accordance with GAAP; (ii) a written report by the Company’s management describing the results of operations of the Company, including any applicable qualitative analysis comparing the Company’s performance with prior periods, for such Fiscal Year; and (iii) a report of the Manager with respect to the operational status of the Company and each of its subsidiaries for such yearly period and a Budget to actual variance analysis;

(e) Upon the written request of a Member and at such Member’s expense and provided it can be furnished upon exercise of reasonable commercial efforts, such additional information necessary for the preparation of any state, local and foreign income tax return that must be filed by such Member;

(f) Promptly after the occurrence of any event that has, or could reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, results of operations, condition, assets, liabilities, employees, prospects, financial condition or capitalization of the Company, notice of such event together with a summary describing the nature of the event and its impact on the Company;

(g) Within 90 days after the end of each Fiscal Year, the Company shall furnish to the Members an engineering report prepared by the independent petroleum engineers of the Company, which report will set forth estimates of the proved, probable and possible oil and gas reserves of the Company as of the preceding January 1 of such Fiscal Year and net revenues expected to be derived therefrom;

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(h) Within five (5) days after delivery pursuant to a Credit Facility, copies of all reports, notices, certifications and other information delivered to the agent, lenders or other counterparties to any Credit Facility; and

(i) With reasonable promptness, the Board of Directors shall cause the Company to furnish to each of the Members such other information and financial data concerning the Company and its business, operations, assets, liabilities, financial condition and results of operations as any such Member may reasonably request.

Section 10.4 Fiscal Year. The fiscal year of the Company shall be the calendar year (“Fiscal Year”). The Company shall have the same Fiscal Year for U.S. federal income tax purposes and for accounting purposes.

ARTICLE XI
DEFINITIONS

Section 11.1 Definitions. Except as otherwise required by the context, the following terms shall have the following meanings:

“A/C Sharing Percentage” means, (i) until an aggregate of $100,000,000 has been distributed by the Company pursuant to Section 5.4 and Section 5.5 (x) 99% to the holders of Class A Units, as a class, and (y) 1% to the holder of Class C Units and (ii) thereafter, (x) as to the holders of Class A Units, as a class, a fraction (expressed as a percentage), the numerator of which is the total number of Class A Units outstanding and the denominator of which is the total number of Class A Units and Class C Units outstanding and (y) as to the holder of Class C Units, a fraction (expressed as a percentage), the numerator of which is the total number of Class C Units outstanding and the denominator of which is the total number of Class A Units and Class C Units outstanding.

“Act” means the Delaware Limited Liability Company Act, as amended from time to time, or any successor statute thereto.

“Adjusted Capital Account” means, as of the end of each Fiscal Year, the balance in a Member’s Capital Account (i) increased by (A) any additional Capital Contributions the Member makes or is obligated to make, or is treated as obligated to make pursuant to the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(c), (B) the amount of the Member’s share of any Company Minimum Gain, and (C) the amount of the Member’s share of any Member Nonrecourse Debt Minimum Gain, and (ii) decreased by any adjustments, allocations or distributions described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). This definition shall be interpreted and applied consistently with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d).

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“Adjusted Capital Account Deficit” means, with respect to any Member, the deficit balance, if any in such Member’s Adjusted Capital Account as of the end of the Fiscal Year, after giving effect to the following adjustments:

(i) Credit to such Adjusted Capital Account any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed obligated to restore pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and

(ii) Debit to such Adjusted Capital Account the items described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6).

The foregoing definition of “Adjusted Capital Account Deficit” is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

“Administrative Expenses” means Company Expenses as described in clause (i) and clause (ii) of the definition of Company Expenses.

“Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such Person.

“Available Cash” means the sum of (i) gross cash proceeds from the operations of the Company or its Subsidiaries, as applicable (including sales and dispositions of property whether or not in the ordinary course of business), (ii) any net cash proceeds from any issuance of equity or refinancing of debt or new debt issuance or incurrence, and (iii) other cash on hand less amounts used to pay or establish reserves for all expenses of the Company or its Subsidiaries, as applicable (including general and administrative expenses, contract and marketing costs, debt payments, taxes, capital expenditures, replacements, future acquisitions and investments and contingencies), all as reasonably determined on a periodic basis by the Board.

“Affiliate Contract” means any contract between the Company, on the one hand, and any Member or any of its Affiliates, on the other hand (excluding this Agreement).

“AMI” means any lands depicted in Exhibit D attached hereto, provided that, if the Board of Directors approves the Company conducting business outside of these lands, the AMI shall be automatically revised to include the lands underlying the area or areas reasonably encompassed by the Board’s election.

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“Book Basis” means, with respect to each Company asset, the adjusted basis of the asset for U.S. federal income tax purposes, except that (i) the initial Book Basis of an asset other than money contributed by a Member to the Company shall be the fair market value of the asset on the date of contribution, as agreed by the contributor and the Board of Directors, (ii) upon the occurrence of a Revaluation Event, the Book Basis of all Company assets (including intangibles) shall be adjusted to their respective fair market values on such date, as determined by the Board of Directors, (iii) the Book Basis of any Company asset distributed to any Member will be adjusted to equal the fair market value of such asset on the date of distribution as agreed by the Board of Directors and the recipient, (iv) the Book Basis of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m) and Section 5.2(f); provided, however, that Book Basis shall be adjusted pursuant to clause (ii) above only if the Board of Directors determines such adjustments are necessary or appropriate, and (v) if the Book Basis of any Company asset has been determined pursuant to the preceding subsections (i), (ii) or (iv), the Book Basis of the asset shall thereafter be adjusted by Simulated Depletion Deductions or Book Depreciation in lieu of any depletion, depreciation, amortization or other cost recovery deductions otherwise allowable for U.S. federal income tax purposes.

“Book Depreciation” means, with respect to any depreciable or amortizable Company asset, an amount that bears the same ratio to the Book Basis of such asset as the amount of depreciation, amortization or other cost recovery deductions with respect to such asset, computed for U.S. federal income tax purposes, bears to the adjusted tax basis of such asset; provided, however, that, if the adjusted tax basis of the asset is zero, Book Depreciation shall be determined under any reasonable method selected by the Board of Directors, and; provided, further, if such asset is subject to adjustments under the remedial allocation method of Treasury Regulations Section 1.704-3(d), Book Depreciation shall be determined under Treasury Regulations Section 1.704-3(d)(2).

“Budget” means the annual capital and operating budget of the Company and each of its Subsidiaries as approved by the Board.

“Business Day” means a day, other than Saturday, Sunday or any other day on which commercial banks in Denver, Colorado or New York, New York are authorized or required by Law to close.

“Capital Account” means the account established for each Member pursuant to Section 4.3.

“Capital Contribution” means the amount of money and the initial Book Basis of any asset other than money (net of liabilities secured thereby that the Company is treated as having assumed or taken subject to pursuant to Code Section 752) contributed by a Member or a Member’s predecessors in interest to the capital of the Company, including Optional Contributions.

“Capital Interest Percentage” means, at any time of determination and as to any Member, the percentage of the total distributions that would be made to such Member if the assets of the Company were sold for their respective Book Basis, all liabilities of the Company were paid in accordance with their terms (limited in the case of non-recourse liabilities to the Book Basis of the property securing such liabilities), all items of Company income, gain, loss and deduction were allocated to the Members in accordance with Section 5.1 and Section 5.2, and the resulting net proceeds were distributed to the Members in accordance with Section 7.3; provided, however, that the Board may determine that the Members’ Capital Interest Percentages should be determined based upon a hypothetical sale of the assets of the Company for their respective Fair Market Value (instead of Book Basis) in order to ensure that such percentages correspond to the Members’ “proportionate interests in partnership capital” as defined in Treasury Regulations Section 1.613A-3(e)(2)(ii). The foregoing definition of Capital Interest Percentage is intended to result in a percentage for each Member that corresponds with the Member’s “proportionate interest in partnership capital” as defined in Treasury Regulations Section 1.613A-3(e)(2)(ii), and Capital Interest Percentage shall be interpreted consistently therewith.

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“Class A Member” means a Member holding Class A Units, in its capacity as a holder of Class A Units.

“Class A Sharing Percentage”, with respect to each holder of Class A Units, shall equal the aggregate Class A Units held by such holder of Class A Units through the date of determination, divided by the aggregate Class A Units held by all holders of Class A Units of the Company through the date of determination.

“Class A Unit Price” means:

(i) One Thousand Dollars ($1,000.00) per Class A Unit for each Class A Unit until the Commitment Release Point; and

(ii) thereafter, an amount equal to the Fair Market Value of a Class A Unit immediately after giving effect to the Capital Contribution with respect to which such Class A Unit is being issued.

“Class B Member” means a Member holding Class B Units, in its capacity as a holder of Class B Units.

“Class C Member” means a Member holding Class C Units, in its capacity as a holder of Class C Units.

“CNX Acquisition” means the transactions contemplated by the CNX PSA.

“CNX PSA” means that certain Purchase and Sale Agreement, dated February 17, 2017, by and between CNX Gas Company LLC (as seller) and the Company (as buyer).

“Code” means the Internal Revenue Code of 1986, as amended (including any corresponding provisions of succeeding law).

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“Company Expenses” means all costs, expenses, liabilities and obligations relating to the Company’s activities, investments and business (to the extent not borne or reimbursed by a Subsidiary of the Company), including (i) all costs, expenses, liabilities and obligations attributable to the formation and organization of the Company and acquiring, holding and disposing of the Company’s investments, (ii) legal, auditing, insurance (including directors and officers and errors and omissions liability insurance), and accounting expenses, including expenses incurred in connection with the maintenance of the Company’s books of account and other records and the preparation and distribution of audited or unaudited financial statements of the Company, the cost of the preparation and distribution of tax returns and Schedule K-1s (included fees and expenses of independent auditors, accountants and counsel) and other routine administrative expenses of the Company or its Subsidiaries, (iii) all expenses incurred in connection with any indebtedness of the Company or other credit arrangement (including any line of credit, loan commitment or letter of credit) for the Company or related to the Company’s investments, (iv) litigation and indemnification costs and expenses, judgments and settlements, including indemnification obligations under Article III, (vi) consulting, financing, appraisal, filing and other fees and expenses (including expenses associated with the preparation or distribution of the Company’s financial statements, and (vii) any taxes, fees and other governmental charges levied against the Company.

“Company Minimum Gain” shall have the same meaning as “partnership minimum gain” set forth in Treasury Regulations Section 1.704-2(b)(2) and Section 1.704-2(d).

“Company Sale Value” means the amount that the Company would receive in an all cash sale of all of the Company’s assets and businesses as a going concern (free and clear of all Liens and after use of proceeds for the payment of indebtedness for borrowed money and other outstanding obligations) in an arm’s length transaction with an unaffiliated third-party consummated immediately preceding the event giving rise to the determination of the Company Sale Value (assuming that all of the proceeds of such sale were paid directly to the Company).

“Confidential Information” means any proprietary or confidential information of or relating to the Company or, with respect to each Member, the other Members, including any business information, intellectual property, trade secrets or other information relating to the respective businesses, operations, assets or liabilities of the Company or the Members; provided, however, that any information that is generally available to the public (other than through a breach by the party disclosing the same of its obligations under this Agreement) shall not be deemed “Confidential Information.”

“Conflict Activity” means (a) the negotiation and execution by the Company of any Affiliate Contract or any amendment to or termination of any Affiliate Contract, (b) the waiver of any of the Company’s rights, or the granting of any consent or approval by the Company, under this Agreement (as to any Member) or any Affiliate Contract, (c) the enforcement of any rights of the Company under this Agreement (as to any Member) or with respect to any Affiliate Contract, including enforcing any rights of the Company under this Agreement or any Affiliate Contract in connection with any breach or default (or alleged breach or default) thereunder by the Conflicted Member (or its Affiliates) or for making or enforcing any claims by the Company or for indemnification under this Agreement or any Affiliate Contract or in connection with any dispute with a Conflicted Member (or any of its Affiliates) under any Affiliate Contract, (d) the enforcement of any rights of the Company or any Member under this Agreement or any Affiliate Contract in connection with any bankruptcy, reorganization, liquidation or dissolution of the Conflicted Member or (e) the exercise of discretionary rights by the Company under this Agreement (as to any Member) or any Affiliate Contract.

“Conflicted Member” means a Member that is (or has an Affiliate that is): (i) the counterparty to the Company under an Affiliate Contract or (ii) the adversary or counterparty opposite the Company on any other transaction or dispute giving rise to a Conflict Activity.

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“Contract Operating Agreement” means that certain Contract Operating Agreement, dated as of February 23, 2017, by and between Nytis LLC and the Company.

“Control,” “Controlling” and “Controlled by” mean the ability (directly or indirectly through one or more intermediaries) to direct or cause the direction of the management or affairs of a Person, whether through the ownership of voting interests, by contract or otherwise.

“Covered Losses” means any and all losses, assessments, fines, penalties, administrative orders, obligations, judgments, amounts paid in settlement, costs, expenses, liabilities and damages (whether actual, consequential or punitive), including interest, penalties, reasonable court costs and attorneys’ fees, disbursements and costs of investigations, deficiencies, levies, duties and imposts.

“Covered Person” means (i) any Member, any Affiliate of a Member or any shareholder, partner, member, manager, director, officer, employee, representative or agent of a Member or any of its Affiliates, (ii) any officer of the Company, (iii) the Manager, and (iv) any member of the Board of Directors, in each case to the extent any such Person is acting in such capacity in connection with the business of the Company.

“Credit Agreement” means that certain Credit Agreement, dated as of February 23, 2017, by and among Carbon Tennessee Company, LLC (as borrower), LegacyTexas Bank (as administrative agent, L/C issuer, sole lead arranger and sole book runner), and the lender parties thereto, as may be amended, restated, modified or supplemented in accordance with its terms.

“Credit Facility” means the Credit Agreement and any other agreement for indebtedness for borrowed money or commodity or interests rate swap, collar or other hedging transactions to which the Company or any Subsidiary of the Company is a party.

“Current Market Value” when used with reference to any capital stock or other security on any date means: (i) if the capital stock or security is then listed or admitted to trading on a national securities exchange, is quoted on the OTC Bulletin Board or is quoted on any other interdealer quotation system or regularly quoted by member firms of the Financial Industry Regulatory Authority, the volume weighted average of the trading prices of such security on the date of determination (if a trading day) and on each of the five (5) trading days immediately preceding, and on each of the five (5) trading days immediately following, the date of the determination (any such capital stock or security so listed, traded or quoted being referred to as “Publicly Traded”) or (ii) if the capital stock or security is not Publicly Traded, the Fair Market Value of such capital stock or security.

“Drilling and Completion Activities” shall have the meaning given such term in the Participation Agreement.

“Electronic Transmission” means a form of communication that (i) does not directly involve the physical transmission of paper, (ii) creates a record that may be retained, retrieved, and reviewed by the recipient, and (iii) may be directly reproduced in paper form by the recipient through an automated process.

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“Emergency Expenditures” means expenditures which are reasonably necessary to be expended in order to mitigate or remedy the endangerment of property, the health or safety of any Person or the environment.

“Excluded Affiliate Transfer” means (i) any Transfer of Units by a Member who is an individual to a member of such Member’s family or to a trust or similar entity for estate planning purposes, but only if the Member retains the right to vote such Interest following such Transfer; (ii) any Transfer occurring by operation of law upon the death or mental incapacity of a Member who is an individual; (iii) any Transfer of Units by a Member which is a trust to the principal beneficiary of that trust; or (iv) any Transfer of Units by a Member which is a partnership, limited partnership, limited liability company, corporation or other entity organized, formed or incorporated to an Affiliate; provided that, in the case of any Transfer described in clauses (i)-(iv), such transferee agrees to be bound by the terms of this Agreement and evidences same by executing a copy of this Agreement prior to receiving the assignment of such Units.

“Existing Assets” means Nytis LLC’s interest in the Tennessee Mining Tract and any other oil and gas assets in which Carbon or any of its Affiliates have an interest as of February 23, 2017 that are not included in the Participation Assets.

“Fair Market Value” means the fair market value as determined by the Board pursuant to Section 2.10. In determining the Fair Market Value of any non-cash property, all factors which the Board determines might reasonably affect such value shall be taken into account; provided, however, that (i) the Fair Market Value of any non-cash property that consists of Publicly Traded securities or similar instruments shall be the Current Market Value thereof, determined by reference to a record date which shall be fixed by the Board as of a date not less than five (5) trading days before and no more than ten (10) trading days before the proposed action requiring a determination of Fair Market Value of any such non cash property and (ii) in no event shall any non-cash property be valued at less than the price at which the Company can require a third Person to buy the non-cash property, taking into account the creditworthiness of the Person with such purchase obligation, the availability of any collateral for the obligation, and other factors that the Board deems appropriate. The Fair Market Value shall be determined without reduction based upon any lack of control, minority ownership, marketability or other similar discounts.

“Fiscal Quarter” means any three-month period commencing on January 1, April 1, July 1 and October 1 and ending on the last date before the next such date.

“GAAP” means United States generally accepted accounting principles.

“Governmental Authority” means any nation or government, any state, city, municipality or political subdivision thereof, any federal or state court and any other agency, body, authority or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“Indebtedness” means (without duplication), with respect to any Person, any indebtedness of such Person in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreement in respect thereof) or representing capital lease obligations or the balance deferred and unpaid of the purchase price of any property (except any such balance that constitutes an accrued expense or trade payable arising in the ordinary course of business), if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the guarantee by such Person of any indebtedness of any other Person.

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“Initial Class A Funding Percentage” means (i) as to Carbon, 26.5%, (ii) as to Yorktown, 0.0% and (iii) as to Old Ironsides, 73.5%.

“Internal Rate of Return” means, with respect to each Class A Unit as of any distribution date, the annual percentage rate, which when utilized to calculate the present value of all distributions (i.e., cash inflows) received by the holder of such Class A Unit from the Company with respect to such Class A Unit shall cause such present value to equal the present value of all Capital Contributions (i.e., cash outflows) made with respect to such Class A Unit. In order for a holder of a Class A Unit to receive a positive Internal Rate of Return, a holder must receive an aggregate amount equal to (a) its aggregate Capital Contributions made to the Company during the term of this Agreement on account of or in exchange for such Class A Unit, plus (b) a return thereon. The Internal Rate of Return with respect to a Class A Unit, at any distribution date, shall be computed with annual compounding. For purposes of computing such Internal Rate of Return, (i) each Capital Contribution made on account of or in exchange for such Class A Unit shall be treated as a Capital Contribution made on the applicable date specified in a Capital Call Notice and (ii) each distribution or payment of non-cash property received with respect to such Class A Unit at such distribution date shall be treated as a distribution on such distribution date; provided, however, that for purposes of calculating the Internal Rate of Return with respect to a Class A Unit, the holder of such Class A Unit shall be deemed to have received cash in an amount equal to the Fair Market Value of all non-cash property distributed (or deemed distributed) with respect to such Class A Unit by the Company.

“Internal Restructure” means any re-formation, Conversion, transfer of assets, transfer of membership interests or other securities, merger, incorporation, liquidation or other transaction of, or relating to, or affecting the Company, completed in compliance with Section 6.9.

“Interest” means, with respect to any Member, the entire interest of such Member in the Company, including (i) Units, (ii) the right of such Member to share in the profits of the Company, (iii) the right of such Member to Distributions and (iv) the right of such Member, if any, to participate in the management of the affairs of the Company.

“Investment Advisers Act” means the Investment Advisers Act of 1940, as amended.

“Investment Company Act” means the Investment Company Act of 1940, as amended.

“IPT Eligible Member” means for purposes of Section 6.4(b)(i) and (ii), (A) if Old Ironsides is the Subject Company, Carbon and its Permitted Transferees holding Class A Units, or (B) if Yorktown or Carbon is the Subject Company, Old Ironsides and its Permitted Transferees holding Class A Units.

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“Law” means any applicable constitutional provision, statute, act, code, law, regulation, rule, ordinance, order, decree, ruling, proclamation, resolution, judgment, decision, declaration, or interpretative or advisory opinion or letter of a Governmental Authority having valid jurisdiction.

