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 quarterly period ended March 31, 2020

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 ENERGY CORPORATION

(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) 407-7030

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
None

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 every Interactive Data File required to be submitted 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 such files).

YES ☒               NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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	☒

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 ☒

At May 7, 2020, there were 7,949,128 issued and outstanding shares of the Company’s common stock, $0.01 par value.

CARBON ENERGY CORPORATION

TABLE OF CONTENTS

Part I – FINANCIAL INFORMATION
Item 1. Financial Statements	1
Condensed Consolidated Balance Sheets (unaudited)	1
Condensed Consolidated Statements of Operations (unaudited)	2
Condensed Consolidated Statements of Stockholders’ Equity (unaudited)	3
Condensed Consolidated Statements of Cash Flows (unaudited)	4
Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	32
Part II – OTHER INFORMATION
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 6. Exhibits	40
Signatures	41

i

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CARBON ENERGY CORPORATION

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

	March 31, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	1,740		$	904
Accounts receivable:
Revenue		10,331			12,886
Joint interest billings and other		1,583			1,552
Commodity derivative asset (Note 12)		18,078			5,915
Prepaid expenses, deposits, and other current assets		2,352			2,500
Inventory		1,943			2,512
Total current assets		36,027			26,269
Non-current assets:
Property and equipment (Note 3)
Oil and gas properties, full cost method of accounting:
Proved, net		239,842			242,144
Unproved		4,906			4,872
Other property and equipment, net		15,768			15,984
Total property and equipment, net		260,516			263,000
Investments in affiliates		67			625
Commodity derivative asset – non-current (Note 12)		5,107			1,164
Right-of-use assets		5,689			6,104
Other non-current assets		980			1,092
Total non-current assets		272,359			271,985
Total assets	$	308,386		$	298,254
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities (Note 4)	$	30,280		$	35,157
Firm transportation contract obligations (Note 13)		5,571			5,679
Lease liability – current		1,638			1,625
Commodity derivative liability (Note 12)		-			469
Credit facilities and notes payable (Note 6)		3,311			5,788
Total current liabilities		40,800			48,718
Non-current liabilities:
Firm transportation contract obligations (Note 13)		8,049			8,905
Lease liability – non-current		3,966			4,383
Commodity derivative liability – non-current (Note 12)		25			87
Production and property taxes payable		3,173			2,815
Asset retirement obligations (Note 5)		17,456			17,514
Credit facilities and notes payable (Note 6)		96,520			94,870
Notes payable – related party (Note 6)		46,517			44,741
Total non-current liabilities		175,706			173,315
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value; liquidation preference of $599 and $524 at March 31, 2020 and December 31, 2019, respectively; authorized 1,000,000 shares, 50,000 shares issued and outstanding at March 31, 2020 and December 31, 2019		1			1
Common stock, $0.01 par value; authorized 35,000,000 shares, 7,899,020 and 7,796,085 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		79			78
Additional paid-in capital		86,037			85,834
Accumulated deficit		(26,043	)		(35,842	)
Total Carbon stockholders’ equity		60,074			50,071
Non-controlling interests		31,806			26,150
Total stockholders’ equity		91,880			76,221
Total liabilities and stockholders’ equity	$	308,386		$	298,254

See accompanying notes to Condensed Consolidated Financial Statements.

1

CARBON ENERGY CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended March 31,
(in thousands, except per share amounts)	2020			2019
Revenue:
Natural gas sales	$	8,434		$	19,316
Natural gas liquids		152			247
Oil sales		7,216			8,989
Transportation and handling		633			734
Marketing gas sales		6,318			4,944
Commodity derivative gain (loss)		19,714			(9,306	)
Other (loss) income		(2	)		26
Total revenue		42,465			24,950
Expenses:
Lease operating expenses		7,372			6,616
Pipeline operating expenses		2,692			3,085
Transportation and gathering costs		2,576			1,669
Production and property taxes		10			2,010
Marketing gas purchases		3,472			6,302
General and administrative		3,303			4,689
Depreciation, depletion and amortization		3,811			3,980
Accretion of asset retirement obligations		478			394
Total expenses		23,714			28,745
Operating income (loss)		18,751			(3,795	)
Other income (expense):
Interest expense		(2,872	)		(2,914	)
Investments in affiliates		(421	)		19
Total other expense		(3,293	)		(2,895	)
Income (loss) before income taxes		15,458			(6,690	)
Provision for income taxes		-			-
Net income (loss) before non-controlling interests and preferred shares		15,458			(6,690	)
Net income (loss) attributable to non-controlling interests		5,659			(2,590	)
Net income (loss) attributable to controlling interests before preferred shares		9,799			(4,100	)
Net income attributable to preferred shares – preferred return		75			75
Net income (loss) attributable to common shares	$	9,724		$	(4,175	)
Net income (loss) per common share:
Basic	$	1.25		$	(0.54	)
Diluted	$	1.20		$	(0.54	)
Weighted average common shares outstanding:
Basic		7,809			7,663
Diluted		8,090			7,663

See accompanying notes to Condensed Consolidated Financial Statements.

2

CARBON ENERGY CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands)

									Additional			Non-						Total
	Common Stock				Preferred Stock				Paid-in			Controlling			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital			Interests			Deficit			Equity
Balance as of December 31, 2019		7,796	$	78		50	$	1	$	85,834		$	26,150		$	(35,842	)	$	76,221
Stock-based compensation		-		-		-		-		204			-			-			204
Restricted stock vested		20		-		-		-		-			-			-			-
Performance units vested		83		1		-		-		(1	)		-			-			-
Non-controlling interests’ distributions, net		-		-		-		-		-			(3	)		-			(3	)
Net income		-		-		-		-		-			5,659			9,799			15,458
Balance as of March 31, 2020		7,899	$	79		50	$	1	$	86,037		$	31,806		$	(26,043	)	$	91,880

									Additional			Non-						Total
	Common Stock				Preferred Stock				Paid-in			Controlling			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital			Interests			Deficit			Equity
Balance as of December 31, 2018		7,656	$	77		50	$	1	$	84,612		$	28,284		$	(36,939	)	$	76,035
Stock-based compensation		-		-		-		-		222			-			-			222
Restricted stock vested		40		1		-		-		-			-			-			1
Performance units vested		95		1		-		-		(1	)		-			-			-
Non-controlling interests’ contributions, net		-		-		-		-		-			22			-			22
Net loss		-		-		-		-		-			(2,590	)		(4,100	)		(6,690	)
Balance as of March 31, 2019		7,791	$	79		50	$	1	$	84,833		$	25,716		$	(41,039	)	$	69,590

See accompanying notes to Condensed Consolidated Financial Statements.

3

CARBON ENERGY CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended
	March 31,
(in thousands)	2020			2019
Cash flows from operating activities:
Net income (loss)	$	15,458		$	(6,690	)
Items not involving cash:
Depreciation, depletion and amortization		3,811			3,980
Accretion of asset retirement obligations		478			394
Unrealized commodity derivative (gain) loss		(16,636	)		8,850
Stock-based compensation expense		204			222
Loss on sale of affiliate investment		419			-
Investments in affiliates		9			(19	)
Amortization of debt costs		212			277
Interest expense paid-in-kind		662			594
Net change in:
Accounts receivable		2,524			6,091
Prepaid expenses, deposits and other current assets		148			375
Accounts payable, accrued liabilities and firm transportation contract obligations		(6,589	)		(6,079	)
Inventory and other non-current items		577			316
Net cash provided by operating activities		1,277			8,311
Cash flows from investing activities:
Development and acquisition of properties and equipment		(1,013	)		(500	)
Proceeds received – disposition of oil and gas properties and other property and equipment		256			164
Proceeds from sale of affiliate investment		131			-
Net cash used in investing activities		(626	)		(336	)
Cash flows from financing activities:
Proceeds from credit facilities and notes payable		5,000			3,000
Payments on credit facilities and notes payable		(4,812	)		(5,676	)
Payments of debt issuance costs		-			(41	)
(Distributions to) contributions from non-controlling interests, net		(3	)		22
Net cash provided by (used in) financing activities		185			(2,695	)
Net increase in cash and cash equivalents		836			5,280
Cash and cash equivalents, beginning of period		904			5,736
Cash and cash equivalents, end of period	$	1,740		$	11,016

See accompanying notes to Condensed Consolidated Financial Statements.

4

CARBON ENERGY CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – ORGANIZATION

Carbon Energy Corporation is an independent oil and natural gas company engaged in the acquisition, exploration, development and production of oil, natural gas and natural gas liquids properties located in the United States. The terms “we”, “us”, “our”, the “Company” or “Carbon” refer to Carbon Energy Corporation and our consolidated subsidiaries (described below). The following is an organization chart of the key subsidiaries discussed in this report as of March 31, 2020:

5

Appalachian and Illinois Basin Operations

In the Appalachian and Illinois Basins, operations are conducted by Nytis Exploration Company, LLC (“Nytis LLC”). The following organizational chart illustrates this relationship as of March 31, 2020:

 

We hold all of the Class A Units of Carbon Appalachian Company, LLC, a Delaware limited liability company (“Carbon Appalachia”), along with its direct and indirect subsidiaries (Carbon Appalachia Group, LLC, Carbon Tennessee Mining Company, LLC, Carbon Appalachia Enterprises, LLC, Carbon West Virginia Company, LLC, Cranberry Pipeline Corporation, Knox Energy, LLC, Coalfield Pipeline Company and Appalachia Gas Services Company, LLC). 

6

Ventura Basin Operations

In California, Carbon California Operating Company, LLC conducts operations on behalf of Carbon California Company, LLC, a Delaware limited liability company (“Carbon California”). We own 53.92% of the voting and profits interests and Prudential Legacy Insurance Company of New Jersey and Prudential Insurance Company of America or its affiliates (collectively, “Prudential”) owns 46.08% of the voting and profits interest in Carbon California. The following organizational chart illustrates this relationship as of March 31, 2020:

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with U.S. generally accepted accounting principles (“GAAP”) applicable to interim financial statements. These unaudited condensed consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim period. Operating results for the interim periods presented require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes and are not necessarily indicative of the results that may be expected for the full year. The condensed consolidated balance sheet data as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. The Company follows the same accounting policies for preparing quarterly and annual reports.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. Partnerships and subsidiaries in which we have a controlling interest are consolidated. We are currently consolidating 46 partnerships, Carbon Appalachia, and Carbon California, and we reflect the non-controlling ownership interest in partnerships and subsidiaries as non-controlling interests on our unaudited condensed consolidated statements of operations and also reflect the non-controlling ownership interest in the net assets of the partnerships as non-controlling interests within stockholders’ equity on our unaudited condensed consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated.

In accordance with established practice in the oil and gas industry, our unaudited condensed consolidated financial statements also include our pro-rata share of assets, liabilities, income, lease operating costs and general and administrative expenses of the oil and gas partnerships in which we have 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 we have the ability to significantly influence the operating decisions of the investee. When we do 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 condensed consolidated financial statements.

7

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued ASU 2020-04 as an update to provide optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform (ASC Topic 848) on financial reporting. The amendments in ASU 2020-04 are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment, net consists of the following:

(in thousands)	March 31, 2020			December 31, 2019
Oil and gas properties:
Proved oil and gas properties	$352,561			$351,488
Unproved properties		4,906			4,872
Accumulated depreciation, depletion, amortization and impairment		(112,719	)		(109,344	)
Oil and gas properties, net		244,748			247,016
Pipeline facilities and equipment		12,820			12,814
Base gas		1,937			1,937
Furniture and fixtures, computer hardware and software, and other equipment		6,967			6,762
Accumulated depreciation and amortization		(5,956	)		(5,529	)
Other property and equipment, net		15,768			15,984
Total property and equipment, net	$	260,516		$	263,000

Unproved oil and gas properties not subject to depletion are excluded from the full cost pool until it is determined if reserves can be assigned to the related properties. Subject to industry conditions, evaluation of most of these properties and the inclusion of their costs in the full cost pool is expected to be completed within five years. Unproved properties are assessed for impairment at least annually. During the three months ended March 31, 2020 and 2019, there were no expiring or impaired leasehold costs that were reclassified into proved property.

We capitalized overhead applicable to acquisition, development and exploration activities of approximately $238,000 and $68,000 for the three months ended March 31, 2020 and 2019, respectively.

Depletion expense related to oil and gas properties for the three months ended March 31, 2020 and 2019 was approximately $3.4 million and $3.5 million, respectively.

For the three months ended March 31, 2020 and 2019, we did not recognize any ceiling test impairments as our full cost pool did not exceed the ceiling limitations. Future declines in oil and natural gas prices, increases in future operating expenses and future development costs could result in impairments of our oil and gas properties in future periods. Impairment changes are a non-cash charge and accordingly would not affect cash flows but would adversely affect our net income and stockholders’ equity.

8

NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

(in thousands)	March 31, 2020		December 31, 2019
Accounts payable	$	4,631	$	9,875
Oil and gas revenue suspense		3,517		3,620
Gathering and transportation payables		2,014		1,877
Production taxes payable		2,768		3,212
Accrued lease operating costs		734		664
Accrued ad valorem taxes-current		4,114		4,407
Accrued general and administrative expenses		3,186		3,260
Asset retirement obligations-current		5,564		5,021
Accrued interest		1,180		1,335
Accrued gas purchases		1,220		1,392
Other liabilities		1,352		494
Total accounts payable and accrued liabilities	$	30,280	$	35,157

NOTE 5 – 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 the estimated ARO liability result in adjustments to the related capitalized asset and corresponding liability.

The ARO liability is based on estimated economic lives, estimates of 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 adjusted as a result of a reassessment of expected cash flows and assumptions inherent in the estimation of the liability. 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. 

The following table is a reconciliation of ARO:

	Three Months Ended March 31,
(in thousands)	2020			2019
Balance at beginning of period	$	22,535		$	22,310
Accretion expense		478			394
Additions		7			-
Balance at end of period	$	23,020		$	22,704
Less:  Current portion		(5,564	)		(3,392	)
Non-current portion	$	17,456		$	19,312

9

NOTE 6 – CREDIT FACILITIES AND NOTES PAYABLE

The table below summarizes the outstanding credit facilities and notes payable:

(in thousands)	March 31, 2020			December 31, 2019
2018 Credit Facility – revolver	$	70,150		$	69,150
2018 Credit Facility – term note		3,333			5,833
Old Ironsides Notes		26,336			25,675
Other debt		34			45
Total debt		99,853			100,703
Less:  unamortized debt discount		(22	)		(45	)
Total credit facilities and notes payable		99,831			100,658
Current portion of credit facilities and notes payable		(3,311	)		(5,788	)
Non-current debt, net of current portion and unamortized debt discount	$	96,520		$	94,870

Carbon Appalachia

2018 Credit Facility

In 2018, the Company and its subsidiaries amended and restated its prior credit facilities and entered into a $500.0 million senior secured asset-based revolving credit facility maturing December 31, 2022 and a $15.0 million term loan maturing in 2020 (the “2018 Credit Facility”). The 2018 Credit Facility includes a sublimit of $1.5 million for letters of credit. The borrowers under the 2018 Credit Facility are Carbon Appalachia Enterprises, LLC (“CAE”) and various other subsidiaries of the Company (including Nytis Exploration (USA) Inc., a direct wholly owned subsidiary of the Company (“Nytis USA”), together with CAE, the “Borrowers”). Under the 2018 Credit Facility, the Company is neither a borrower nor a guarantor. The initial borrowing base under the 2018 Credit Facility was $75.0 million and was $71.0 million as of March 31, 2020.

The 2018 Credit Facility is guaranteed by each existing and future direct or indirect subsidiary of the Borrowers and certain other subsidiaries of the Company (subject to various exceptions) and the obligations under the 2018 Credit Facility are secured by essentially all tangible, intangible and real property (subject to certain exclusions).

Interest accrues on borrowings under the 2018 Credit Facility at a rate per annum equal to either (i) the base rate plus a margin equal to 0.25% - 0.75% depending on the utilization percentage or (ii) the Adjusted LIBOR plus a margin equal to 2.75% - 3.75% depending on the utilization percentage, at the Borrowers’ option. The Borrowers are obligated to pay certain fees and expenses in connection with the 2018 Credit Facility, including a commitment fee for any unused amounts of 0.50% and an origination fee of 0.50%. Loans under the 2018 Credit Facility may be prepaid without premium or penalty.

The 2018 Credit Facility also provides for a $15.0 million term loan which bears interest at a rate of 6.25% and is payable in 18 equal monthly installments beginning February 1, 2019 with the last payment due on July 1, 2020.

The 2018 Credit Facility contains certain affirmative and negative covenants that, among other things, limit the Borrowers’ 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 distribution on, or repurchase of, equity; (vi) make certain investments; (vii) enter into certain transactions with their affiliates; (viii) enter in sale-leaseback transactions; (ix) make optional or voluntary payment of debt other than obligations under the 2018 Credit Facility; (x) change the nature of their business; (xi) change their fiscal year or make changes to the accounting treatment or reporting practices; (xii) amend their 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 2018 Credit Facility requires the Borrowers’ compliance, on a consolidated basis, with a maximum Net Debt (all debt of the Borrowing Parties minus all unencumbered cash and cash equivalents of the Borrowers not to exceed $3.0 million) / EBITDAX (as defined) ratio of 3.50 to 1.00 and a current ratio, as defined, minimum of 1.00 to 1.00, tested quarterly.

10

In August 2019, we amended the 2018 Credit Facility, effective October 1, 2019, to restrict the aging of our accounts payable to 90 days or less, maintain minimum liquidity of $3.0 million and require the sale of certain non-core assets by December 31, 2019. 

In February 2020, we amended the 2018 Credit Facility to eliminate the minimum liquidity requirement and reduce the borrowing base from $75.0 million to $73.0 million, with subsequent borrowing base reductions totaling $6.0 million scheduled through May 1, 2020. Also, pursuant to this amendment, the lenders agreed to provide a limited waiver of non-compliance with the asset sale covenant included in the amendment from August 2019.

In April 2020, we amended the 2018 Credit Facility to extend the remaining borrowing base reductions totaling $4.0 million through June 1, 2020.

As of March 31, 2020, there was approximately $70.2 million in outstanding borrowings and no borrowing capacity available under the 2018 Credit Facility, after considering letters of credit outstanding. As of March 31, 2020, we were not in compliance with our current ratio financial covenant. However, we anticipate a full payoff of the 2018 Credit Facility as a result of Contemplated Transactions described in Note 15 prior to any potential event of default. The Company believes given these circumstances it is appropriate to classify the outstanding borrowings associated with the 2018 Credit Facility as non-current.

The terms of the 2018 Credit Facility require us to enter into derivative contracts at fixed pricing for a certain percentage of our production. We are party to International Swaps and Derivatives Association Master Agreements (“ISDA Master Agreements”) that establish standard terms for the derivative contracts and inter-creditor agreements with the lenders whereby any credit exposure related to the derivative contracts entered into by us is secured by the collateral and backed by the guarantees supporting the 2018 Credit Facility.

Fees paid in connection with the 2018 Credit Facility totaled approximately $824,000, of which $134,000 was associated with the term loan. The current portion of unamortized fees associated with the credit facility is included in prepaid expenses, deposits and other current assets and the non-current portion is included in other non-current assets. The unamortized portion associated with the term loan was $22,000 as of March 31, 2020 and is directly offset against the loan in current liabilities. As of March 31, 2020, we had unamortized deferred issuance costs of approximately $476,000 associated with the credit facility. During the three months ended March 31, 2020 and 2019, we amortized approximately $66,000 and $63,000, respectively, as interest expense associated with the 2018 Credit Facility.

Old Ironsides Notes

On December 31, 2018, in connection with our acquisition (the “OIE Membership Acquisition”) of all of the Class A Units of Carbon Appalachia from Old Ironside Fund II-A Portfolio Holding Company, LLC, a Delaware limited liability company, and Old Ironside Fund II-B Portfolio Holding Company, LLC, a Delaware limited liability company (collectively, “Old Ironsides”), we delivered unsecured, promissory notes in the aggregate original principal amount of approximately $25.1 million to Old Ironsides (the “Old Ironsides Notes”). The Old Ironsides Notes bear interest at 10.0% per annum and have a term of five years, the first three of which require interest-only payments at the end of each calendar quarter beginning with the quarter ending March 31, 2019. At the end of the three-year interest-only period, the then current outstanding principal balance and interest is to be paid in 24 equal monthly payments. The Old Ironsides Notes also require mandatory prepayments upon the occurrence of certain subsequent liquidity events. A mandatory, one-time principal reduction payment in the aggregate amount of $2.0 million was made to Old Ironsides on February 1, 2019.

The interest payable under the Old Ironsides Notes can be paid-in-kind at the election of the Company. This provision allows the Company to increase the principal balance associated with the Old Ironsides Notes. This election creates a second tranche of principal, which bears interest at 12.0% per annum. For the three months ended March 31, 2020, the Company elected payment-in-kind interest of approximately $662,000.

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Carbon California

The table below summarizes the outstanding notes payable – related party:

(in thousands)	March 31, 2020			December 31, 2019
Senior Revolving Notes, related party, due February 15, 2022	$	34,700		$	33,000
Subordinated Notes, related party, due February 15, 2024		13,000			13,000
Total principal		47,700			46,000
Less: Deferred notes costs		(164	)		(175	)
Less: unamortized debt discount		(1,019	)		(1,084	)
Total notes payable – related party	$	46,517		$	44,741

Senior Revolving Notes, Related Party

On February 15, 2017, Carbon California entered into a Note Purchase Agreement (the “Note Purchase Agreement”) for the issuance and sale of Senior Secured Revolving Notes to Prudential with an initial revolving borrowing capacity of $25.0 million which mature on February 15, 2022 (the “Senior Revolving Notes”). The Company is not a guarantor of the Senior Revolving Notes. The closing of the Note Purchase Agreement on February 15, 2017 resulted in the sale and issuance by Carbon California of Senior Revolving Notes in the 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. As of March 31, 2020, the borrowing base was $45.0 million, of which $34.7 million was outstanding. On April 1, 2020, the borrowing base was redetermined and reduced to $40.0 million.  

Carbon California may elect to incur interest at either (i) 5.50% plus LIBOR or (ii) 4.50% plus the Prime Rate (which is defined as the interest rate published daily by JPMorgan Chase Bank, N.A.). As of December 31, 2019, the effective borrowing rate for the Senior Revolving Notes was 7.10%. In addition, the Senior Revolving Notes include a commitment fee for any unused amounts at 0.50% as well as an annual administrative fee of $75,000, payable on February 15 each year.

The Senior Revolving Notes are secured by all the assets of Carbon California. The Senior Revolving Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated proved developed production at such time for year one, two and three at a rate of 75%, 65% and 50%, respectively. Carbon California may make principal payments in minimum installments of $500,000. Distributions to equity members are generally restricted.

Carbon California incurred fees directly associated with the issuance of the Senior Revolving Notes and amortizes these fees over the life of the Senior Revolving Notes. The current portion of these fees are included in prepaid expenses and deposits and the long-term portion is included in other non-current assets for a combined value of approximately $528,000. For the three months ended March 31, 2020 and 2019, Carbon California amortized fees of $70,000 and $74,000, respectively.

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

Subordinated Notes, Related Party

On February 15, 2017, Carbon California entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Prudential Capital Energy Partners, L.P. for the issuance and sale of Subordinated Notes due February 15, 2024, bearing interest of 12.0% per annum (the “Subordinated Notes”). The Company is not a guarantor of the Subordinated Notes. The closing of the Securities Purchase Agreement on February 15, 2017 resulted in the sale and issuance by Carbon California of Subordinated Notes in the original principal amount of $10.0 million, all of which remains outstanding as of March 31, 2020.

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Prudential received an additional 1,425 Class A Units, representing 5.0% of the total sharing percentage, for the issuance of the Subordinated Notes. Carbon California valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the outstanding Subordinated Notes of $10.0 million. The Company then allocated the non-cash value of the units of approximately $1.3 million, which was recorded as a discount to the Subordinated Notes. As of March 31, 2020, Carbon California had an outstanding discount of approximately $691,000, which is presented net of the Subordinated Notes within Notes payable-related party on the unaudited condensed consolidated balance sheets. During the three months ended March 31, 2020, Carbon California amortized $45,000 and $45,000, respectively, associated with the Subordinated Notes.

The Subordinated Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production at such time for year one, two and three at a rate of 67.5%, 58.5% and 45.0%, respectively.

Prepayment of the Subordinated Notes is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is not subject to a prepayment fee after February 17, 2020. Distributions to equity members are generally restricted. 

2018 Subordinated Notes, Related Party

On May 1, 2018, Carbon California entered into an agreement with Prudential for the issuance and sale of $3.0 million in subordinated notes due February 15, 2024, bearing interest of 12.0% per annum (the “2018 Subordinated Notes”), of which $3.0 million remains outstanding as of March 31, 2020.

Prudential received 585 Class A Units, representing an approximate 2.0% additional sharing percentage, for the issuance of the 2018 Subordinated Notes. Carbon California valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the outstanding 2018 Subordinated Notes of $3.0 million. The Company then allocated the non-cash value of the units of approximately $490,000, which was recorded as a discount to the 2018 Subordinated Notes. As of March 31, 2020, Carbon California had an outstanding discount of $328,000 associated with these notes, which is presented net of the 2018 Subordinated Notes within Notes payable - related party on the unaudited condensed consolidated balance sheets. During the three months ended March 31, 2020 and 2019, Carbon California amortized $21,000 and $21,000, respectively, associated with the 2018 Subordinated Notes.

The 2018 Subordinated Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production at such time for year one, two and three at a rate of 67.5%, 58.5% and 45.0%, respectively.

Prepayment of the 2018 Subordinated Notes is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is not subject to a prepayment fee after February 17, 2020. Distributions to equity members are generally restricted.

Restrictions and Covenants

The Senior Revolving Notes, Subordinated Notes and 2018 Subordinated Notes contain affirmative and negative covenants that, among other things, limit Carbon California’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 our affiliates; (viii) enter into sales-leaseback transactions; (ix) make optional or voluntary payments of debt; (x) change the nature of our business; (xi) change our fiscal year to make changes to the accounting treatment or reporting practices; (xii) amend constituent documents; and (xiii) enter into certain hedging transactions.

In December 2019, Carbon California amended the Senior Revolving Notes, the Subordinated Notes and the 2018 Subordinated Notes to amend the total leverage ratio and senior leverage ratio, effective September 30, 2019. The Senior Revolving Notes were also amended to provide a mechanism to determine a successor reference rate to LIBOR.

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The affirmative and negative covenants are subject to various exceptions, including basket amounts and acceptable transaction levels. In addition, (i) the Senior Revolving Notes require at December 31, 2019 Carbon California’s compliance with (A) a maximum Debt/EBITDA ratio of 4.5 to 1.0 (B) a maximum Senior Revolving Notes/EBITDA ratio of 3.5 to 1.0 and (C) a minimum interest coverage ratio of 2.0 to 1 and (ii) the Subordinated Notes require at December 31, 2019 Carbon California’s compliance with (A) a maximum Debt/EBITDA ratio of 5.18 to 1.0, (B) a maximum Senior Revolving Notes/EBITDA ratio of 4.03 to 1.0, (C) a minimum interest coverage ratio of 1.6 to 1.0, (D) an asset coverage test whereby indebtedness may not exceed the product of 0.65 times Adjusted PV-10 of proved developed reserves set forth in the most recent reserve report, (E) maintenance of a minimum borrowing base of $30.0 million under the Senior Revolving Notes and (F) a minimum current ratio of 0.85 to 1.00.

As of March 31, 2020, Carbon California was not in compliance with its Senior Revolving Notes/EBITDA ratio. We are currently negotiating an amendment to the covenant requirements with Prudential and are confident we will be successful in amending the covenants. While we have historically been successful in renegotiating covenant requirements with our lenders, there can be no assurance that we will be able to do so successfully in the future.

NOTE 7 – REVENUE

The following tables present our disaggregated revenue by primary region within the United States and major product line for the three months ended March 31, 2020 and 2019 (in thousands):

	Appalachian and Illinois Basins				Ventura Basin				Total
	Three Months Ended March 31,				Three Months Ended March 31,				Three Months Ended March 31,
	2020		2019		2020		2019		2020		2019
Natural gas sales	$	8,019	$	18,792	$	415	$	524	$	8,434	$	19,316
Natural gas liquids sales		-		-		152		247		152		247
Oil sales		1,147		1,537		6,069		7,452		7,216		8,989
Transportation and handling		633		734		-		-		633		734
Marketing gas sales		6,318		4,944		-		-		6,318		4,944
Total	$	16,117	$	26,007	$	6,636	$	8,223	$	22,753	$	34,230

We record revenue in the month production is delivered to the purchaser, but settlement statements may not be received until 30 to 90 days after the month of production. As such, we estimate the production delivered and the related pricing. The estimated revenue is recorded within Accounts receivable – Revenue on the consolidated balance sheets. Any differences between our initial estimates and actuals are recorded in the month payment is received from the customer. These differences have not historically been material.

NOTE 8 – STOCK-BASED COMPENSATION PLANS

We have three stock plans, the Carbon 2011 Stock Incentive Plan, the Carbon 2015 Stock Incentive Plan and the Carbon 2019 Long Term Incentive Plan (collectively the “Carbon Plans”). The Carbon 2019 Long Term Incentive Plan was approved by the Company’s stockholders in May 2019. The Carbon Plans provide for the issuance of approximately 1.6 million shares of common stock to our officers, directors, employees or consultants eligible to receive the awards under the Carbon Plans.

The Carbon Plans provide for the granting of incentive stock options, non-qualified stock options, restricted stock awards, performance awards and phantom stock awards, or a combination of the foregoing, to employees, officers, directors or consultants, provided that only employees may be granted incentive stock options and directors may only be granted restricted stock awards and phantom stock awards.

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Restricted Stock

As of March 31, 2020, approximately 748,000 shares of restricted stock have been granted under the terms of the Carbon Plans. Restricted stock awards for employees vest ratably over a three-year service period or cliff vest at the end of a three-year service period. For non-employee directors, the awards vest upon the earlier of a change in control of us or the date their membership on the Board of Directors is terminated other than for cause as defined in the agreement. During the three months ended March 31, 2020, approximately 20,000 restricted stock units vested.

Compensation costs recognized for restricted stock grants were approximately $204,000 and $179,000 for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, there was approximately $1.3 million unrecognized compensation costs related to these restricted stock grants which we expect to be recognized over the next 6.0 years.

Restricted Performance Units

As of March 31, 2020, approximately 699,000 shares of performance units have been granted under the terms of the Carbon Plans. Performance units represent a contractual right to receive one share of our 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 growth of certain performance measures over a defined period of time as well as, in some cases, continued service requirements. During the three months ended March 31, 2020, approximately 83,000 performance units vested.

We account for the performance units granted during 2018 and 2019 at their fair value determined at the date of grant, which were $9.80 and $10.00 per share, respectively. The final measurement of compensation cost will be based on the number of performance units that ultimately vest. At March 31, 2020, we estimated that none of the performance units granted in 2019 and 2018 would vest, and, accordingly, no compensation cost has been recorded for these performance units. As of March 31, 2020, if a change in control and other performance provisions pursuant to the terms and conditions of these award agreements as defined in the agreement were met in full, the estimated unrecognized compensation cost related to unvested performance units would be approximately $3.2 million.

NOTE 9 – EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders for the period by the basic weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share includes potentially issuable shares consisting primarily of non-vested restricted stock and contingent restricted performance units, using the treasury stock method. In periods when we report a net loss, all common stock equivalents are excluded from the calculation of diluted weighted average shares outstanding because they would have an anti-dilutive effect, meaning the loss per share would be reduced.

For the three months ended March 31, 2019, approximately 269,000 shares of restricted stock, respectively, were considered anti-dilutive and were excluded from the computation of diluted earnings per share. For the three months ended March 31, 2020 and 2019, approximately 193,000 and 200,000 shares of restricted performance units, respectively, subject to future contingencies were excluded from the computation of basic and diluted earnings per share.

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

	Three Months Ended March 31,
(in thousands, except per share amounts)	2020		2019
Net income (loss) attributable to common stockholders, basic and diluted		9,724		(4,175	)
Weighted-average number of common shares outstanding, basic		7,809		7,663
Add dilutive effects of non-vested shares of restricted stock and restricted performance units		281		-
Weighted-average number of common shares outstanding, diluted		8,090		7,663
Net income (loss) per common share, basic	$	1.25	$	(0.54	)
Net income (loss) per common share, diluted	$	1.20	$	(0.54	)

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Series B Convertible Preferred Stock - Related Party

In May 2018, we raised $5.0 million through the issuance of 50,000 shares of Series B Convertible Preferred Stock, par value $0.01 per share (“Preferred Stock”) to Yorktown. The Preferred Stock converts into common stock at the election of the holder or will automatically convert into shares of our common stock upon completion of a qualifying equity financing event. The number of shares of common stock issuable upon conversion is dependent upon the price per share of common stock issued in connection with any such qualifying equity financing but has a floor conversion price equal to $8.00 per share. The conversion ratio at which the Preferred Stock will convert into common stock is equal to an amount per share of $100 plus all accrued but unpaid dividends payable in respect thereof divided by the greater of (i) $8.00 per share or (ii) the price that is 15.0% less than the lowest price per share of shares sold to the public in the next equity financing. Using the floor of $8.00 per share would yield 12.5 shares of common stock for every unit of Preferred Stock. The conversion price will be proportionately increased or decreased to reflect changes to the outstanding shares of common stock, such as the result of a combination, reclassification, subdivision, stock split, stock dividend or other similar transaction involving the common stock. Additionally, after the third anniversary of the issuance of the Preferred Stock, we have the option to redeem the shares for cash.

The Preferred Stock accrues cash dividends at a rate of 6.0% of the initial issue price of $100 per share per annum. The holders of the Preferred Stock are entitled to the same number of votes of common stock that such share of Preferred Stock would represent on an as converted basis. The holders of the Preferred Stock receive liquidation preference based on the initial issue price of $100 per share plus a preferred return over common stockholders and the holders of any junior ranking stock. The preferred return was approximately $599,000 as of March 31, 2020 and increased by $75,000 during the three months ended March 31, 2020.

NOTE 10 – INCOME TAXES

We recognize 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. We have net operating loss carryforwards available in certain jurisdictions to reduce future taxable income. Future tax benefits from 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 March 31, 2020, the Company has established a full valuation allowance against the balance of net deferred tax assets.

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NOTE 11 – FAIR VALUE MEASUREMENTS

The following table presents our financial assets and liabilities that were accounted for at fair value on a recurring basis by level:

(in thousands)	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
March 31, 2020
Assets:
Commodity derivatives	$	-	$	23,185	$	-	$	23,185
Liabilities:
Commodity derivatives	$	-	$	25	$	-	$	25
December 31, 2019
Assets:
Commodity derivatives	$	-	$	7,079	$	-	$	7,079
Liabilities:
Commodity derivatives	$	-	$	556	$	-	$	556

Commodity Derivative

As of March 31, 2020, our commodity derivative financial instruments are comprised of natural gas and oil swaps and costless collars. The fair values of these agreements are determined under an income valuation technique. The valuation model requires a variety of inputs, including contractual terms, published forward prices, volatilities for options and discount rates, as appropriate. Our estimates of fair value of derivatives include consideration of the counterparty’s credit worthiness, our credit worthiness and the time value of money. The consideration of these factors results in an estimated exit-price for each derivative asset or liability under a marketplace participant’s view. All significant inputs are observable, either directly or indirectly; therefore, our derivative instruments are included within the Level 2 fair value hierarchy.

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

Certain assets and liabilities are measured at fair value on a non-recurring basis. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances. The fair value of the following assets and liabilities are based on unobservable pricing inputs and therefore, are included within the Level 3 fair value hierarchy.

Firm transportation contracts. We assume, at times, certain firm transportation contracts as part of our acquisitions of oil and natural gas properties. The fair value of the firm transportation contract obligations was determined based upon the contractual obligations assumed by us and discounted based upon our effective borrowing rate.

Debt Discount. The fair value of the debt discount from the 1,425 and 585 additional Class A Units issued in connection with the Subordinated Notes and 2018 Subordinated Notes was $1.3 million and $490,000, respectively. The debt discount was based on the relative fair value of Class A Units. Class A Units were issued contemporaneously at $1,000 per Class A Unit.

Asset Retirement Obligations. The fair value of our asset retirement obligation liability is recorded in the period in which it is incurred or assumed by taking into account the cost of abandoning oil and gas wells ranging from $20,000 to $45,000, which is based on our historical experience and industry expectations for similar work; the estimated timing of reclamation ranging from one to 75 years based on estimates from reserve engineers; an inflation rate between 1.52% to 2.79%; and a credit adjusted risk-free rate between 3.28% to 8.27%, which takes into account our credit risk and the time value of money.

NOTE 12 – COMMODITY DERIVATIVES

We historically use commodity-based derivative contracts to manage exposures to commodity price on a portion of our oil and natural gas production. We do not hold or issue derivative financial instruments for speculative or trading purposes. We also have entered 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. These contracts are not recorded at fair value in the unaudited condensed consolidated financial statements.

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We have entered into swap and costless collar derivative agreements to hedge a portion of our oil and natural gas production through December 2022. As of March 31, 2020, these derivative agreements consisted of the following:

	Natural Gas Swaps				Natural Gas Collars
			Weighted Average				Weighted Average Price
Year	MMBtu		Price (a)		MMBtu		Range (a)
2020		9,262,000	$	2.70		2,541,000	$	2.10 – $2.75
2021		6,448,000	$	2.58		6,395,000	$	2.00 – $2.75

	Oil Swaps*								Oil Collars*
Year	WTI Bbl		Weighted Average Price (b)		Brent Bbl		Weighted Average Price (c)		WTI Bbl		Weighted Average Price (b)		Brent Bbl		Weighted Average Price (c)
2020		98,844	$	55.37		172,403	$	64.58		20,600	$	47.00 - $60.15		46,700	$	47.00 - $75.00
2021		-	$	-		86,341	$	67.12		66,200	$	47.00 - $60.15		190,000	$	47.00 - $75.00
2022		-	$	-		-	$	-		-	$	-		199,900	$	50.00 - $61.00

*	Includes 100% of Carbon California’s outstanding derivative hedges at March 31, 2020, and not our proportionate share.
(a)	NYMEX Henry Hub Natural Gas futures contracts for the respective period.
(b)	NYMEX Light Sweet Crude West Texas Intermediate futures contracts for the respective period.
(c)	Brent future contracts for the respective period.

For our swap instruments, we receive a fixed price for the hedged commodity and pay 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 condensed consolidated balance sheets. These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

(in thousands)	March 31, 2020		December 31, 2019
Commodity derivative contracts:
Commodity derivative asset	$	18,078	$	5,915
Commodity derivative asset – non-current	$	5,107	$	1,164
Commodity derivative liability	$	-	$	469
Commodity derivative liability – non-current	$	25	$	87

The table below summarizes the commodity settlements and unrealized gains and losses related to the Company’s derivative instruments for the three months ended March 31, 2020 and 2019. Changes in the fair value of commodity derivative contracts are recognized in revenues in the unaudited condensed consolidated statements of operations and gains and losses are included within the cash flows from operating activities in the unaudited condensed consolidated statements of cash flows. 

	Three Months Ended March 31,
(in thousands)	2020		2019
Commodity derivative contracts:
Settlement gain (loss)	$	3,078	$	(456	)
Unrealized gain (loss)		16,636		(8,850	)
Total commodity derivative gain (loss)	$	19,714	$	(9,306	)

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Commodity derivative settlement gains and losses are included within the cash flows from operating activities in the unaudited condensed consolidated statements of cash flows.

We net our derivative instrument fair value amounts pursuant to ISDA Master Agreements, which provide 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 effect of netting arrangements for recognized derivative assets and liabilities that are subject to master netting arrangements or similar arrangements in the unaudited condensed consolidated balance sheet as of March 31, 2020:

							Net
	Gross						Recognized
	Recognized			Gross			Fair Value
	Assets/			Amounts			Assets/
Balance Sheet Classification (in thousands)	Liabilities			Offset			Liabilities
Commodity derivative assets:
Commodity derivative asset	$	18,441		$	(363	)	$	18,078
Commodity derivative asset – non-current		7,144			(2,037	)		5,107
Total derivative assets	$	25,585		$	(2,400	)	$	23,185
Commodity derivative liabilities:
Commodity derivative liability	$	(363	)	$	363		$	-
Commodity derivative liability – non-current		(2,062	)		2,037			(25	)
Total derivative liabilities	$	(2,425	)	$	24,00		$	(25	)

Due to the volatility of oil and natural gas prices, the estimated fair value of our derivatives is subject to fluctuations from period to period.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Delivery Commitments

We have entered into firm transportation contracts to ensure the transport for certain of our gas production to purchasers. Firm transportation volumes and the related demand charges for the remaining term of these contracts as of March 31, 2020 are summarized in the table below.

Period	Dekatherms per day		Demand Charges
Apr 2020 – May 2020		57,791	$	0.20 - 0.56
Jun 2020 – Oct 2020		56,641	$	0.20 - 0.56
Nov 2020 – Aug 2022		50,341	$	0.20 - 0.56
Sep 2022 – May 2027		30,990	$	0.20 - 0.21
Jun 2027 – May 2036		1,000	$	0.20

As of March 31, 2020, the remaining commitment related to the firm transportation contracts assumed in the EXCO Acquisition in October 2016 and the OIE Membership Acquisition in December 2018 is $13.6 million and reflected in the Company’s unaudited condensed consolidated balance sheet. These contractual obligations are reduced monthly as the Company pays these firm transportation obligations.

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Natural gas processing agreement

We have entered into an initial five-year gas processing agreement expiring in 2022. We have an option to extend the term of the agreement by another five years. The related demand charges for volume commitments over the remaining term of the agreement are approximately $1.8 million per year. We will pay a processing fee of $2.50 per Mcf for the term of the agreement, with a minimum annual volume commitment of 720,000 Mcf.

Capital Commitments

As of March 31, 2020, we had no capital commitments.

Litigation

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.

NOTE 14 – SUPPLEMENTAL CASH FLOW DISCLOSURE

Supplemental cash flow disclosures for the three months ended March 31, 2020 and 2019 are presented below:

	Three Months Ended March 31,
(in thousands)	2020			2019
Cash paid for interest	$	1,794		$	1,875
Non-cash transactions:
Capital expenditures included in accounts payable and accrued liabilities	$	(564	)	$	(82	)
Increase in asset retirement obligations	$	7		$	-

NOTE 15 – SUBSEQUENT EVENTS

Contemplated Transactions

On April 7, 2020, Carbon Energy Corporation, together with Nytis USA (the “Sellers”), and certain of the Company’s other direct and indirect wholly owned subsidiaries, entered into a Membership Interest Purchase Agreement (“MIPA”) to sell all of the issued and outstanding membership interests of Carbon Appalachia and Nytis LLC to Diversified Gas & Oil Corporation for $110.0 million, subject to customary purchase price adjustments, and a contingent payment of up to $15.0 million (“Contemplated Transactions”). The assets contained in the Contemplated Transactions comprise all of the Company’s assets in the Appalachian and Illinois basin. If the Sellers terminate the MIPA under certain circumstances, the Sellers may be required to pay a termination fee of $3.8 million. The transaction is expected to close during the second quarter of 2020.

Upon closing of the Contemplated Transactions, the Company’s remaining assets will be located solely in the Ventura Basin of California. Proceeds from the Contemplated Transactions will be used to settle all outstanding amounts associated with the 2018 Credit Facility and a portion of the Old Ironsides Notes.

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COVID-19

Like other oil and gas companies, our business is being adversely affected by the COVID-19 pandemic and measures being taken to mitigate its impact. The pandemic has resulted in widespread adverse impacts on the global economy and on our employees, customers, suppliers and other parties with whom we have business relations. As the coronavirus pandemic and government responses are rapidly evolving, the extent of the impact on domestic exploration and production companies remains unknown. Further, the impact of the pandemic, including the resulting significant reduction in global demand for oil and gas, coupled with the sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of the Organization of the Petroleum Exporting Countries (“OPEC”) and other foreign, oil-exporting countries is expected to lead to significant global economic contraction generally and in our industry in particular. We anticipate that our business, financial condition and results of operations may be materially and adversely impacted as a result of these developments.