“Lien” means any mortgage, lien (statutory or other), other security agreement, arrangement or interest, hypothecation, pledge or other deposit arrangement, assignment, charge, levy, executory seizure, attachment, garnishment, encumbrance (including any easement, exception, reservation or limitation, right of way, and the like), conditional sale, title retention, voting agreement or other similar agreement, arrangement, device or restriction, preemptive or similar right, the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction, or restriction on sale, transfer, assignment, disposition or other alienation, provided, however, that the term “Lien” shall not include any of the foregoing to the extent created by this Agreement.

“Liquidity Event” means any event wherein cash or cash equivalent proceeds to the Members on account of their respective Units are generated outside the ordinary operation of the Company in conjunction with (i) a sale, in one or a series of transactions, of all or substantially all of the assets of the Company, (ii) a sale by the Members of all of the equity of the Company (through a sale, merger or similar transaction), or (iii) a Public Offering.

“Majority Vote” means the affirmative vote of Members whose aggregate Class A Sharing Percentages exceed 50%; provided as long as Old Ironsides owns any Class A Units the affirmative vote of Old Ironsides shall be required to constitute a Majority Vote.

“Management Services Agreement” means that certain Management Services Agreement, dated as of February 23, 2017, by and between the Company and Carbon.

“Manager” shall be the Person from time to time designated by the Board as “Manager” for purposes of this Agreement; Carbon shall be the “Manager” unless otherwise determined by the Board pursuant to Section 2.4(a)(xvii).

“Marketable Securities” means Securities (a) that are traded on an established U.S. or non-U.S. securities exchange, (b) that are reported through an established U.S. or non-U.S. over-the-counter trading system or (c) that the Board reasonably believes are eligible for immediate sale by any Member to which such Securities are distributed (assuming that such Member is not an Affiliate of the issuer of such Securities), in each case that are not subject to any material restrictions on transfer (generally applicable to the distributees thereof) under the Securities Act or other applicable securities laws or as a result of any applicable contractual provisions.

“Member Nonrecourse Deductions” shall have the same meaning as the term “partner nonrecourse deductions” set forth in Treasury Regulations Section 1.704 2(i)(2).

“Member Nonrecourse Debt Minimum Gain” shall have the same meaning as the term “partner nonrecourse debt minimum gain” set forth in Treasury Regulations Section 1.704-2(i)(2).

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“Members” means any Person admitted as a member of the Company as of the Effective Date or at any time after the Effective Date in accordance with this Agreement (but such term does not include any Person who has ceased to be a member of the Company).

“Net Income” and “Net Loss” means, the taxable income or loss of the Company, as the case may be, as determined in accordance with Code Section 703(a) for U.S. federal income tax purposes as of the close of each of the Fiscal Years of the Company, computed with the following adjustments:

(a) Any income of the Company that is exempt from U.S. federal income tax and not otherwise taken into account in computing Net Income or Net Losses pursuant to this definition of Net Income and Net Losses will increase the amount of such income and/or decrease the amount of such loss;

(b) Expenditures described in Section 705(a)(2)(B) of the Code or those treated as a Code Section 705(a)(2)(B) expenditure pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Income or Net Loss pursuant to this definition will be treated as deductible expenses;

(c) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Book Depreciation for such Fiscal Year or other period;

(d) Gain or loss from the disposition of any Company asset that has a Book Basis that differs from the asset’s adjusted tax basis, will be computed based upon the Book Basis (rather than the adjusted tax basis) of such asset;

(e) Any increase or decrease to Book Basis resulting from a Revaluation Event or from the distribution of any Company asset to a Member shall be included in the computation of Net Income or Net Loss;

(f) gain resulting from any disposition of an Oil and Gas Property shall be treated as being equal to the corresponding Simulated Gain; and

(g) Any items of income, gain, loss, or deduction allocated pursuant to any provision of Section 5.2 will be excluded from the computation of Net Income and Net Loss for purposes of applying Section 5.1.

“Non-Conflicted Member” means, in the context of a Conflict Activity, a Member that is not the Conflicted Member.

“Nonrecourse Deductions” has the meaning set forth in in Treasury Regulations Sections 1.704-2(b)(1) and 1.704-2(c).

“Nytis LLC” means Nytis Exploration Company LLC.

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“Oil and Gas Property” means each separate oil and gas property (as defined in Section 614 of the Code and the applicable Treasury Regulations) held by the Company or any of its Subsidiaries.

“OpCo” means Carbon Tennessee Mining Company, LLC, a Delaware limited liability company, which is a direct, wholly-owned Subsidiary of the Company.

“Parent” means, with respect to any legal entity, any other legal entity that Controls such first legal entity.

“Participation Agreement” means that certain Participation Agreement, dated as of February 23, 2017, by and between Nytis LLC and OpCo.

“Participation Assets” means the right, title and interests of Carbon in all of the existing undeveloped leasehold, undrilled prospects, rights in joint operating agreements and the like, related to Carbon’s Tennessee Mining Tract properties, that are the subject of the Participation Agreement.

“Permitted Transferee” means, as to any Member, any Affiliate of such Member or any other transferee of such Member in an Excluded Affiliate Transfer.

“Person” has the meaning given to such term in the Act.

“Primary JOA” means the “Operating Agreement” as such term is defined in the Participation Agreement.

“Prior Agreement” means that certain Limited Liability Company Agreement of the Company, dated as of February 23, 2017, by and among the Members.

“Priority Amount” means, at the time of any distribution pursuant to Section 5.4, with respect to each Class A Unit, the amount that would be required to be distributed to the holder of such Class A Unit at such time to cause the cumulative amount of distributions made pursuant to Section 5.4 and Section 5.5 (to the extent treated as an advanced distribution under Section 5.4) on account of such Class A Unit to provide an Internal Rate of Return of ten percent (10%) on the aggregate amount of all funded Capital Contributions made to the Company on account of or in exchange for such Class A Unit, including a return of the aggregate amount of all funded Capital Contributions made to the Company on account of or in exchange for such Class A Unit.

“Project” means such projects as may be selected by the Manager for the acquisition, ownership, management, maintenance and operation of oil and gas leases, lease options or other interests in oil and gas properties and seismic data and other rights of entitlement that are acquired by the Company or any of its Subsidiaries.

“Prudent Industry Practices” means, at a particular time, any of the practices, methods, standards of care, skill, safety and diligence, as the same may change from time to time, but applied in light of the facts known at the time, that are consistent with the general standards applied or utilized under comparable circumstances by a reasonably prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good upstream industry practice.

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“Public Offering” means the sale in a firm underwritten public offering registered under the Securities Act of any class of equity securities of the Company (or any successor thereto).

“Qualified Appraiser” means an investment bank or appraisal firm with experience in valuing businesses or non–public securities in the upstream oil and gas industry.

“Records” means all books, records and other documentation, both written and electronic, customarily used to conduct an oil and gas exploration and development business.

“Required Representations” means, with respect to any Member involved in a Transfer of its Interests, representations and warranties by such Member with respect to its ownership of such Transferred Interests free and clear of all Liens and its authority to sell such Transferred Interests.

“Revaluation Event” means, except as otherwise agreed by the Board of Directors, (i) the acquisition of an additional Interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution, (ii) the Distribution by the Company to a Member of more than a de minimis amount of money or other property as consideration for an Interest in the Company, (iii) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), (iv) the grant of an Interest as consideration for the provision of services to or for the benefit of the Company by an existing Member acting in a Member capacity or by a new Member acting in a Member capacity in anticipation of becoming a Member and (v) at such other times as the Board may reasonably determine to be necessary or advisable in order to comply with Treasury Regulations Sections 1.704–1(b) and 1.704–2.

“Securities Act” means the Securities Act of 1933, as amended.

“Simulated Basis” means the Book Basis of any Oil and Gas Property.

“Simulated Depletion Deductions” means the simulated depletion allowance computed by the Company with respect to its Oil and Gas Properties pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(k)(2). For purposes of computing Simulated Depletion Deductions with respect to any Oil and Gas Property, the Simulated Basis of such property shall be deemed to be the Book Basis of such property, and in no event shall such allowance, in the aggregate, exceed such Simulated Basis. For purposes of computing Simulated Depletion Deductions, the Company will apply on a property by property basis the simulated cost depletion method or the simulated percentage depletion method under Treasury Regulations Section 1.704-1(b)(2)(iv)(k)(2), as reasonably determined by the Manager.

“Simulated Gain” or “Simulated Loss” means the simulated gain or simulated loss computed by the Company with respect to its Oil and Gas Properties pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(k)(2).

72

“Subsidiary” means, with respect to any Person, any corporation, limited liability company, partnership or other entity (i) of which equity securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other similar managing body of such corporation, limited liability company, partnership or other entity or having the right to more than 50% of the distributions to be made by such corporation, limited liability company, partnership or other entity (either generally or upon liquidation of such corporation, limited liability company, partnership or other entity) are at the time owned by such Person or (ii) the management of which is otherwise Controlled by such Person.

“Tax Liability Deficiency” means an amount equal to the product of (a) the highest combined U.S. federal, state and local income tax rates (including for this purpose any tax under Code Section 1411 or similar provisions of law) applicable to an individual or corporation (whichever is higher) resident in New York, New York, multiplied by (b) the amount of the Company’s U.S. federal taxable income (net of current year federal taxable losses) for the current taxable year (and as estimated by the Board for any period for which a federal information return has not been filed) allocated to the Members pursuant to this Agreement (ignoring, for this purpose, any allocations pursuant to Code Section 704(c) and the Treasury Regulations thereunder).

“Tennessee Mining Tract” means the property described in Exhibits A and B to the Participation Agreement.

“Transfer” means to sell, or in any other way directly or indirectly transfer, assign, distribute, convey, gift, abandon, hypothecate, encumber, pledge, mortgage or otherwise dispose of, either voluntarily or involuntarily or by operation of law; and “Transferring” means the act of making a Transfer; and “Transferred” means the condition of a Transfer having occurred.

“Treasury Regulations” means temporary and final regulations promulgated under the Code by the United States Department of the Treasury, as amended (including any corresponding provisions of succeeding regulations).

“Ultimate Parent” means (a) subject to clause (b), (i) with respect to Old Ironsides, Old Ironsides Energy Fund II GP, LLC, (ii) with respect to Carbon, Carbon Natural Gas Company, (iii) with respect to Yorktown, Yorktown XI Associates LLC, and (iv) with respect to any other Member, the Person designated by the Board reasonably and in good faith as the Person that ultimately Controls such Member upon its admission as a Member and (b) upon a Change of Control of the Ultimate Parent of a holder of Units, the Person that ultimately Controls such holder of Units following such Change in Control.

“Unfunded Amount” means, as the context requires, (a) that portion of a Capital Call that a Defaulting Member was required to contribute but failed to timely contribute (after giving effect to the Default Cure Period) or (b) that portion of a Capital Call that a Shortfall Member was entitled to contribute but failed to timely contribute (after giving effect to the Shortfall Cure Period).

“Units” mean the Class A Units, the Class B Units and the Class C Units.

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Section 11.2 Other Defined Terms. Each of the terms is defined in the provision of the Agreement identified opposite such term in the following table:

Term	Provision
Agreement	Preamble
Approved Exit	Section 6.5(c)
Baseline Budget	Section 2.8(b)
Board of Directors or Board	Section 2.1(a)
Board of Directors Designee	Section 2.2(d)
Business Opportunity	Section 3.4(b)(iii)
Buy/Sell Election Notice	Section 6.6(b)
Buy/Sell Unit Price	Section 6.6(a)
Capital Call Notice	Section 4.1(c)
Capital Calls	Section 4.1(c)
Capital Commitment	Section 4.1(d)
Carbon	Preamble
Carbon Designee	Section 2.2(c)
Certificate of Formation	Section 1.1(a)
Class A Units	Section 3.1(a)
Class B Units	Section 3.1(a)
Class C Units	Section 3.1(a)
Class C Non-Cash Capital Contribution	Section 4.1(a)
Commitment Reduction Date	Section 4.1(g)
Commitment Release Point	Section 4.1(h)
Company	Preamble
Conversion	Section 6.9(c)
Conversion Consideration	Section 6.9(c)
Cure Notice	Section 6.4(e)
Cure Period	Section 6.4(e)
Default Cure Period	Section 4.6
Default Notice	Section 4.6
Defaulting Member	Section 4.6(a)
Designating Party	Section 2.2(d)
Development Budget	Section 2.8(b)
Director	Section 2.1(a)
Disposition Proceeds	Section 6.11(a)
Dissolution Events	Section 7.1
Drag-Along Member	Section 6.2(a)
Drag-Along Notice	Section 6.2(b)
Drag-Along Notice Period	Section 6.2(c)
Drag-Along Sale	Section 6.2(a)
Dragging Member	Section 6.2(a)
Effective Date	Preamble
Electing Party	Section 4.4
Excess Class B Distribution Amount	Section 5.7
Exercising Member	Section 6.4(b)
Fiscal Year	Section 10.4

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Term	Provision
Independent Appraiser	Section 2.10
Indirect Parent Transfer	Section 6.4(a)
Initial Appraiser	Section 6.4(c)
Initial Budget	Section 2.8(a)
Initial Contributions	Section 4.1(b)
Initiating Member	Section 6.6(a)
IPT Exercise Notice	Section 6.4(b)
IPT Notice	Section 6.4(a)
IPT Transaction Value	Section 6.4(b)
Key Man Event	Section 4.2
Liquidity Event Notice	Section 6.5(a)
Member Indemnitors	Section 8.5
Member Related Party	Section 3.4(a)(i)
Neutral Appraiser	Section 6.4(d)
Non-Defaulting Member	Section 4.6
Non-Initiating Member	Section 6.6(a)
Non-Shortfall Member	Section 4.1(i)
Offer	Section 6.6(a)
Offeror	Section 6.4(a)
OIE Fund II-A	Preamble
OIE Fund II-B	Preamble
Old Interests	Section 6.9(c)
Old Ironsides	Preamble
Old Ironsides Designee	Section 2.2(c)
Optional Contribution	Section 4.6(c)
Other Investments	Section 3.5(a)(i)
Permitted Investment	Section 3.6(b)
Permitted Variance	Section 2.4(a)(i)
Preemptive Rights Member	Section 4.4
Preemptive Rights Notice	Section 4.4
Primary Exercising Member	Section 6.4(c)
Proposed Budget	Section 2.8(c)
Remaining Tag Balance	Section 6.11(b)(ii)
Restricted Interest	Section 3.6(a)
Second Appraiser	Section 6.4(d)
Services Agreement	Section 2.5
Shortfall Member	Section 4.1(i)
Shortfall Cure Period	Section 4.1(i)
Subject Assets	Section 3.5(d)
Subject Company	Section 6.4(a)
Subsequent Notice	Section 4.4
Subsequent Purchase	Section 4.4
Tag-Along Notice	Section 6.3(b)
Tag-Along Participant	Section 6.3(a)
Tag-Along Partial Sale	Section 6.3(d)
Tag-Along Sale	Section 6.3(a)
Tag-Along Transferring Member	Section 6.3(a)
Tax Matters Representative	Section 9.5
Third Party Sale	Section 6.6(e)(ii)
Transaction Expenses	Section 12.3(a)
Unit Certificate	Section 4.5(a)
Yorktown	Preamble
Yorktown-Carbon Assignment	Section 6.12(a)

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Section 11.3 Construction. When required by the context, the gender of words in this Agreement includes the masculine, feminine and neuter genders, and the singular includes the plural (and vice versa). Unless otherwise specified, references in this Agreement to (a) Articles and Sections are to Articles and Sections of this Agreement, (b) Schedules, Exhibits or Annexes are to those attached hereto, each of which is incorporated herein and made a part hereof for all purposes, (c) Article and Section headings are for convenience only and shall not affect the interpretation of this Agreement, (d) the terms “herein,” “hereof,” “hereinafter” or similar derivations are to this Agreement as a whole and not to any particular Article or Section, and (e) the terms “include,” “including” or similar derivations are without limitation.

ARTICLE XII
MISCELLANEOUS

Section 12.1 Notices. All notices and other communications under this Agreement or in connection herewith shall be in writing and shall be given by delivery in person or by overnight courier, by registered or certified mail (return receipt requested and with postage prepaid thereon) or by facsimile or Electronic Transmission to the parties at the respective addresses set forth in Exhibit A (or at such other address as any party shall have furnished to the others in accordance with the terms of this Section 12.1). All notices and other communications that are addressed as provided in or pursuant to this Section 12.1 shall be deemed duly and validly given (a) if delivered in person or by overnight courier, upon delivery, (b) if delivered by registered or certified mail (return receipt requested and with postage paid thereon), 72 hours after being placed in a depository of the United States mails and (c) if delivered by facsimile or Electronic Transmission, upon transmission thereof and receipt of the appropriate answerback.

Section 12.2 Confidentiality. Each party hereto acknowledges the proprietary and confidential nature of the Confidential Information, and agrees that it shall preserve the confidentiality of the Confidential Information and shall not use, publish, disseminate, distribute or otherwise disclose all or any portion thereof without the prior written approval of the Board of Directors.

(a) In the event that a Member receives either a request to disclose any Confidential Information under the terms of a subpoena or order issued by a court or other Governmental Authority of competent jurisdiction or advice of legal counsel that disclosure is required under applicable Law, such Member agrees that, prior to disclosing any Confidential Information, it shall (i) immediately notify the Board of Directors of the existence and terms of, and the circumstances attendant to, such request or advice, (ii) consult with the Board of Directors as to the advisability of taking legally available steps to resist or narrow any such request or to otherwise eliminate the need for such disclosure and (iii) if disclosure is required, use commercially reasonable efforts to obtain a protective order or other reliable assurance that confidential treatment will be accorded to such portion of the Confidential Information as is required to be disclosed.

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(b) Notwithstanding the above, a Member or a member of the Board of Directors may disclose Confidential Information (i) to the extent the disclosure is necessary as a result of the due and proper performance of its duties to the Company pursuant to this Agreement, (ii) to the extent necessary to enforce rights hereunder (provided, however, that the Member seeking to enforce its rights uses commercially reasonable efforts to preserve the confidential nature of the Confidential Information and to limit the harm to the Company or the other Members from the disclosure thereof) or (iii) in connection with disclosures of a general nature regarding general financial information, return on investment and similar information, including in connection with communications to direct and indirect beneficial owners of interests in the Member. The agreements contained in this Section 12.2 shall survive the withdrawal of any Member and the termination of the Company.

Section 12.3 Expenses.

(a) Except as set forth in Section 12.3(b), unless approved by the Board of Directors as a Company Expense, each Member shall be responsible for the payment of all reasonable fees and expenses incurred by such Member in connection with the negotiation and preparation of this Agreement and all agreements and documents ancillary thereto (“Transaction Expenses”). Transaction Expenses shall include all fees, costs, and expenses of legal counsel, accountants and all other third party consultants and advisors engaged by such Member to assist with the due diligence reviews conducted by it or the negotiation or preparation of this Agreement or other agreements and all direct out-of-pocket expenses for travel and similar matters.

(b) Carbon shall be responsible for the payment of all reasonable fees and expenses incurred by or on behalf of such Member in connection with (i) due diligence relating to the CNX Acquisition and (ii) negotiation and preparation of the CNX PSA; provided, however, that the Company shall reimburse Carbon (A) $300,000 for its efforts and expenditures related to its diligence review of the CNX Acquisition and (B) Carbon’s actual out-of-pocket legal and other third party fees incurred in connection with the CNX Acquisition and CNX PSA, promptly following request thereof by Carbon. The Company shall be responsible for the payment or reimbursement of all Transaction Expenses incurred by Old Ironsides and by Yorktown in connection with the negotiation and preparation of this Agreement and all agreements and documents ancillary thereto.

Section 12.4 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior written or oral agreements and understandings and all contemporaneous oral agreements and understandings among the parties or any of them with respect to the subject matter hereof, including the Prior Agreement. All Exhibits and Schedules hereto are expressly made a part of this Agreement.