We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

Oil Pricing Environment

In the midst of the ongoing COVID-19 pandemic, oil prices declined significantly due to potential increases in supply emanating from the disagreement on production cuts among members of OPEC and certain non-OPEC, oil-producing countries. The resulting supply and demand imbalance is having disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies. These industry conditions, coupled with those resulting from the COVID-19 pandemic, could lead to significant global economic contraction generally and in our industry in particular. Although OPEC agreed in April to cut production, the responses of oil and gas producers to the lower demand for, and price of, oil, natural gas and NGLs are constantly evolving and remain uncertain. In addition, the dramatic decrease in oil and gas prices could have substantial negative implications for our revenue sources that are related to or underpinned by commodity prices. As a result, these factors could have a material adverse effect on our business, future results of operations, financial position or cash flows.

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

The following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions, and you should not construe these statements either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors may cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. A description of material factors known to us that may cause our results to vary or may cause management to deviate from its current plans and expectations, is set forth under “Risk Factors.” The following discussion should be read in conjunction with “Forward-Looking Statements,” “Risk Factors” and our unaudited condensed consolidated financial statements, including the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the information included or incorporated by reference in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Annual Report on Form 10-K”).

General Overview

Carbon Energy Corporation, a Delaware corporation formed in 2007, is an independent oil and natural gas company engaged in the acquisition, exploration, development and production of oil, natural gas and natural gas liquids (“NGLs”) properties located in the United States. We currently develop and operate oil and gas properties in the Appalachian Basin in Kentucky, Ohio, Tennessee, Virginia and West Virginia, in the Illinois Basin in Illinois and Indiana, and in the Ventura Basin in California through our wholly-owned and majority-owned subsidiaries. We own 100% of the outstanding interests of Carbon Appalachia, and Nytis Exploration (USA) Inc., a Delaware corporation (“Nytis USA”), which in turn owns 98.11% of Nytis Exploration Company LLC, a Delaware limited liability company (“Nytis LLC”). Nytis LLC holds interests in our operating subsidiaries. We own 53.92% of Carbon California which we consolidate for financial reporting purposes as a majority-owned subsidiary. We focus on conventional and unconventional reservoirs, including shale, tight sands and coalbed methane.

At March 31, 2020, our proved developed reserves were comprised of 14% oil and NGLs and 86% 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:

● Acquire and develop oil and gas producing properties that deliver attractive risk adjusted rates of return, provide for field development projects, and complement our existing asset base; and

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

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Factors That Significantly Affect Our Financial Condition and Results of Operations

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 due to a variety of factors, including but not limited to, prevailing economic conditions, supply and demand of hydrocarbons in the marketplace, actions by speculators, and geopolitical events such as wars or natural disasters.

Like other oil and gas companies, our business is being adversely affected by the COVID-19 pandemic and measures being taken to mitigate its impact. The pandemic has resulted in widespread adverse impacts on the global economy and on our employees, customers, suppliers and other parties with whom we have business relations. As the coronavirus pandemic and government responses are rapidly evolving, the extent of the impact on domestic exploration and production companies remains unknown. Further, the impact of the pandemic, including the resulting significant reduction in global demand for oil and gas, coupled with the sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of the Organization of the Petroleum Exporting Countries (“OPEC”) and other foreign, oil-exporting countries is expected to lead to significant global economic contraction generally and in our industry in particular. We anticipate that our business, financial condition and results of operations may be materially and adversely impacted as a result of these developments.

We have modified certain business and workforce practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. However, the quarantine of personnel or the inability to access our facilities or customer sites could adversely affect our operations. Additionally, currently many of our employees are working remotely. We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties.

In the midst of the ongoing COVID-19 pandemic, oil prices declined significantly due to potential increases in supply emanating from the disagreement on production cuts among members of OPEC and certain non-OPEC, oil-producing countries. The resulting supply and demand imbalance is having disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies. These industry conditions, coupled with those resulting from the COVID-19 pandemic, could lead to significant global economic contraction generally and in our industry in particular. Although OPEC agreed in April to cut production, the responses of oil and gas producers to the lower demand for, and price of, oil, natural gas and NGLs are constantly evolving and remain uncertain. In addition, the dramatic decrease in oil and gas prices could have substantial negative implications for our revenue sources that are related to or underpinned by commodity prices. As a result, these factors could have a material adverse effect on our business, future results of operations, financial position or cash flows.

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For example, in March 2020, the OPEC price war, together with the decline in demand due to slowed economic conditions attributable to COVID-19, contributed to a decline in the price of crude oil from $61.14 per barrel on December 31, 2019 to $20.48 per Bbl on March 31, 2020. The following table highlights the quarterly average of NYMEX oil and natural gas prices for the last five calendar quarters: 

	2020		2019
	Q1		Q1		Q2		Q3		Q4
Oil (Bbl)	$	45.78	$	54.90	$	59.96	$	56.43	$	56.87
Natural Gas (MMBtu)	$	1.90	$	3.00	$	2.57	$	2.38	$	2.40

Low oil, NGL and natural gas prices may decrease our revenues, may reduce the amount of oil, NGL and natural gas that we can produce economically and potentially lower our oil and natural gas reserves. Our estimated proved reserves may decrease if the economic life of underlying producing wells is shortened as a result of lower oil, NGL and natural gas prices. A substantial or extended decline in oil, NGL 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, NGL and natural gas prices may also reduce the amount of borrowing base under our bank credit facilities, which are determined at the discretion of our lenders and may make it more difficult to comply with the covenants and other restrictions under our bank credit facilities. 

We use the full cost method of accounting for our oil and gas properties and perform a ceiling test quarterly. The ceiling calculation utilizes a rolling 12-month average commodity price. We did not recognize an impairment for the three months ended March 31, 2020 and 2019.

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.

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.

We use commodity derivative instruments, such as swaps and costless collars, to manage and reduce price volatility and other market risks associated with our production. These arrangements are structured to reduce our exposure to commodity price decreases, but they can also limit the benefit we might otherwise receive from commodity price increases.

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 facilities, sales of properties or the issuance of additional equity or debt.

Operational Highlights

During 2019, we concentrated our efforts on the acquisition and development of producing properties through the acquisitions consummated by Carbon California and Carbon Appalachia in 2018. Our field development activities have consisted principally of oil-related drilling, remediation and return to production and recompletion projects in California. We have focused on operating efficiencies and reduction of operating expenses, optimization of natural gas gathering and compression facilities, greater flexibility in transporting our production to markets with more favorable pricing, and the identification of development project opportunities to provide more efficient and lower-cost operations. During the second half of 2019, we executed a two-well drilling program in California, and as a result of such drilling program, one well was completed in the fourth quarter of 2019 and the other was completed during the first quarter of 2020. As a result of the recent volatility and historically low oil prices, our remaining 2020 drilling program in California is under review.

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As of March 31, 2020, we owned working interests in approximately 7,200 gross wells (6,600 net), royalty interests located primarily in California, Illinois, Indiana, Kentucky, Ohio, Tennessee, Virginia, and West Virginia and held leasehold positions in approximately 313,500 net developed acres and approximately 1,254,000 net undeveloped acres. Approximately 70% of the undeveloped acreage is held by production and of the remaining undeveloped acreage, approximately 88% have lease terms of greater than five years remaining in the primary term or contractual extension periods.

Our oil and natural gas assets contain an inventory of field development projects which may provide growth opportunities when oil and natural gas commodity prices warrant capital investment to develop the properties.

We are continually evaluating producing property and land acquisition opportunities in our operating areas which would expand our operations and provide attractive risk adjusted rates of return on invested capital. The drilling of additional oil and natural gas wells is contingent on our expectation of future oil and natural gas prices. 

Principal Components of Our Cost Structure

● Lease operating expenses. Lease operating expenses are costs incurred to bring oil and natural gas out of the ground, together with the costs incurred to maintain our producing properties. Such costs include maintenance, repairs and workover expenses related to our oil and natural gas properties.

● Pipeline operating expenses. Pipeline operating expenses are costs incurred to accept, transport and deliver gas across our midstream assets.

● Transportation and gathering costs. Transportation and gathering costs are incurred to bring oil and natural gas to market. Gathering refers to the utilization of low-pressure pipelines to move the oil and natural gas from the wellhead into a transportation pipeline, or in case of oil, into a tank battery from which sales of oil are made.

● Production and property taxes.  Production and property taxes consist of severance, property and ad valorem taxes. Production and severance taxes are paid on oil and natural gas produced based on a percentage of market prices or at fixed rates established by federal, state or local taxing authorities. Ad valorem tax rates, which can fluctuate by year, are determined by individual counties where we have production and are assessed on our sales one or two years in arrears depending on the location of the production.

● Marketing gas purchases.  Marketing gas purchases consist of third-party purchases of gas associated with our midstream operations.

● Depreciation, amortization and impairment. We use the full cost method of accounting for oil and gas properties. 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. We perform a quarterly ceiling test based on average first-of-the-month prices during the twelve-month period prior to the reporting date. The full cost ceiling test is a limitation on capitalized costs prescribed by the SEC. The ceiling test is not a fair value-based measurement; rather, it is a standardized mathematical calculation that compares the net capitalized costs of our full cost pool to estimated discounted cash flows. Should the net capitalized cost exceed the sum of the estimated discounted cash flows, a ceiling test write-down would be recognized to the extent of the excess.

● Depletion. Depletion is calculated using capitalized costs in the full cost pool, including estimated asset retirement costs and estimated future expenditures to be incurred in developing proved reserves, net of estimated salvage values and depleted based on a unit-of-production method.

● General and administrative expense.  General and administrative expense includes payroll and benefits for our corporate staff, non-cash stock-based compensation, costs of maintaining our offices, costs of managing our production, marketing, development and acquisition operations, franchise taxes, audit, tax, legal and other professional fees and legal compliance.

● Interest expense.  We finance a portion of our working capital requirements for drilling and completion activities and acquisitions with borrowings under our bank credit facilities. As a result, we incur interest expense that is affected by both fluctuations in interest rates and our financing decisions. Interest expense, net is net of interest income.

● Income tax expense.  We are subject to state and federal income taxes but typically have not been in a tax paying position for regular federal income taxes, primarily due to the current deductibility of intangible drilling costs (“IDC”) and until 2023 tangible drilling costs and net operating loss (“NOL”) carryforwards. We pay alternative minimum tax, state income or franchise taxes where IDC or NOL deductions do not exceed taxable income or where state income or franchise taxes are determined on another basis.

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Results of Operations

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

The following discussion and analysis relates to items that have affected our results of operations for the three months ended March 31, 2020 and 2019. The following table sets forth, for the periods presented, selected historical unaudited condensed consolidated statements of operations and production data. The information contained in the table below should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto and the information under “Forward Looking Statements” below.

	Three Months Ended
	March 31,						Percent
(in thousands, except production and per unit data)	2020			2019			Change
Revenue:
Natural gas sales	$	8,434		$	19,316			(56	%)
Natural gas liquids sales		152			247			(38	%)
Oil sales		7,216			8,989			(20	%)
Transportation and handling		633			734			(14	%)
Marketing gas sales		6,318			4,944			28	%
Commodity derivative gain (loss)		19,714			(9,306	)		*
Other income		(2	)		26			*
Total revenues		42,465			24,950			70	%
Expenses:
Lease operating expenses		7,372			6,616			11	%
Pipeline operating expenses		2,692			3,085			(13	%)
Transportation costs		2,576			1,669			54	%
Production and property taxes		10			2,010			(100	%)
Marketing gas purchases		3,472			6,302			(45	%)
General and administrative		3,303			4,689			(30	%)
Depreciation, depletion and amortization		3,811			3,980			(4	%)
Accretion of asset retirement obligations		478			394			21	%
Total expenses		23,714			28,745			(18	%)
Operating income (loss)	$	18,751		$	(3,795	)		*
Other income and (expense):
Interest expense		(2,872	)		(2,914	)		*
Equity investment income		(421	)		19			*
Total other expense	$	(3,293	)	$	(2,895	)		*
Production data:
Natural gas (Mcf)		5,240,381			5,544,052			(5	%)
Oil (Bbl)		146,525			147,492			(1	%)
Natural gas liquids (Bbl)		12,363			13,210			(6	%)
Combined (Mcfe)		6,193,709			6,508,264			(5	%)
Average prices before effects of hedges:
Natural gas (per Mcf)	$	1.61		$	3.48			(54	%)
Oil (per Bbl)	$	49.24		$	60.95			(19	%)
Natural gas liquids (per Bbl)	$	12.30		$	18.67			(34	%)
Combined (per Mcfe)	$	2.55		$	4.39			(42	%)
Average prices after effects of hedges**:
Natural gas (per Mcf)	$	2.18		$	3.34			(35	%)
Oil (per Bbl)	$	49.85		$	63.29			(21	%)
Natural gas liquids (per Bbl)	$	12.30		$	18.67			(34	%)
Combined (per Mcfe)	$	3.04		$	4.32			(30	%)
Average costs (per Mcfe):
Lease operating expenses	$	1.19		$	1.02			17	%
Transportation costs	$	0.42		$	0.26			62	%
Production and property taxes	$	0.00		$	0.31			(100	%)
Cash-based general and administrative expenses	$	0.50		$	0.69			(27	%)
Depreciation, depletion and amortization	$	0.61		$	0.61			0	%

*	Not meaningful or applicable
**	Includes effect of settled commodity derivative gains and losses

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Natural gas, natural gas liquids, and oil sales – Sales of natural gas, natural gas liquids and oil decreased approximately $10.9 million for the three months ended March 31, 2020 compared to the same period in 2019, primarily due to a 42% decrease in combined product pricing and a 5% decrease in natural gas, natural gas liquids and oil sales volumes.

Transportation and handling – Revenue from transportation and handling correlates to the price of natural gas, which decreased 54% compared to the same period in 2019.

Marketing gas sales – Sales from marketing gas increased $1.4 million primarily due to an additional storage facility and related contracts.

Commodity derivative gain (loss) – We do not designate our commodity derivatives as cash flow hedges; therefore, they do not receive hedge accounting treatment and all mark-to-market 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 March 31, 2020 and 2019, we had hedging gains of approximately $19.7 million and hedging losses of approximately $9.3 million, respectively. Our derivative gain or loss is primarily due to fair market value adjustments caused by market prices being lower or higher than our contracted hedged prices.

Lease operating expenses – Lease operating expenses increased $756,000 for the three months ended March 31, 2020 primarily due to increasing insurance costs and employee benefits, as well as the timing of non-operated property expenses in 2020 versus 2019.

Pipeline operating expenses – Pipeline operating expenses decreased $393,000 for the three months ended March 31, 2020 as a result of operational focus on efficiency and expense reduction measures.

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Transportation costs – Transportation costs increased $907,000 for the three months ended March 31, 2020 primarily due to a one-time benefit associated with revisions to prior estimates.

Production and property taxes – Production and property taxes decreased $2.0 million for the three months ended March 31, 2020 due to decreased ad valorem estimated tax rates and decreases in commodity prices. Production taxes averaged approximately (1.2%) and 3.4% of product sales for the three months ended March 31, 2020 and 2019, respectively. Production taxes associated with oil production are generally lower on a per Mcfe basis versus gas production. Oil production accounted for approximately 14% of our production mix for the three months ended March 31, 2020 and 2019.

Marketing gas purchases – Marketing gas purchases decreased $2.8 million primarily due to the decrease in natural gas pricing.

Depreciation, depletion and amortization (“DD&A”) – DD&A decreased $169,000 for the three months ended March 31, 2020 primarily due to decreases in our depletable cost base.

General and administrative expenses – General and administrative expenses decreased $1.4 million for the three months ended March 31, 2020 primarily due to a company-wide focus on cost reductions and efficiencies, including decreased reliance on consultants. Cash-based general and administrative expenses for the three months ended March 31, 2020 and 2019 are summarized in the following table:

General and administrative expenses	Three Months Ended March 31,
(in thousands)	2020		2019
General and administrative expenses	$	3,303	$	4,689
Adjustments:
Stock-based compensation		204		222
Cash-based general and administrative expense	$	3,099	$	4,467

Interest expense – Interest expense, net decreased $42,000 for the three months ended March 31, 2020, primarily due to lower outstanding debt balances.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows from operations, borrowings under our credit facilities and Carbon California’s Senior Secured Revolving Notes issued to Prudential with an initial revolving borrowing capacity of $25.0 million which mature on February 15, 2022 (the “Senior Revolving Notes”), and on occasion, the sale of non-core assets. Borrowings under the credit facilities and Senior Revolving Notes may be used to fund field development projects and to fund future complementary acquisitions and for general working capital purposes. We may use other sources of capital, including the issuance of debt or equity securities, to fund acquisitions or maintain financial flexibility.

As of March 31, 2020, our liquidity was $12.0 million, consisting of cash on hand of $1.7 million and $10.3 million of available borrowing capacity on the Senior Revolving Notes. On April 1, 2020, the borrowing base on the Senior Revolving Notes was redetermined and reduced to $40.0 million.  

On February 14, 2020, we amended our 2018 Credit Facility, resulting in a borrowing base of $73.0 million with subsequent borrowing base reductions totaling $6.0 million scheduled through May 1, 2020. As of March 31, 2020, the 2018 Credit Facility had a borrowing base of $71.0 million.

As of March 31, 2020, there was approximately $70.2 million in outstanding borrowings and no borrowing capacity available under the 2018 Credit Facility, after considering letters of credit outstanding. As of March 31, 2020, we were not in compliance with our current ratio financial covenant. However, we anticipate a full payoff of the 2018 Credit Facility as a result of Contemplated Transactions described in Note 15 prior to any potential event of default.

On April 30, 2020, we further amended our 2018 Credit Facility, extending the remaining borrowing base reductions totaling $4.0 million to June 1, 2020 in anticipation of a full payoff of the 2018 Credit Facility as a result of the pending Contemplated Transactions.

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In March 2020, the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) was signed into law in the United States. It is intended to provide economic relief to individuals and businesses affected by the coronavirus pandemic. We are in the process of applying for potential funding that may be available to the Company under the CARES Act or other recently enacted programs; however, there is no guarantee that such funds will be received.

On April 7, 2020, Carbon Energy Corporation, together with Nytis USA (the “Sellers”) and certain of the Company’s other direct and wholly owned subsidiaries, entered into a Membership Interest Purchase Agreement (“MIPA”) to sell all of the issued and outstanding membership interests of Carbon Appalachia and Nytis LLC to Diversified Gas & Oil Corporation (the “Purchaser”) for $110.0 million, subject to customary purchase price adjustments, and a contingent payment of up to $15.0 million (“Contemplated Transactions”). The assets contained in the Contemplated Transactions comprise all of the Company’s assets in the Appalachian and Illinois basin. If the Sellers terminate the MIPA under certain circumstances, they may be required to pay a termination fee of $3.8 million. The transaction is subject to customary conditions, including, among other things, the mailing of an information statement to the Company’s stockholders at least 20 calendar days prior to the closing date in accordance with applicable securities laws, and is expected to close during the second quarter of 2020. In accordance with Rule 14c-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Contemplated Transactions may not be completed until 20 calendar days after the date of mailing of an information statement to the Company’s stockholders.

The Contemplated Transactions constitute a sale of substantially all of the Company’s assets under the Delaware General Corporation Law. Following consummation of the Contemplated Transactions, the Company would continue to own its membership interests in Carbon California and continue to conduct operations in the Ventura Basin in California. Notwithstanding the foregoing, the Company’s Board of Directors is continuously evaluating strategic alternatives for the Company’s business in light of current market and industry conditions.

Upon consummation of the Contemplated Transactions, net of expected purchase price adjustments, the Sellers expect to receive cash proceeds of $105 million, of which $3.3 million will be deposited in an escrow account to support the Sellers’ indemnification obligations and, subject to certain exceptions, released on the 18-month anniversary of the closing. The Sellers intend to use approximately $75.0 million of the proceeds to repay outstanding indebtedness, including accrued interest, under the 2018 Credit Facility, approximately $10.0 million to pay estimated transaction expenses, including legal, accounting and severance and other employment-related costs, and approximately $12.7 million to pay indebtedness under the Old Ironsides Notes. Nytis USA will retain the remaining proceeds, but to the extent these funds are in excess of those required in the operations of Nytis USA, it may distribute those funds to the Company who may use them for general corporate purposes, including the repayment of indebtedness. Yorktown, as the holder of all of the Series B convertible preferred stock, has waived its right to be paid a liquidating distribution of approximately $5.6 million in connection with the closing of the Contemplated Transactions until the payment in full of the Old Ironsides Notes or the earlier termination or cancellation of the Old Ironsides Notes, at which point the liquidating distribution will become immediately due and payable by the Company out of Company’s assets legally available for distribution to its stockholders. Ongoing general and corporate operations will be funded by management fees paid to the Company by Carbon California of approximately $1.2 million annually as well as any proceeds received from the contingent payment associated with the Contemplated Transactions. The contingent payment of up to $15.0 million in the aggregate will be calculated and paid yearly by January 5 of each of 2021, 2022 and 2023 based on the contingent payment calculation for calendar years 2020, 2021 and 2022.

Access to additional capital within the current commodity price environment is limited and the terms of any available capital may not be acceptable to the Company.

Commodity Derivatives

Our exploration, development and acquisition activities may require us to make significant operating and capital expenditures. 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 to moderate the effects of commodity price fluctuations on our cash flow.

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This hedge program mitigates uncertainty regarding cash flow that we will receive with respect to a portion of our expected production through 2022. 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 2019 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. See Note 12 – Commodity Derivatives in the unaudited condensed consolidated financial statements in Item 1 for more information, including our outstanding derivatives.

Sources and Uses of Cash

The following table presents net cash provided by or used in operating, investing and financing activities:

	Three Months Ended
	March 31,
(in thousands)	2020			2019
Net cash provided by operating activities	$	1,277		$	8,311
Net cash used in investing activities	$	(626	)	$	(336	)
Net cash provided by (used in) financing activities	$	185		$	(2,695	)

Operating Activities

Net cash provided by 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 decreased approximately $7.0 million for the three months ended March 31, 2020 as compared to the same period in 2019. This decrease was primarily due to decreased revenues.

Investment Activities

Net cash 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. Net cash used in investing activities increased approximately $290,000 for the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to funding our drilling program in California.

Financing Activities

Net cash provided by or used in financing activities is primarily comprised of activities associated with our credit facilities. During the three months ended March 31, 2020, the Company increased borrowings under the 2018 Credit Facility by approximately $3.0 million and increased borrowings under the Senior Revolving Notes by $2.0 million. These advances were partially offset by payments of $2.5 million in principal associated with the Old Ironsides Notes, payments of approximately $1.0 million in principal associated with the 2018 Credit Facility, and payments of approximately $1.3 million in principal associated with the Senior Revolving Notes. During the three months ended March 31, 2019, the Company (i) paid $2.0 million in principal associated with the Old Ironsides Notes; (ii) paid approximately $1.7 million in principal associated with the 2018 Credit Facility term note; and (iii) increased net borrowings under the 2018 Credit Facility revolver by approximately $1.0 million.

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Capital Expenditures

Capital expenditures incurred are summarized in the following table:

	Three Months Ended March 31,
(in thousands)	2020		2019
Drilling and development	$	793	$	461
Other		220		39
Total capital expenditures	$	1,013	$	500

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

Due to low natural gas prices, the Company 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. 

Credit Facilities and Notes Payable

For a discussion of our long-term debt, see Note 6 – Credit Facilities and Notes Payable in the unaudited condensed consolidated financial statements in Item 1.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2020.

Critical Accounting Policies, Estimates, Judgments, and Assumptions

Our critical accounting policies and estimates are set forth in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations- Critical Accounting Policies, Estimates, Judgments, and Assumptions” in our 2019 Annual Report on Form 10-K. As of March 31, 2020, there have been no significant changes to our critical accounting policies and estimates since our 2019 Annual Report on Form 10-K was filed.  

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 Exchange Act. 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 several places in this report and include statements with respect to, among other things:

●   ● estimates of our oil, natural gas liquids, and natural gas reserves;   effect of the COVID-19 pandemic and the OPEC price war on our business results;

● estimates of our future oil, natural gas liquids, 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 and acquisitions;

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● our outlook on oil, natural gas liquids, 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 and local political, regulatory, and environmental developments in the United States of America

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 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, natural gas liquids 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 in our 2019 Annual Report on Form 10-K.

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 Quarterly Report on Form 10-Q and attributable to us 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 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide information for this item.

ITEM 4. Controls and Procedures

Evaluation of disclosure controls and procedures.  

We have established disclosure controls and procedures to ensure that material information relating to us and our consolidated subsidiaries is made known to the officers who certify our financial reports and the Board of Directors.

Our Chief Executive Officer, Patrick R. McDonald, and our Chief Financial Officer, Kevin D. Struzeski, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2020. Based on this evaluation, they believe that as of March 31, 2020, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting.  There were no changes in our internal control over financial reporting during the quarter ended March 31, 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We are subject to legal claims and proceedings in the ordinary course of our business. Management believes that should the controversies be resolved against us, none of the current pending proceedings would have a material adverse effect on us.

ITEM 1A. Risk Factors

In addition to the risk factors contained in the Item 1A. Risk Factors of the 2019 Annual Report on Form 10-K, investors should carefully consider the following risk factors, which relate to the Contemplated Transaction discussed above. These risk factors should be read in conjunction with the risk factors set forth in our 2019 Annual Report on Form 10-K and other information contained in this report and our other filings with the SEC, which are hereby incorporated by reference.

Risks Related to the Contemplated Transactions

The announcement and pendency of the Contemplated Transactions, whether or not consummated, may adversely affect Carbon’s business.

The announcement and pendency of the Contemplated Transactions, whether or not consummated, may adversely affect the trading price of Carbon’s common stock, its business or its relationships with customers and suppliers. New or existing customers and business partners may prefer to do business with our competitors because of uncertainty whether the Contemplated Transactions will be consummated.

Uncertainties associated with the Contemplated Transactions may cause a loss of management personnel and other key employees, which could adversely affect the future business and operations of Carbon.

Whether or not the Contemplated Transactions are completed, the announcement and pendency of the Contemplated Transactions could disrupt the business of Carbon. Carbon is dependent on the experience and industry knowledge of its senior management and other key employees to execute its business plan. Carbon’s success after the Contemplated Transactions will depend in part upon the ability of Carbon to retain key management personnel and other key employees. Pending the completion of the Contemplated Transactions, Carbon may be unable to attract and retain key personnel and the focus and attention of Carbon’s management and employee resources may be diverted from operational matters during the pendency of the Contemplated Transactions. In addition, Carbon might not be able to locate suitable replacements for any such key employees who leave, whether to transition to employment with the Purchaser as part of the Contemplated Transactions or otherwise, or offer employment to potential replacements on satisfactory terms.

Carbon cannot be sure if or when the Contemplated Transactions will be completed.

The closing of the Contemplated Transactions is subject to the satisfaction or waiver of various conditions. Carbon cannot guarantee that the closing conditions set forth in the MIPA, some of which are beyond the control of Carbon, will be satisfied. If the closing conditions to the MIPA are not satisfied, the Purchaser or the Sellers may not be obligated to complete the Contemplated Transactions. In the event that the Contemplated Transactions are not completed, the termination of the MIPA may adversely affect the trading price of Carbon’s common stock, its business and operations or its relationships with vendors, suppliers, customers and employees. If the Contemplated Transactions are not completed for any reason, Carbon will be subject to a number of risks, including paying its costs relating to the Contemplated Transactions, which are substantial, such as legal, accounting and printing fees, whether or not the Contemplated Transactions are completed.

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If the Contemplated Transactions are not completed and the 2018 Credit Facility remains outstanding, we may have difficulty complying with our Current Ratio covenant of 1.00 to 1.00 and our Leverage Ratio covenant of 3.50 to 1.00, as such terms are defined in our 2018 Credit Facility. Our ability to comply with the Current Ratio covenant is affected by borrowing base reductions totaling $6.0 million scheduled through May 1, 2020, and may be further impacted by future borrowing base redeterminations in 2020 and might also be adversely affected if we were required to pay a $3.8 million termination fee pursuant to the MIPA. Our ability to comply with our Leverage Ratio covenant would be adversely affected if the current low level of natural gas prices persist through the remainder of 2020. Our Leverage Ratio measures our Net Debt (as defined in the 2018 Credit Facility) over our EBITDAX (as defined in the 2018 Credit Facility) and we generate less EBITDAX in a low-price environment. These potential covenant compliance issues could cause doubt about our ability to continue as a going concern. Failure to comply with these covenants, if not waived, would result in an event of default and related actions under the 2018 Credit Facility.

If the Contemplated Transactions are not completed, Carbon’s board of directors may evaluate other strategic alternatives that may be available, which such alternatives may not be as favorable to Carbon or its stockholders as the Contemplated Transactions.

The MIPA contains restrictions on the conduct of Carbon’s business prior to closing.

Under the terms of the MIPA, Carbon is subject to certain restrictions on the conduct of its business prior to the closing, which may adversely affect its ability to execute certain of its business strategies. Limitations include, among other things, the ability to approve certain capital projects, dispose of the Acquired Assets (as defined in the Purchase Agreement), create any liens on the Acquired Assets, enter into or modify any employment agreements, adopt, amend, modify or terminate any benefit plan or modify or terminate any lease or material contract, in each case, subject to certain exceptions set forth in the MIPA. Such limitations could negatively affect Carbon’s business and operations prior to the completion of the Contemplated Transactions.

The MIPA limits Carbon’s ability to pursue alternatives to the Contemplated Transactions.

The MIPA contains provisions that make it more difficult for Carbon to sell its assets or engage in another type of acquisition transaction with a party other than the Purchaser. These provisions include a provision obligating Carbon to pay the Purchaser a termination fee of $3.8 million if, among other things, (i) the Sellers materially breach the solicitation obligations under the MIPA or (ii) the MIPA is terminated in connection with a Superior Proposal (as defined in the MIPA). These provisions could discourage a third party that might have an interest in acquiring all of, or substantially all of, Carbon’s assets or its common stock from considering or proposing such an acquisition, even if that party were prepared to pay consideration with a higher value than the consideration to be paid by the Purchaser.

The holder of the Old Ironsides Notes may claim that it is entitled to receive more of the proceeds of the Contemplated Transactions than we believe we are required to apply to the payment of the Old Ironsides Notes.

Under the terms of the Old Ironsides Notes, we are required to make a mandatory prepayment on the Old Ironsides Notes no later than the first business day following the date of receipt by us of any “Net Cash Proceeds,” as defined in the Old Ironsides Notes, from the sale of our assets. The mandatory prepayment must be in an amount equal to the lesser of (i) the then-outstanding obligation under the Old Ironsides Notes and (ii) the amount of such Net Cash Proceeds received by us, after repayment of amounts due under the 2018 Credit Facility and expenses incurred in connection with the Contemplated Transactions. Old Ironsides, the holder of the Old Ironsides Notes, has asserted in writing that it believes that the Net Cash Proceeds would be sufficient for us to repay the full amount outstanding under the Old Ironsides Notes, approximately $26.3 million, while we believe that the Net Cash Proceeds available to repay the Old Ironsides Notes would be approximately $12.7 million.

We are in discussions with Old Ironsides regarding the amount owed, but if the resolution of the discussions is not satisfactory to Old Ironsides, it may file a lawsuit claiming that it is entitled to receive more than what we believe is owed, including and up to the full amount of the Old Ironsides Notes. If we were required by a court to pay such a judgment in excess of what we believe is owed, as well as costs to defend any such claims, we may not have the cash on hand or ability to raise the funds necessary to pay such amounts. Furthermore, given the scope of our operations post-transaction and the state of the industry and energy capital markets, we expect that it would be very difficult for us to raise additional capital to pay a judgment and legal costs. Therefore, a judgment against us in an amount greater than we believe we owe on the Old Ironsides Notes could make it necessary for us to seek protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, or an involuntary petition for bankruptcy may be filed against us.

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Carbon will incur significant expenses in connection with the Contemplated Transactions, regardless of whether the Contemplated Transactions are completed and, in certain circumstances, may be required to pay a termination fee to the Purchaser.

Carbon expects to incur significant expenses related to the Contemplated Transactions. These expenses include, but are not limited to, legal fees, accounting fees and expenses, certain employee expenses, filing fees, printing expenses and other related fees and expenses. Many of these expenses will be payable by Carbon regardless of whether the Contemplated Transactions are completed. In addition, if the MIPA is terminated in certain circumstances, Carbon will be required to pay the Purchaser a $3.8 million termination fee.

Carbon expects to record a loss at the closing of the Contemplated Transactions.

Upon the consummation of the Contemplated Transactions, Carbon expects to record a book loss of approximately $50.1 million. If the Contemplated Transactions are not completed, Carbon may be required to take an impairment charge related to the Appalachian assets. GAAP requires us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties for impairments, which may occur if we experience substantial downward adjustments to our estimated proved reserves or our unproved property values, or if estimated future development costs increase. We are required to perform impairment tests on our assets periodically and whenever events or changes in circumstances warrant a review of our assets. To the extent such tests indicate a reduction of the estimated useful life or estimated future cash flows of our assets, the carrying value may not be recoverable and therefore requires a write-down. Future write-downs of our full cost pool may be required if oil and natural gas prices decline, unproved property values decrease, estimated proved reserve volumes are revised downward or costs incurred in exploration, development, or acquisition activities in our full cost pool exceed the discounted future net cash flows from the additional reserves, if any, attributable to our cost pool. Any recorded impairment is not reversible.

In connection with the Contemplated Transactions, the Sellers will indemnify the Purchaser and the Purchaser will indemnify the Sellers for certain liabilities. There can be no assurance that the indemnities from the Sellers will be sufficient to insure the Purchaser against the full amount of such liabilities.

Pursuant to the MIPA, the Sellers agreed to indemnify the Purchaser for certain liabilities, and the Purchaser agreed to indemnify the Sellers for certain liabilities. The Sellers will indemnify the Purchaser for claims, proceedings and losses relating to retained liabilities, a breach of the MIPA by the Sellers and certain other matters set forth in the Purchase Agreement, and the Purchaser will indemnify the Sellers for claims, proceedings and losses relating to the assumed liabilities, including ownership of Nytis LLC and Carbon Appalachia on or after the closing, and a breach of the MIPA by the Purchaser. However, third parties might seek to hold the Sellers responsible for liabilities that the Purchaser agreed to assume, and there can be no assurance that the Sellers will be able to fully satisfy its indemnification obligations under the MIPA, which could be significant and could adversely affect our business.

Risks Related to Carbon’s Future Operations

Carbon’s operations will be curtailed and Carbon will have limited sources of revenue following the Contemplated Transactions, which may negatively impact the value and liquidity of Carbon’s common stock.

Upon the closing of the Contemplated Transactions, the size of Carbon’s business operations will be significantly reduced and its sources of revenue will be limited to its operations in the Ventura Basin through Carbon California. Carbon does not intend to use any portion of the proceeds from the Contemplated Transactions to support the business operations remaining following the Contemplated Transactions, and there can be no assurance that Carbon will be successful at carrying out the operations of its remaining business or that it will be successful at generating revenue. A failure by Carbon to secure additional sources of revenue following the closing of the Contemplated Transactions could negatively impact the value and liquidity of its common stock.

Carbon will continue to incur the expense of complying with public company reporting requirements following the closing of the Contemplated Transactions.

After the Contemplated Transactions, Carbon will continue to be required to comply with the applicable reporting requirements of the Exchange Act, even though compliance with such reporting requirements is economically burdensome.

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Carbon’s common stock may be removed from trading on OTCQB following the consummation of the Contemplated Transactions.

Carbon’s SEC reporting obligations as a public company will not be impacted as a result of the closing of the Contemplated Transactions and, following the completion of the Contemplated Transactions, Carbon expects that its common stock will continue to be quoted on OTCQB. However, it is not possible to predict the trading price of Carbon’s common stock following the closing of the Contemplated Transactions or the impact that the Contemplated Transactions may have on Carbon’s remaining business.

In order to remain eligible for trading on OTCQB, Carbon’s common stock must comply with certain standards for continued eligibility, including:

● a minimum closing bid price of at least $0.01 per share on at least one of the prior thirty consecutive calendar days;

● at least 50 beneficial holders, each owning at least 100 shares; and

● freely traded public float of at least 10% of the total shares of common stock issued and outstanding.

Carbon believes that it will continue to meet OTCQB’s standards for continued eligibility following the completion of the Contemplated Transactions. No assurances, however, can be given that Carbon will continue to satisfy these requirements as some of these requirements are outside of Carbon’s direct control, such as the bid price of its common stock, the number of holders of its common stock and the value of its publicly held shares. If Carbon is unable to meet these requirements, OTCQB may take action to remove Carbon’s common stock from trading on OTCQB.

The removal of Carbon’s common stock from trading on OTCQB could result in a reduction in its trading price and would substantially limit the liquidity of Carbon’s common stock. In addition, removal could materially adversely impact Carbon’s ability to raise capital or pursue strategic restructuring, refinancing or other transactions. The removal of Carbon’s common stock from trading on OTCQB could also have other negative results, including the potential loss of confidence by institutional investors.

Carbon is a holding company with no oil and gas operations of its own, and Carbon depends on its subsidiaries for cash to fund certain of its operations and expenses.

Carbon’s operations are conducted entirely through its subsidiaries, and its ability to generate cash to meet its operating obligations is dependent on the earnings and the receipt of funds from its subsidiaries through distributions or intercompany loans. Following the consummation of the Contemplated Transactions, Carbon California will be Carbon’s sole operating subsidiary. Carbon California’s ability to generate adequate cash depends on a number of factors, including development of reserves, successful acquisitions of complementary properties, advantageous drilling conditions, oil and natural gas prices, compliance with all applicable laws and regulations and other factors.

We do not solely control Carbon California.

Following the consummation of the Contemplated Transactions, we will have no significant assets other than our ownership interest in Carbon California, which owns and operates oil, natural gas, and NGLs interests. More specifically:

● Carbon California is managed by its governing board. Our ability to influence decisions with respect to its operations varies depending on the amount of control we exercise under the governing agreement;

● We do not control the amount of cash distributed by Carbon California. Further, debt facilities at Carbon California currently restrict distributions. We may influence the amount of cash distributed through our board seats on Carbon California’s governing board, but may not ultimately be successful in such efforts;

● We may not have the ability to unilaterally require Carbon California to make capital expenditures, and Carbon California may require us to make additional capital contributions to fund operating and maintenance expenditures, as well as to fund expansion capital expenditures, which would reduce the amount of cash otherwise available for dividend payments by us or require us to incur additional indebtedness;

● Carbon California may incur additional indebtedness without our consent, which debt payments would reduce the amount of cash that might otherwise be available for distributions; and

● The third-party operator of certain of the assets held by Carbon California and the identity of our partners could change, in some cases without our consent. Our dependence on the operators of such assets and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could have a material adverse effect on the realization of our targeted returns on capital or lead to unexpected future costs.

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Due to our lack of asset and geographic diversification, adverse developments in our operating areas would reduce our ability to pay dividends on shares of our common stock.

Upon closing of the Contemplated Transactions, all of our assets will be located exclusively in the Ventura Basin in California. Due to our lack of diversification in asset type and location, an adverse development in the oil and gas business in the Ventura Basin, including those resulting from the impact of regional supply and demand factors, delays or interruptions of production from wells in these areas caused by and costs associated with governmental regulation, processing or transportation capacity constraints, market limitations, water shortages, wildfires or other weather related conditions, interruption of the processing or transportation of oil, NGLs or natural gas and changes in regional and local political regimes and regulations, would have a significantly greater impact on our results of operations and cash available for dividend payments on shares of our common stock than if we maintained more diverse assets and locations.

Our operations are currently conducted in locations that may be at risk of damage from fire, mudslides, earthquakes or other natural disasters.

Carbon California currently conducts operations in California near known wildfire and mudslide areas and earthquake fault zones. Certain of Carbon California’s operations were temporarily halted in December 2017 due to the wildfires in southern California. A future natural disaster, such as a fire, mudslide or an earthquake, could cause substantial delays in our operations, damage or destroy equipment, prevent or delay transport of production and cause us to incur additional expenses, which would adversely affect our business, financial condition and results of operations. In addition, our facilities would be difficult to replace and would require substantial lead time to repair or replace. The insurance we maintain against earthquakes, mudslides, fires and other natural disasters would not be adequate to cover a total loss of our facilities, may not be adequate to cover our losses in any particular case and may not continue to be available to us on acceptable terms, or at all.

Our operations are substantially dependent on the availability of water and electricity. Restrictions on our ability to obtain water, or increasing prices or shortages of electricity, particularly in California, may have an adverse effect on our financial condition, results of operations, and cash flows.

Water and electricity are essential components of oil and natural gas production during both the drilling and hydraulic fracturing processes. Historically, we have been able to purchase water from local land owners for use in our operations. As a result of severe drought in parts of California, some local water districts have begun restricting the use of water subject to their jurisdiction for hydraulic fracturing to protect the availability of local water supply. Additionally, in recent years, shortages of electricity have resulted in increased costs for consumers and certain interruptions in service. California has experienced rolling blackouts due to excessive demand on the electrical grid or as precautionary measures against the risk of wildfire in the past because of unexpectedly high temperatures. If we are unable to obtain water to use in our operations from local sources or we experience electricity blackouts, we may be unable to economically produce our reserves or run our operations, which could have an adverse effect on our financial condition, results of operations, and cash flows.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be sufficient.

Following the closing of the Contemplated Transactions, our sole source of revenue will be from Carbon California’s operations. Our ability to service our debt obligations following the Contemplated Transactions depends on the future operating performance and cash flow from Carbon California. There can be no assurance that our cash from operations will be sufficient to meet continuing debt obligations, and if we are unable to generate sufficient cash through our operations, we could face substantial liquidity problems, which could have a material adverse effect on our results of operations and financial condition. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or refinance our indebtedness. We may not be able to take any of these actions, and these actions may not be successful or permit us to meet our scheduled debt service obligations. Furthermore, these actions may not be permitted under the terms of our existing or future debt agreements.

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The recent spread of COVID-19, or the novel coronavirus, and measures taken to mitigate the impact of the COVID-19 pandemic, are adversely affecting our business, operations and financial condition.

Like other oil and gas companies, our business is being adversely affected by the COVID-19 pandemic and measures being taken to mitigate its impact. The pandemic has resulted in widespread adverse impacts on the global economy and on our employees, customers, suppliers and other parties with whom we have business relations. As the coronavirus pandemic and government responses are rapidly evolving, the extent of the impact on domestic exploration and production companies remains unknown. We are experiencing a sharp and rapid decline in the demand for the oil and natural gas we produce and in the prices we receive for our products as the U.S. and global economy are being negatively impacted as economic activity is curtailed in response to the COVID-19 pandemic. Official restrictions on non-essential activities have been introduced across the U.S., which may adversely impact our production activities. For example, since mid-March, we have had to restrict access to our administrative offices. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, us, our suppliers and other business counterparties to experience operational delays, delays in the delivery of materials and supplies that are sourced from around the globe, and have caused, and may continue to cause, milestones or deadlines relating to various projects to be missed. Further, the impact of the pandemic, including the resulting significant reduction in global demand for oil and gas, coupled with the sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of OPEC and other foreign, oil-exporting countries is expected to lead to significant global economic contraction generally and in our industry in particular. We anticipate that our business, financial condition and results of operations may be materially and adversely impacted as a result of these developments.

We have modified certain business and workforce practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. However, the quarantine of personnel or the inability to access our facilities or customer sites could adversely affect our operations. Additionally, currently many of our employees are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.