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Section 12.5 Waiver or Consent. A waiver or consent, express or implied, to or of any breach or default by any Person in the performance of its obligations with respect to the Company is not a consent or waiver to or of any other breach or default in the performance by that Person of the same or any other obligations of that Person with respect to the Company. Failure on the part of a Person to complain of any act or omission of any Person or to declare any Person in breach or default with respect to an obligation, irrespective of how long that failure continues, shall not be construed as a waiver of the breach or default until the applicable statute of limitations has run. No waiver of any obligation under this Agreement or the Act shall be effective unless in writing signed by or on behalf of the Person or Persons to whom the obligation is owed.

Section 12.6 Amendment. No amendment of this Agreement shall be effective (by merger, consolidation or otherwise) unless such amendment is executed by all of the Class A Members; provided, however, that no Member approval shall be required for any amendment made (x) to Exhibit A in accordance with the last sentence of this Section 12.6, (y) to reflect admission of a new Member approved pursuant to Section 2.4(a)(xii) or effected pursuant to Section 6.7 or (z) in connection with the creation and issuance of additional or different classes or series of Units approved pursuant to Section 2.4(a)(xi); and, provided, further, that (i) the approval of the holder of the Class B Units shall be required for any amendment that adversely affects the right of the Class B Units under Article V of this Agreement relative to the rights of the Class A Units and Class C Units under this Agreement in any material respect, (ii) the approval of the holder of the Class C Units shall be required for any amendment that adversely affects the right of the Class C Units under Article V of this Agreement relative to the rights of the Class A Units and Class B Units under this Agreement in any material respect and (iii) at any time there is a Defaulting Member, the approval of the Defaulting Member (in its capacity as a Class A Member) shall not be required for any amendment of this Agreement provided that such amendment does not materially and adversely affect the rights of the Defaulting Member in its capacity as a holder of Class A Units in a manner that is disproportionate to the other holders of Class A Units. Neither the waiver by the Company or a Member of a breach of or a default under any of the provisions of this Agreement, nor the failure of the Company or a Member, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right, remedy or privilege hereunder, shall thereafter be construed as a waiver of any subsequent breach or default of a similar nature, or as a waiver of any such provisions, rights, remedies or privileges hereunder. Exhibit A shall be amended from time to time to reflect any changes to the information contained therein without the necessity of any Board or Member approval.

Section 12.7 Choice of Law. This Agreement shall be constructed, interpreted and enforced in accordance with, and the respective rights and obligations of the parties shall be governed by, the laws of the State of Delaware without regard to principles of conflicts of law.

Section 12.8 Public Announcement. Except as otherwise required by applicable Law, no Member or its Affiliates shall make any public announcement or filing with respect to the Company or its affairs or the transactions provided for herein without the prior written consent of the other Member(s), which shall not be withheld unreasonably, except as may be required by law.

78

Section 12.9 Availability of Equitable Relief. Each of the parties hereto recognizes that irreparable injury may result from a breach of any provision of this Agreement and that money damages may be inadequate to fully remedy the injury. In order to prevent such irreparable injury, a party hereto may seek temporary injunctive relief from any court of competent jurisdiction.

Section 12.10 Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns (it being understood and agreed that, except as expressly provided herein and the rights of Covered Persons and Member Indemnitors under Article VIII, nothing contained in this Agreement is intended to confer any rights, benefits or remedies of any kind or character on any other Person under or by reason of this Agreement). It is expressly understood and agreed that any attempted or purported Transfer by any party of this Agreement in violation of the provisions of this Section 12.10 shall be null and void.

Section 12.11 Benefit of Agreement. Nothing in this Agreement expressed or implied, shall be construed to give to any creditor of the Company or of any Member any legal or equitable right, remedy or claim under or in respect of this Agreement.

Section 12.12 Further Assurances. In connection with this Agreement and the transactions contemplated hereby, each Member agrees to execute and deliver any additional documents and instruments and to perform any additional acts necessary or appropriate to effectuate the provisions of this Agreement and those transactions.

Section 12.13 Counterparts. This Agreement may be executed in any number of counterparts or counterpart signature pages, each of which shall constitute an original and all of which shall constitute one and the same instrument.

[Remainder of page intentionally left blank; Signature page follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

CLASS A MEMBERS:
CARBON NATURAL GAS COMPANY
By:	/s/ Patrick R. McDonald
Name:	Patrick R. McDonald
Title:	Chief Executive Officer
YORKTOWN ENERGY PARTNERS XI, L.P.
By:	Yorktown XI Company LP, its general partner
By:	Yorktown XI Associates LLC, its general partner
By:	/s/ Peter A. Leidel
Name:	Peter A. Leidel
Title:	Member
OLD IRONSIDES FUND II-A PORTFOLIO HOLDING COMPANY, LLC
By:	/s/ Christopher L. Stoeckle
Name:	Christopher L. Stoeckle
Title:	Director
OLD IRONSIDES FUND II-B PORTFOLIO HOLDING COMPANY, LLC
By:	/s/ Christopher L. Stoeckle
Name:	Christopher L. Stoeckle
Title:	Director

Signature Page to A&R LLC Agreement of Carbon Appalachian Company, LLC

CLASS B MEMBER:
CARBON NATURAL GAS COMPANY
By:	/s/ Patrick R. McDonald
Name:	Patrick R. McDonald
Title:	Chief Executive Officer
CLASS C MEMBER:
CARBON NATURAL GAS COMPANY
By:	/s/ Patrick R. McDonald
Name:	Patrick R. McDonald
Title:	Chief Executive Officer

Signature Page to A&R LLC Agreement of Carbon Appalachian Company, LLC

Exhibit A

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT OF
CARBON APPALACHIAN COMPANY, LLC

This Exhibit is dated as of August [●], 2017

Members and Addresses	Aggregate Capital Contributions Made To-Date (Cash)		Capital Commitment (Cash)		Class A Units		Class A Sharing Percentage			Class B Units		Class C Units
Carbon Natural Gas Company 1700 Broadway, Suite 1170 Denver, CO 80290	$	3,950,000.00	$	23,560,000.00		3,950.000		15.19	%		1,000		121.21212	1
Yorktown Energy Partners XI, L.P. 410 Park Avenue, 19th Floor New York, NY 10022	$	2,940,000.00	$	2,940,000.00		2,940.000		11.31	%		–		–
Old Ironsides Fund II-A Portfolio Holding Company, LLC 10 Saint James Avenue, 19th Floor Boston, MA 02116	$	15,890,700.57	$	61,118,079.75		15,890.70057		61.12	%		–		–
Old Ironsides Fund II-B Portfolio Holding Company, LLC 10 Saint James Avenue, 19th Floor Boston, MA 02116	$	3,219,299.43	$	12,381,920.25		3,219.29943		12.38	%		–		–
Total	$	26,000,000.00	$	100,000,000.00		26,000		100.00	%		1,000		121.21212

¹ The Class C Units were issued to Carbon in exchange for the Class C Non-Cash Capital Contribution.

A-1

Exhibit B

Members of the Board of Directors

Old Ironsides Designees:	Scott E. Carson
	Daniel A. Rioux
	Christopher L. Stoeckle
Carbon Designee:	Patrick R. McDonald

B-1

Exhibit C

INSURANCE

[See Attached.]

C-1

EXHIBIT D

AMI

 

D-1

ExHIBIT E

INITIAL BUDGET

[See Attached.]

E-1

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Patrick R. McDonald, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Carbon Natural Gas Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 14, 2017   /s/ Patrick R. McDonald            

Patrick R. McDonald
Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Kevin D. Struzeski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Carbon Natural Gas Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 14, 2017     /s/ Kevin D. Struzeski          

Kevin D. Struzeski
Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF CARBON NATURAL GAS COMPANY
PURSUANT TO 18 U.S.C. SECTION 1350

        Pursuant to 18 U.S.C. Section 1350 and in connection with the accompanying report on Form 10-Q for the quarter ended September 30, 2017 that is being filed concurrently with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officer of Carbon Natural Gas Company (the "Company") hereby certifies that:

1.       The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.       The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 14, 2017   /s/ Patrick R. McDonald              
Patrick R. McDonald
Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF CARBON NATURAL GAS COMPANY
PURSUANT TO 18 U.S.C. SECTION 1350

        Pursuant to 18 U.S.C. Section 1350 and in connection with the accompanying report on Form 10-Q for the quarter ended September 30, 2017 that is being filed concurrently with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officer of Carbon Natural Gas Company (the "Company") hereby certifies that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 14, 2017   /s/ Kevin D. Struzeski            
Kevin D. Struzeski
Chief Financial Officer

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Nov. 10, 2017
Document and Entity Information [Abstract]
Entity Registrant Name	Carbon Natural Gas Co
Entity Central Index Key	0000086264
Trading Symbol	CRBO
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Type	10-Q
Document Period End Date	Sep. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		6,059,640

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 1,119	$ 858
Accounts receivable:
Revenue	2,349	2,369
Trade receivables	1,023	330
Receivable - related party	346
Other	39	1,921
Commodity derivative asset	190
Prepaid expense, deposits and other current assets	585	305
Total current assets	5,651	5,783
Oil and gas properties, full cost method of accounting;
Proved, net	32,059	33,212
Unproved	1,926	1,999
Other property and equipment, net	773	325
Total property and equipment, net	34,758	35,536
Investments in affiliates (note 5)	14,245	668
Other long-term assets	847	725
Total assets	55,501	42,712
Current liabilities:
Accounts payable and accrued liabilities (note 9)	8,093	9,121
Firm transportation contract obligations (note 12)	234	561
Commodity derivative liability		1,341
Total current liabilities	8,327	11,023
Non-current liabilities:
Firm transportation contract obligations (note 12)	166	261
Commodity derivative liability		591
Ad valorem taxes payable	561	628
Warrant derivative liability	4,600
Asset retirement obligations (note 2)	5,120	5,120
Notes payable (note 6)	22,140	16,230
Total non-current liabilities	32,587	22,716
Commitments (note 12)
Stockholders' equity:
Common stock, $0.01 par value; authorized 200,000,000 shares, 5,627,589 and 5,482,673 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	56	55
Additional paid-in capital	58,339	57,588
Accumulated deficit	(45,701)	(50,535)
Total Carbon stockholders' equity	12,694	7,108
Non-controlling interests	1,893	1,865
Total stockholders' equity	14,587	8,973
Total liabilities and stockholders' equity	$ 55,501	$ 42,712

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Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2017	Dec. 31, 2016
Balance Sheets [Abstract]
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	5,627,589	5,482,673
Common stock, shares outstanding	5,627,589	5,482,673

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Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Revenue:
Natural gas sales	$ 3,689	$ 1,431	$ 11,706	$ 3,484
Oil sales	997	765	3,189	2,201
Commodity derivative (loss) gain	(499)	160	2,642	(474)
Other income	8	9	28	10
Total revenue	4,195	2,365	17,565	5,221
Expenses:
Lease operating expenses	1,605	622	4,311	1,864
Transportation costs	556	364	1,571	1,121
Production and property taxes	331	184	1,186	443
General and administrative	2,129	2,327	5,623	5,402
General and administrative - related party reimbursement	(423)		(723)
Depreciation, depletion and amortization	613	393	1,847	1,332
Accretion of asset retirement obligations	77	35	232	105
Impairment of oil and gas properties				4,299
Total expenses	4,888	3,925	14,047	14,566
Operating (loss) income	(693)	(1,560)	3,518	(9,345)
Other income and (expense):
Interest expense	(299)	(38)	(821)	(141)
Warrant derivative gain	811		2,494
Equity investment loss	(285)	(4)	(285)	(10)
Other	20		20	17
Total other income (expense)	247	(42)	1,408	(134)
Income (loss) before income taxes	(446)	(1,602)	4,926	(9,479)
Provision for income taxes
Net income (loss) before non-controlling interests	(446)	(1,602)	4,926	(9,479)
Net income (loss) attributable to non-controlling interests	16	(3)	92	(435)
Net income (loss) attributable to non-controlling interests	$ (462)	$ (1,599)	$ 4,834	$ (9,044)
Net income (loss) per common share:
Basic	$ (0.08)	$ (0.29)	$ 0.87	$ (1.66)
Diluted	$ (0.08)	$ (0.29)	$ 0.36	$ (1.66)
Weighted average common shares outstanding:
Basic	5,628	5,507	5,579	5,455
Diluted	5,628	5,507	6,486	5,455

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Consolidated Statements of Stockholders' Equity (Unaudited) - 9 months ended Sep. 30, 2017 - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-in Capital	Non-Controlling Interests	Accumulated Deficit
Beginning balances at Dec. 31, 2016	$ 8,973	$ 55	$ 57,588	$ 1,865	$ (50,535)
Beginning balances, in shares at Dec. 31, 2016		5,483
Stock-based compensation	752		732
Restricted stock vested
Restricted stock vested, shares		65
Performance units vested		$ 1	(1)
Performance units vested, shares		80
Non-controlling interest distributions, net	(64)			(64)
Net income	4,926			92	4,834
Ending balances at Sep. 30, 2017	$ 14,587	$ 56	$ 58,339	$ 1,893	$ (45,701)
Ending balances, in shares at Sep. 30, 2017		5,628

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Cash flows from operating activities:
Net income (loss)	$ 4,926	$ (9,479)
Items not involving cash:
Depreciation, depletion and amortization	1,847	1,332
Accretion of asset retirement obligations	232	105
Impairment of oil and gas properties		4,299
Unrealized commodity derivative (gain) loss	(2,179)	823
Warrant derivative unrealized gain	(2,494)
Stock-based compensation expense	752	2,037
Investment in affiliates (gain) loss	315	10
Amortization of debt issuance costs	131
Other	(108)	(8)
Net change in:
Accounts receivable	863	43
Prepaid expenses, deposits and other current assets	(280)	27
Accounts payable, accrued liabilities and firm transportation contract obligations	(1,425)	118
Net cash provided by (used in) operating activities	2,580	(693)
Cash flows from investing activities:
Development and acquisition of properties and equipment	(1,268)	(328)
Proceeds from sale of oil and gas properties and other assets	16	8
Other long-term assets	(56)	57
Investment in affiliates	(6,798)	275
Net cash (used in) provided by investing activities	(8,106)	12
Cash flows from financing activities:
Proceeds from notes payable	7,210	707
Payments on notes payable	(1,300)	(200)
Debt issuance costs	(59)
Distributions to non-controlling interests	(64)	(3)
Net cash provided by financing activities	5,787	504
Net increase (decrease) in cash and cash equivalents	261	(177)
Cash and cash equivalents, beginning of period	858	305
Cash and cash equivalents, end of period	$ 1,119	$ 128

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Organization

9 Months Ended

Sep. 30, 2017

Organization [Abstract]

Organization

Note 1 – Organization

The Company’s business is comprised of the assets and properties of Carbon Natural Gas Company and its subsidiaries as well as its equity investments in Carbon Appalachian Company, LLC (“Carbon Appalachia”) and Carbon California Company, LLC (“Carbon California”).

Appalachian and Illinois Basin Operations

In the Appalachian and Illinois Basins, Nytis Exploration Company, LLC (“Nytis LLC”) conducts operations for the Company and Carbon Appalachia.

California Operations

In California, Carbon California Operating Company, LLC (“CCOC”), conducts Carbon California’s operations.

Collectively, Carbon Natural Gas Company, CCOC, Nytis Exploration (USA) Inc. (“Nytis USA”) and Nytis LLC are referred to as the Company.

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly the Company’s financial position as of September 30, 2017 and the Company’s results of operations and cash flows for the three and nine months ended September 30, 2017 and 2016. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year because of the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results and other factors. For a more complete understanding of the Company’s operations, financial position and accounting policies, the unaudited Consolidated Financial Statements and the notes thereto should be read in conjunction with the Company’s audited Consolidated Financial Statements for the year ended December 31, 2016 filed on Form 10-K with the Securities and Exchange Commission (“SEC”).

In the course of preparing the unaudited Consolidated Financial Statements, management makes various assumptions, judgments and estimates to determine the reported amount of assets, liabilities, revenue and expenses and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events and accordingly, actual results could differ from amounts initially established.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Carbon, CCOC, Nytis USA and its consolidated subsidiary, Nytis LLC. Carbon owns 100% of Nytis USA and CCOC. Nytis USA owns approximately 99% of Nytis LLC.

Nytis LLC also holds an interest in 64 oil and gas partnerships. For partnerships where the Company has a controlling interest, the partnerships are consolidated. The Company is currently consolidating on a pro-rata basis 46 partnerships. In these instances, the Company reflects the non-controlling ownership interest in partnerships and subsidiaries as non-controlling interests on its Consolidated Statements of Operations and reflects the non-controlling ownership interests in the net assets of the partnerships as non-controlling interests within stockholders’ equity on its Consolidated Balance Sheets. All significant intercompany accounts and transactions have been eliminated.

In accordance with established practice in the oil and gas industry, the Company’s unaudited Consolidated Financial Statements also include its pro-rata share of assets, liabilities, income, lease operating costs and general and administrative expenses of the oil and gas partnerships in which the Company has a non-controlling interest.

Non-majority owned investments that do not meet the criteria for pro-rata consolidation are accounted for using the equity method when the Company has the ability to significantly influence the operating decisions of the investee. When the Company does not have the ability to significantly influence the operating decisions of an investee, the cost method is used. All transactions, if any, with investees have been eliminated in the accompanying unaudited Consolidated Financial Statements.

Accounting for Oil and Gas Operations

The Company uses the full cost method of accounting for oil and gas properties. Accordingly, all costs incidental to the acquisition, exploration and development of oil and gas properties, including costs of undeveloped leasehold, dry holes and leasehold equipment, are capitalized. Overhead costs incurred that are directly identified with acquisition, exploration and development activities undertaken by the Company for its own account, and which are not related to production, general corporate overhead or similar activities, are also capitalized.

Unproved properties are excluded from amortized capitalized costs until it is determined if proved reserves can be assigned to such properties. The Company assesses its unproved properties for impairment at least annually. Significant unproved properties are assessed individually.

Capitalized costs are depleted by an equivalent unit-of-production method, converting oil to gas at the ratio of one barrel of oil to six thousand cubic feet of natural gas. Depletion is calculated using capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.

No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves. All costs related to production activities, including work-over costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred.

The Company performs a ceiling test quarterly. The full cost ceiling test is a limitation on capitalized costs prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is not a fair value based measurement, rather it is a standardized mathematical calculation. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using the un-weighted arithmetic average of the first-day-of-the month price for the previous twelve month period, excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. Should the net capitalized costs exceed the sum of the components noted above, a ceiling test write-down would be recognized to the extent of the excess capitalized costs. Such impairments are permanent and cannot be recovered in future periods even if the sum of the components noted above exceeds the capitalized costs in future periods.

For the three and nine months ended September 30, 2017, the Company did not recognize a ceiling test impairment as the Company’s full cost pool did not exceed the ceiling limitations. For the three months ended September 30, 2016, the Company did not recognize a ceiling test impairment as the Company’s full cost pool did not exceed the ceiling limitations. For the nine months ended September 30, 2016, the Company recognized a ceiling test impairment of approximately $4.3 million as the Company’s full cost pool exceeded its ceiling limitations. Future declines in oil and natural gas prices, and increases in future operating expenses and future development costs could result in additional impairments of our oil and gas properties in future periods. Impairment charges are a non-cash charge and accordingly, do not affect cash flow, but adversely affect our net income and stockholders’ equity.

Investments in Affiliates

Investments in non-consolidated affiliates are accounted for under either the cost or equity method of accounting, as appropriate. The cost method of accounting is generally used for investments in affiliates in which the Company has less than 20% of the voting interests of a corporate affiliate or less than a 3% to 5% interest of a partnership or limited liability company and does not have significant influence. Investments in non-consolidated affiliates, accounted for using the cost method of accounting, are recorded at cost and impairment assessments for each investment are made annually to determine if a decline in the fair value of the investment, other than temporary, has occurred. A permanent impairment is recognized if a decline in the fair value occurs.

If the Company holds between 20% and 50% of the voting interest in non-consolidated corporate affiliates or generally greater than a 3% to 5% interest of a partnership or limited liability company and exerts significant influence or control (e.g., through its influence with a seat on the board of directors or management of operations), the equity method of accounting is generally used to account for the investment. Equity method investments will increase or decrease by the Company’s share of the affiliate’s profits or losses and such profits or losses are recognized in the Company’s Consolidated Statements of Operations. For its equity method investments in Carbon Appalachia and Carbon California, the Company uses the hypothetical liquidation at book value method to recognize its share of the affiliate’s profits or losses. The Company reviews equity method investments for impairment whenever events or changes in circumstances indicate that an other than temporary decline in value has occurred.