We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by members of OPEC and other foreign, oil-exporting countries, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

Oil prices are highly volatile. Declines in commodity prices, especially steep declines in the price of oil, have adversely affected, and in the future will adversely affect, our financial condition and results of operations, cash flow, access to the capital markets and ability to grow.

As a result of the Contemplated Transactions, Carbon will no longer produce natural gas and instead will concentrate on the production of oil from its assets in the Ventura Basin. The oil market is highly volatile, and we cannot predict future oil prices. Beginning in February 2020, oil and natural gas prices have experienced record declines and are currently at record low levels in response to dramatic supply and demand uncertainty caused by the coronavirus pandemic and the recent announcement of planned production increases by Saudi Arabia. For example, the price of oil fell approximately 20% on March 9, 2020 due to Saudi Arabia’s decision to increase its production to record levels. As of April 30, 2020, the NYMEX WTI oil futures price for June 2020 was $18.84 per Bbl and the Henry Hub natural gas price was $1.949 per MMBtu. Although OPEC agreed in April to cut production, the responses of oil and gas producers to the lower demand for, and price of, oil, natural gas and NGLs are constantly evolving and remain uncertain. We cannot anticipate whether or when production will return to normalized levels, and oil and natural gas prices could remain at current levels or decline further, for an extended period of time.

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Prices for oil may fluctuate widely in response to relatively minor changes in the supply of and demand for oil, market uncertainty and a variety of additional factors that are beyond our control, such as:

● domestic and foreign supply of and demand for oil;

● market prices of oil;

● level of consumer product demand;

● overall domestic and global political and economic conditions;

● political and economic conditions in producing countries, including those in the Middle East, Russia, South America and Africa;

● global or national health concerns, including the outbreak of pandemic or contagious disease, such as the recent coronavirus, which may reduce demand for crude oil because of reduced global or national economic activity;

● actions of the OPEC and other state-controlled oil companies relating to oil price and production controls;

● weather conditions;

● impact of the U.S. dollar exchange rates on commodity prices;

● technological advances affecting energy consumption and energy supply;

● domestic and foreign governmental regulations and taxation;

● impact of energy conservation efforts;

● capacity, cost and availability of oil pipelines, processing, gathering and other transportation facilities and the proximity of these facilities to our wells; and

● price and availability of alternative fuels.

Our production in the Ventura Basin received an approximate 9.7% premium to the NYMEX WTI benchmark price during 2019. A reduction in this premium would reduce the relative price advantage we receive for a substantial portion of our production in the Ventura Basin.

Our revenue, profitability and cash flow depend upon the prices and demand for oil. A drop in prices would significantly affect our financial results and impede our growth. In particular, a significant or prolonged decline in oil prices will negatively impact:

● the value of our reserves, because declines in oil prices would reduce the amount of oil that we can produce economically;

● the amount of cash flow available for capital expenditures;

● our ability to replace our production and future rate of growth;

● our ability to borrow money or raise additional capital and our cost of such capital; and

● our ability to meet our financial obligations.

Historically, higher oil prices generally result in increased demand and prices for drilling equipment, crews and associated supplies, equipment and services, as well as higher lease operating expenses and increased end-user conservation or conversion to alternative fuels. However, commodity price declines do not result in similarly rapid declines of costs associated with drilling. Accordingly, a high cost environment could adversely affect our ability to pursue our drilling program and our results of operations. 

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ITEM 6. Exhibits

Exhibit No.	Description
2.1**	Membership Interest Purchase Agreement, dated as of April 7, 2020, by and among Carbon Energy Corporation, Nytis Exploration (USA) Inc., Diversified Gas & Oil Corporation, Nytis Exploration Company LLC, Carbon Appalachian Company, LLC, and the other entities party thereto, incorporated by reference to Exhibit 2.1 to Form 8-K filed on April 8, 2020.
10.1	Third Amendment to the Amended and Restated Credit Agreement, dated February 14, 2020, incorporated by reference to Exhibit 10.26 to Form 10-K filed on March 30, 2020.
10.2	Fourth Amendment to the Amended and Restated Credit Agreement, dated April 30, 2020, incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 6, 2020.
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
**	Certain schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Carbon Energy Corporation agrees to furnish supplementally a copy of any such omitted schedule to the SEC upon request.
†	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

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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 ENERGY CORPORATION
	(Registrant)
Date: May 14, 2020	By:	/s/ Patrick R. McDonald
		PATRICK R. MCDONALD,
		Chief Executive Officer
Date: May 14, 2020	By:	/s/ Kevin D. Struzeski
		KEVIN D. STRUZESKI
		Chief Financial Officer

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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 Energy Corporation;

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; and

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 functions):

(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.

May 14, 2020
	/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 Energy Corporation;

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; and

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 functions):

(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.

May 14, 2020
	/s/ Kevin D. Struzeski
	Kevin D. Struzeski Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF CARBON ENERGY CORPORATION
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 March 31, 2020 that is being filed concurrently with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officer of Carbon Energy Corporation (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: May 14, 2020
	/s/ Patrick R. McDonald
	Patrick R. McDonald Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF CARBON ENERGY CORPORATION
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 March 31, 2020 that is being filed concurrently with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officer of Carbon Energy Corporation (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: May 14, 2020
	/s/ Kevin D. Struzeski
	Kevin D. Struzeski Chief Financial Officer

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Commodity Derivatives (Tables)

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of commodity derivative contracts

	Natural Gas Swaps				Natural Gas Collars
			Weighted Average				Weighted Average Price
Year	MMBtu		Price (a)		MMBtu		Range (a)
2020		9,262,000	$	2.70		2,541,000	$	2.10 – $2.75
2021		6,448,000	$	2.58		6,395,000	$	2.00 – $2.75

	Oil Swaps*								Oil Collars*
Year	WTI Bbl		Weighted Average Price (b)		Brent Bbl		Weighted Average Price (c)		WTI Bbl		Weighted Average Price (b)		Brent Bbl		Weighted Average Price (c)
2020		98,844	$	55.37		172,403	$	64.58		20,600	$	47.00 - $60.15		46,700	$	47.00 - $75.00
2021		-	$	-		86,341	$	67.12		66,200	$	47.00 - $60.15		190,000	$	47.00 - $75.00
2022		-	$	-		-	$	-		-	$	-		199,900	$	50.00 - $61.00

*	Includes 100% of Carbon California's outstanding derivative hedges at March 31, 2020, and not our proportionate share.
(a)	NYMEX Henry Hub Natural Gas futures contracts for the respective period.
(b)	NYMEX Light Sweet Crude West Texas Intermediate futures contracts for the respective period.
(c)	Brent future contracts for the respective period.

Schedule of derivatives positions and balance sheet location

(in thousands)	March 31, 2020		December 31, 2019
Commodity derivative contracts:
Commodity derivative asset	$	18,078	$	5,915
Commodity derivative asset – non-current	$	5,107	$	1,164
Commodity derivative liability	$	-	$	469
Commodity derivative liability – non-current	$	25	$	87

Schedule of realized and unrealized gains and losses

	Three Months Ended March 31,
(in thousands)	2020		2019
Commodity derivative contracts:
Settlement gain (loss)	$	3,078	$	(456	)
Unrealized gain (loss)		16,636		(8,850	)
Total commodity derivative gain (loss)	$	19,714	$	(9,306	)

Schedule of commodity derivative contracts subject to master netting arrangements

							Net
	Gross						Recognized
	Recognized			Gross			Fair Value
	Assets/			Amounts			Assets/
Balance Sheet Classification (in thousands)	Liabilities			Offset			Liabilities
Commodity derivative assets:
Commodity derivative asset	$	18,441		$	(363	)	$	18,078
Commodity derivative asset – non-current		7,144			(2,037	)		5,107
Total derivative assets	$	25,585		$	(2,400	)	$	23,185
Commodity derivative liabilities:
Commodity derivative liability	$	(363	)	$	363		$	-
Commodity derivative liability – non-current		(2,062	)		2,037			(25	)
Total derivative liabilities	$	(2,425	)	$	24,00		$	(25	)

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Summary of Significant Accounting Policies (Details)	3 Months Ended
	Mar. 31, 2020 Partnerships
Accounting Policies [Abstract]
Number of consolidated partnerships	46

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Asset Retirement Obligations (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Asset Retirement Obligation [Abstract]
Balance at beginning of period	$ 22,535	$ 22,310
Accretion expense	478	394
Additions	7
Balance at end of period	23,020	22,704
Less: Current portion	(5,564)	(3,392)	$ (5,021)
Non-current portion	$ 17,456	$ 19,312	$ 17,514

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Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 11 – FAIR VALUE MEASUREMENTS

The following table presents our financial assets and liabilities that were accounted for at fair value on a recurring basis by level:

(in thousands)	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
March 31, 2020
Assets:
Commodity derivatives	$	-	$	23,185	$	-	$	23,185
Liabilities:
Commodity derivatives	$	-	$	25	$	-	$	25
December 31, 2019
Assets:
Commodity derivatives	$	-	$	7,079	$	-	$	7,079
Liabilities:
Commodity derivatives	$	-	$	556	$	-	$	556

Commodity Derivative

As of March 31, 2020, our commodity derivative financial instruments are comprised of natural gas and oil swaps and costless collars. The fair values of these agreements are determined under an income valuation technique. The valuation model requires a variety of inputs, including contractual terms, published forward prices, volatilities for options and discount rates, as appropriate. Our estimates of fair value of derivatives include consideration of the counterparty's credit worthiness, our credit worthiness and the time value of money. The consideration of these factors results in an estimated exit-price for each derivative asset or liability under a marketplace participant's view. All significant inputs are observable, either directly or indirectly; therefore, our derivative instruments are included within the Level 2 fair value hierarchy.

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

Certain assets and liabilities are measured at fair value on a non-recurring basis. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances. The fair value of the following assets and liabilities are based on unobservable pricing inputs and therefore, are included within the Level 3 fair value hierarchy.

Firm transportation contracts. We assume, at times, certain firm transportation contracts as part of our acquisitions of oil and natural gas properties. The fair value of the firm transportation contract obligations was determined based upon the contractual obligations assumed by us and discounted based upon our effective borrowing rate.

Debt Discount. The fair value of the debt discount from the 1,425 and 585 additional Class A Units issued in connection with the Subordinated Notes and 2018 Subordinated Notes was $1.3 million and $490,000, respectively. The debt discount was based on the relative fair value of Class A Units. Class A Units were issued contemporaneously at $1,000 per Class A Unit.

Asset Retirement Obligations. The fair value of our asset retirement obligation liability is recorded in the period in which it is incurred or assumed by taking into account the cost of abandoning oil and gas wells ranging from $20,000 to $45,000, which is based on our historical experience and industry expectations for similar work; the estimated timing of reclamation ranging from one to 75 years based on estimates from reserve engineers; an inflation rate between 1.52% to 2.79%; and a credit adjusted risk-free rate between 3.28% to 8.27%, which takes into account our credit risk and the time value of money.

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Revenue

3 Months Ended

Mar. 31, 2020

Revenue Recognition and Deferred Revenue [Abstract]

REVENUE

NOTE 7 – REVENUE

The following tables present our disaggregated revenue by primary region within the United States and major product line for the three months ended March 31, 2020 and 2019 (in thousands):

	Appalachian and Illinois Basins				Ventura Basin				Total
	Three Months Ended March 31,				Three Months Ended March 31,				Three Months Ended March 31,
	2020		2019		2020		2019		2020		2019
Natural gas sales	$	8,019	$	18,792	$	415	$	524	$	8,434	$	19,316
Natural gas liquids sales		-		-		152		247		152		247
Oil sales		1,147		1,537		6,069		7,452		7,216		8,989
Transportation and handling		633		734		-		-		633		734
Marketing gas sales		6,318		4,944		-		-		6,318		4,944
Total	$	16,117	$	26,007	$	6,636	$	8,223	$	22,753	$	34,230

We record revenue in the month production is delivered to the purchaser, but settlement statements may not be received until 30 to 90 days after the month of production. As such, we estimate the production delivered and the related pricing. The estimated revenue is recorded within Accounts receivable – Revenue on the consolidated balance sheets. Any differences between our initial estimates and actuals are recorded in the month payment is received from the customer. These differences have not historically been material.

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Condensed Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Common Stock	Preferred Stock	Additional Paid-In Capital	Non- controlling Interests	Accumulated Deficit	Total
Balance at Dec. 31, 2018	$ 77	$ 1	$ 84,612	$ 28,284	$ (36,939)	$ 76,035
Balance, shares at Dec. 31, 2018	7,656	50
Stock-based compensation			222			222
Stock-based compensation, shares
Restricted stock vested	$ 1					1
Restricted stock vested, shares	40
Performance units vested	$ 1		(1)
Performance units vested, shares	95
Non-controlling interests' distributions, net				22		22
Net income (loss)				(2,590)	(4,100)	(6,690)
Balance at Mar. 31, 2019	$ 79	$ 1	84,833	25,716	(41,039)	69,590
Balance, shares at Mar. 31, 2019	7,791	50
Balance at Dec. 31, 2019	$ 78	$ 1	85,834	26,150	(35,842)	76,221
Balance, shares at Dec. 31, 2019	7,796	50
Stock-based compensation			204			204
Stock-based compensation, shares
Restricted stock vested
Restricted stock vested, shares	20
Performance units vested	$ 1		(1)
Performance units vested, shares	83
Non-controlling interests' distributions, net				(3)		(3)
Net income (loss)				5,659	9,799	15,458
Balance at Mar. 31, 2020	$ 79	$ 1	$ 86,037	$ 31,806	$ (26,043)	$ 91,880
Balance, shares at Mar. 31, 2020	7,899	50

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Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2020	May 07, 2020
Document and Entity Information [Abstract]
Entity Registrant Name	Carbon Energy Corp
Entity Central Index Key	0000086264
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Type	10-Q
Document Period End Date	Mar. 31, 2020
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2020
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		7,949,128
Entity File Number	000-02040
Entity Interactive Data Current	Yes
Entity Incorporation State Country Code	DE

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Property and Equipment

3 Months Ended

Mar. 31, 2020

Property, Plant and Equipment [Abstract]

PROPERTY AND EQUIPMENT

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment, net consists of the following:

(in thousands)	March 31, 2020			December 31, 2019
Oil and gas properties:
Proved oil and gas properties	$352,561			$351,488
Unproved properties		4,906			4,872
Accumulated depreciation, depletion, amortization and impairment		(112,719	)		(109,344	)
Oil and gas properties, net		244,748			247,016
Pipeline facilities and equipment		12,820			12,814
Base gas		1,937			1,937
Furniture and fixtures, computer hardware and software, and other equipment		6,967			6,762
Accumulated depreciation and amortization		(5,956	)		(5,529	)
Other property and equipment, net		15,768			15,984
Total property and equipment, net	$	260,516		$	263,000

Unproved oil and gas properties not subject to depletion are excluded from the full cost pool until it is determined if reserves can be assigned to the related properties. Subject to industry conditions, evaluation of most of these properties and the inclusion of their costs in the full cost pool is expected to be completed within five years. Unproved properties are assessed for impairment at least annually. During the three months ended March 31, 2020 and 2019, there were no expiring or impaired leasehold costs that were reclassified into proved property.

We capitalized overhead applicable to acquisition, development and exploration activities of approximately $238,000 and $68,000 for the three months ended March 31, 2020 and 2019, respectively.

Depletion expense related to oil and gas properties for the three months ended March 31, 2020 and 2019 was approximately $3.4 million and $3.5 million, respectively.

For the three months ended March 31, 2020 and 2019, we did not recognize any ceiling test impairments as our full cost pool did not exceed the ceiling limitations. Future declines in oil and natural gas prices, increases in future operating expenses and future development costs could result in impairments of our oil and gas properties in future periods. Impairment changes are a non-cash charge and accordingly would not affect cash flows but would adversely affect our net income and stockholders' equity.

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Supplemental Cash Flow Disclosure (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Supplemental Cash Flow Elements [Abstract]
Cash paid for interest	$ 1,794	$ 1,875
Non-cash transactions:
Capital expenditures included in accounts payable and accrued liabilities	(564)	(82)
Increase in asset retirement obligations	$ 7

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Commodity Derivatives (Details 2) - Commodity derivative contracts [Member] - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Derivative Instruments, Gain (Loss) [Line Items]
Settlement gain (loss)	$ 3,078	$ (456)
Unrealized gain (loss)	16,636	(8,850)
Total commodity derivative gain (loss)	$ 19,714	$ (9,306)

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Credit Facilities and Notes Payable (Details 1) - Prudential [Member] - Carbon California [Member] - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Debt Instrument [Line Items]
Total principal	$ 47,700	$ 46,000
Less: Deferred notes costs	(164)	(175)
Less: unamortized debt discount	(1,019)	(1,084)
Total notes payable - related party	46,517	44,741
Senior Revolving Notes [Member]
Debt Instrument [Line Items]
Total principal	34,700	33,000
Subordinated Notes [Member]
Debt Instrument [Line Items]
Total principal	$ 13,000	$ 13,000

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Stock-Based Compensation Plans (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019	Dec. 31, 2018
Share-based Arrangements with Employees and Nonemployees [Abstract]
Shares authorized	1,600,000
Restricted Performance Units [Member]
Share-based Arrangements with Employees and Nonemployees [Abstract]
Granted (in shares)	699,000
Vested (in shares)	83,000
Fair value of performance units at date of grant			$ 9.80	$ 10.00
Unrecognized compensation costs	$ 3,200
Restricted Stock [Member]
Share-based Arrangements with Employees and Nonemployees [Abstract]
Granted (in shares)	748,000
Vested (in shares)	20,000
Compensation costs	$ 204	$ 179
Unrecognized compensation costs	$ 1,300
Compensation recognized period	6 years

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Fair Value Measurements (Details Textual) - Fair Value, Inputs, Level 3 [Member] - Non-Recurring [Member] $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($) shares
Minimum [Member] | Abandonment Costs Member [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset retirement obligation liability	$ 20
Minimum [Member] | Inflation rate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset retirement obligation, measurement input rate	1.52%
Minimum [Member] | Risk-free rate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset retirement obligation, measurement input rate	3.28%
Minimum [Member] | Reclamation Period [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Estimated timing of reclamation range (in years)	1 year
Maximum [Member] | Abandonment Costs Member [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset retirement obligation liability	$ 45
Maximum [Member] | Inflation rate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset retirement obligation, measurement input rate	2.79%
Maximum [Member] | Risk-free rate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Asset retirement obligation, measurement input rate	8.27%
Maximum [Member] | Reclamation Period [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Estimated timing of reclamation range (in years)	75 years
Class A Units [Member] | Subordinated Notes [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Number of common units issued | shares	1,425
Fair value of debt discount	$ 1,300
Fair value per Class A unit	$ 1
Class A Units [Member] | 2018 Subordinated Notes [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Number of common units issued | shares	585
Fair value of debt discount	$ 490

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Schedule of financial assets and liabilities at fair value

(in thousands)	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
March 31, 2020
Assets:
Commodity derivatives	$	-	$	23,185	$	-	$	23,185
Liabilities:
Commodity derivatives	$	-	$	25	$	-	$	25
December 31, 2019
Assets:
Commodity derivatives	$	-	$	7,079	$	-	$	7,079
Liabilities:
Commodity derivatives	$	-	$	556	$	-	$	556

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Asset Retirement Obligations (Tables)

3 Months Ended

Mar. 31, 2020

Asset Retirement Obligation [Abstract]

Schedule of reconciliation of the ARO

	Three Months Ended March 31,
(in thousands)	2020			2019
Balance at beginning of period	$	22,535		$	22,310
Accretion expense		478			394
Additions		7			-
Balance at end of period	$	23,020		$	22,704
Less:  Current portion		(5,564	)		(3,392	)
Non-current portion	$	17,456		$	19,312

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Subsequent Events

3 Months Ended

Mar. 31, 2020

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 15 – SUBSEQUENT EVENTS

Contemplated Transactions

On April 7, 2020, Carbon Energy Corporation, together with Nytis USA (the "Sellers"), and certain of the Company's other direct and indirect wholly owned subsidiaries, entered into a Membership Interest Purchase Agreement ("MIPA") to sell all of the issued and outstanding membership interests of Carbon Appalachia and Nytis LLC to Diversified Gas & Oil Corporation for $110.0 million, subject to customary purchase price adjustments, and a contingent payment of up to $15.0 million ("Contemplated Transactions"). The assets contained in the Contemplated Transactions comprise all of the Company's assets in the Appalachian and Illinois basin. If the Sellers terminate the MIPA under certain circumstances, the Sellers may be required to pay a termination fee of $3.8 million. The transaction is expected to close during the second quarter of 2020.

Upon closing of the Contemplated Transactions, the Company's remaining assets will be located solely in the Ventura Basin of California. Proceeds from the Contemplated Transactions will be used to settle all outstanding amounts associated with the 2018 Credit Facility and a portion of the Old Ironsides Notes.

COVID-19

Like other oil and gas companies, our business is being adversely affected by the COVID-19 pandemic and measures being taken to mitigate its impact. The pandemic has resulted in widespread adverse impacts on the global economy and on our employees, customers, suppliers and other parties with whom we have business relations. As the coronavirus pandemic and government responses are rapidly evolving, the extent of the impact on domestic exploration and production companies remains unknown. Further, the impact of the pandemic, including the resulting significant reduction in global demand for oil and gas, coupled with the sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of the Organization of the Petroleum Exporting Countries ("OPEC") and other foreign, oil-exporting countries is expected to lead to significant global economic contraction generally and in our industry in particular. We anticipate that our business, financial condition and results of operations may be materially and adversely impacted as a result of these developments.

We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

Oil Pricing Environment

In the midst of the ongoing COVID-19 pandemic, oil prices declined significantly due to potential increases in supply emanating from the disagreement on production cuts among members of OPEC and certain non-OPEC, oil-producing countries. The resulting supply and demand imbalance is having disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies. These industry conditions, coupled with those resulting from the COVID-19 pandemic, could lead to significant global economic contraction generally and in our industry in particular. Although OPEC agreed in April to cut production, the responses of oil and gas producers to the lower demand for, and price of, oil, natural gas and NGLs are constantly evolving and remain uncertain. In addition, the dramatic decrease in oil and gas prices could have substantial negative implications for our revenue sources that are related to or underpinned by commodity prices. As a result, these factors could have a material adverse effect on our business, future results of operations, financial position or cash flows.

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Commodity Derivatives (Details) - Carbon California [Member]	3 Months Ended
	Mar. 31, 2020 bbl MMBTU $ / MMBTU $ / Bbl
2020 [Member] | Natural Gas Swaps [Member] | MMBtu [Member]
Derivative agreements details:
Crude oil, notional amount (in MMBtu) | MMBTU	9,262,000
Weighted Average Price | $ / MMBTU	2.70	[1]
2020 [Member] | Natural Gas Collars [Member] | MMBtu [Member]
Derivative agreements details:
Crude oil, notional amount (in MMBtu) | MMBTU	2,541,000
2020 [Member] | Natural Gas Collars [Member] | MMBtu [Member] | Minimum [Member]
Derivative agreements details:
Weighted Average Price | $ / MMBTU	2.10	[1]
2020 [Member] | Natural Gas Collars [Member] | MMBtu [Member] | Maximum [Member]
Derivative agreements details:
Weighted Average Price | $ / MMBTU	2.75	[1]
2020 [Member] | Oil Swaps [Member] | WTI Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl	98,844	[2]
Weighted Average Price | $ / bbl	55.37	[2],[3]
2020 [Member] | Oil Swaps [Member] | Brent Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl	172,403	[2]
Weighted Average Price | $ / bbl	64.58	[2],[4]
2020 [Member] | Oil Collars [Member] | WTI Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl	20,600	[2]
2020 [Member] | Oil Collars [Member] | WTI Bbl [Member] | Minimum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	47.00	[2],[3]
2020 [Member] | Oil Collars [Member] | WTI Bbl [Member] | Maximum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	60.15	[2],[3]
2020 [Member] | Oil Collars [Member] | Brent Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl	46,700	[2]
2020 [Member] | Oil Collars [Member] | Brent Bbl [Member] | Minimum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	47.00	[2],[4]
2020 [Member] | Oil Collars [Member] | Brent Bbl [Member] | Maximum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	75.00	[2],[4]
2021 [Member] | Natural Gas Swaps [Member] | MMBtu [Member]
Derivative agreements details:
Crude oil, notional amount (in MMBtu) | MMBTU	6,448,000
Weighted Average Price | $ / MMBTU	2.58	[1]
2021 [Member] | Natural Gas Collars [Member] | MMBtu [Member]
Derivative agreements details:
Crude oil, notional amount (in MMBtu) | MMBTU	6,395,000
2021 [Member] | Natural Gas Collars [Member] | MMBtu [Member] | Minimum [Member]
Derivative agreements details:
Weighted Average Price | $ / MMBTU	2.00	[1]
2021 [Member] | Natural Gas Collars [Member] | MMBtu [Member] | Maximum [Member]
Derivative agreements details:
Weighted Average Price | $ / MMBTU	2.75	[1]
2021 [Member] | Oil Swaps [Member] | WTI Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl		[2]
Weighted Average Price | $ / bbl		[2],[3]
2021 [Member] | Oil Swaps [Member] | Brent Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl	86,341	[2]
Weighted Average Price | $ / bbl	67.12	[2],[4]
2021 [Member] | Oil Collars [Member] | WTI Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl	66,200	[2]
2021 [Member] | Oil Collars [Member] | WTI Bbl [Member] | Minimum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	47.00	[2],[3]
2021 [Member] | Oil Collars [Member] | WTI Bbl [Member] | Maximum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	60.15	[2],[3]
2021 [Member] | Oil Collars [Member] | Brent Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl	190,000	[2]
2021 [Member] | Oil Collars [Member] | Brent Bbl [Member] | Minimum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	47.00	[2],[4]
2021 [Member] | Oil Collars [Member] | Brent Bbl [Member] | Maximum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	75.00	[2],[4]
2022 [Member] | Oil Swaps [Member] | WTI Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl		[2]
Weighted Average Price | $ / bbl		[2],[3]
2022 [Member] | Oil Swaps [Member] | Brent Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl		[2]
Weighted Average Price | $ / bbl		[2],[4]
2022 [Member] | Oil Collars [Member] | WTI Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl		[2]
Weighted Average Price | $ / bbl		[2],[3]
2022 [Member] | Oil Collars [Member] | Brent Bbl [Member]
Derivative agreements details:
Crude oil, notional amount (in Bbl) | bbl	199,900	[2]
2022 [Member] | Oil Collars [Member] | Brent Bbl [Member] | Minimum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	50.00	[2],[4]
2022 [Member] | Oil Collars [Member] | Brent Bbl [Member] | Maximum [Member]
Derivative agreements details:
Weighted Average Price | $ / bbl	61.00	[2],[4]

[1] NYMEX Henry Hub Natural Gas futures contracts for the respective period.

[2] Includes 100% of Carbon California's outstanding derivative hedges at March 31, 2020, and not our proportionate share.

[3] NYMEX Light Sweet Crude West Texas Intermediate futures contracts for the respective period.

[4] Brent future contracts for the respective period.

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Credit Facilities and Notes Payable (Details Textual) - USD ($) $ in Thousands			3 Months Ended
	Oct. 01, 2019	Feb. 01, 2019	Mar. 31, 2020	Mar. 31, 2019	Jun. 01, 2020	May 01, 2020	Feb. 29, 2020
Credit Facilities and Notes Payable (Textual)
Senior secured asset-based revolving credit facility			$ 5,000	$ 3,000
Amortization of deferred issuance costs			212	277
Paid in kind interest			662	594
One-time principal reduction payment			$ 4,812	$ 5,676
Line Of Credit [Member] | Minimum [Member]
Credit Facilities and Notes Payable (Textual)
Funded debt ratio required to be maintained			1.00
Debt Instrument, covenant, current ratio			1.00
Old Ironsides Notes [Member] | Carbon Appalachia [Member]
Credit Facilities and Notes Payable (Textual)
Bank credit facility, terms				5 years
Amount of unsecured notes issuance				$ 25,100
Interest rate (as a percent)				10.00%
Number of monthly installments			24
One-time principal reduction payment		$ 2,000
Old Ironsides Notes [Member] | Carbon Appalachia [Member] | Payment in Kind (PIK) Note [Member]
Credit Facilities and Notes Payable (Textual)
Interest rate (as a percent)			12.00%
Paid in kind interest			$ 662
2018 Credit Facility [Member] | Carbon Appalachia [Member]
Credit Facilities and Notes Payable (Textual)
Unamortized deferred issuance costs			476
Unamortized debt discount, term note			22
Senior secured asset-based revolving credit facility			$ 500,000
Commitment fee (as a percent)			0.50%
Origination fee (as a percent)			0.50%
Credit facility			$ 75,000				$ 73,000
Credit facility remained			71,000
Additional borrowing capacity available
Debt Instrument, covenant, ratio of debt to EBITDAX			3.50
Debt Instrument, covenant, current ratio			1.00
Credit facility-revolver outstanding			$ 70,200
Debt instrument, covenant, minimum liquidity	$ 3,000
Debt instrument, covenant, minimum liquidity, term	90 days
Amortization of deferred issuance costs			$ 66	$ 63
Revolving credit facility maturing date			Dec. 31, 2022
Cash and cash equivalents of borrowers not to exceed			$ 3,000
Debt issuance costs paid, revolver and term loan			824
Debt issuance costs paid, term loan			134
Term loan			15,000
Sublimit for letters of credit			$ 1,500
Interest rate (as a percent)			6.25%
Number of monthly installments			18
2018 Credit Facility [Member] | Carbon Appalachia [Member] | Subsequent Event [Member]
Credit Facilities and Notes Payable (Textual)
Total future borrowing base reductions					$ 4,000	$ 6,000
2018 Credit Facility [Member] | Minimum [Member] | Carbon Appalachia [Member] | Base rate [Member]
Credit Facilities and Notes Payable (Textual)
Spread on variable base rate (as a percent)			0.25%
2018 Credit Facility [Member] | Minimum [Member] | Carbon Appalachia [Member] | London interbank offered rate [Member]
Credit Facilities and Notes Payable (Textual)
Spread on variable base rate (as a percent)			2.75%
2018 Credit Facility [Member] | Maximum [Member] | Carbon Appalachia [Member] | Base rate [Member]
Credit Facilities and Notes Payable (Textual)
Spread on variable base rate (as a percent)			0.75%
2018 Credit Facility [Member] | Maximum [Member] | Carbon Appalachia [Member] | London interbank offered rate [Member]
Credit Facilities and Notes Payable (Textual)
Spread on variable base rate (as a percent)			3.75%

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Earnings (Loss) Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Earnings Per Share [Abstract]
Net income (loss) attributable to common stockholders	$ 9,724	$ (4,175)
Weighted-average number of common shares outstanding, basic	7,809,000	7,663,000
Add dilutive effects of non-vested shares of restricted stock and restricted performance units	281
Weighted-average number of common shares outstanding, diluted	8,090,000	7,663,000
Net income (loss) per common share, basic	$ 1.25	$ (0.54)
Net income (loss) per common share, diluted	$ 1.2	$ (0.54)

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Accounts Payable and Accrued Liabilities (Tables)

3 Months Ended

Mar. 31, 2020

Payables and Accruals [Abstract]

Schedule of accounts payable and accrued liabilities

(in thousands)	March 31, 2020		December 31, 2019
Accounts payable	$	4,631	$	9,875
Oil and gas revenue suspense		3,517		3,620
Gathering and transportation payables		2,014		1,877
Production taxes payable		2,768		3,212
Accrued lease operating costs		734		664
Accrued ad valorem taxes-current		4,114		4,407
Accrued general and administrative expenses		3,186		3,260
Asset retirement obligations-current		5,564		5,021
Accrued interest		1,180		1,335
Accrued gas purchases		1,220		1,392
Other liabilities		1,352		494
Total accounts payable and accrued liabilities	$	30,280	$	35,157

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Supplemental Cash Flow Disclosure

3 Months Ended

Mar. 31, 2020

Supplemental Cash Flow Elements [Abstract]

SUPPLEMENTAL CASH FLOW DISCLOSURE

NOTE 14 – SUPPLEMENTAL CASH FLOW DISCLOSURE

Supplemental cash flow disclosures for the three months ended March 31, 2020 and 2019 are presented below:

	Three Months Ended March 31,
(in thousands)	2020			2019
Cash paid for interest	$	1,794		$	1,875
Non-cash transactions:
Capital expenditures included in accounts payable and accrued liabilities	$	(564	)	$	(82	)
Increase in asset retirement obligations	$	7		$	-

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Earnings (Loss) Per Common Share (Tables)

3 Months Ended

Mar. 31, 2020

Earnings Per Share [Abstract]

Schedule of basic and diluted (loss) income per share

	Three Months Ended March 31,
(in thousands, except per share amounts)	2020		2019
Net income (loss) attributable to common stockholders, basic and diluted		9,724		(4,175	)
Weighted-average number of common shares outstanding, basic		7,809		7,663
Add dilutive effects of non-vested shares of restricted stock and restricted performance units		281		-
Weighted-average number of common shares outstanding, diluted		8,090		7,663
Net income (loss) per common share, basic	$	1.25	$	(0.54	)
Net income (loss) per common share, diluted	$	1.20	$	(0.54	)

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Credit Facilities and Notes Payable (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
2018 Credit Facility - revolver [Member]
Debt Instrument [Line Items]
Total debt	$ 70,150	$ 69,150
2018 Credit Facility - term note [Member]
Debt Instrument [Line Items]
Total debt	3,333	5,833
Old Ironsides Notes [Member]
Debt Instrument [Line Items]
Total debt	26,336	25,675
Other Debt [Member]
Debt Instrument [Line Items]
Total debt	34	45
Credit Facilities [Member]
Debt Instrument [Line Items]
Total debt	99,853	100,703
Less: unamortized debt discount	(22)	(45)
Total credit facilities and notes payable	99,831	100,658
Current portion of credit facilities and notes payable	(3,311)	(5,788)
Non-current debt, net of current portion and unamortized debt discount	$ 96,520	$ 94,870

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Commitments and Contingencies (Tables)

3 Months Ended

Mar. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Schedule of firm transportation volumes and related demand charges

Period	Dekatherms per day		Demand Charges
Apr 2020 – May 2020		57,791	$	0.20 - 0.56
Jun 2020 – Oct 2020		56,641	$	0.20 - 0.56
Nov 2020 – Aug 2022		50,341	$	0.20 - 0.56
Sep 2022 – May 2027		30,990	$	0.20 - 0.21
Jun 2027 – May 2036		1,000	$	0.20

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Property and Equipment (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Oil and gas properties:
Proved oil and gas properties	$ 352,561	$ 351,488
Unproved properties	4,906	4,872
Accumulated depreciation, depletion, amortization and impairment	(112,719)	(109,344)
Oil and gas properties, net	244,748	247,016
Pipeline facilities and equipment	12,820	12,814
Base gas	1,937	1,937
Furniture and fixtures, computer hardware and software, and other equipment	6,967	6,762
Accumulated depreciation and amortization	(5,956)	(5,529)
Other property and equipment, net	15,768	15,984
Total property and equipment, net	$ 260,516	$ 263,000

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Income Taxes

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 10 – INCOME TAXES

We recognize 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. We have net operating loss carryforwards available in certain jurisdictions to reduce future taxable income. Future tax benefits from 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 March 31, 2020, the Company has established a full valuation allowance against the balance of net deferred tax assets.

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Credit Facilities and Notes Payable

3 Months Ended

Mar. 31, 2020

Debt Disclosure [Abstract]

CREDIT FACILITIES AND NOTES PAYABLE

NOTE 6 – CREDIT FACILITIES AND NOTES PAYABLE

The table below summarizes the outstanding credit facilities and notes payable:

(in thousands)	March 31, 2020			December 31, 2019
2018 Credit Facility – revolver	$	70,150		$	69,150
2018 Credit Facility – term note		3,333			5,833
Old Ironsides Notes		26,336			25,675
Other debt		34			45
Total debt		99,853			100,703
Less:  unamortized debt discount		(22	)		(45	)
Total credit facilities and notes payable		99,831			100,658
Current portion of credit facilities and notes payable		(3,311	)		(5,788	)
Non-current debt, net of current portion and unamortized debt discount	$	96,520		$	94,870

Carbon Appalachia

2018 Credit Facility

In 2018, the Company and its subsidiaries amended and restated its prior credit facilities and entered into a $500.0 million senior secured asset-based revolving credit facility maturing December 31, 2022 and a $15.0 million term loan maturing in 2020 (the "2018 Credit Facility"). The 2018 Credit Facility includes a sublimit of $1.5 million for letters of credit. The borrowers under the 2018 Credit Facility are Carbon Appalachia Enterprises, LLC ("CAE") and various other subsidiaries of the Company (including Nytis Exploration (USA) Inc., a direct wholly owned subsidiary of the Company ("Nytis USA"), together with CAE, the "Borrowers"). Under the 2018 Credit Facility, the Company is neither a borrower nor a guarantor. The initial borrowing base under the 2018 Credit Facility was $75.0 million and was $71.0 million as of March 31, 2020.

The 2018 Credit Facility is guaranteed by each existing and future direct or indirect subsidiary of the Borrowers and certain other subsidiaries of the Company (subject to various exceptions) and the obligations under the 2018 Credit Facility are secured by essentially all tangible, intangible and real property (subject to certain exclusions).

Interest accrues on borrowings under the 2018 Credit Facility at a rate per annum equal to either (i) the base rate plus a margin equal to 0.25% - 0.75% depending on the utilization percentage or (ii) the Adjusted LIBOR plus a margin equal to 2.75% - 3.75% depending on the utilization percentage, at the Borrowers' option. The Borrowers are obligated to pay certain fees and expenses in connection with the 2018 Credit Facility, including a commitment fee for any unused amounts of 0.50% and an origination fee of 0.50%. Loans under the 2018 Credit Facility may be prepaid without premium or penalty.

The 2018 Credit Facility also provides for a $15.0 million term loan which bears interest at a rate of 6.25% and is payable in 18 equal monthly installments beginning February 1, 2019 with the last payment due on July 1, 2020.

The 2018 Credit Facility contains certain affirmative and negative covenants that, among other things, limit the Borrowers' 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 distribution on, or repurchase of, equity; (vi) make certain investments; (vii) enter into certain transactions with their affiliates; (viii) enter in sale-leaseback transactions; (ix) make optional or voluntary payment of debt other than obligations under the 2018 Credit Facility; (x) change the nature of their business; (xi) change their fiscal year or make changes to the accounting treatment or reporting practices; (xii) amend their 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 2018 Credit Facility requires the Borrowers' compliance, on a consolidated basis, with a maximum Net Debt (all debt of the Borrowing Parties minus all unencumbered cash and cash equivalents of the Borrowers not to exceed $3.0 million) / EBITDAX (as defined) ratio of 3.50 to 1.00 and a current ratio, as defined, minimum of 1.00 to 1.00, tested quarterly.

In August 2019, we amended the 2018 Credit Facility, effective October 1, 2019, to restrict the aging of our accounts payable to 90 days or less, maintain minimum liquidity of $3.0 million and require the sale of certain non-core assets by December 31, 2019. 

In February 2020, we amended the 2018 Credit Facility to eliminate the minimum liquidity requirement and reduce the borrowing base from $75.0 million to $73.0 million, with subsequent borrowing base reductions totaling $6.0 million scheduled through May 1, 2020. Also, pursuant to this amendment, the lenders agreed to provide a limited waiver of non-compliance with the asset sale covenant included in the amendment from August 2019.

In April 2020, we amended the 2018 Credit Facility to extend the remaining borrowing base reductions totaling $4.0 million through June 1, 2020.

As of March 31, 2020, there was approximately $70.2 million in outstanding borrowings and no borrowing capacity available under the 2018 Credit Facility, after considering letters of credit outstanding. As of March 31, 2020, we were not in compliance with our current ratio financial covenant. However, we anticipate a full payoff of the 2018 Credit Facility as a result of Contemplated Transactions described in Note 15 prior to any potential event of default. The Company believes given these circumstances it is appropriate to classify the outstanding borrowings associated with the 2018 Credit Facility as non-current.

The terms of the 2018 Credit Facility require us to enter into derivative contracts at fixed pricing for a certain percentage of our production. We are party to International Swaps and Derivatives Association Master Agreements ("ISDA Master Agreements") that establish standard terms for the derivative contracts and inter-creditor agreements with the lenders whereby any credit exposure related to the derivative contracts entered into by us is secured by the collateral and backed by the guarantees supporting the 2018 Credit Facility.

Fees paid in connection with the 2018 Credit Facility totaled approximately $824,000, of which $134,000 was associated with the term loan. The current portion of unamortized fees associated with the credit facility is included in prepaid expenses, deposits and other current assets and the non-current portion is included in other non-current assets. The unamortized portion associated with the term loan was $22,000 as of March 31, 2020 and is directly offset against the loan in current liabilities. As of March 31, 2020, we had unamortized deferred issuance costs of approximately $476,000 associated with the credit facility. During the three months ended March 31, 2020 and 2019, we amortized approximately $66,000 and $63,000, respectively, as interest expense associated with the 2018 Credit Facility.

Old Ironsides Notes

On December 31, 2018, in connection with our acquisition (the "OIE Membership Acquisition") of all of the Class A Units of Carbon Appalachia from Old Ironside Fund II-A Portfolio Holding Company, LLC, a Delaware limited liability company, and Old Ironside Fund II-B Portfolio Holding Company, LLC, a Delaware limited liability company (collectively, "Old Ironsides"), we delivered unsecured, promissory notes in the aggregate original principal amount of approximately $25.1 million to Old Ironsides (the "Old Ironsides Notes"). The Old Ironsides Notes bear interest at 10.0% per annum and have a term of five years, the first three of which require interest-only payments at the end of each calendar quarter beginning with the quarter ending March 31, 2019. At the end of the three-year interest-only period, the then current outstanding principal balance and interest is to be paid in 24 equal monthly payments. The Old Ironsides Notes also require mandatory prepayments upon the occurrence of certain subsequent liquidity events. A mandatory, one-time principal reduction payment in the aggregate amount of $2.0 million was made to Old Ironsides on February 1, 2019.

The interest payable under the Old Ironsides Notes can be paid-in-kind at the election of the Company. This provision allows the Company to increase the principal balance associated with the Old Ironsides Notes. This election creates a second tranche of principal, which bears interest at 12.0% per annum. For the three months ended March 31, 2020, the Company elected payment-in-kind interest of approximately $662,000.

Carbon California

The table below summarizes the outstanding notes payable – related party:

(in thousands)	March 31, 2020			December 31, 2019
Senior Revolving Notes, related party, due February 15, 2022	$	34,700		$	33,000
Subordinated Notes, related party, due February 15, 2024		13,000			13,000
Total principal		47,700			46,000
Less: Deferred notes costs		(164	)		(175	)
Less: unamortized debt discount		(1,019	)		(1,084	)
Total notes payable – related party	$	46,517		$	44,741

Senior Revolving Notes, Related Party

On February 15, 2017, Carbon California entered into a Note Purchase Agreement (the "Note Purchase Agreement") for the issuance and sale of Senior Secured Revolving Notes to Prudential with an initial revolving borrowing capacity of $25.0 million which mature on February 15, 2022 (the "Senior Revolving Notes"). The Company is not a guarantor of the Senior Revolving Notes. The closing of the Note Purchase Agreement on February 15, 2017 resulted in the sale and issuance by Carbon California of Senior Revolving Notes in the 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. As of March 31, 2020, the borrowing base was $45.0 million, of which $34.7 million was outstanding. On April 1, 2020, the borrowing base was redetermined and reduced to $40.0 million.  

Carbon California may elect to incur interest at either (i) 5.50% plus LIBOR or (ii) 4.50% plus the Prime Rate (which is defined as the interest rate published daily by JPMorgan Chase Bank, N.A.). As of December 31, 2019, the effective borrowing rate for the Senior Revolving Notes was 7.10%. In addition, the Senior Revolving Notes include a commitment fee for any unused amounts at 0.50% as well as an annual administrative fee of $75,000, payable on February 15 each year.