Related Party Transactions

On February 15, 2017, the Company entered into a limited liability company agreement of Carbon California to make investments in California oil and gas projects. Pursuant to the limited liability agreement, Carbon California reimbursed the Company for (i) due diligence costs incurred on behalf of Carbon California, (ii) transaction-related costs and (iii) management-related costs in connection with its role as manager of Carbon California. Management-related reimbursements were $150,000 and $375,000 for the three months ended September 30, 2017 and period February 15, 2017 (inception) through September 30, 2017, respectively.   

On April 3, 2017, the Company entered into the limited liability company agreement of Carbon Appalachia to make investments in Appalachia oil and gas projects. Pursuant to the limited liability agreement, Carbon Appalachia reimbursed the Company for (i) due diligence costs incurred on behalf of Carbon Appalachia, (ii) transaction-related costs and (iii) management-related costs in connection with its role as manager of Carbon Appalachia. Management-related reimbursements were approximately $273,000 and $348,000 for the three months ended September 30, 2017 and period April 3, 2017 (inception) through September 30, 2017, respectively. As of September 30, 2017, Carbon Appalachia owes the Company approximately $273,000 in connection with its role as manager.

Warrant Derivative Liability

The Company issued warrants related to investments in Carbon California and Carbon Appalachia. The Company accounts for these warrants in accordance with guidance contained in Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, which requires these warrants to be recorded on the balance sheet as either an asset or a liability measured at fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that the Company’s warrants do not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as liabilities. The warrants are subject to remeasurement at each balance sheet date, with any change in the fair value recognized as a component of other income or expense, net in the statement of operations. For the three and nine months ended September 30, 2017, changes in the fair value of warrants accounted for gains of approximately $811,000 and $2.5 million, respectively.

Asset Retirement Obligations

The Company’s asset retirement obligations (“ARO”) relate to future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and returning such land to its original condition. The fair value of a liability for an ARO is recorded in the period in which it is incurred and the cost of such liability is recorded as an increase in the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period and the capitalized cost is depleted on a units-of-production basis as part of the full cost pool. Revisions to estimated AROs result in adjustments to the related capitalized asset and corresponding liability.

The estimated ARO liability is based on estimated economic lives, estimates as to the cost to abandon the wells in the future, and federal and state regulatory requirements. The liability is discounted using a credit-adjusted risk-free rate estimated at the time the liability is incurred or increased as a result of a reassessment of expected cash flows and assumptions inherent in the estimation of the liability. Upward revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells. AROs are valued utilizing Level 3 fair value measurement inputs.

The following table is a reconciliation of the ARO for the nine months ended September 30, 2017 and 2016:

(in thousands)	Nine Months Ended September 30,
	2017			2016
Balance at beginning of period	$	5,120		$	3,095
Accretion expense		232			105
Additions during period		5			5
Obligations on sale of oil & gas properties		(93	)		-
		5,264			3,205
Less: ARO recognized as a current liability		(144	)		-
Balance at end of period	$	5,120		$	3,205

Earnings (Loss) Per Common Share

Basic earnings or loss per common share is computed by dividing the net income or loss attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period. The shares of restricted common stock granted to certain officers, directors and employees of the Company are included in the computation of basic net income or loss per share only after the shares become fully vested. Diluted earnings per common share includes both the vested and unvested shares of restricted stock and the potential dilution that could occur upon exercise of warrants to acquire common stock, computed using the treasury stock method, which assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company with the proceeds from the exercise of warrants (which were assumed to have been made at the average market price of the common shares during the reporting period).

The following table sets forth the calculation of basic and diluted income (loss) per share:

in thousands except per share amounts	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Basic Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$	(462	)	$	(1,599	)	$	4,834		$	(9,044	)
Weighted average shares outstanding, basic		5,628			5,507			5,579			5,455
Net income (loss) per common share, basic	$	(0.08	)	$	(0.29	)	$	0.87			(1.66	)
Diluted Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$	(462	)	$	(1,599	)	$	4,834		$	(9,044	)
Less: decrease in fair value of warrant		-			-			(2,494	)		-
Adjusted net income (loss) available to common shareholders, diluted	$	(462	)	$	(1,599	)	$	2,340		$	(9,044	)
Weighted average shares outstanding, basic		5,628			5,507			5,579			5,455
Add: dilutive effects of warrant and nonvested shares of restricted stock		-			-			907			-
Weighted-average shares outstanding, diluted		5,628			5,507			6,486			5,455
Net income (loss) per common share, diluted	$	(0.08	)	$	(0.29	)	$	0.36		$	(1.66	)

For the three months ended September 30, 2017, the Company had a net loss, and therefore, the diluted net loss per share calculation excluded the anti-dilutive effect of approximately 284,000 non-vested shares of restricted stock and approximately 617,000 in-the-money warrants. In addition, approximately 276,000 restricted performance units, subject to future contingencies, are excluded from the basic and diluted loss per share calculations.

For the nine months ended September 30, 2017, the Company had net income and the diluted net income per share calculation for that period includes the dilutive effect of approximately 284,000 non-vested shares of restricted stock and approximately 623,000 in-the-money warrants. In addition, approximately 276,000 restricted performance units, subject to future contingencies, are excluded from the basic and diluted loss per share calculations.

For the three and nine months ended September 30, 2016, the Company had a net loss and therefore, the diluted net loss per share calculation excluded the anti-dilutive effect of approximately 13,000 warrants and approximately 291,000 non-vested shares of restricted stock in each period. In addition, approximately 298,000 restricted performance units, in each period, subject to future contingencies were excluded from the basic and diluted loss per share calculations.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and disclosure of contingent assets and liabilities. Significant items subject to such estimates and assumptions include the carrying value of oil and gas properties, the estimate of proved oil and gas reserve volumes and the related depletion and present value of estimated future net cash flows and the ceiling test applied to capitalized oil and gas properties, determining the amounts recorded for deferred income taxes, stock-based compensation, fair value of commodity derivative instruments, fair value of warrants, equity method investments, fair value of assets acquired qualifying as business contributions and asset retirement obligations. Actual results could differ from those estimates and assumptions used, and the use of such estimates may result in volatility within the Company’s financial statements. 

Adopted and Recently Issued Accounting Pronouncements

In February 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”). The objective of this ASU is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and should be applied using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting ASU 2016-02.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The FASB subsequently issued ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, which deferred the effective date of ASU 2014-09 and provided additional implementation guidance. These ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application. The Company plans to adopt these ASUs effective January 1, 2018 using the modified retrospective method. The Company is in the process of assessing its contracts with customers and evaluating the effect of adopting these standards on its financial statements, accounting policies, internal controls and disclosures. The adoption is not expected to have a significant impact on the Company’s net income or cash flows, however, the Company is currently evaluating the proper classification of certain pipeline gathering, transportation and gas processing agreements to determine whether changes to total revenues and expenses will be necessary under the new standards.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. These amendments change the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The amendments in this update affect investments in loans, investments in debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact on its consolidated financial statements of adopting ASU 2016-13.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of “a business” to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company elected to early adopt this pronouncement effective January 1, 2017.

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Acquisitions and Divestitures

9 Months Ended

Sep. 30, 2017

Acquisitions and Divestitures [Abstract]

Acquisitions and Divestitures

Note 3 – Acquisitions and Divestitures

In October 2016, Nytis LLC completed an acquisition (the “EXCO Acquisition”) consisting of producing natural gas wells and natural gas gathering facilities located in the Company’s Appalachian Basin operating area. The natural gas gathering facilities are primarily used to gather the Company’s natural gas production. The acquisition was pursuant to a purchase and sale agreement, effective October 1, 2016 (the “EXCO Purchase Agreement”) by and among EXCO Production Company (WV), LLC, BG Production Company (WV), LLC and EXCO Resources (PA) LLC (collectively, the “Sellers”) and Nytis LLC, as the buyer. The purchase price of the acquired assets was $9.0 million subject to customary closing adjustments plus certain assumed obligations.

The EXCO Acquisition included proved developed reserves, production and operating cash flow in a location where the Company has similar assets.

EXCO Acquisition Unaudited Pro Forma Results of Operations

Below are consolidated results of operations for the nine months ended September 30, 2017 and 2016 as though the EXCO Acquisition had been completed as of January 1, 2016. The EXCO Acquisition closed October 3, 2016, and accordingly, the Company’s unaudited consolidated statement of operations for the nine months ended September 30, 2017 includes the results of operations for the nine months ended September 30, 2017 of the EXCO properties acquired. 

	Unaudited Pro Forma Consolidated Results
	For Nine Months Ended September 30,
(in thousands, except per share amounts)	2017		2016
Revenue	$	17,565	$	10,990
Net income (loss) before non-controlling interests		4,926		(4,447	)
Net income (loss) attributable to non-controlling interests		92		(435	)
Net income (loss) attributable to controlling interests		4,834		(4,012	)
Net income (loss) income per share (basic)		0.87		(0.74	)
Net income (loss) income per share (diluted)		0.36		(0.74	)

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Property and Equipment

9 Months Ended

Sep. 30, 2017

Property and Equipment [Abstract]

Property and Equipment

Note 4 – Property and Equipment

Net property and equipment as of September 30, 2017 and December 31, 2016 consists of the following:

(in thousands)	September 30, 2017			December 31, 2016
Oil and gas properties:
Proved oil and gas properties	$	112,211		$	111,771
Unproved properties not subject to depletion		1,926			1,999
Accumulated depreciation, depletion, amortization and impairment		(80,152	)		(78,559	)
Net oil and gas properties		33,985			35,211
Furniture and fixtures, computer hardware and software, and other equipment		1,661			990
Accumulated depreciation and amortization		(888	)		(665	)
Net other property and equipment		773			325
Total net property and equipment	$	34,758		$	35,536

As of September 30, 2017, and December 31, 2016, the Company had approximately $1.9 million and $2.0 million, respectively, of unproved oil and gas properties not subject to depletion. The costs not subject to depletion relate to unproved properties that are excluded from amortized capital costs until it is determined if proved reserves can be assigned to such properties. The excluded properties are assessed for impairment at least annually. Subject to industry conditions, evaluation of most of these properties and the inclusion of their costs in amortized capital costs is expected to be completed within five years.

During the nine months ended September 30, 2017 and 2016, the Company capitalized general and administrative expenses applicable to development and exploration activities of approximately $178,000 and $431,000, respectively.

Depletion expense related to oil and gas properties for the three and nine months ended September 30, 2017 was approximately $521,000, or $0.38 per Mcfe, and $1.6 million, or $0.40 per Mcfe, respectively. For the three and nine months ended September 30, 2016, depletion expense was approximately $368,000, or $0.60 per Mcfe, and $1.2 million, or $0.68 per Mcfe, respectively.

Depreciation and amortization expense related to furniture and fixtures, computer hardware and software and other equipment for the three months ended September 30, 2017 and 2016 was approximately $91,000 and $25,000, respectively and for the nine months ended September 30, 2017 and 2016 was approximately $254,000 and $85,000, respectively.

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Investments in Affiliates

9 Months Ended

Sep. 30, 2017

Investments in Affiliates [Abstract]

Investments in Affiliates

Note 5– Investments in Affiliates

Carbon California

On February 15, 2017, the Company entered into a limited liability company agreement (the “Carbon California LLC Agreement”) of Carbon California, a Delaware limited liability company established by the Company. Pursuant to the Carbon California LLC Agreement, Carbon acquired a 17.8% interest in Carbon California represented by Class B Units. The Class B Units were acquired for no cash consideration. No further equity commitments have been made or are required by the Company under the Carbon California LLC Agreement.

On February 15, 2017, Carbon California (i) issued and sold Class A Units to two institutional investors for an aggregate cash consideration of $22.0 million, (ii) entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with two institutional investors for the issuance and sale of up to $25.0 million of Senior Secured Revolving Notes (the “Senior Revolving Notes”) due February 15, 2022 and (iii) entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with one institutional investor for the issuance and sale of $10.0 million of Senior Subordinated Notes (the “Subordinated Notes”) due February 15, 2024. The Company is not a guarantor of the Senior Revolving Notes or the Subordinate Notes. The closing of the Note Purchase Agreement and the Securities Purchase Agreement on February 15, 2017, resulted in the sale and issuance by Carbon California of (i) Senior Revolving Notes in the principal amount of $10.0 million and (ii) Subordinated Notes in the original principal amount of $10.0 million. The maximum principal amount available under the Senior Revolving Notes is based upon the borrowing base attributable to Carbon California’s proved oil and gas reserves which is to be determined at least semi-annually. The current borrowing base is $15.0 million, of which $10.0 million is outstanding as of September 30, 2017.

Net proceeds from the offering transaction were used by Carbon California to complete the acquisitions of oil and gas assets in the Ventura Basin of California, which acquisitions also closed on February 15, 2017. The remainder of the net proceeds may be used to fund field development projects and to fund future complementary acquisitions and for general working capital purposes of Carbon California.

In connection with the Company entering into the Carbon California LLC Agreement described above and Carbon California engaging in the transactions also described above, the Company issued to an affiliate of one of the institutional investors which purchased Class A Units of Carbon California (which is also an affiliate of the Company’s largest stockholders), a warrant to purchase approximately 1.5 million shares of the Company’s common stock at an exercise price of $7.20 per share (the “California Warrant”). The exercise price for the California Warrant is payable exclusively with Class A Units of Carbon California held by this investor and the number of shares of the Company’s common stock for which the California Warrant is exercisable is determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of the warrantholder’s Class A Units of Carbon California by (b) the exercise price. The California Warrant has a term of seven years and includes certain standard registration rights with respect to the shares of the Company’s common stock issuable upon exercise of the California Warrant. If exercised, the California Warrant provides Carbon an opportunity to increase its ownership stake in Carbon California without requiring the payment of cash.  

Based on its 17.8% interest in Carbon California, its ability to appoint a member to the board of directors and its role of manager of Carbon California, the Company is accounting for its investment in Carbon California under the equity method of accounting as it believes it can exert significant influence. The Company uses the hypothetical liquidation at book value method (“HLBV”) to determine its share of profits or losses in Carbon California and adjusts the carrying value of its investment accordingly. The HLBV is a balance-sheet approach that calculates the amount each member of Carbon California would receive if Carbon California were liquidated at book value at the end of each measurement period. The change in the allocated amount to each member during the period represents the income or loss allocated to that member. In the event of liquidation of Carbon California, to the extent that Carbon California has net income, available proceeds are first distributed to members holding Class A and Class B units and any remaining proceeds are then distributed to members holding Class A units, of which the Company holds none. For the three months ended September 30, 2017, and for the period of February 15, 2017 through September 30, 2017, Carbon California incurred a net loss. Should Carbon California report income, the Company will not record income (or losses) until the Company’s share of such income equals the amount of its share of losses not previously reported. While income may be recorded in future periods, the ability of Carbon California to make distributions to its owners, including us, is dependent upon the terms of its credit facilities, which currently prohibit distributions unless agreed to by the lender.

The Company accounted for the California Warrant, at issuance, as the initial investment in Carbon California and a liability based on the fair value of the California Warrant as of the date of grant (February 15, 2017). Future changes to the fair value of the California Warrant are recognized in earnings.

As of grant date of the California Warrant, the Company estimated that the fair market value of the California Warrant was approximately $5.8 million and recorded that amount to its investment in Carbon California and a long-term liability. As of September 30, 2017, the Company estimated that the fair value of the California Warrant was approximately $3.0 million. The difference in the fair value of the California Warrant from the grant date though September 30, 2017 was approximately $2.8 million and approximately $1.3 million and $2.8 million was recognized in warrant derivative gain in the Company’s unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2017, respectively. See Note 10 for additional information.

The following table sets forth, for the periods presented, selected historical financial data for Carbon California.

(in thousands, except per share amounts)	Three Months Ended September 30, 2017			February 15, 2017 (Inception) through September 30, 2017
Revenues	$	1,994		$	6,511
Operating expenses		2,625			6,578
Loss from continuing operations		(1,135	)		(1,313	)
Net loss		(1,135	)		(1,313	)

Carbon Appalachia

Outlined below is a summary of i) the Company’s contributions, ii) its resulting percent of Class A unit ownership and iii) the Company’s overall resulting sharing percentage of Carbon Appalachia after giving effect of all classes of ownership. Each contribution and its use is described in detail following the table.

Timing	Capital Contribution	Resulting Class A Units (%)	Resulting Sharing %
April 2017	$0.24 million	2.00%	2.98%
August 2017	$3.71 million	15.20%	16.04%
September 2017	$2.92 million	18.55%	19.37%
November 2017*	Warrant exercise*	26.50%	27.24%

* See Note 14 for further details regarding the November 1, 2017 exercise of the Appalachia Warrant

On April 3, 2017, the Company finalized a limited liability company agreement (the “Carbon Appalachia LLC Agreement”) and the initial funding of Carbon Appalachia. Carbon Appalachia was formed by Carbon and two institutional investors to acquire producing assets in the Southern Appalachian Basin and has an initial equity commitment of $100.0 million, of which $37.0 million has been contributed as of September 30, 2017.

Pursuant to the Carbon Appalachia LLC Agreement, Carbon acquired a 2.0% interest in Carbon Appalachia for $240,000 of Class A Units associated with its initial equity commitment of $2.0 million. Carbon also has the ability to earn up to an additional 19.6% of Carbon Appalachia distributions (represented by Class B Units) after certain return thresholds to the holders of Class A Units are met. The Class B Units were acquired for no cash consideration.

In addition, Carbon acquired a 1.0% interest represented by Class C Units which were obtained in connection with the contribution to Carbon Appalachia of a portion of its working interest in undeveloped properties in Tennessee. If Carbon Appalachia agrees to drill horizontal Chattanooga Shale wells on these properties, it will pay 100% of the cost of drilling and completion of the first 20 wells to earn a 75% working interest in such properties. Carbon, through its subsidiary, Nytis LLC, will retain a 25% working interest in the properties.

In connection with and concurrently with the closing of the acquisition described below, Carbon Appalachia Enterprises, LLC, formerly known as Carbon Tennessee Company, LLC (“Carbon Appalachia Enterprises”), an indirect subsidiary of Carbon Appalachia, entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank with an initial borrowing base of $10.0 million. The Company is not a guarantor of this credit facility.

Borrowings under the credit facility, along with the initial equity contributions made to Carbon Appalachia, were used to complete the acquisition of natural gas producing properties and related facilities located predominantly in Tennessee (the “April 2017 Acquisition”). The purchase price was $20.0 million, subject to normal and customary pre and post-closing adjustments, and Carbon Appalachia Enterprises used $8.5 million drawn from the credit facility toward the purchase price.

During the quarter ended September 30, 2017, CAC completed two acquisitions, one on August 15, 2015 and the other on September 29, 2017. Each acquisition is described in more detail below.

On August 15, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties and related facilities located predominantly in the state of West Virginia (the “August 2017 Acquisition”). The purchase price was $21.5 million, subject to normal and customary pre- and post-closing adjustments.

On August 15, 2017, the Carbon Appalachia LLC Agreement was amended and restated. Pursuant to the amended and restated Carbon Appalachia LLC Agreement, Carbon increased its capital commitment in Carbon Appalachia from $2.0 million to $23.6 million and its portion of any subsequent capital call from 2.0% to 26.5%. Aggregate capital commitments of all Members remained at $100.0 million. As each subsequent capital call is made, Carbon will contribute 26.5%. The Company is the sole manager of Carbon Appalachia and maintains the ability to earn additional ownership interests of Carbon Appalachia (represented by Class B Units) after certain thresholds to the holders of Class A Units are met. The Company also maintains its 1.0% carried interest represented by Class C Units.

In connection with and concurrently with the closing of the August 2017 Acquisition, the borrowing base of its existing credit facility with LegacyTexas Bank increased to $22.0 million and Carbon Appalachia Enterprises borrowed $8.0 million from its existing credit facility with LegacyTexas Bank. Carbon Appalachia received equity funding in the amount of $14.0 million from its members, including $3.7 million from Carbon. The contributed funds and funds drawn from the credit facility were used to pay the purchase price.

On September 29, Carbon Appalachia Enterprises amended its 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank, resulting in a borrowing base of $50.0 million with redeterminations as of April 1 and October 1 each year and the addition of East West Bank as a participating lender. As of September 30, 2017, there was approximately $38.0 million outstanding under the credit facility. 

On September 29, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties, natural gas gathering pipelines and related facilities located predominantly in the state of West Virginia (the “September 2017 Acquisition”). The purchase price was $41.3 million, subject to normal and customary pre- and post-closing adjustments.

In connection with and concurrently with the closing of the September 2017 Acquisition described above, Carbon Appalachia Enterprises borrowed $20.4 million from its credit facility. Carbon Appalachia received equity funding in the amount of $11.0 million from its members, including $2.9 million from Carbon. The contributed funds and funds drawn from the credit facility were used to pay the purchase price.

In connection with the Company entering into the Carbon Appalachia LLC Agreement described above and Carbon Appalachia Enterprises engaging in the April 2017 Acquisition, the Company issued to an affiliate of one of the institutional investors which purchased Class A Units of Carbon Appalachia (which is also an affiliate of the Company’s largest stockholders), a warrant to purchase approximately 408,000 shares of the Company’s common stock at an exercise price of $7.20 per share (the “Appalachia Warrant”). The exercise price for the Appalachia Warrant is payable exclusively with Class A Units of Carbon Appalachia held by this investor and the number of shares of the Company common stock for which the Appalachia Warrant is exercisable is determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of the warrantholder’s Class A Units of Carbon Appalachia plus a 10% internal rate of return by (b) the exercise price. The Appalachia Warrant has a term of seven years and includes certain standard registration rights with respect to the shares of Carbon’s common stock issuable upon exercise of the Appalachia Warrant. If exercised, the Appalachia Warrant provides Carbon an opportunity to increase its ownership stake in Carbon Appalachia without requiring the payment of cash.

Based on its 19.4% combined Class A and Class C interest (and its ability as of September 30, 2017 to earn up to an additional 16.3%) in Carbon Appalachia, its ability to appoint a member to the board of directors and its role of manager of Carbon Appalachia, the Company is accounting for its investment in Carbon Appalachia under the equity method of accounting as it believes it can exert significant influence. The Company uses the HLBV to determine its share of profits or losses in Carbon Appalachia and adjusts the carrying value of its investment accordingly. The Company’s investment in Carbon Appalachia is represented by its Class A and C interests, which it acquired by contributing approximately $6.9 million in cash and unevaluated property. In the event of liquidation of Carbon Appalachia, available proceeds are first distributed to members holding Class A and Class C Units until their contributed capital is recovered with an internal rate of return of 10%. Any additional distributions would then be shared between holders of Class A, Class B and Class C Units. For the period of April 3, 2017 through September 30, 2017, Carbon Appalachia incurred a net loss, of which the Company’s share is approximately $348,000. While income may be recorded in future periods, the ability of Carbon Appalachia to make distributions to its owners, including us, is dependent upon the terms of its credit facilities, which currently prohibit distributions unless agreed to by the lender.

The Company accounted for the Appalachia Warrant, at issuance, as an investment in Carbon Appalachia and a liability based on the fair value of the Appalachia Warrant as of the date of grant (April 3, 2017). Future changes to the fair value of the Appalachia Warrant are recognized in earnings.

As of the grant date of the Appalachia Warrant, the Company estimated that the fair value of the Appalachia Warrant was approximately $1.3 million and recorded that amount to its investment in Carbon Appalachia and a long-term liability. As of September 30, 2017, the Company estimated that the fair value of the Appalachia Warrant was approximately $1.6 million. The difference in the fair value of the Appalachia Warrant from the grant date through September 30, 2017 was approximately $323,000 and approximately $497,000 and $323,000 was recognized in derivative warrant gain in the Company’s unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2017. See Note 10 for additional information. On November 1, 2017, the holder of the Appalachia Warrant exercised the warrant. See Note 14 for additional information.

The following table sets forth, for the periods presented, selected historical financial data for Carbon Appalachia.

(in thousands, except per share amounts)	Three Months Ended September 30, 2017			April 3, 2017 (Inception) through September 30, 2017
Revenues	$	1,348		$	2,905
Operating expenses		2,691			4,449
Loss from continuing operations		(1,545	)		(1,874	)
Net loss		(1,545	)		(1,874	)

Crawford County Gas Gathering Company

The Company has a 50% interest in Crawford County Gas Gathering Company, LLC (“CCGGC”) which owns and operates pipelines and related gathering and treatment facilities which services the Company’s natural gas production in the Illinois Basin. The Company accounts for its investment in CCGGC under the equity method of accounting, and its share of income or loss is recognized in the Company’s statement of operations. During the nine months ended September 30, 2017 and 2016, the Company recorded equity method income of approximately $32,000 and equity method loss of approximately $10,000, respectively, related to this investment. In addition, during the third quarter of 2017 and first quarter of 2016, the Company received cash distributions from CCGGC of approximately $68,000 and $275,000, respectively.

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Bank Credit Facility

9 Months Ended

Sep. 30, 2017

Bank Credit Facility [Abstract]

Bank Credit Facility

Note 6 – Bank Credit Facility

In 2016, Carbon entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank. LegacyTexas Bank is the initial lender and acts as administrative agent.

The credit facility has a maximum availability of $100.0 million (with a $500,000 sublimit for letters of credit), which availability is subject to the amount of the borrowing base. The initial borrowing base established under the credit facility was $17.0 million. The borrowing base is subject to semi-annual redeterminations in March and September. On March 30, 2017, the borrowing base was increased to $23.0 million. As of September 30, 2017, the borrowing base remained at $23.0 million.

The credit facility is guaranteed by each existing and future direct or indirect subsidiary of Carbon (subject to certain exceptions). The obligations of Carbon and the subsidiary guarantors under the credit facility are secured by essentially all tangible and intangible personal and real property of the Company (subject to certain exclusions).

Interest is payable quarterly and accrues on borrowings under the credit facility at a rate per annum equal to either (i) the base rate plus an applicable margin between 0.50% and 1.50% or (ii) the Adjusted LIBOR rate plus an applicable margin between 3.50% and 4.50% at Carbon’s option. The actual margin percentage is dependent on the credit facility utilization percentage. Carbon is obligated to pay certain fees and expenses in connection with the credit facility, including a commitment fee for any unused amounts of 0.50%.

The credit facility contains certain affirmative and negative covenants that, among other things, limit the Company’s ability to (1) incur additional debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge or consolidate, wind-up, dissolve or liquidate; (v) make dividends and distributions on, or repurchases of, equity; (vi) make certain investments; (vii) enter into certain transactions with its affiliates; (viii) enter into sales-leaseback transaction; (ix) make optional or voluntary payment of debt; (x) change the nature of its business; (xi) change its fiscal year to make changes to the accounting treatment or reporting practices; (xii) amend constituent documents; and (xiii) enter into certain hedging transactions.

The affirmative and negative covenants are subject to various exceptions, including certain basket amounts and acceptable transaction levels. In addition, the credit facility requires Carbon’s compliance, on a consolidated basis, with (i) maximum funded Debt/EBITDA ratio of 3.5 to 1.0 and (ii) a minimum current ratio of 1.0 to 1.0, commencing with the quarter ended March 31, 2017.

In the third quarter of 2017, the Company contributed approximately $6.6 to Carbon Appalachia to fund its share of producing oil and gas properties acquired during the third quarter. This funding was provided primarily with borrowings under the credit facility. The funded Debt/EBITDA and current ratio covenants negotiated at the time the credit facility was established did not contemplate the Company’s contributions for its investment in Carbon Appalachia and, as a result, the Company was not in compliance with the financial covenants associated with the credit facility as of September 30, 2017. However, the Company has obtained a waiver of the funded debt/EBITDA ratio and the current ratio covenants as of September 30, 2017. The Company has requested that LegacyTexas Bank amend such financial covenants to take into account the Company’s investment in Carbon Appalachia. While the Company believes its relationship with LegacyTexas Bank is such that the requested amendment is likely, there can be no assurance that the bank will agree to an amendment.

Carbon may at any time repay the loans under the credit facility, in whole or in part, without penalty. Carbon must pay down borrowings under the credit facility or provide mortgages of additional oil and natural gas properties to the extent that outstanding loan and letters of credit exceed the borrowing base.

As required under the terms of the credit facility, the Company entered into derivative contracts at fixed pricing for a certain percentage of its production. The Company is party to an ISDA Master Agreement with BP Energy Company that establishes standard terms for the derivative contracts and an inter-creditor agreement with LegacyTexas Bank and BP Energy Company whereby any credit exposure related to the derivative contracts entered into by the Company and BP Energy Company is secured by the collateral and backed by the guarantees supporting the credit facility.

As of September 30, 2017, there were approximately $22.1 million in outstanding borrowings and approximately $860,000 of additional borrowing capacity available under the credit facility. The Company’s effective borrowing rate at September 30, 2017 was approximately 5.82%.

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Income Taxes

9 Months Ended

Sep. 30, 2017

Income Taxes [Abstract]

Income Taxes

Note 7 – Income Taxes

The Company recognizes deferred income tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company has net operating loss carryforwards available in certain jurisdictions to reduce future taxable income. Future tax benefits for net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.

At September 30, 2017, the Company has established a full valuation allowance against the balance of net deferred tax assets.

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Stockholders' Equity

9 Months Ended

Sep. 30, 2017

Stockholders' Equity [Abstract]

Stockholders' Equity

Note 8 – Stockholders’ Equity

Authorized and Issued Capital Stock

Effective March 15, 2017 and pursuant to a reverse stock split approved by the shareholders and Board of Directors, each 20 shares of issued and outstanding common stock became one share of common stock and no fractional shares were issued. References to the number of shares and price per share give retroactive effect to the reverse stock split for all periods presented.

As of September 30, 2017, the Company had 200,000,000 shares of common stock authorized with a par value of $0.01 per share, of which approximately 5.6 million were issued and outstanding and 1,000,000 shares of preferred stock authorized with a par value of $0.01 per share, none of which were issued and outstanding. During the first nine months of 2017, the increase in the Company’s issued and outstanding common stock was a result of restricted stock and performance units that vested during the period.

Equity Plans Prior to Merger

Pursuant to the merger of Nytis USA with and into the Company in 2011, all options, warrants and restricted stock were adjusted to reflect the conversion ratio used in the merger.  

Nytis USA Restricted Stock Plan

As of September 30, 2017, all restricted stock issued under the Nytis USA Restricted Stock Plan (“Nytis USA Plan”) have vested. The Company accounted for these grants at their intrinsic value. From the date of grant through March 31, 2013, the Company estimated that none of these shares would vest and accordingly, no compensation cost had been recorded through March 31, 2013.

In June 2013, the vesting terms of these restricted stock grants were modified so that 25% of the shares would vest on the first of January from 2014 through 2017. As such, the Company recognized compensation expense for those restricted stock grants based on the fair value of the shares on the date the vesting terms were modified. Compensation expense recognized for those restricted stock grants was approximately $84,000 and approximately $252,000 for the three and nine months ended September 30, 2016, respectively. No compensation expense was recognized for those restricted stock grants for the three and nine months ended September 30, 2017. As of December 31, 2016, compensation costs relative to those restricted stock grants were fully recognized.

Carbon Stock Incentive Plans

The Company has two stock plans, the Carbon 2011 and 2015 Stock Incentive Plans (collectively the “Carbon Plans”). The Carbon Plans were approved by the shareholders of the Company and in the aggregate provide for the issuance of approximately 1.1 million shares of common stock to Carbon officers, directors, employees or consultants eligible to receive these awards under the Carbon Plans.

The Carbon Plans provide for granting Director Stock Awards to non-employee directors and for granting Incentive Stock Options, Non-qualified Stock Options, Restricted Stock Awards, Performance Awards and Phantom Stock Awards, or a combination of the foregoing, as is best suited to the circumstances of the particular employee, officer, director or consultant.

Restricted Stock

During the nine months ended September 30, 2017, approximately 81,000 shares of restricted stock were granted under the terms of the Carbon Plan in addition to 462,000 shares granted during previous years. For employees, these restricted stock awards either vest ratably over a three-year service period or cliff vest after a three-year service period. For non-employee directors, the awards vest upon the earlier of a change in control of the Company or the date their membership on the Board of Directors is terminated other than for cause. The Company recognizes compensation expense for these restricted stock grants based on the estimated grant date fair value of the shares, amortized ratably over three years for employee awards (based on the required service period for vesting) and seven years for non-employee director awards (based on a market survey of the average tenure of directors among U.S. public companies). As of September 30, 2017, approximately 258,000 of these restricted stock grants have vested.

Compensation costs recognized for these restricted stock grants were approximately $160,000 and $186,000 for the three months ended September 30, 2017 and 2016, respectively, and $513,000 and $554,000 for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was approximately $1.3 million of unrecognized compensation costs related to these restricted stock grants. This cost is expected to be recognized over the next 6.5 years.

Performance Units

During the nine months ended September 30, 2017, approximately 60,000 shares of performance units were granted under the terms of the Carbon plans in addition to approximately 401,000 shares granted during previous years. The performance units represent a contractual right to receive one share of the Company’s common stock subject to the terms and conditions of the agreements including the achievement of certain performance measures relative to a defined peer group or the achievement of certain performance measures over a defined period of time for the Company as well as the lapse of forfeiture restrictions pursuant to the terms and conditions of the agreements, including for certain of the grants, the requirement of continuous employment by the grantee prior to a change in control of the Company. Based on the relative achievement of performance, approximately 272,000 restricted performance units are outstanding as of September 30, 2017. 

The Company accounts for the performance units granted during 2012 and 2014 through 2017 at their fair value determined at the date of grant. The final measurement of compensation cost will be based on the number of performance units that ultimately vest. At September 30, 2017, the Company estimated that none of the performance units granted in 2012 and 2016 through 2017 would vest due to change in control or other performance provisions and accordingly, no compensation cost has been recorded for these performance units. At September 30, 2016, the Company estimated that it was probable that certain of the performance units granted in 2014 and 2015 would vest. Compensation costs of approximately $53,000 and $239,000 related to these performance units were recognized for the three and nine months ended September 30, 2017, respectively. Compensation expense of approximately $1.1 million was recognized for these performance units for the three and nine months ended September 30, 2016. As of September 30, 2017, if change in control and other performance provisions pursuant to the terms and conditions of these agreements are met in full, the estimated unrecognized compensation cost related to the performance units granted in 2012 and 2014 through 2017 would be approximately $2.4 million.

The performance units granted in 2013 contain specific vesting provisions, no change in control provisions nor any performance conditions other than stock price performance. Due to different earning requirements compared to the performance units granted in 2012 and 2014 through 2017, the Company recognized compensation expense for the performance units granted in 2013 based on the grant date fair value of the performance units, amortized ratably over three years (the performance period). The fair value of the performance units granted in 2013 was estimated using a Monte Carlo simulation (“MCS”) valuation model using the following key assumptions: no expected dividends, volatility of our stock and those of defined peer companies used to determine our performance relative to the defined peer group, a risk-free interest rate and an expected life of three years. Compensation costs recognized for these performance unit grants were nil and approximately $127,000 for the three and nine months ended September 30, 2016, respectively. As of September 30, 2016, compensation costs relative to these performance units had been fully recognized.

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Accounts Payable and Accrued Liabilities

9 Months Ended

Sep. 30, 2017

Accounts Payable and Accrued Liabilities [Abstract]

Accounts Payable and Accrued Liabilities

Note 9 – Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at September 30, 2017 and December 31, 2016 consist of the following:

(in thousands)	September 30, 2017		December 31, 2016
Accounts payable	$	1,801	$	2,315
Oil and gas revenue payable to oil and gas property owners		1,583		1,415
Gathering and transportation payables		498		468
Production taxes payable		212		113
Drilling advances received from joint venture partner		422		955
Accrued drilling costs		-		4
Accrued lease operating costs		535		282
Accrued ad valorem taxes		1,461		1,552
Accrued general and administrative expenses		1,085		1,572
Accrued interest		232		184
Other liabilities		264		261
Total accounts payable and accrued liabilities	$	8,093	$	9,121

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Fair Value Measurements

9 Months Ended

Sep. 30, 2017

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 10 – Fair Value Measurements

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1:	Quoted prices are available in active markets for identical assets or liabilities;
Level 2:	Quoted prices in active markets for similar assets or liabilities that are observable for the asset or liability; or
Level 3:	Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s policy is to recognize transfers in and/or out of the fair value hierarchy as of the end of the reporting period for which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed below for all periods presented.

Assets Measured and Recorded at Fair Value on a Recurring Basis

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 by level within the fair value hierarchy:

(in thousands)	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
September 30, 2017
Assets:
Commodity derivatives	$	-	$	247	$	-	$	247
Liabilities:
Warrant derivatives	$	-	$	-	$	4,600	$	4,600
December 31, 2016
Liabilities:
Commodity derivatives	$	-	$	1,932	$	-	$	1,932

Level 2 Fair Value Measurements

As of September 30, 2017, the Company’s commodity derivative financial instruments are comprised of twelve natural gas swap agreements, ten oil swap agreements and one natural gas costless collar agreement. The fair values of these agreements are determined under an income valuation technique. The valuation requires a variety of inputs, including contractual terms, published forward prices, volatilities for options, and discount rates, as appropriate. The Company’s estimates of fair value of derivatives include consideration of the counterparty’s credit worthiness, the Company’s credit worthiness and the time value of money. The consideration of these factors resulted in an estimated exit-price for each derivative asset or liability under a market place participant’s view. All the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy. The counterparty for all the Company’s commodity financial instruments as of September 30, 2017 is BP Energy Company.

Level 3 Fair Value Measurements

A third-party valuation specialist is utilized to determine the fair value of the Company’s California Warrant and Appalachia Warrant. These warrants are designated as Level 3. The Company reviews these valuations, including the related model inputs and assumptions, and analyzes changes in fair value measurements between periods. The Company corroborates such inputs, calculations and fair value changes using various methodologies, and reviews unobservable inputs for reasonableness utilizing relevant information from other published sources. Due to the limited trading volume of the Company’s shares, adjustments are made to the per share value.

The Company estimated the fair value of the California Warrant on February 15, 2017, the grant date of the warrant, to be approximately $5.8 million, using a call option pricing model with the following assumptions: a seven-year term, exercise price of $7.20, volatility rate of 41.8% and a risk-free rate of 2.3%. As the Company will receive Class A units in Carbon California in the event the holder exercises the California Warrant, the Company also considered the fair value of the Class A units in its valuation. The Company remeasured the California Warrant as of September 30, 2017, using a Monte Carlo valuation model which utilized unobservable inputs including the percentage return on the Company’s shares at various timelines, the percentage return on the privately-held Carbon California Class A units at various timelines, an exercise price of $7.20, volatility rate of 45%, a risk-free rate of 2.1% and an estimated remaining term of 6.4 years. For the quarter ended September 30, 2017, it was determined that a change from the Black Scholes model to the Monte Carlo valuation model with the ability to incorporate the multitude of probabilities associated with various market participant exercise scenarios was appropriate given the passage of time between the formation and funding of Carbon California in February 2017. As of September 30, 2017, the fair value of the California Warrant was approximately $3.0 million.

The Company estimated the fair value of the Appalachia Warrant on April 3, 2017, the grant date of the warrant, to be approximately $1.3 million, using a call option pricing model with the following assumptions: a seven-year term, exercise price of $7.20, volatility rate of 39.3% and a risk-free rate of 2.1%. As the Company will receive Class A units in Carbon Appalachia in the event the holder exercises the Appalachia Warrant, the Company also considered the fair value of the Class A units in its valuation. The Company remeasured the Appalachia Warrant as of September 30, 2017, using a Monte Carlo valuation model which utilized unobservable inputs including the percentage return on the Company’s shares at various timelines, the percentage return on the privately-held Carbon Appalachia Class A units at various timelines, an exercise price of $7.20, volatility rate of 45%, a risk-free rate of 2.1% and an estimated remaining term of 6.5 years. For the quarter ended September 30, 2017, it was determined that a change from the Black Scholes model to the Monte Carlo valuation model with the ability to incorporate the multitude of probabilities associated with various market participant exercise scenarios was appropriate given the passage of time between the formation and funding of Carbon Appalachia in April 2017. As of September 30, 2017, the fair value of the Appalachia Warrant was approximately $1.6 million.