The Senior Revolving Notes are secured by all the assets of Carbon California. The Senior Revolving Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated proved developed production at such time for year one, two and three at a rate of 75%, 65% and 50%, respectively. Carbon California may make principal payments in minimum installments of $500,000. Distributions to equity members are generally restricted.

Carbon California incurred fees directly associated with the issuance of the Senior Revolving Notes and amortizes these fees over the life of the Senior Revolving Notes. The current portion of these fees are included in prepaid expenses and deposits and the long-term portion is included in other non-current assets for a combined value of approximately $528,000. For the three months ended March 31, 2020 and 2019, Carbon California amortized fees of $70,000 and $74,000, respectively.

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

Subordinated Notes, Related Party

On February 15, 2017, Carbon California entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with Prudential Capital Energy Partners, L.P. for the issuance and sale of Subordinated Notes due February 15, 2024, bearing interest of 12.0% per annum (the "Subordinated Notes"). The Company is not a guarantor of the Subordinated Notes. The closing of the Securities Purchase Agreement on February 15, 2017 resulted in the sale and issuance by Carbon California of Subordinated Notes in the original principal amount of $10.0 million, all of which remains outstanding as of March 31, 2020.

Prudential received an additional 1,425 Class A Units, representing 5.0% of the total sharing percentage, for the issuance of the Subordinated Notes. Carbon California valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the outstanding Subordinated Notes of $10.0 million. The Company then allocated the non-cash value of the units of approximately $1.3 million, which was recorded as a discount to the Subordinated Notes. As of March 31, 2020, Carbon California had an outstanding discount of approximately $691,000, which is presented net of the Subordinated Notes within Notes payable-related party on the unaudited condensed consolidated balance sheets. During the three months ended March 31, 2020, Carbon California amortized $45,000 and $45,000, respectively, associated with the Subordinated Notes.

The Subordinated Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production at such time for year one, two and three at a rate of 67.5%, 58.5% and 45.0%, respectively.

Prepayment of the Subordinated Notes is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is not subject to a prepayment fee after February 17, 2020. Distributions to equity members are generally restricted. 

2018 Subordinated Notes, Related Party

On May 1, 2018, Carbon California entered into an agreement with Prudential for the issuance and sale of $3.0 million in subordinated notes due February 15, 2024, bearing interest of 12.0% per annum (the "2018 Subordinated Notes"), of which $3.0 million remains outstanding as of March 31, 2020.

Prudential received 585 Class A Units, representing an approximate 2.0% additional sharing percentage, for the issuance of the 2018 Subordinated Notes. Carbon California valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the outstanding 2018 Subordinated Notes of $3.0 million. The Company then allocated the non-cash value of the units of approximately $490,000, which was recorded as a discount to the 2018 Subordinated Notes. As of March 31, 2020, Carbon California had an outstanding discount of $328,000 associated with these notes, which is presented net of the 2018 Subordinated Notes within Notes payable - related party on the unaudited condensed consolidated balance sheets. During the three months ended March 31, 2020 and 2019, Carbon California amortized $21,000 and $21,000, respectively, associated with the 2018 Subordinated Notes.

The 2018 Subordinated Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production at such time for year one, two and three at a rate of 67.5%, 58.5% and 45.0%, respectively.

Prepayment of the 2018 Subordinated Notes is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is not subject to a prepayment fee after February 17, 2020. Distributions to equity members are generally restricted.

Restrictions and Covenants

The Senior Revolving Notes, Subordinated Notes and 2018 Subordinated Notes contain affirmative and negative covenants that, among other things, limit Carbon California'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 our affiliates; (viii) enter into sales-leaseback transactions; (ix) make optional or voluntary payments of debt; (x) change the nature of our business; (xi) change our fiscal year to make changes to the accounting treatment or reporting practices; (xii) amend constituent documents; and (xiii) enter into certain hedging transactions.

In December 2019, Carbon California amended the Senior Revolving Notes, the Subordinated Notes and the 2018 Subordinated Notes to amend the total leverage ratio and senior leverage ratio, effective September 30, 2019. The Senior Revolving Notes were also amended to provide a mechanism to determine a successor reference rate to LIBOR.

The affirmative and negative covenants are subject to various exceptions, including basket amounts and acceptable transaction levels. In addition, (i) the Senior Revolving Notes require at December 31, 2019 Carbon California's compliance with (A) a maximum Debt/EBITDA ratio of 4.5 to 1.0 (B) a maximum Senior Revolving Notes/EBITDA ratio of 3.5 to 1.0 and (C) a minimum interest coverage ratio of 2.0 to 1 and (ii) the Subordinated Notes require at December 31, 2019 Carbon California's compliance with (A) a maximum Debt/EBITDA ratio of 5.18 to 1.0, (B) a maximum Senior Revolving Notes/EBITDA ratio of 4.03 to 1.0, (C) a minimum interest coverage ratio of 1.6 to 1.0, (D) an asset coverage test whereby indebtedness may not exceed the product of 0.65 times Adjusted PV-10 of proved developed reserves set forth in the most recent reserve report, (E) maintenance of a minimum borrowing base of $30.0 million under the Senior Revolving Notes and (F) a minimum current ratio of 0.85 to 1.00.

As of March 31, 2020, Carbon California was not in compliance with its Senior Revolving Notes/EBITDA ratio. We are currently negotiating an amendment to the covenant requirements with Prudential and are confident we will be successful in amending the covenants. While we have historically been successful in renegotiating covenant requirements with our lenders, there can be no assurance that we will be able to do so successfully in the future.

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") and in accordance with U.S. generally accepted accounting principles ("GAAP") applicable to interim financial statements. These unaudited condensed consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim period. Operating results for the interim periods presented require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes and are not necessarily indicative of the results that may be expected for the full year. The condensed consolidated balance sheet data as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. The Company follows the same accounting policies for preparing quarterly and annual reports.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. Partnerships and subsidiaries in which we have a controlling interest are consolidated. We are currently consolidating 46 partnerships, Carbon Appalachia, and Carbon California, and we reflect the non-controlling ownership interest in partnerships and subsidiaries as non-controlling interests on our unaudited condensed consolidated statements of operations and also reflect the non-controlling ownership interest in the net assets of the partnerships as non-controlling interests within stockholders' equity on our unaudited condensed consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated.

In accordance with established practice in the oil and gas industry, our unaudited condensed consolidated financial statements also include our pro-rata share of assets, liabilities, income, lease operating costs and general and administrative expenses of the oil and gas partnerships in which we have 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 we have the ability to significantly influence the operating decisions of the investee. When we do 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 condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued ASU 2020-04 as an update to provide optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform (ASC Topic 848) on financial reporting. The amendments in ASU 2020-04 are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London interbank offered rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

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Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenue:
Commodity derivative gain (loss)	$ 19,714	$ (9,306)
Other (loss) income	(2)	26
Total revenue	42,465	24,950
Expenses:
Lease operating expenses	7,372	6,616
Pipeline operating expenses	2,692	3,085
Transportation and gathering costs	2,576	1,669
Production and property taxes	10	2,010
Marketing gas purchases	3,472	6,302
General and administrative	3,303	4,689
Depreciation, depletion and amortization	3,811	3,980
Accretion of asset retirement obligations	478	394
Total expenses	23,714	28,745
Operating income (loss)	18,751	(3,795)
Other income (expense):
Interest expense	(2,872)	(2,914)
Investments in affiliates	(421)	19
Total other expense	(3,293)	(2,895)
Income (loss) before income taxes	15,458	(6,690)
Provision for income taxes
Net income (loss) before non-controlling interests and preferred shares	15,458	(6,690)
Net income (loss) attributable to non-controlling interests	5,659	(2,590)
Net income (loss) attributable to controlling interests before preferred shares	9,799	(4,100)
Net income attributable to preferred shares - preferred return	75	75
Net income (loss) attributable to common shares	$ 9,724	$ (4,175)
Net income (loss) per common share:
Basic	$ 1.25	$ (0.54)
Diluted	$ 1.2	$ (0.54)
Weighted average common shares outstanding:
Basic	7,809	7,663
Diluted	8,090	7,663
Natural gas liquids [Member]
Revenue:
Total revenue	$ 152	$ 247
Oil sales [Member]
Revenue:
Total revenue	7,216	8,989
Transportation and handling [Member]
Revenue:
Total revenue	633	734
Marketing gas sales [Member]
Revenue:
Total revenue	6,318	4,944
Natural gas sales [Member]
Revenue:
Total revenue	$ 8,434	$ 19,316

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Commitments and Contingencies (Details Textual) $ in Thousands	3 Months Ended
	Mar. 31, 2020 USD ($) $ / Mcf Mcf
Commitments and Contingencies Disclosure [Abstract]
Firm transportation contract obligations, current and non-current	$ 13,600
Natural gas processing agreement initial term	5 years
Natural gas processing agreement extension period	5 years
Annual demand charges for volume commitments	$ 1,800
Minimum annual volume commitment | Mcf	720
Natural gas processing fee | $ / Mcf	2.50

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Commodity Derivatives (Details 1) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Commodity derivative contracts:
Commodity derivative asset	$ 18,078	$ 5,915
Commodity derivative asset - non-current	5,107	1,164
Commodity derivative liability		469
Commodity derivative liability - non-current	$ 25	$ 87

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Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Total [Member]
Disaggregation of Revenue [Line Items]
Total	$ 22,753	$ 34,230
Natural gas sales [Member]
Disaggregation of Revenue [Line Items]
Total	8,434	19,316
Natural gas liquids sales [Member]
Disaggregation of Revenue [Line Items]
Total	152	247
Oil sales [Member]
Disaggregation of Revenue [Line Items]
Total	7,216	8,989
Transportation and handling [Member]
Disaggregation of Revenue [Line Items]
Total	633	734
Marketing gas sales [Member]
Disaggregation of Revenue [Line Items]
Total	6,318	4,944
Appalachian and Illinois Basins [Member]
Disaggregation of Revenue [Line Items]
Total	16,117	26,007
Appalachian and Illinois Basins [Member] | Natural gas sales [Member]
Disaggregation of Revenue [Line Items]
Total	8,019	18,792
Appalachian and Illinois Basins [Member] | Natural gas liquids sales [Member]
Disaggregation of Revenue [Line Items]
Total
Appalachian and Illinois Basins [Member] | Oil sales [Member]
Disaggregation of Revenue [Line Items]
Total	1,147	1,537
Appalachian and Illinois Basins [Member] | Transportation and handling [Member]
Disaggregation of Revenue [Line Items]
Total	633	734
Appalachian and Illinois Basins [Member] | Marketing gas sales [Member]
Disaggregation of Revenue [Line Items]
Total	6,318	4,944
Ventura Basin [Member]
Disaggregation of Revenue [Line Items]
Total	8,223	22,753
Ventura Basin [Member] | Natural gas sales [Member]
Disaggregation of Revenue [Line Items]
Total	415	524
Ventura Basin [Member] | Natural gas liquids sales [Member]
Disaggregation of Revenue [Line Items]
Total	152	247
Ventura Basin [Member] | Oil sales [Member]
Disaggregation of Revenue [Line Items]
Total	6,069	7,452
Ventura Basin [Member] | Transportation and handling [Member]
Disaggregation of Revenue [Line Items]
Total
Ventura Basin [Member] | Marketing gas sales [Member]
Disaggregation of Revenue [Line Items]
Total

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Fair Value Measurements (Details) - Fair Value Measurements [Member] - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Assets:
Commodity derivatives	$ 23,185	$ 7,079
Liabilities:
Commodity derivatives	25	556
Level 1 [Member]
Assets:
Commodity derivatives
Liabilities:
Commodity derivatives
Level 2 [Member]
Assets:
Commodity derivatives	23,185	7,079
Liabilities:
Commodity derivatives	25	556
Level 3 [Member]
Assets:
Commodity derivatives
Liabilities:
Commodity derivatives

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Credit Facilities and Notes Payable (Tables)

3 Months Ended

Mar. 31, 2020

Debt Disclosure [Abstract]

Schedule of outstanding credit facilities and notes payable

(in thousands)	March 31, 2020			December 31, 2019
2018 Credit Facility – revolver	$	70,150		$	69,150
2018 Credit Facility – term note		3,333			5,833
Old Ironsides Notes		26,336			25,675
Other debt		34			45
Total debt		99,853			100,703
Less:  unamortized debt discount		(22	)		(45	)
Total credit facilities and notes payable		99,831			100,658
Current portion of credit facilities and notes payable		(3,311	)		(5,788	)
Non-current debt, net of current portion and unamortized debt discount	$	96,520		$	94,870

Schedule of outstanding notes payable - related party

(in thousands)	March 31, 2020			December 31, 2019
Senior Revolving Notes, related party, due February 15, 2022	$	34,700		$	33,000
Subordinated Notes, related party, due February 15, 2024		13,000			13,000
Total principal		47,700			46,000
Less: Deferred notes costs		(164	)		(175	)
Less: unamortized debt discount		(1,019	)		(1,084	)
Total notes payable – related party	$	46,517		$	44,741

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") and in accordance with U.S. generally accepted accounting principles ("GAAP") applicable to interim financial statements. These unaudited condensed consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim period. Operating results for the interim periods presented require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes and are not necessarily indicative of the results that may be expected for the full year. The condensed consolidated balance sheet data as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. The Company follows the same accounting policies for preparing quarterly and annual reports.

Principles of Consolidation

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. Partnerships and subsidiaries in which we have a controlling interest are consolidated. We are currently consolidating 46 partnerships, Carbon Appalachia, and Carbon California, and we reflect the non-controlling ownership interest in partnerships and subsidiaries as non-controlling interests on our unaudited condensed consolidated statements of operations and also reflect the non-controlling ownership interest in the net assets of the partnerships as non-controlling interests within stockholders' equity on our unaudited condensed consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated.

In accordance with established practice in the oil and gas industry, our unaudited condensed consolidated financial statements also include our pro-rata share of assets, liabilities, income, lease operating costs and general and administrative expenses of the oil and gas partnerships in which we have 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 we have the ability to significantly influence the operating decisions of the investee. When we do 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 condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued ASU 2020-04 as an update to provide optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform (ASC Topic 848) on financial reporting. The amendments in ASU 2020-04 are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London interbank offered rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

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Commodity Derivatives

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

COMMODITY DERIVATIVES

NOTE 12 – COMMODITY DERIVATIVES

We historically use commodity-based derivative contracts to manage exposures to commodity price on a portion of our oil and natural gas production. We do not hold or issue derivative financial instruments for speculative or trading purposes. We also have entered 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. These contracts are not recorded at fair value in the unaudited condensed consolidated financial statements.

We have entered into swap and costless collar derivative agreements to hedge a portion of our oil and natural gas production through December 2022. As of March 31, 2020, these derivative agreements consisted of the following:

	Natural Gas Swaps				Natural Gas Collars
			Weighted Average				Weighted Average Price
Year	MMBtu		Price (a)		MMBtu		Range (a)
2020		9,262,000	$	2.70		2,541,000	$	2.10 – $2.75
2021		6,448,000	$	2.58		6,395,000	$	2.00 – $2.75

	Oil Swaps*								Oil Collars*
Year	WTI Bbl		Weighted Average Price (b)		Brent Bbl		Weighted Average Price (c)		WTI Bbl		Weighted Average Price (b)		Brent Bbl		Weighted Average Price (c)
2020		98,844	$	55.37		172,403	$	64.58		20,600	$	47.00 - $60.15		46,700	$	47.00 - $75.00
2021		-	$	-		86,341	$	67.12		66,200	$	47.00 - $60.15		190,000	$	47.00 - $75.00
2022		-	$	-		-	$	-		-	$	-		199,900	$	50.00 - $61.00

*	Includes 100% of Carbon California's outstanding derivative hedges at March 31, 2020, and not our proportionate share.
(a)	NYMEX Henry Hub Natural Gas futures contracts for the respective period.
(b)	NYMEX Light Sweet Crude West Texas Intermediate futures contracts for the respective period.
(c)	Brent future contracts for the respective period.

For our swap instruments, we receive a fixed price for the hedged commodity and pay 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 condensed consolidated balance sheets. These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

(in thousands)	March 31, 2020		December 31, 2019
Commodity derivative contracts:
Commodity derivative asset	$	18,078	$	5,915
Commodity derivative asset – non-current	$	5,107	$	1,164
Commodity derivative liability	$	-	$	469
Commodity derivative liability – non-current	$	25	$	87

The table below summarizes the commodity settlements and unrealized gains and losses related to the Company's derivative instruments for the three months ended March 31, 2020 and 2019. Changes in the fair value of commodity derivative contracts are recognized in revenues in the unaudited condensed consolidated statements of operations and gains and losses are included within the cash flows from operating activities in the unaudited condensed consolidated statements of cash flows. 

	Three Months Ended March 31,
(in thousands)	2020		2019
Commodity derivative contracts:
Settlement gain (loss)	$	3,078	$	(456	)
Unrealized gain (loss)		16,636		(8,850	)
Total commodity derivative gain (loss)	$	19,714	$	(9,306	)

Commodity derivative settlement gains and losses are included within the cash flows from operating activities in the unaudited condensed consolidated statements of cash flows.

We net our derivative instrument fair value amounts pursuant to ISDA Master Agreements, which provide 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 effect of netting arrangements for recognized derivative assets and liabilities that are subject to master netting arrangements or similar arrangements in the unaudited condensed consolidated balance sheet as of March 31, 2020:

							Net
	Gross						Recognized
	Recognized			Gross			Fair Value
	Assets/			Amounts			Assets/
Balance Sheet Classification (in thousands)	Liabilities			Offset			Liabilities
Commodity derivative assets:
Commodity derivative asset	$	18,441		$	(363	)	$	18,078
Commodity derivative asset – non-current		7,144			(2,037	)		5,107
Total derivative assets	$	25,585		$	(2,400	)	$	23,185
Commodity derivative liabilities:
Commodity derivative liability	$	(363	)	$	363		$	-
Commodity derivative liability – non-current		(2,062	)		2,037			(25	)
Total derivative liabilities	$	(2,425	)	$	24,00		$	(25	)

Due to the volatility of oil and natural gas prices, the estimated fair value of our derivatives is subject to fluctuations from period to period.

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Stock-Based Compensation Plans

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

STOCK-BASED COMPENSATION PLANS

NOTE 8 – STOCK-BASED COMPENSATION PLANS

We have three stock plans, the Carbon 2011 Stock Incentive Plan, the Carbon 2015 Stock Incentive Plan and the Carbon 2019 Long Term Incentive Plan (collectively the "Carbon Plans"). The Carbon 2019 Long Term Incentive Plan was approved by the Company's stockholders in May 2019. The Carbon Plans provide for the issuance of approximately 1.6 million shares of common stock to our officers, directors, employees or consultants eligible to receive the awards under the Carbon Plans.

The Carbon Plans provide for the granting of incentive stock options, non-qualified stock options, restricted stock awards, performance awards and phantom stock awards, or a combination of the foregoing, to employees, officers, directors or consultants, provided that only employees may be granted incentive stock options and directors may only be granted restricted stock awards and phantom stock awards.

Restricted Stock

As of March 31, 2020, approximately 748,000 shares of restricted stock have been granted under the terms of the Carbon Plans. Restricted stock awards for employees vest ratably over a three-year service period or cliff vest at the end of a three-year service period. For non-employee directors, the awards vest upon the earlier of a change in control of us or the date their membership on the Board of Directors is terminated other than for cause as defined in the agreement. During the three months ended March 31, 2020, approximately 20,000 restricted stock units vested.

Compensation costs recognized for restricted stock grants were approximately $204,000 and $179,000 for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, there was approximately $1.3 million unrecognized compensation costs related to these restricted stock grants which we expect to be recognized over the next 6.0 years.

Restricted Performance Units

As of March 31, 2020, approximately 699,000 shares of performance units have been granted under the terms of the Carbon Plans. Performance units represent a contractual right to receive one share of our 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 growth of certain performance measures over a defined period of time as well as, in some cases, continued service requirements. During the three months ended March 31, 2020, approximately 83,000 performance units vested.

We account for the performance units granted during 2018 and 2019 at their fair value determined at the date of grant, which were $9.80 and $10.00 per share, respectively. The final measurement of compensation cost will be based on the number of performance units that ultimately vest. At March 31, 2020, we estimated that none of the performance units granted in 2019 and 2018 would vest, and, accordingly, no compensation cost has been recorded for these performance units. As of March 31, 2020, if a change in control and other performance provisions pursuant to the terms and conditions of these award agreements as defined in the agreement were met in full, the estimated unrecognized compensation cost related to unvested performance units would be approximately $3.2 million.