The following table summarizes the changes in fair value of our financial instruments classified as Level 3 in the fair value hierarchy:

(in thousands)	California Warrant			Appalachia Warrant		Total
Balance, December 31, 2016	$	-		$	-	$	-
Warrant derivative liability		5,769			1,325		7,094
Unrealized (gain) loss included in warrant derivative gain		(2,817	)		323		2,494
Balance, September 30, 2017	$	2,952		$	1,648	$	4,600

Assets Measured and Recorded at Fair Value on a Non-Recurring Basis

The fair value of the Company’s asset retirement obligations are measured and recorded at fair value on a non-recurring basis, are based on unobservable pricing inputs and therefore, are included within the Level 3 fair value hierarchy.

The Company uses the income valuation technique to estimate the fair value of asset retirement obligations using the amounts and timing of expected future dismantlement costs, credit-adjusted risk-free rates and time value of money. During the nine months ended September 30, 2017 and 2016, the Company recorded additions to asset retirement obligations of approximately $5,000 in each period. See Note 2 for additional information.

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Physical Delivery Contracts and Gas Derivatives

9 Months Ended

Sep. 30, 2017

Physical Delivery Contracts and Gas Derivatives [Abstract]

Physical Delivery Contracts and Gas Derivatives

Note 11 – Physical Delivery Contracts and Gas Derivatives

The Company has historically used commodity-based derivative contracts to manage exposures to commodity price on a portion of its oil and natural gas production. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. The Company also enters into, on occasion, oil and natural gas physical delivery contracts to effectively provide commodity price hedges. Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives. Therefore, these contracts are not recorded at fair value in the unaudited Consolidated Financial Statements.

Pursuant to the terms of the Company’s credit facility with LegacyTexas Bank, the Company has entered into swap and costless collar derivative agreements to hedge a portion of its oil and natural gas production for 2017 through 2019. As of September 30, 2017, these derivative agreements consisted of the following:

	Natural Gas Swaps				Natural Gas Collars				Oil Swaps
			Weighted				Weighted				Weighted
			Average				Average Price				Average
Year	MMBtu		Price (a)		MMBtu		Range (a)		Bbl		Price (b)
2017		900,000	$	3.27		30,000		$3.00 - $3.48		23,000	$	52.64
2018		3,390,000	$	3.01		90,000		$3.00 - $3.48		60,000	$	53.36
2019		1,920,000	$	2.85		-		-		48,000	$	53.76

(a) NYMEX Henry Hub Natural Gas futures contract for the respective delivery month.

(b) NYMEX Light Sweet Crude West Texas Intermediate futures contract for the respective delivery month

For its swap instruments, the Company receives a fixed price for the hedged commodity and pays a floating price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty. Costless collars are designed to establish floor and ceiling prices on anticipated future oil and gas production. The ceiling establishes a maximum price that the Company will receive for the volumes under contract, while the floor establishes a minimum price.

The following table summarizes the fair value of the derivatives recorded in the unaudited Consolidated Balance Sheets.

These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

(in thousands)	September 30, 2017		December 31, 2016
Commodity derivative contracts:
Current assets	$	190	$	-
Non-current assets	$	57	$	-
Current liabilities	$	-	$	1,341
Non-current liabilities	$	-	$	591

The table below summarizes the commodity settlements and unrealized gains and losses related to the Company’s derivative instruments for the three and nine months ended September 30, 2017 and 2016. These commodity derivative settlements and unrealized gains and losses are recorded and included in commodity derivative income or loss in the accompanying unaudited Consolidated Statements of Operations. 

(in thousands)	Three Months Ended  September 30,					Nine Months Ended  September 30,
	2017			2016		2017		2016
Commodity derivative contracts:
Settlement gains	$	345		$	17	$	463	$	349
Unrealized (losses) gains		(844	)		143		2,179		(823	)
Total settlement and unrealized (losses) gains, net	$	(499	)	$	160	$	2,642	$	(474	)

Commodity derivative settlement gains and losses are included in cash flows from operating activities in the Company’s unaudited Consolidated Statements of Cash Flows.

The counterparty in all the Company’s derivative instruments is BP Energy Company. The Company has entered into an ISDA Master Agreement with BP Energy Company that establishes standard terms for the derivative contracts and an inter-creditor agreement with LegacyTexas Bank and BP Energy Company whereby any credit exposure related to the derivative contracts entered into by the Company and BP Energy Company is secured by the collateral and backed by the guarantees supporting the credit facility.

The Company nets its derivative instrument fair value amounts executed with its counterparty pursuant to an ISDA master agreement, which provides for the net settlement over the term of the contracts and in the event of default or termination of the contracts. The following table summarizes the location and fair value amounts of all derivative instruments in the unaudited Consolidated Balance Sheet, as well as the gross recognized derivative assets, liabilities and amounts offset in the unaudited Consolidated Balance Sheet as of September 30, 2017.

						Net
	Gross					Recognized
	Recognized		Gross			Fair Value
	Assets/		Amounts			Assets/
Balance Sheet Classification	Liabilities		Offset			Liabilities
Commodity derivative assets:
Current assets	$	448	$	(258	)	$	190
Other long-term assets		305		(248	)		57
Total derivative assets	$	753	$	(506	)	$	247
Commodity derivative liabilities:
Current liability	$	258	$	(258	)	$	-
Non-current liabilities		248		(248	)		-
Total derivative liabilities	$	506	$	(506	)	$	-

Due to the volatility of oil and natural gas prices, the estimated fair values of the Company’s derivatives are subject to fluctuations from period to period.

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Commitments

9 Months Ended

Sep. 30, 2017

Commitments [Abstract]

Commitments

Note 12 – Commitments

Employment Agreements

The Company has entered into employment agreements with certain executives and officers of the Company. The term of the agreements generally range from one to two years and provide for renewal provisions in one year increments thereafter. The agreements provide for, among other items, severance and continuation of benefit payments upon termination of employment or certain change of control events.

Firm Transportation Contracts

The Company has entered into long-term firm transportation contracts to ensure the transport for a portion of its gas production to purchasers. Firm transportation volumes and the related demand charges for the remaining term of these contracts at September 30, 2017 are summarized in the table below.

Period	Dekatherms  per day		Demand  Charges
Oct 2017 - Apr 2018		5,530	$	0.20 - $0.65
May 2018 - May 2020		3,230	$	0.20 - $0.62
Apr 2020 – May 2020		2,150	$	0.20
Jun 2020 – May 2036		1,000	$	0.20

A liability of approximately $400,000 related to firm transportation contracts assumed in asset acquisitions, which represents the remaining commitment, is reflected on the Company’s unaudited Consolidated Balance Sheet as of September 30, 2017. The fair value of these firm transportation obligations was determined based upon the contractual obligations assumed by the Company and discounted based upon the Company’s effective borrowing rate. These contractual obligations are being amortized on a monthly basis as the Company pays these firm transportation obligations.

Capital Commitments

In its participation as a Class A member of Carbon Appalachia, the Company has made a capital commitment of $23.6 million, of which it has contributed $6.9 million as of September 30, 2017.

Litigation

From time to time, the Company is a party to various commercial and regulatory claims, pending or threatened legal action, and other proceedings that arise in the ordinary course of business. It is the opinion of management that none of the current matters of contention are reasonably likely to have a material adverse impact on our business, financial position, results of operations, or cash flows.

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Supplemental Cash Flow Disclosure

9 Months Ended

Sep. 30, 2017

Supplemental Cash Flow Disclosure [Abstract]

Supplemental Cash Flow Disclosure

Note 13 – Supplemental Cash Flow Disclosure

Supplemental cash flow disclosures for the nine months ended September 30, 2017 and 2016 are presented below:

	Nine Months Ended September 30,
(in thousands)	2017			2016
Cash paid during the period for:
Interest	$	645		$	117
Non-cash transactions:
Increase in net asset retirement obligations	$	5		$	5
Decrease in accounts payable and accrued liabilities included in oil and gas properties	$	(12	)	$	(23	)
Issuance of warrants for investment in affiliates	$	7,094		$	-

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Subsequent Events

9 Months Ended

Sep. 30, 2017

Subsequent Events [Abstract]

Subsequent Events

Note 14 – Subsequent Events

On November 1, 2017, the holder of the Appalachia Warrant (see Note 5) exercised the warrant resulting in the issuance of 432,051 shares of the Company’s common stock in exchange for Class A Units representing approximately 7.95% of then outstanding Class A Units of Carbon Appalachia. After giving effect to the exercise, Carbon owns 26.5% of Carbon Appalachia outstanding Class A Units along with its 1% Class C ownership. The Company is evaluating any accounting effects of the exercise.

On November 13, 2017, LegacyTexas Bank reaffirmed the Company’s borrowing base associated with the credit facility at $23.0 million.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly the Company’s financial position as of September 30, 2017 and the Company’s results of operations and cash flows for the three and nine months ended September 30, 2017 and 2016. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year because of the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results and other factors. For a more complete understanding of the Company’s operations, financial position and accounting policies, the unaudited Consolidated Financial Statements and the notes thereto should be read in conjunction with the Company’s audited Consolidated Financial Statements for the year ended December 31, 2016 filed on Form 10-K with the Securities and Exchange Commission (“SEC”).

In the course of preparing the unaudited Consolidated Financial Statements, management makes various assumptions, judgments and estimates to determine the reported amount of assets, liabilities, revenue and expenses and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events and accordingly, actual results could differ from amounts initially established.

Principles of Consolidation

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Carbon, CCOC, Nytis USA and its consolidated subsidiary, Nytis LLC. Carbon owns 100% of Nytis USA and CCOC. Nytis USA owns approximately 99% of Nytis LLC.

Nytis LLC also holds an interest in 64 oil and gas partnerships. For partnerships where the Company has a controlling interest, the partnerships are consolidated. The Company is currently consolidating on a pro-rata basis 46 partnerships. In these instances, the Company reflects the non-controlling ownership interest in partnerships and subsidiaries as non-controlling interests on its Consolidated Statements of Operations and reflects the non-controlling ownership interests in the net assets of the partnerships as non-controlling interests within stockholders’ equity on its Consolidated Balance Sheets. All significant intercompany accounts and transactions have been eliminated.

In accordance with established practice in the oil and gas industry, the Company’s unaudited Consolidated Financial Statements also include its pro-rata share of assets, liabilities, income, lease operating costs and general and administrative expenses of the oil and gas partnerships in which the Company has a non-controlling interest.

Non-majority owned investments that do not meet the criteria for pro-rata consolidation are accounted for using the equity method when the Company has the ability to significantly influence the operating decisions of the investee. When the Company does not have the ability to significantly influence the operating decisions of an investee, the cost method is used. All transactions, if any, with investees have been eliminated in the accompanying unaudited Consolidated Financial Statements.

Accounting for Oil and Gas Operations

Accounting for Oil and Gas Operations

The Company uses the full cost method of accounting for oil and gas properties. Accordingly, all costs incidental to the acquisition, exploration and development of oil and gas properties, including costs of undeveloped leasehold, dry holes and leasehold equipment, are capitalized. Overhead costs incurred that are directly identified with acquisition, exploration and development activities undertaken by the Company for its own account, and which are not related to production, general corporate overhead or similar activities, are also capitalized.

Unproved properties are excluded from amortized capitalized costs until it is determined if proved reserves can be assigned to such properties. The Company assesses its unproved properties for impairment at least annually. Significant unproved properties are assessed individually.

Capitalized costs are depleted by an equivalent unit-of-production method, converting oil to gas at the ratio of one barrel of oil to six thousand cubic feet of natural gas. Depletion is calculated using capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.

No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves. All costs related to production activities, including work-over costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred.

The Company performs a ceiling test quarterly. The full cost ceiling test is a limitation on capitalized costs prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is not a fair value based measurement, rather it is a standardized mathematical calculation. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using the un-weighted arithmetic average of the first-day-of-the month price for the previous twelve month period, excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. Should the net capitalized costs exceed the sum of the components noted above, a ceiling test write-down would be recognized to the extent of the excess capitalized costs. Such impairments are permanent and cannot be recovered in future periods even if the sum of the components noted above exceeds the capitalized costs in future periods.

For the three and nine months ended September 30, 2017, the Company did not recognize a ceiling test impairment as the Company’s full cost pool did not exceed the ceiling limitations. For the three months ended September 30, 2016, the Company did not recognize a ceiling test impairment as the Company’s full cost pool did not exceed the ceiling limitations. For the nine months ended September 30, 2016, the Company recognized a ceiling test impairment of approximately $4.3 million as the Company’s full cost pool exceeded its ceiling limitations. Future declines in oil and natural gas prices, and increases in future operating expenses and future development costs could result in additional impairments of our oil and gas properties in future periods. Impairment charges are a non-cash charge and accordingly, do not affect cash flow, but adversely affect our net income and stockholders’ equity.

Investments in Affiliates

Investments in Affiliates

Investments in non-consolidated affiliates are accounted for under either the cost or equity method of accounting, as appropriate. The cost method of accounting is generally used for investments in affiliates in which the Company has less than 20% of the voting interests of a corporate affiliate or less than a 3% to 5% interest of a partnership or limited liability company and does not have significant influence. Investments in non-consolidated affiliates, accounted for using the cost method of accounting, are recorded at cost and impairment assessments for each investment are made annually to determine if a decline in the fair value of the investment, other than temporary, has occurred. A permanent impairment is recognized if a decline in the fair value occurs.

If the Company holds between 20% and 50% of the voting interest in non-consolidated corporate affiliates or generally greater than a 3% to 5% interest of a partnership or limited liability company and exerts significant influence or control (e.g., through its influence with a seat on the board of directors or management of operations), the equity method of accounting is generally used to account for the investment. Equity method investments will increase or decrease by the Company’s share of the affiliate’s profits or losses and such profits or losses are recognized in the Company’s Consolidated Statements of Operations. For its equity method investments in Carbon Appalachia and Carbon California, the Company uses the hypothetical liquidation at book value method to recognize its share of the affiliate’s profits or losses. The Company reviews equity method investments for impairment whenever events or changes in circumstances indicate that an other than temporary decline in value has occurred.

Related Party Transactions

Related Party Transactions

On February 15, 2017, the Company entered into a limited liability company agreement of Carbon California to make investments in California oil and gas projects. Pursuant to the limited liability agreement, Carbon California reimbursed the Company for (i) due diligence costs incurred on behalf of Carbon California, (ii) transaction-related costs and (iii) management-related costs in connection with its role as manager of Carbon California. Management-related reimbursements were $150,000 and $375,000 for the three months ended September 30, 2017 and period February 15, 2017 (inception) through September 30, 2017, respectively.   

On April 3, 2017, the Company entered into the limited liability company agreement of Carbon Appalachia to make investments in Appalachia oil and gas projects. Pursuant to the limited liability agreement, Carbon Appalachia reimbursed the Company for (i) due diligence costs incurred on behalf of Carbon Appalachia, (ii) transaction-related costs and (iii) management-related costs in connection with its role as manager of Carbon Appalachia. Management-related reimbursements were approximately $273,000 and $348,000 for the three months ended September 30, 2017 and period April 3, 2017 (inception) through September 30, 2017, respectively. As of September 30, 2017, Carbon Appalachia owes the Company approximately $273,000 in connection with its role as manager.

Warrant Derivative Liability

Warrant Derivative Liability

The Company issued warrants related to investments in Carbon California and Carbon Appalachia. The Company accounts for these warrants in accordance with guidance contained in Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, which requires these warrants to be recorded on the balance sheet as either an asset or a liability measured at fair value, with changes in fair value recognized in earnings. Based on this guidance, the Company determined that the Company’s warrants do not meet the criteria for classification as equity. Accordingly, the Company classified the warrants as liabilities. The warrants are subject to remeasurement at each balance sheet date, with any change in the fair value recognized as a component of other income or expense, net in the statement of operations. For the three and nine months ended September 30, 2017, changes in the fair value of warrants accounted for gains of approximately $811,000 and $2.5 million, respectively.

Asset Retirement Obligations

Asset Retirement Obligations

The Company’s asset retirement obligations (“ARO”) relate to future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and returning such land to its original condition. The fair value of a liability for an ARO is recorded in the period in which it is incurred and the cost of such liability is recorded as an increase in the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period and the capitalized cost is depleted on a units-of-production basis as part of the full cost pool. Revisions to estimated AROs result in adjustments to the related capitalized asset and corresponding liability.

The estimated ARO liability is based on estimated economic lives, estimates as to the cost to abandon the wells in the future, and federal and state regulatory requirements. The liability is discounted using a credit-adjusted risk-free rate estimated at the time the liability is incurred or increased as a result of a reassessment of expected cash flows and assumptions inherent in the estimation of the liability. Upward revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells. AROs are valued utilizing Level 3 fair value measurement inputs.

The following table is a reconciliation of the ARO for the nine months ended September 30, 2017 and 2016:

(in thousands)	Nine Months Ended September 30,
	2017			2016
Balance at beginning of period	$	5,120		$	3,095
Accretion expense		232			105
Additions during period		5			5
Obligations on sale of oil & gas properties		(93	)		-
		5,264			3,205
Less: ARO recognized as a current liability		(144	)		-
Balance at end of period	$	5,120		$	3,205

Earnings (Loss) Per Common Share

Earnings (Loss) Per Common Share

Basic earnings or loss per common share is computed by dividing the net income or loss attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period. The shares of restricted common stock granted to certain officers, directors and employees of the Company are included in the computation of basic net income or loss per share only after the shares become fully vested. Diluted earnings per common share includes both the vested and unvested shares of restricted stock and the potential dilution that could occur upon exercise of warrants to acquire common stock, computed using the treasury stock method, which assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company with the proceeds from the exercise of warrants (which were assumed to have been made at the average market price of the common shares during the reporting period).

The following table sets forth the calculation of basic and diluted income (loss) per share:

in thousands except per share amounts	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Basic Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$	(462	)	$	(1,599	)	$	4,834		$	(9,044	)
Weighted average shares outstanding, basic		5,628			5,507			5,579			5,455
Net income (loss) per common share, basic	$	(0.08	)	$	(0.29	)	$	0.87			(1.66	)
Diluted Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$	(462	)	$	(1,599	)	$	4,834		$	(9,044	)
Less: decrease in fair value of warrant		-			-			(2,494	)		-
Adjusted net income (loss) available to common shareholders, diluted	$	(462	)	$	(1,599	)	$	2,340		$	(9,044	)
Weighted average shares outstanding, basic		5,628			5,507			5,579			5,455
Add: dilutive effects of warrant and nonvested shares of restricted stock		-			-			907			-
Weighted-average shares outstanding, diluted		5,628			5,507			6,486			5,455
Net income (loss) per common share, diluted	$	(0.08	)	$	(0.29	)	$	0.36		$	(1.66	)

For the three months ended September 30, 2017, the Company had a net loss, and therefore, the diluted net loss per share calculation excluded the anti-dilutive effect of approximately 284,000 non-vested shares of restricted stock and approximately 617,000 in-the-money warrants. In addition, approximately 276,000 restricted performance units, subject to future contingencies, are excluded from the basic and diluted loss per share calculations.

For the nine months ended September 30, 2017, the Company had net income and the diluted net income per share calculation for that period includes the dilutive effect of approximately 284,000 non-vested shares of restricted stock and approximately 623,000 in-the-money warrants. In addition, approximately 276,000 restricted performance units, subject to future contingencies, are excluded from the basic and diluted loss per share calculations.

For the three and nine months ended September 30, 2016, the Company had a net loss and therefore, the diluted net loss per share calculation excluded the anti-dilutive effect of approximately 13,000 warrants and approximately 291,000 non-vested shares of restricted stock in each period. In addition, approximately 298,000 restricted performance units, in each period, subject to future contingencies were excluded from the basic and diluted loss per share calculations.

Use of Estimates in the Preparation of Financial Statements

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and disclosure of contingent assets and liabilities. Significant items subject to such estimates and assumptions include the carrying value of oil and gas properties, the estimate of proved oil and gas reserve volumes and the related depletion and present value of estimated future net cash flows and the ceiling test applied to capitalized oil and gas properties, determining the amounts recorded for deferred income taxes, stock-based compensation, fair value of commodity derivative instruments, fair value of warrants, equity method investments, fair value of assets acquired qualifying as business contributions and asset retirement obligations. Actual results could differ from those estimates and assumptions used, and the use of such estimates may result in volatility within the Company’s financial statements.

Adopted and Recently Issued Accounting Pronouncements

Adopted and Recently Issued Accounting Pronouncements

In February 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”). The objective of this ASU is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and should be applied using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting ASU 2016-02.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The FASB subsequently issued ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, which deferred the effective date of ASU 2014-09 and provided additional implementation guidance. These ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application. The Company plans to adopt these ASUs effective January 1, 2018 using the modified retrospective method. The Company is in the process of assessing its contracts with customers and evaluating the effect of adopting these standards on its financial statements, accounting policies, internal controls and disclosures. The adoption is not expected to have a significant impact on the Company’s net income or cash flows, however, the Company is currently evaluating the proper classification of certain pipeline gathering, transportation and gas processing agreements to determine whether changes to total revenues and expenses will be necessary under the new standards.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. These amendments change the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The amendments in this update affect investments in loans, investments in debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact on its consolidated financial statements of adopting ASU 2016-13.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of “a business” to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company elected to early adopt this pronouncement effective January 1, 2017.

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies [Abstract]

Summary of reconciliation of the ARO

(in thousands)	Nine Months Ended September 30,
	2017			2016
Balance at beginning of period	$	5,120		$	3,095
Accretion expense		232			105
Additions during period		5			5
Obligations on sale of oil & gas properties		(93	)		-
		5,264			3,205
Less: ARO recognized as a current liability		(144	)		-
Balance at end of period	$	5,120		$	3,205

Schedule of basic and diluted income (loss) per share

Earnings (Loss) Per Common Share

Basic earnings or loss per common share is computed by dividing the net income or loss attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period. The shares of restricted common stock granted to certain officers, directors and employees of the Company are included in the computation of basic net income or loss per share only after the shares become fully vested. Diluted earnings per common share includes both the vested and unvested shares of restricted stock and the potential dilution that could occur upon exercise of warrants to acquire common stock, computed using the treasury stock method, which assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company with the proceeds from the exercise of warrants (which were assumed to have been made at the average market price of the common shares during the reporting period).

The following table sets forth the calculation of basic and diluted income (loss) per share:

in thousands except per share amounts	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Basic Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$	(462	)	$	(1,599	)	$	4,834		$	(9,044	)
Weighted average shares outstanding, basic		5,628			5,507			5,579			5,455
Net income (loss) per common share, basic	$	(0.08	)	$	(0.29	)	$	0.87			(1.66	)
Diluted Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$	(462	)	$	(1,599	)	$	4,834		$	(9,044	)
Less: decrease in fair value of warrant		-			-			(2,494	)		-
Adjusted net income (loss) available to common shareholders, diluted	$	(462	)	$	(1,599	)	$	2,340		$	(9,044	)
Weighted average shares outstanding, basic		5,628			5,507			5,579			5,455
Add: dilutive effects of warrant and nonvested shares of restricted stock		-			-			907			-
Weighted-average shares outstanding, diluted		5,628			5,507			6,486			5,455
Net income (loss) per common share, diluted	$	(0.08	)	$	(0.29	)	$	0.36		$	(1.66	)

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Acquisitions and Divestitures (Tables)

9 Months Ended

Sep. 30, 2017

Acquisitions and Divestitures [Abstract]

Schedule on EXCO acquisition unaudited Pro Forma results of operations

	Unaudited Pro Forma Consolidated Results
	For Nine Months Ended September 30,
(in thousands, except per share amounts)	2017		2016
Revenue	$	17,565	$	10,990
Net income (loss) before non-controlling interests		4,926		(4,447	)
Net income (loss) attributable to non-controlling interests		92		(435	)
Net income (loss) attributable to controlling interests		4,834		(4,012	)
Net income (loss) income per share (basic)		0.87		(0.74	)
Net income (loss) income per share (diluted)		0.36		(0.74	)

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2017

Property and Equipment [Abstract]

Summary of net property and equipment

(in thousands)	September 30, 2017			December 31, 2016
Oil and gas properties:
Proved oil and gas properties	$	112,211		$	111,771
Unproved properties not subject to depletion		1,926			1,999
Accumulated depreciation, depletion, amortization and impairment		(80,152	)		(78,559	)
Net oil and gas properties		33,985			35,211
Furniture and fixtures, computer hardware and software, and other equipment		1,661			990
Accumulated depreciation and amortization		(888	)		(665	)
Net other property and equipment		773			325
Total net property and equipment	$	34,758		$	35,536

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Investments in Affiliates (Tables)

9 Months Ended

Sep. 30, 2017

Related Party Transaction [Line Items]

Summary of company's contributions

Timing	Capital Contribution	Resulting Class A Units (%)	Resulting Sharing %
April 2017	$0.24 million	2.00%	2.98%
August 2017	$3.71 million	15.20%	16.04%
September 2017	$2.92 million	18.55%	19.37%
November 2017*	Warrant exercise*	26.50%	27.24%

* See Note 14 for further details regarding the November 1, 2017 exercise of the Appalachia Warrant

Carbon California [Member]

Related Party Transaction [Line Items]

Schedule of selected historical financial data

(in thousands, except per share amounts)	Three Months Ended September 30, 2017			February 15, 2017 (Inception) through September 30, 2017
Revenues	$	1,994		$	6,511
Operating expenses		2,625			6,578
Loss from continuing operations		(1,135	)		(1,313	)
Net loss		(1,135	)		(1,313	)

Carbon Appalachia [Member]

Related Party Transaction [Line Items]

Schedule of selected historical financial data

(in thousands, except per share amounts)	Three Months Ended September 30, 2017			April 3, 2017 (Inception) through September 30, 2017
Revenues	$	1,348		$	2,905
Operating expenses		2,691			4,449
Loss from continuing operations		(1,545	)		(1,874	)
Net loss		(1,545	)		(1,874	)

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Accounts Payable and Accrued Liabilities (Tables)

9 Months Ended

Sep. 30, 2017

Accounts Payable and Accrued Liabilities [Abstract]

Summary of accounts payable and accrued liabilities

(in thousands)	September 30, 2017		December 31, 2016
Accounts payable	$	1,801	$	2,315
Oil and gas revenue payable to oil and gas property owners		1,583		1,415
Gathering and transportation payables		498		468
Production taxes payable		212		113
Drilling advances received from joint venture partner		422		955
Accrued drilling costs		-		4
Accrued lease operating costs		535		282
Accrued ad valorem taxes		1,461		1,552
Accrued general and administrative expenses		1,085		1,572
Accrued interest		232		184
Other liabilities		264		261
Total accounts payable and accrued liabilities	$	8,093	$	9,121

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2017

Fair Value Measurements [Abstract]

Summary of financial assets and liabilities at fair value

(in thousands)	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
September 30, 2017
Assets:
Commodity derivatives	$	-	$	247	$	-	$	247
Liabilities:
Warrant derivatives	$	-	$	-	$	4,600	$	4,600
December 31, 2016
Liabilities:
Commodity derivatives	$	-	$	1,932	$	-	$	1,932

Schedule of changes in fair value of our financial instruments

(in thousands)	California Warrant			Appalachia Warrant		Total
Balance, December 31, 2016	$	-		$	-	$	-
Warrant derivative liability		5,769			1,325		7,094
Unrealized (gain) loss included in warrant derivative gain		(2,817	)		323		2,494
Balance, September 30, 2017	$	2,952		$	1,648	$	4,600

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Physical Delivery Contracts and Gas Derivatives (Tables)

9 Months Ended

Sep. 30, 2017

Physical Delivery Contracts and Gas Derivatives [Abstract]

Schedule of swap derivative agreements

	Natural Gas Swaps				Natural Gas Collars				Oil Swaps
			Weighted				Weighted				Weighted
			Average				Average Price				Average
Year	MMBtu		Price (a)		MMBtu		Range (a)		Bbl		Price (b)
2017		900,000	$	3.27		30,000		$3.00 - $3.48		23,000	$	52.64
2018		3,390,000	$	3.01		90,000		$3.00 - $3.48		60,000	$	53.36
2019		1,920,000	$	2.85		-		-		48,000	$	53.76

(a) NYMEX Henry Hub Natural Gas futures contract for the respective delivery month.

(b) NYMEX Light Sweet Crude West Texas Intermediate futures contract for the respective delivery month

Schedule of fair value of the derivatives recorded

(in thousands)	September 30, 2017		December 31, 2016
Commodity derivative contracts:
Current assets	$	190	$	-
Non-current assets	$	57	$	-
Current liabilities	$	-	$	1,341
Non-current liabilities	$	-	$	591

Schedule of realized and unrealized gains and losses

(in thousands)	Three Months Ended  September 30,					Nine Months Ended  September 30,
	2017			2016		2017		2016
Commodity derivative contracts:
Settlement gains	$	345		$	17	$	463	$	349
Unrealized (losses) gains		(844	)		143		2,179		(823	)
Total settlement and unrealized (losses) gains, net	$	(499	)	$	160	$	2,642	$	(474	)

Schedule of fair value amounts of all derivative instruments assets and liabilities

						Net
	Gross					Recognized
	Recognized		Gross			Fair Value
	Assets/		Amounts			Assets/
Balance Sheet Classification	Liabilities		Offset			Liabilities
Commodity derivative assets:
Current assets	$	448	$	(258	)	$	190
Other long-term assets		305		(248	)		57
Total derivative assets	$	753	$	(506	)	$	247
Commodity derivative liabilities:
Current liability	$	258	$	(258	)	$	-
Non-current liabilities		248		(248	)		-
Total derivative liabilities	$	506	$	(506	)	$	-

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Commitments (Tables)

9 Months Ended

Sep. 30, 2017

Commitments [Abstract]

Summary of firm transportation volumes and related demand charges

Period	Dekatherms  per day		Demand  Charges
Oct 2017 - Apr 2018		5,530	$	0.20 - $0.65
May 2018 - May 2020		3,230	$	0.20 - $0.62
Apr 2020 – May 2020		2,150	$	0.20
Jun 2020 – May 2036		1,000	$	0.20

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Supplemental Cash Flow Disclosure (Tables)

9 Months Ended

Sep. 30, 2017

Supplemental Cash Flow Disclosure [Abstract]

Summary of supplemental cash flow disclosures

	Nine Months Ended September 30,
(in thousands)	2017			2016
Cash paid during the period for:
Interest	$	645		$	117
Non-cash transactions:
Increase in net asset retirement obligations	$	5		$	5
Decrease in accounts payable and accrued liabilities included in oil and gas properties	$	(12	)	$	(23	)
Issuance of warrants for investment in affiliates	$	7,094		$	-

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Summary of Significant Accounting Policies (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Summary of reconciliation of the ARO
Balance at beginning of period	$ 5,120	$ 3,095
Accretion expense	232	105
Additions during period	5	5
Obligations on sale of oil & gas properties	(93)
Reconciliation of the ARO, gross	5,264	3,205
Less: ARO recognized as a current liability	(144)
Balance at end of period	$ 5,120	$ 3,205

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Summary of Significant Accounting Policies (Details 1) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Basic Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$ (462)	$ (1,599)	$ 4,834	$ (9,044)
Weighted average shares outstanding, basic	5,628	5,507	5,579	5,455
Net income (loss) per common share, basic	$ (0.08)	$ (0.29)	$ 0.87	$ (1.66)
Diluted Earnings (Loss) per Share
Net income (loss) available to common shareholders, basic	$ (462)	$ (1,599)	$ 4,834	$ (9,044)
Less: decrease in fair value of warrant			(2,494)
Adjusted net income (loss) available to common shareholders, diluted	$ (462)	$ (1,599)	$ 2,340	$ (9,044)
Weighted average shares outstanding, basic	5,628	5,507	5,579	5,455
Add: dilutive effects of warrant and nonvested shares of restricted stock			907
Weighted-average shares outstanding, diluted	5,628	5,507	6,486	5,455
Net income (loss) per common share, diluted	$ (0.08)	$ (0.29)	$ 0.36	$ (1.66)

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Summary of Significant Accounting Policies (Details Textual) $ in Thousands		1 Months Ended	3 Months Ended		9 Months Ended
	Apr. 03, 2017	Feb. 15, 2017	Sep. 30, 2017 USD ($) shares	Sep. 30, 2016 shares	Sep. 30, 2017 USD ($) Partnership shares	Sep. 30, 2016 USD ($) shares
Summary of Significant Accounting Policies (Textual)
Ceiling test impairment cost | $						$ 4,300
Number of consolidated partnerships | Partnership					46
Cost method investments, additional information, description					The Company has less than 20% of the voting interests of a corporate affiliate or less than a 3% to 5% interest of a partnership or limited liability company and does not have significant influence.
Equity method investment, additional information, description					If the Company holds between 20% and 50% of the voting interest in non-consolidated corporate affiliates or generally greater than a 3% to 5% interest of a partnership or limited liability company and exerts significant influence or control (e.g., through its influence with a seat on the board of directors or management of operations), the equity method of accounting is generally used to account for the investment.
Liability agreement reimbursed, description	The Company for (i) due diligence costs incurred on behalf of Carbon Appalachia, (ii) transaction-related costs and (iii) management-related costs in connection with its role as manager of Carbon Appalachia. Management-related reimbursements were approximately $273,000 and $348,000 for the three months ended September 30, 2017 and period April 3, 2017 (inception) through September 30, 2017, respectively.	The Company for (i) due diligence costs incurred on behalf of Carbon California, (ii) transaction-related costs and (iii) management-related costs in connection with its role as manager of Carbon California. Management-related reimbursements were $150,000 and $375,000 for the three months ended September 30, 2017 and period February 15, 2017 (inception) through September 30, 2017, respectively.			As of September 30, 2017, Carbon Appalachia owes the Company approximately $273,000 in connection with its role as manager. See Note 5 for additional information.
Changes in fair value of warrants | $			$ 811		$ 2,500
Warrant [Member]
Summary of Significant Accounting Policies (Textual)
Non-vested shares of restricted stock			6,170,000		623,000
Restricted Stock [Member]
Summary of Significant Accounting Policies (Textual)
Anti-dilutive earnings per shares			284,000	250,000	284,000	13,000
Non-vested shares of restricted stock				5,800,000		291,000
Restricted Performance Units [Member]
Summary of Significant Accounting Policies (Textual)
Anti-dilutive earnings per shares				6,000,000		298,000
Common stock equivalent restricted to future contingencies			276,000		276,000
Nytis LLC [Member]
Summary of Significant Accounting Policies (Textual)
Percentage of ownership interest in the subsidiary					99.00%
Nytis USA [Member]
Summary of Significant Accounting Policies (Textual)
Percentage of ownership interest in the subsidiary					100.00%

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Acquisitions and Divestitures (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Acquisitions and Divestitures [Abstract]
Revenue			$ 17,565	$ 10,990
Net income (loss) before non-controlling interests			6,647	(4,497)
Net income (loss) attributable to non-controlling interests	$ 16	$ (3)	92	(435)
Net income (loss) attributable to controlling interests			$ 4,834	$ (4,012)
Net income (loss) income per share (basic)			$ 0.87	$ (0.74)
Net income (loss) income per share (diluted)			$ 0.36	$ (0.74)

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Acquisitions and Divestitures (Details Textual) $ in Millions	Oct. 01, 2016 USD ($)
Purchase Agreement [Member]
Acquisitions and Divestitures (Textual)
Purchase price of acquired assets	$ 9.0

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Property and Equipment (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Oil and gas properties:
Accumulated depreciation, depletion, amortization and impairment	$ (80,152)	$ (78,559)
Net oil and gas properties	33,985	35,211
Furniture and fixtures, computer hardware and software, and other equipment	1,661	990
Accumulated depreciation and amortization	(888)	(665)
Net other property and equipment	773	325
Total net property and equipment	34,758	35,536
Proved oil and gas properties [Member]
Oil and gas properties:
Oil and gas properties	112,211	111,771
Unproved properties not subject to depletion [Member]
Oil and gas properties:
Oil and gas properties	$ 1,926	$ 1,999

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Property and Equipment (Details Textual)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2017 USD ($) Per_Mcfe	Sep. 30, 2016 USD ($) Per_Mcfe	Sep. 30, 2017 USD ($) Per_Mcfe	Sep. 30, 2016 USD ($) Per_Mcfe	Dec. 31, 2016 USD ($)
Property and Equipment (Textual)
Capitalized general and administrative expenses			$ 178,000	$ 431,000
Depletion expense related to oil and gas properties	$ 521,000	$ 368,000	$ 1,600,000	$ 1,200,000
Depletion expense related to oil and gas properties (in dollars per Mcfe) | Per_Mcfe	0.38	0.60	0.40	0.68
Depreciation and amortization expense	$ 91,000	$ 25,000	$ 254,000	$ 85,000
Amortized capital cost, description			Within five years.
Unproved properties not subject to depletion [Member]
Property and Equipment (Textual)
Depletion expense related to unproved oil and gas properties			$ 1,900,000		$ 2,000,000

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Investments in Affiliates (Details) - USD ($) $ in Thousands	3 Months Ended		8 Months Ended	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2017	Sep. 30, 2016
Related Party Transaction [Line Items]
Revenues	$ 4,195	$ 2,365		$ 17,565	$ 5,221
Operating expenses	(693)	(1,560)		3,518	(9,345)
Net loss	(462)	$ (1,599)		$ 4,834	$ (9,044)
Carbon California [Member]
Related Party Transaction [Line Items]
Revenues	1,994		$ 6,511
Operating expenses	2,625		6,578
Loss from continuing operations	(1,135)		(1,313)
Net loss	$ (1,135)		$ (1,313)

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Investments in Affiliates (Details 1) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2017	Sep. 30, 2016
Related Party Transaction [Line Items]
Revenues	$ 4,195	$ 2,365		$ 17,565	$ 5,221
Operating expenses	(693)	(1,560)		3,518	(9,345)
Net loss	(462)	$ (1,599)		$ 4,834	$ (9,044)
Carbon Appalachia [Member]
Related Party Transaction [Line Items]
Revenues	1,348		$ 2,905
Operating expenses	2,691		4,449
Loss from continuing operations	(1,545)		(1,874)
Net loss	$ (1,545)		$ (1,874)

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Investments in Affiliates (Details 2) $ in Thousands	Sep. 30, 2017 USD ($)
April 2017 [Member]
Related Party Transaction [Line Items]
Capital Contribution	$ 240
Resulting Class A Units (%)	2.00%
Resulting Sharing %	2.98%
August 2017 [Member]
Related Party Transaction [Line Items]
Capital Contribution	$ 3,710
Resulting Class A Units (%)	15.20%
Resulting Sharing %	16.04%
September 2017 [Member]
Related Party Transaction [Line Items]
Capital Contribution	$ 2,920
Resulting Class A Units (%)	18.55%
Resulting Sharing %	19.37%
November 2017 [Member]
Related Party Transaction [Line Items]
Capital Contribution		[1]
Resulting Class A Units (%)	26.50%	[1]
Resulting Sharing %	27.24%	[1]

[1] See Note 14 for further details regarding the November 1, 2017 exercise of the Appalachia Warrant

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Investments in Affiliates (Details Textual)

1 Months Ended

3 Months Ended

9 Months Ended

Apr. 03, 2017

USD ($)

Well

Sep. 29, 2017

USD ($)

Aug. 31, 2017

Aug. 15, 2017

USD ($)

Feb. 15, 2017

Sep. 30, 2017

USD ($)

$ / shares

Sep. 30, 2016

USD ($)

Mar. 31, 2016

USD ($)

Sep. 30, 2017

USD ($)

$ / shares

shares

Sep. 30, 2016

USD ($)

Investments in Affiliates (Textual)

Ownership interest percentage

50.00%

50.00%

Equity investment income (loss)

$ (285,000)

$ (4,000)

$ (285,000)

$ (10,000)

Cash received from related party

$ 275,000

Fair value of warrant

$ (2,494,000)

Equity commitment

$ 100,000,000

Percentage of interest

75.00%

16.30%

16.30%

Other income

$ 8,000

9,000

$ 28,000

10,000

Equity method loss

$ (285,000)

(4,000)

(285,000)

(10,000)

Drilling [Member]

Investments in Affiliates (Textual)

Percentage of interest

100.00%

Senior Revolving Notes [Member]

Investments in Affiliates (Textual)

Senior subordinated notes

$ 100,000,000

Current borrowing base

$ 50,000,000

Revolving credit facility, description

Redeterminations as of April 1 and October 1 each year and the addition of East West Bank as a participating lender.