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Accounts Payable and Accrued Liabilities

3 Months Ended

Mar. 31, 2020

Payables and Accruals [Abstract]

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

(in thousands)	March 31, 2020		December 31, 2019
Accounts payable	$	4,631	$	9,875
Oil and gas revenue suspense		3,517		3,620
Gathering and transportation payables		2,014		1,877
Production taxes payable		2,768		3,212
Accrued lease operating costs		734		664
Accrued ad valorem taxes-current		4,114		4,407
Accrued general and administrative expenses		3,186		3,260
Asset retirement obligations-current		5,564		5,021
Accrued interest		1,180		1,335
Accrued gas purchases		1,220		1,392
Other liabilities		1,352		494
Total accounts payable and accrued liabilities	$	30,280	$	35,157

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Organization (Details) - Carbon California [Member]	Mar. 31, 2020
Ownership percentage	53.92%
Prudential [Member]
Ownership percentage	46.08%

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Accounts Payable and Accrued Liabilities (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	Mar. 31, 2019
Payables and Accruals [Abstract]
Accounts payable	$ 4,631	$ 9,875
Oil and gas revenue suspense	3,517	3,620
Gathering and transportation payables	2,014	1,877
Production taxes payable	2,768	3,212
Accrued lease operating costs	734	664
Accrued ad valorem taxes-current	4,114	4,407
Accrued general and administrative expenses	3,186	3,260
Asset retirement obligations-current	5,564	5,021	$ 3,392
Accrued interest	1,180	1,335
Accrued gas purchases	1,220	1,392
Other liabilities	1,352	494
Total accounts payable and accrued liabilities	$ 30,280	$ 35,157

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Subsequent Events (Details) - Subsequent Event [Member] $ in Thousands	Apr. 07, 2020 USD ($)
Consideration for sale of subsidiaries	$ 110,000
Contingent consideration	15,000
Termination fee payable under certain circumstances	$ 3,800

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Commodity Derivatives (Details 3) $ in Thousands	Mar. 31, 2020 USD ($)
Commodity derivative asset - current [Member]
Derivatives, Fair Value [Line Items]
Gross Recognized Assets	$ 18,441
Gross Amounts Offset	7,144
Net Recognized Fair Value Assets	25,585
Commodity derivative asset - non-current [Member]
Derivatives, Fair Value [Line Items]
Gross Recognized Assets	(363)
Gross Amounts Offset	(2,037)
Net Recognized Fair Value Assets	(2,400)
Total derivative assets [Member]
Derivatives, Fair Value [Line Items]
Gross Recognized Assets	18,078
Gross Amounts Offset	5,107
Net Recognized Fair Value Assets	23,185
Commodity derivative liability - current [Member]
Derivatives, Fair Value [Line Items]
Gross Recognized Liabilities	(363)
Gross Amounts Offset	(2,062)
Net Recognized Fair Value Liabilities	(2,425)
Commodity derivative liability - non-current [Member]
Derivatives, Fair Value [Line Items]
Gross Recognized Liabilities	363
Gross Amounts Offset	2,037
Net Recognized Fair Value Liabilities	2,400
Total derivative liabilities [Member]
Derivatives, Fair Value [Line Items]
Gross Recognized Liabilities
Gross Amounts Offset	(25)
Net Recognized Fair Value Liabilities	$ (25)

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash flows from operating activities:
Net income (loss)	$ 15,458	$ (6,690)
Items not involving cash:
Depreciation, depletion and amortization	3,811	3,980
Accretion of asset retirement obligations	478	394
Unrealized commodity derivative (gain) loss	(16,636)	8,850
Stock-based compensation expense	204	222
Loss on sale of affiliate investment	419
Investments in affiliates	9	(19)
Amortization of debt costs	212	277
Interest expense paid-in-kind	662	594
Net change in:
Accounts receivable	2,524	6,091
Prepaid expenses, deposits and other current assets	148	375
Accounts payable, accrued liabilities and firm transportation contract obligations	(6,589)	(6,079)
Inventory and other non-current items	577	316
Net cash provided by operating activities	1,277	8,311
Cash flows from investing activities:
Development and acquisition of properties and equipment	(1,013)	(500)
Proceeds received - disposition of oil and gas properties and other property and equipment	256	164
Proceeds from sale of affiliate investment	131
Net cash used in investing activities	(626)	(336)
Cash flows from financing activities:
Proceeds from credit facilities and notes payable	5,000	3,000
Payments on credit facilities and notes payable	(4,812)	(5,676)
Payments of debt issuance costs		(41)
(Distributions to) contributions from non-controlling interests, net	(3)	22
Net cash provided by (used in) financing activities	185	(2,695)
Net increase in cash and cash equivalents	836	5,280
Cash and cash equivalents, beginning of period	904	5,736
Cash and cash equivalents, end of period	$ 1,740	$ 11,016

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Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Current assets:
Cash and cash equivalents	$ 1,740	$ 904
Accounts receivable:
Revenue	10,331	12,886
Joint interest billings and other	1,583	1,552
Commodity derivative asset (Note 12)	18,078	5,915
Prepaid expenses, deposits, and other current assets	2,352	2,500
Inventory	1,943	2,512
Total current assets	36,027	26,269
Oil and gas properties, full cost method of accounting:
Proved, net	239,842	242,144
Unproved	4,906	4,872
Other property and equipment, net	15,768	15,984
Total property and equipment, net	260,516	263,000
Investments in affiliates	67	625
Commodity derivative asset - non-current (Note 12)	5,107	1,164
Right-of-use assets	5,689	6,104
Other non-current assets	980	1,092
Total non-current assets	272,359	271,985
Total assets	308,386	298,254
Current liabilities:
Accounts payable and accrued liabilities (Note 4)	30,280	35,157
Firm transportation contract obligations (Note 13)	5,571	5,679
Lease liability - current	1,638	1,625
Commodity derivative liability (Note 12)		469
Credit facilities and notes payable (Note 6)	3,311	5,788
Total current liabilities	40,800	48,718
Non-current liabilities:
Firm transportation contract obligations (Note 13)	8,049	8,905
Lease liability - non-current	3,966	4,383
Commodity derivative liability - non-current (Note 12)	25	87
Production and property taxes payable	3,173	2,815
Asset retirement obligations (Note 5)	17,456	17,514
Credit facilities and notes payable (Note 6)	96,520	94,870
Notes payable - related party (Note 6)	46,517	44,741
Total non-current liabilities	175,706	173,315
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $0.01 par value; liquidation preference of $599 and $524 at March 31, 2020 and December 31, 2019, respectively; authorized 1,000,000 shares, 50,000 shares issued and outstanding at March 31, 2020 and December 31, 2019	1	1
Common stock, $0.01 par value; authorized 35,000,000 shares, 7,899,020 and 7,796,085 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively	79	78
Additional paid-in capital	86,037	85,834
Accumulated deficit	(26,043)	(35,842)
Total Carbon stockholders' equity	60,074	50,071
Non-controlling interests	31,806	26,150
Total stockholders' equity	91,880	76,221
Total liabilities and stockholders' equity	$ 308,386	$ 298,254

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Earnings (Loss) Per Common Share

3 Months Ended

Mar. 31, 2020

Earnings Per Share [Abstract]

EARNINGS (LOSS) PER COMMON SHARE

NOTE 9 – EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders for the period by the basic weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share includes potentially issuable shares consisting primarily of non-vested restricted stock and contingent restricted performance units, using the treasury stock method. In periods when we report a net loss, all common stock equivalents are excluded from the calculation of diluted weighted average shares outstanding because they would have an anti-dilutive effect, meaning the loss per share would be reduced.

For the three months ended March 31, 2019, approximately 269,000 shares of restricted stock, respectively, were considered anti-dilutive and were excluded from the computation of diluted earnings per share. For the three months ended March 31, 2020 and 2019, approximately 193,000 and 200,000 shares of restricted performance units, respectively, subject to future contingencies were excluded from the computation of basic and diluted earnings per share.

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

	Three Months Ended March 31,
(in thousands, except per share amounts)	2020		2019
Net income (loss) attributable to common stockholders, basic and diluted		9,724		(4,175	)
Weighted-average number of common shares outstanding, basic		7,809		7,663
Add dilutive effects of non-vested shares of restricted stock and restricted performance units		281		-
Weighted-average number of common shares outstanding, diluted		8,090		7,663
Net income (loss) per common share, basic	$	1.25	$	(0.54	)
Net income (loss) per common share, diluted	$	1.20	$	(0.54	)

Series B Convertible Preferred Stock - Related Party

In May 2018, we raised $5.0 million through the issuance of 50,000 shares of Series B Convertible Preferred Stock, par value $0.01 per share ("Preferred Stock") to Yorktown. The Preferred Stock converts into common stock at the election of the holder or will automatically convert into shares of our common stock upon completion of a qualifying equity financing event. The number of shares of common stock issuable upon conversion is dependent upon the price per share of common stock issued in connection with any such qualifying equity financing but has a floor conversion price equal to $8.00 per share. The conversion ratio at which the Preferred Stock will convert into common stock is equal to an amount per share of $100 plus all accrued but unpaid dividends payable in respect thereof divided by the greater of (i) $8.00 per share or (ii) the price that is 15.0% less than the lowest price per share of shares sold to the public in the next equity financing. Using the floor of $8.00 per share would yield 12.5 shares of common stock for every unit of Preferred Stock. The conversion price will be proportionately increased or decreased to reflect changes to the outstanding shares of common stock, such as the result of a combination, reclassification, subdivision, stock split, stock dividend or other similar transaction involving the common stock. Additionally, after the third anniversary of the issuance of the Preferred Stock, we have the option to redeem the shares for cash.

The Preferred Stock accrues cash dividends at a rate of 6.0% of the initial issue price of $100 per share per annum. The holders of the Preferred Stock are entitled to the same number of votes of common stock that such share of Preferred Stock would represent on an as converted basis. The holders of the Preferred Stock receive liquidation preference based on the initial issue price of $100 per share plus a preferred return over common stockholders and the holders of any junior ranking stock. The preferred return was approximately $599,000 as of March 31, 2020 and increased by $75,000 during the three months ended March 31, 2020.

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Asset Retirement Obligations

3 Months Ended

Mar. 31, 2020

Asset Retirement Obligation [Abstract]

ASSET RETIREMENT OBLIGATIONS

NOTE 5 – 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 the estimated ARO liability result in adjustments to the related capitalized asset and corresponding liability.

The ARO liability is based on estimated economic lives, estimates of 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 adjusted as a result of a reassessment of expected cash flows and assumptions inherent in the estimation of the liability. 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. 

The following table is a reconciliation of ARO:

	Three Months Ended March 31,
(in thousands)	2020			2019
Balance at beginning of period	$	22,535		$	22,310
Accretion expense		478			394
Additions		7			-
Balance at end of period	$	23,020		$	22,704
Less:  Current portion		(5,564	)		(3,392	)
Non-current portion	$	17,456		$	19,312

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Delivery Commitments

We have entered into firm transportation contracts to ensure the transport for certain of our gas production to purchasers. Firm transportation volumes and the related demand charges for the remaining term of these contracts as of March 31, 2020 are summarized in the table below.

Period	Dekatherms per day		Demand Charges
Apr 2020 – May 2020		57,791	$	0.20 - 0.56
Jun 2020 – Oct 2020		56,641	$	0.20 - 0.56
Nov 2020 – Aug 2022		50,341	$	0.20 - 0.56
Sep 2022 – May 2027		30,990	$	0.20 - 0.21
Jun 2027 – May 2036		1,000	$	0.20

As of March 31, 2020, the remaining commitment related to the firm transportation contracts assumed in the EXCO Acquisition in October 2016 and the OIE Membership Acquisition in December 2018 is $13.6 million and reflected in the Company's unaudited condensed consolidated balance sheet. These contractual obligations are reduced monthly as the Company pays these firm transportation obligations.

Natural gas processing agreement

We have entered into an initial five-year gas processing agreement expiring in 2022. We have an option to extend the term of the agreement by another five years. The related demand charges for volume commitments over the remaining term of the agreement are approximately $1.8 million per year. We will pay a processing fee of $2.50 per Mcf for the term of the agreement, with a minimum annual volume commitment of 720,000 Mcf.

Capital Commitments

As of March 31, 2020, we had no capital commitments.

Litigation

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.

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Supplemental Cash Flow Disclosure (Tables)

3 Months Ended

Mar. 31, 2020

Supplemental Cash Flow Elements [Abstract]

Schedule of supplemental cash flow disclosures

	Three Months Ended March 31,
(in thousands)	2020			2019
Cash paid for interest	$	1,794		$	1,875
Non-cash transactions:
Capital expenditures included in accounts payable and accrued liabilities	$	(564	)	$	(82	)
Increase in asset retirement obligations	$	7		$	-

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Property and Equipment (Details Textual) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Property, Plant and Equipment [Abstract]
Capitalized overhead	$ 238	$ 68
Depletion expense related to oil and gas properties	3,400	3,500
Leasehold costs reclassified into proved property

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Commitments and Contingencies (Details) - Transportation Commitments [Member]	3 Months Ended
	Mar. 31, 2020 $ / Dekatherm Dekatherms
Apr 2020 - May 2020 [Member]
Other Commitments [Line Items]
Capacity levels (Dekatherms per day) | Dekatherms	57,791
Apr 2020 - May 2020 [Member] | Minimum [Member]
Other Commitments [Line Items]
Demand Charges (in dollars per dekatherm)	0.20
Apr 2020 - May 2020 [Member] | Maximum [Member]
Other Commitments [Line Items]
Demand Charges (in dollars per dekatherm)	0.56
Jun 2020 - Oct 2020 [Member]
Other Commitments [Line Items]
Capacity levels (Dekatherms per day) | Dekatherms	56,641
Jun 2020 - Oct 2020 [Member] | Minimum [Member]
Other Commitments [Line Items]
Demand Charges (in dollars per dekatherm)	0.20
Jun 2020 - Oct 2020 [Member] | Maximum [Member]
Other Commitments [Line Items]
Demand Charges (in dollars per dekatherm)	0.56
Nov 2020 - Aug 2022 [Member]
Other Commitments [Line Items]
Capacity levels (Dekatherms per day) | Dekatherms	50,341
Nov 2020 - Aug 2022 [Member] | Minimum [Member]
Other Commitments [Line Items]
Demand Charges (in dollars per dekatherm)	0.20
Nov 2020 - Aug 2022 [Member] | Maximum [Member]
Other Commitments [Line Items]
Demand Charges (in dollars per dekatherm)	0.56
Sep 2022 - May 2027 [Member]
Other Commitments [Line Items]
Capacity levels (Dekatherms per day) | Dekatherms	30,990
Sep 2022 - May 2027 [Member] | Minimum [Member]
Other Commitments [Line Items]
Demand Charges (in dollars per dekatherm)	0.20
Sep 2022 - May 2027 [Member] | Maximum [Member]
Other Commitments [Line Items]
Demand Charges (in dollars per dekatherm)	0.21
Jun 2027 - May 2036 [Member]
Other Commitments [Line Items]
Capacity levels (Dekatherms per day) | Dekatherms	1,000
Demand Charges (in dollars per dekatherm)	0.20

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Organization

3 Months Ended

Mar. 31, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

ORGANIZATION

NOTE 1 – ORGANIZATION

Carbon Energy Corporation is an independent oil and natural gas company engaged in the acquisition, exploration, development and production of oil, natural gas and natural gas liquids properties located in the United States. The terms "we", "us", "our", the "Company" or "Carbon" refer to Carbon Energy Corporation and our consolidated subsidiaries (described below). The following is an organization chart of the key subsidiaries discussed in this report as of March 31, 2020:

Appalachian and Illinois Basin Operations

In the Appalachian and Illinois Basins, operations are conducted by Nytis Exploration Company, LLC ("Nytis LLC"). The following organizational chart illustrates this relationship as of March 31, 2020:

 

We hold all of the Class A Units of Carbon Appalachian Company, LLC, a Delaware limited liability company ("Carbon Appalachia"), along with its direct and indirect subsidiaries (Carbon Appalachia Group, LLC, Carbon Tennessee Mining Company, LLC, Carbon Appalachia Enterprises, LLC, Carbon West Virginia Company, LLC, Cranberry Pipeline Corporation, Knox Energy, LLC, Coalfield Pipeline Company and Appalachia Gas Services Company, LLC). 

Ventura Basin Operations

In California, Carbon California Operating Company, LLC conducts operations on behalf of Carbon California Company, LLC, a Delaware limited liability company ("Carbon California"). We own 53.92% of the voting and profits interests and Prudential Legacy Insurance Company of New Jersey and Prudential Insurance Company of America or its affiliates (collectively, "Prudential") owns 46.08% of the voting and profits interest in Carbon California. The following organizational chart illustrates this relationship as of March 31, 2020:

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Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Statement of Financial Position [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	50,000	50,000
Preferred stock, shares outstanding	50,000	50,000
Preferred stock, liquidation preference	$ 599	$ 524
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	35,000,000	35,000,000
Common stock, shares issued	7,899,020	7,796,085
Common stock, shares outstanding	7,899,020	7,796,085

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Credit Facilities and Notes Payable (Details Textual 1) - USD ($) $ in Thousands			3 Months Ended
	May 01, 2018	Feb. 15, 2017	Mar. 31, 2020	Mar. 31, 2019	Apr. 01, 2020
Credit Facilities and Notes Payable (Textual)
Amortization of deferred issuance costs			$ 212	$ 277
Carbon California [Member]
Credit Facilities and Notes Payable (Textual)
Business acquisitions, description		The sale and issuance by Carbon California of Senior Revolving Notes in the principal amount of $10.0 million.
Carbon California [Member] | Prudential [Member] | Senior Revolving Notes [Member]
Credit Facilities and Notes Payable (Textual)
Initial revolving borrowing capacity		$ 25,000
Notes maturity date		Feb. 15, 2022
Principal outstanding			10,000
Borrowing base amount			45,000
Outstanding borrowings			$ 34,700
Effective borrowing rate			7.10%
Commitment fee (as a percent)		0.50%
Annual administrative fee payable		$ 75
Percentage of production hedged by commodity derivatives, year one		75.00%
Percentage of production hedged by commodity derivatives, year two		65.00%
Percentage of production hedged by commodity derivatives, year three		50.00%
Principal payments in minimum installments		$ 500
Current portion of fees			$ 528
Amortization of deferred issuance costs			70	74
Debt instrument, covenant, debt to EBITDA ratio		4.5
Debt instrument, covenant, senior revolving notes to EBITDA ratio		3.5
Debt instrument, covenant, interest coverage ratio		2.0
Debt instrument, covenant, current ratio		1.0
Carbon California [Member] | Prudential [Member] | Senior Revolving Notes [Member] | Subsequent Event [Member]
Credit Facilities and Notes Payable (Textual)
Borrowing base amount					$ 40,000
Carbon California [Member] | Prudential [Member] | Senior Revolving Notes [Member] | LIBOR [Member]
Credit Facilities and Notes Payable (Textual)
Effective borrowing rate		5.50%
Carbon California [Member] | Prudential [Member] | Senior Revolving Notes [Member] | Prime Rate [Member]
Credit Facilities and Notes Payable (Textual)
Effective borrowing rate		4.50%
Carbon California [Member] | Prudential [Member] | Subordinated Notes [Member]
Credit Facilities and Notes Payable (Textual)
Notes maturity date		Feb. 15, 2024
Principal outstanding			10,000
Percentage of production hedged by commodity derivatives, year one		67.50%
Percentage of production hedged by commodity derivatives, year two		58.50%
Percentage of production hedged by commodity derivatives, year three		45.00%
Amortization of debt discount			45	45
Interest rate (as a percent)		12.00%
Number of common units issued		1,425
Increase in sharing percentage by noncontroling interest		5.00%
Fair value per Class A unit		$ 1,000
Fair value of debt discount		1,300
Outstanding discount amount of notes			691
Proceeds from debt		$ 30,000
Principal prepayment allowed (as a percent)		100.00%
Prepayment fee (as a percent)		3.00%
Debt instrument, covenant, debt to EBITDA ratio		5.18
Debt instrument, covenant, senior revolving notes to EBITDA ratio		4.03
Debt instrument, covenant, interest coverage ratio		1.6
Debt instrument, covenant, current ratio		0.85
Percentage of adjusted PV-10 not to exceed indebtedness		0.65%
Carbon California [Member] | Prudential [Member] | 2018 Subordinated Notes [Member]
Credit Facilities and Notes Payable (Textual)
Notes maturity date	Feb. 15, 2024
Principal outstanding			3,000
Percentage of production hedged by commodity derivatives, year one	67.50%
Percentage of production hedged by commodity derivatives, year two	58.50%
Percentage of production hedged by commodity derivatives, year three	45.00%
Amortization of debt discount			$ 21	$ 21
Interest rate (as a percent)	12.00%
Number of common units issued	585
Increase in sharing percentage by noncontroling interest	2.00%
Fair value per Class A unit	$ 1,000
Fair value of debt discount	490
Proceeds from debt	$ 3,000
Principal prepayment allowed (as a percent)	100.00%
Prepayment fee (as a percent)	3.00%

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Earnings (Loss) Per Common Share (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended	3 Months Ended
	May 31, 2018	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Issuance of preferred stock, value		$ 1		$ 1
Issuance of preferred stock, shares		50,000		50,000
Preferred return		$ 599		$ 524
Restricted Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive shares excluded from computation of diluted earnings per share		269,000
Restricted Performance Units [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive shares excluded from computation of diluted earnings per share		193,000	200,000
Series B Convertible Preferred Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Issue price, per share	$ 0.01
Series B Convertible Preferred Stock [Member] | Yorktown [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Issuance of preferred stock, value	$ 5,000
Issuance of preferred stock, shares	50,000
Conversion price, per share	$ 8.00
Annual per share dividend rate	6.00%
Issue price, per share	$ 100
Preferred return		$ 599
Preferred return increased		$ 75
Convertible preferred stock shares issued upon conversion	12.5
Preferred stock, conversion ratio, stock price trigger	15.00%

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Revenue (Tables)

3 Months Ended

Mar. 31, 2020

Revenue Recognition and Deferred Revenue [Abstract]

Schedule of disaggregation of revenue

	Appalachian and Illinois Basins				Ventura Basin				Total
	Three Months Ended March 31,				Three Months Ended March 31,				Three Months Ended March 31,
	2020		2019		2020		2019		2020		2019
Natural gas sales	$	8,019	$	18,792	$	415	$	524	$	8,434	$	19,316
Natural gas liquids sales		-		-		152		247		152		247
Oil sales		1,147		1,537		6,069		7,452		7,216		8,989
Transportation and handling		633		734		-		-		633		734
Marketing gas sales		6,318		4,944		-		-		6,318		4,944
Total	$	16,117	$	26,007	$	6,636	$	8,223	$	22,753	$	34,230

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Property and Equipment (Tables)

3 Months Ended

Mar. 31, 2020

Property, Plant and Equipment [Abstract]

Schedule of net property and equipment

(in thousands)	March 31, 2020			December 31, 2019
Oil and gas properties:
Proved oil and gas properties	$352,561			$351,488
Unproved properties		4,906			4,872
Accumulated depreciation, depletion, amortization and impairment		(112,719	)		(109,344	)
Oil and gas properties, net		244,748			247,016
Pipeline facilities and equipment		12,820			12,814
Base gas		1,937			1,937
Furniture and fixtures, computer hardware and software, and other equipment		6,967			6,762
Accumulated depreciation and amortization		(5,956	)		(5,529	)
Other property and equipment, net		15,768			15,984
Total property and equipment, net	$	260,516		$	263,000