Outstanding under the credit facility

$ 38,000,000

California Warrant [Member]

Investments in Affiliates (Textual)

Acquired interest

17.80%

Business acquisitions description

Carbon California (i) issued and sold Class A Units to two institutional investors for an aggregate cash consideration of $22.0 million, (ii) entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with two institutional investors for the issuance and sale of up to $25.0 million of Senior Secured Revolving Notes (the “Senior Revolving Notes”) due February 15, 2022 and (iii) entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with one institutional investor for the issuance and sale of $10.0 million of Senior Subordinated Notes (the “Subordinated Notes”) due February 15, 2024. The Company is not a guarantor of the Senior Revolving Notes or the Subordinate Notes. The closing of the Note Purchase Agreement and the Securities Purchase Agreement on February 15, 2017, resulted in the sale and issuance by Carbon California of (i) Senior Revolving notes in the principal amount of $10.0 million and (ii) Subordinated Notes in the original principal amount of $10.0 million. The maximum principal amount available under the Senior Revolving Notes is based upon the borrowing base attributable to Carbon California’s proved oil and gas reserves which is to be determined at least semi-annually. The current borrowing base is $15.0 million, of which $10.0 million is outstanding as of September 30, 2017.

Warrant to purchase common stock | shares

1,500,000

Warrant exercise price | $ / shares

$ 7.20

$ 7.20

Estimated fair market value of warrant

$ 3,000,000

$ 3,000,000

Fair value of warrant

1,500,000

Percentage of interest

17.80%

Other income

2,800,000

Carbon Appalachia Class A [Member]

Investments in Affiliates (Textual)

Equity investment income (loss)

$ 348,000

Acquired interest

2.00%

Senior secured asset

$ 2,000,000

Business acquisitions description

The borrowing base of its existing credit facility with LegacyTexas Bank increased to $22.0 million and Carbon Appalachia Enterprises borrowed $8.0 million from its existing credit facility with LegacyTexas Bank. Carbon Appalachia received equity funding in the amount of $14.0 million from its members, including $3.7 million from Carbon.

Carbon Appalachia Enterprises borrowed $20.4 million from its existing credit facility with LegacyTexas Bank and East West Bank and received additional funding in the amount of $11.0 million from its members, including $2.9 million from Carbon.

Senior subordinated notes

100,000,000

Warrant to purchase common stock | shares

408,000

Warrant exercise price | $ / shares

$ 7.20

$ 7.20

Estimated fair market value of warrant

$ 1,300,000

$ 1,300,000

Fair value of warrant

1,200,000

1,300,000

Equity commitment

$ 100,000,000

$ 37,000,000

$ 37,000,000

Number of wells | Well

20

Percentage of interest

10.00%

10.00%

Purchase price of acquired assets

$ 20,000,000

$ 41,300,000

21,500,000

Credit facility purchase price

8,500,000

Initial borrowing

$ 10,000,000

Equity method loss

$ 348,000

Carbon Appalachia Class A [Member] | Maximum [Member]

Investments in Affiliates (Textual)

Equity commitment

$ 23,600,000

Percentage of interest

26.50%

Carbon Appalachia Class A [Member] | Minimum [Member]

Investments in Affiliates (Textual)

Equity commitment

$ 2,000,000

Percentage of interest

2.00%

Carbon Appalachia Class A [Member] | Class B Units [Member]

Investments in Affiliates (Textual)

Ownership interest percentage

19.60%

Carbon Appalachia Class A [Member] | Class C Units [Member]

Investments in Affiliates (Textual)

Ownership interest percentage

1.00%

26.50%

19.40%

19.40%

Acquired interest

1.00%

Investment in cash and unevaluated property

$ 6,900,000

$ 6,900,000

Carbon Appalachia Class A [Member] | Class A Units [Member]

Investments in Affiliates (Textual)

Ownership interest percentage

19.40%

19.40%

Equity commitment

$ 240,000

Investment in cash and unevaluated property

$ 6,900,000

$ 6,900,000

Nytis LLC [Member]

Investments in Affiliates (Textual)

Percentage of interest

25.00%

Crawford County Gas Gathering [Member]

Investments in Affiliates (Textual)

Equity investment income (loss)

32,000

10,000

Cash received from related party

$ 275,000

68,000

Equity method loss

32,000

$ 10,000

Warrant [Member]

Investments in Affiliates (Textual)

Estimated fair market value of warrant

5,800,000

5,800,000

Warrant [Member] | Carbon Appalachia Class A [Member]

Investments in Affiliates (Textual)

Estimated fair market value of warrant

0

0

Fair value of warrant

1,600,000

Appalachia Warrant [Member]

Investments in Affiliates (Textual)

Fair value of warrant

$ 323,000

Derivative warrant gain

$ 497,000

$ 323,000,000

XML

Bank Credit Facility (Details)	3 Months Ended	9 Months Ended
	Mar. 31, 2017	Sep. 30, 2017 USD ($)	Mar. 30, 2017 USD ($)
Bank Credit Facility (Textual)
Line of credit facility maximum borrowing capacity		$ 23,000,000
Outstanding borrowings		22,100,000
Additional borrowing capacity available		$ 860,000
Effective borrowing rate (as a percent)		5.82%
Proceeds from Contributed Capital		$ 6,600,000
Line of Credit [Member]
Bank Credit Facility (Textual)
Revolving credit facility, description		In 2016, Carbon entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank. LegacyTexas Bank is the initial lender and acts as administrative agent.
Line of credit facility maximum borrowing capacity		$ 100,000,000	$ 23,000,000
Submit letters of credit		500,000
Initial borrowing		$ 17,000,000
Variable interest rate basis, description		(i) the base rate plus an applicable margin between 0.50% and 1.50% or (ii) the Adjusted LIBOR rate plus an applicable margin between 3.50% and 4.50% at Carbon's option. The actual margin percentage is dependent on the credit facility utilization percentage. Carbon is obligated to pay certain fees and expenses in connection with the credit facility, including a commitment fee for any unused amounts of 0.50%.
Percentage of commitment fee		0.50%
Line of Credit [Member] | Minimum [Member]
Bank Credit Facility (Textual)
LIBOR rate percentage		0.50%
Funded debt ratio required to be maintained	1.0
Current ratio required to be maintained	1.0
Line of Credit [Member] | Maximum [Member]
Bank Credit Facility (Textual)
LIBOR rate percentage		1.50%
Funded debt ratio required to be maintained	3.5
Current ratio required to be maintained	1.0
Line of Credit [Member] | LIBOR [Member] | Minimum [Member]
Bank Credit Facility (Textual)
LIBOR rate percentage		3.50%
Line of Credit [Member] | LIBOR [Member] | Maximum [Member]
Bank Credit Facility (Textual)
LIBOR rate percentage		4.50%

XML

Stockholders' Equity (Details) - USD ($)		1 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended
	Mar. 15, 2017	Jun. 30, 2013	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2012
Stockholders' Equity (Textual)
Reverse stock split, description	Reverse stock split approved by the shareholders and Board of Directors, each 20 shares of issued and outstanding common stock became one share of common stock and no fractional shares were issued.
Common stock, shares authorized			200,000,000		200,000,000		200,000,000
Common stock, par value (in dollars per share)			$ 0.01		$ 0.01		$ 0.01
Common stock, shares issued			5,627,589		5,627,589		5,482,673
Common stock, shares outstanding			5,627,589		5,627,589		5,482,673
Preferred stock, shares authorized			1,000,000		1,000,000		1,000,000
Preferred stock, par value (in dollars per share)			$ 0.01		$ 0.01		$ 0.01
Preferred stock, shares issued			0		0		0
Preferred stock, shares outstanding			0		0		0
Restricted Stock [Member]
Stockholders' Equity (Textual)
Expected period of recognition of unrecognized compensation costs					6 years 6 months
Restricted stock grants					81,000		462,000
Unrecognized compensation cost			$ 1,300,000		$ 1,300,000
Compensation costs			$ 160,000	$ 186,000	$ 513,000	$ 554,000
Restricted stock awards vest period					3 years
Restricted stock grants vested					258,000
Restricted Stock [Member] | Officers, Directors, Employees or Consultants [Member]
Stockholders' Equity (Textual)
Stock incentive plan, common stock shares authorized			1,100,000		1,100,000
Restricted Performance Units [Member]
Stockholders' Equity (Textual)
Restricted stock grants					60,000		401,000
Unrecognized compensation cost			$ 2,400,000		$ 2,400,000		$ 2,500,000	$ 2,500,000	$ 2,500,000	$ 2,500,000
Number of shares outstanding			272,000		272,000
Expected term					3 years
Restricted Performance Units [Member] | Granted during 2012 and 2014 through 2017 [Member]
Stockholders' Equity (Textual)
Compensation costs			$ 53,000	1,100,000	$ 239,000	1,100,000
Restricted Performance Units [Member] | Granted 2013 [Member]
Stockholders' Equity (Textual)
Compensation costs						127,000
Nytis USA Restricted Stock Plan [Member]
Stockholders' Equity (Textual)
Vesting terms of restricted stock		The vesting terms of these restricted stock grants were modified so that 25% of the shares would vest on the first of January from 2014 through 2017.
Vesting, percentage		25.00%
Compensation costs			$ 0	$ 84,000	$ 0	$ 252,000

XML

Accounts Payable and Accrued Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Accounts Payable and Accrued Liabilities [Abstract]
Accounts payable	$ 1,801	$ 2,315
Oil and gas revenue payable to oil and gas property owners	1,583	1,415
Gathering and transportation payables	498	468
Production taxes payable	212	113
Drilling advances received from joint venture partner	422	955
Accrued drilling costs		4
Accrued lease operating costs	535	282
Accrued ad valorem taxes	1,461	1,552
Accrued general and administrative expenses	1,085	1,572
Accrued interest	232	184
Other liabilities	264	261
Total accounts payable and accrued liabilities	$ 8,093	$ 9,121

XML

Fair Value Measurements (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016	Sep. 30, 2016	Dec. 31, 2015
Assets:
Commodity derivatives	$ 247
Liabilities:
Commodity derivatives		$ 1,932
Warrant derivatives	2,951
Level 3 [Member]
Liabilities:
Commodity derivatives			$ 4,600
Recurring basis [Member] | Level 1 [Member]
Assets:
Commodity derivatives
Liabilities:
Commodity derivatives
Warrant derivatives
Recurring basis [Member] | Level 2 [Member]
Assets:
Commodity derivatives	247
Liabilities:
Commodity derivatives		1,932
Warrant derivatives
Recurring basis [Member] | Level 3 [Member]
Assets:
Commodity derivatives
Liabilities:
Commodity derivatives
Warrant derivatives	$ 2,951

XML

Fair Value Measurements (Details 1) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Balance, December 31, 2016	$ 1,932
Unrealized (gain) loss included in warrant derivative gain	$ 2,179	$ (823)
Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Balance, December 31, 2016
Warrant Derivative Liability		7,094
Unrealized (gain) loss included in warrant derivative gain		2,494
Balance, September 30, 2017		4,600
California Warrant [Member] | Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Balance, December 31, 2016
Warrant Derivative Liability		5,769
Unrealized (gain) loss included in warrant derivative gain		(2,817)
Balance, September 30, 2017		2,952
Appalachia Warrant [Member] | Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Balance, December 31, 2016
Warrant Derivative Liability		1,325
Unrealized (gain) loss included in warrant derivative gain		323
Balance, September 30, 2017		$ 1,648

XML

Fair Value Measurements (Details Textual) - USD ($)		1 Months Ended	9 Months Ended
	Apr. 03, 2017	Feb. 15, 2017	Sep. 30, 2017	Sep. 30, 2016
Fair Value Measurements (Textual)
Asset retirement obligation			$ 5,000	$ 5,000
Carbon Appalachia Class A [Member] | Level 3 [Member]
Fair Value Measurements (Textual)
Fair value of warrant	$ 1,300,000		1,600,000
Exercise price	$ 7.20
Volatility rate	39.30%
Risk free rate	2.10%
California Warrant [Member] | Level 3 [Member]
Fair Value Measurements (Textual)
Fair value of warrant		$ 5,800,000	$ 3,000,000
Exercise price		$ 7.20
Volatility rate		41.80%
Risk free rate		2.30%
Term		7 years
Carbon California Class A units [Member] | Level 3 [Member]
Fair Value Measurements (Textual)
Exercise price			$ 7.20
Volatility rate			45.00%
Risk free rate			2.10%
Term			6 years 4 months 24 days
Carbon Appalachia Class A units [Member] | Level 3 [Member]
Fair Value Measurements (Textual)
Exercise price			$ 7.20
Volatility rate			45.00%
Risk free rate			2.10%
Term			6 years 6 months

XML

Physical Delivery Contracts and Gas Derivatives (Details)	Sep. 30, 2017 USD_MMBtu USD_Bbl $ / shares
2017 [Member] | Natural Gas Swaps [Member]
Derivative Instrument [Abstract]
Quantity | USD_MMBtu	900,000
Weighted Average Price	$ 3.27
2017 [Member] | Natural Gas Collars [Member]
Derivative Instrument [Abstract]
Quantity | USD_MMBtu	30,000
2017 [Member] | Natural Gas Collars [Member] | Maximum [Member]
Derivative Instrument [Abstract]
Weighted Average Price	$ 3.48	[1]
2017 [Member] | Natural Gas Collars [Member] | Minimum [Member]
Derivative Instrument [Abstract]
Weighted Average Price	$ 3.00	[1]
2017 [Member] | Oil Swaps [Member]
Derivative Instrument [Abstract]
Quantity | USD_Bbl	23,000
Weighted Average Price	$ 52.64	[2]
2018 [Member] | Natural Gas Swaps [Member]
Derivative Instrument [Abstract]
Quantity | USD_MMBtu	3,390,000
Weighted Average Price	$ 3.01	[1]
2018 [Member] | Natural Gas Collars [Member]
Derivative Instrument [Abstract]
Quantity | USD_MMBtu	90,000
2018 [Member] | Natural Gas Collars [Member] | Maximum [Member]
Derivative Instrument [Abstract]
Weighted Average Price	$ 3.48	[1]
2018 [Member] | Natural Gas Collars [Member] | Minimum [Member]
Derivative Instrument [Abstract]
Weighted Average Price	$ 3.00	[1]
2018 [Member] | Oil Swaps [Member]
Derivative Instrument [Abstract]
Quantity | USD_Bbl	60,000
Weighted Average Price	$ 53.36	[2]
2019 [Member] | Natural Gas Swaps [Member]
Derivative Instrument [Abstract]
Quantity | USD_MMBtu	1,920,000
Weighted Average Price	$ 2.85	[1]
2019 [Member] | Oil Swaps [Member]
Derivative Instrument [Abstract]
Quantity | USD_Bbl	48,000
Weighted Average Price	$ 53.76	[2]

[1] NYMEX Henry Hub Natural Gas futures contract for the respective delivery month.

[2] NYMEX Light Sweet Crude West Texas Intermediate futures contract for the respective delivery month

XML

Physical Delivery Contracts and Gas Derivatives (Details 1) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Commodity derivative contracts:
Current assets	$ 190
Non-current assets	57
Current liabilities		$ 1,341
Non-current liabilities		$ 591

XML

Physical Delivery Contracts and Gas Derivatives (Details 2) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Commodity derivative contracts:
Unrealized (losses) gains			$ 2,179	$ (823)
Commodity derivative contracts [Member]
Commodity derivative contracts:
Settlement gains	$ 345	$ 17	463	349
Unrealized (losses) gains	(844)	143	2,179	(823)
Total settlement and unrealized (losses) gains, net	$ (499)	$ 160	$ 2,642	$ (474)

XML

Physical Delivery Contracts and Gas Derivatives (Details 3) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Commodity derivative assets:
Current assets	$ 190
Other long-term assets	57
Total derivative assets	247
Commodity derivative liabilities:
Current liability		$ 1,341
Non-current liabilities		591
Total derivative liabilities		$ 1,932
Gross Recognized Assets/Liabilities [Member]
Commodity derivative assets:
Current assets	448
Other long-term assets	305
Total derivative assets	753
Commodity derivative liabilities:
Current liability	258
Non-current liabilities	248
Total derivative liabilities	506
Gross Amounts Offset [Member]
Commodity derivative assets:
Current assets	(258)
Other long-term assets	(248)
Total derivative assets	(506)
Commodity derivative liabilities:
Current liability	(258)
Non-current liabilities	(248)
Total derivative liabilities	(506)
Net Recognized Fair Value Assets/Liabilities [Member]
Commodity derivative assets:
Current assets	190
Other long-term assets	57
Total derivative assets	247
Commodity derivative liabilities:
Current liability
Non-current liabilities
Total derivative liabilities

XML

Commitments (Details)	9 Months Ended
	Sep. 30, 2017 Per_Mcfe Partnership
Oct 2017 - Apr 2018 [Member]
Other Commitments [Line Items]
Capacity levels (Dekatherms per day) | Partnership	5,530
Oct 2017 - Apr 2018 [Member] | Minimum [Member]
Other Commitments [Line Items]
Demand charges (in dollars per dekatherm)	0.20
Oct 2017 - Apr 2018 [Member] | Maximum [Member]
Other Commitments [Line Items]
Demand charges (in dollars per dekatherm)	0.65
May 2018 - May 2020 [Member]
Other Commitments [Line Items]
Capacity levels (Dekatherms per day) | Partnership	3,230
May 2018 - May 2020 [Member] | Minimum [Member]
Other Commitments [Line Items]
Demand charges (in dollars per dekatherm)	0.20
May 2018 - May 2020 [Member] | Maximum [Member]
Other Commitments [Line Items]
Demand charges (in dollars per dekatherm)	0.62
Apr 2020 - May 2020 [Member]
Other Commitments [Line Items]
Capacity levels (Dekatherms per day) | Partnership	2,150
Demand charges (in dollars per dekatherm)	0.20
Jun 2020 - May 2036 [Member]
Other Commitments [Line Items]
Capacity levels (Dekatherms per day) | Partnership	1,000
Demand charges (in dollars per dekatherm)	0.20

XML

Commitments (Details Textual)	Sep. 30, 2017 USD ($)
Commitments (Textual)
Liability related to firm transportation contracts assumed	$ 400,000
Capital commitment	6,900,000
Carbon Appalachia Class A [Member]
Commitments (Textual)
Capital commitment	$ 23,600,000

XML

Supplemental Cash Flow Disclosure (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Cash paid during the period for:
Interest	$ 645	$ 117
Non-cash transactions:
Increase in net asset retirement obligations	5	5
Decrease in accounts payable and accrued liabilities included in oil and gas properties	(12)	(23)
Issuance of warrants for investment in affiliates	$ 7,094

XML

Subsequent Events (Details) - USD ($)
$ in Millions

1 Months Ended

Nov. 01, 2017

Nov. 13, 2017

Sep. 30, 2017

Subsequent Events [Textual]

Borrowing base associated with the credit facility

$ 23.0

Subsequent Event [Member] | Carbon Appalachia Class A units [Member]

Subsequent Events [Textual]

Subsequent event, description

Carbon owns 26.5% of Carbon Appalachia outstanding Class A Units along with its 1% Class C ownership.

Common stock in exchange of issuance

432,051

Percentage of outstanding warrants

7.95%

Subsequent Event [Member] | LegacyTexas Bank [Member]

Subsequent Events [Textual]

Borrowing base associated with the credit facility

$ 23.0