Carbon Natural Gas Co (Form: 10-K, Received: 03/31/2017 15:10:36)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-02040

CARBON NATURAL GAS COMPANY
(Exact Name of Registrant as Specified in Its Charter)

State of incorporation: Delaware		I.R.S. Employer Identification No. 26-0818050
1700 Broadway - Suite 1170 - Denver, Colorado		80290
(Address of Principal Executive Offices)		(Zip Code)

Registrant's telephone number, including area code: (720) 407-7030

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, Par Value $0.01 Per Share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ☐ No ☒

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

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐
(Do not check if a smaller
reporting company)

Smaller reporting company ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $32.9 million (based on the closing price of such stock).

There were approximately 5.5 million shares (post reverse split) of the registrant's common stock, par value $0.01 per share, outstanding as of March 17, 2017.

CARBON NATURAL GAS COMPANY
TABLE OF CONTENTS

		Page No.
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	28
Item 2.	Properties	28
Item 3.	Legal Proceedings	28
Item 4.	Mine Safety Disclosures	28
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	29
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 8.	Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	70
Item 9A.	Controls and Procedures	70
Item 9B.	Other Information	70
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	71
Item 11.	Executive Compensation	75
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	80
Item 13.	Certain Relationships and Related Transactions, and Director Independence	82
Item 14.	Principal Accountant Fees and Services	82
PART IV
Item 15.	Exhibits, Financial Statement Schedules	84
	Signatures	85

PART I

Item 1. Business.

General

Throughout this Annual Report on Form 10-K, we use the terms "Carbon," "Company," "we," "our," and "us" to refer to Carbon Natural Gas Company and its subsidiaries. In the following discussion, we make statements that may be deemed "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See " Forward-Looking Statements ," below, for more details. We also use a number of terms used in the oil and gas industry. See " Glossary of Oil and Gas Terms " for the definition of certain terms.

Carbon Natural Gas Company is a Delaware corporation, originally formed in Indiana in 1959, which owns and operates oil and natural gas and oil interests in the Appalachian and Illinois Basins of the United States. It produces and sells oil, natural gas, natural gas condensate and natural gas liquids. Carbon’s acreage is held and its exploration and production activities are conducted indirectly through majority-owned subsidiaries.

●

Nytis Exploration (USA) Inc. (“Nytis USA”) was organized as a Delaware corporation in 2004. Pursuant to the Merger, Nytis USA is owned 100% by Carbon.

●

In 2005 Nytis USA acquired oil and natural gas interests (owned by Addington Exploration, LLC (“Addington”)) located in Illinois, Indiana, Kentucky, Ohio, Tennessee and West Virginia. To acquire the Addington assets, Nytis USA formed (along with a different unaffiliated person) Nytis Exploration Company LLC (“Nytis LLC”). Nytis LLC is owned 98.1% by Nytis USA.

●

On January 31, 2011, Nytis USA entered into an Agreement and Plan of Merger (the “Merger Agreement”) with St. Lawrence Seaway Corporation (“SLSC”), which was closed on February 14, 2011. At that date, SLSC acquired all of the issued and outstanding shares of Nytis USA from the Nytis USA stockholders, and thereby became the indirect owner of all of Nytis USA’s equity interests in Nytis LLC. In exchange for the issuance by SLSC to the Nytis USA stockholders of 47,000,003 restricted shares of SLSC common stock (which then constituted 98.9% of SLSC’s issued and outstanding common stock), Nytis USA became a wholly-owned subsidiary of SLSC, and Nytis LLC became a majority-owned indirect subsidiary of SLSC (the “Merger”). The transactions contemplated by the Merger Agreement were intended to be a “tax-free” reorganization under Sections 351 and/or 368 of the Internal Revenue Code of 1986. Prior to the Merger closing, SLSC was a “shell company” (as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”)), with no operations and nominal cash assets. As a result of the Merger, SLSC exited shell company status as of February 17, 2011, when it filed a Form 8-K with complete “Form 10 Information” as required by Item 2.01(f) of Form 8-K. On May 2, 2011, SLSC’s name was changed to Carbon Natural Gas Company.

●

In connection with the closing of the Merger, the officers and directors of Nytis USA became the officers and directors of SLSC.

●

In October 2016, Nytis LLC completed an acquisition of approximately 2,300 natural gas wells and over 900 miles of associated natural gas gathering pipeline and compression facilities, located primarily in West Virginia. The assets have estimated proved developing producing reserves of approximately 46.4 Bcfe, approximately 201,000 net acres of oil and natural gas mineral interests and were producing approximately 9,000 net Mcfe per day as of December 31, 2016.

●

As of December 31, 2016, the Company owned interests in approximately 3,211 gross (2,589 net) productive oil and natural gas wells and approximately 532,000 (466,000 net) acres in the Appalachian and Illinois Basin of which 329,000 (277,000 net) acres are undeveloped.

●

On February 15, 2017, the Company entered into an agreement in which Carbon acquired 17.813% interest in Carbon California Company, LLC for no cash consideration. Concurrently, Carbon California Company, LLC completed the acquisition of certain oil and gas assets in the Ventura Basin of California.

●

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

Carbon is a holding company which conducts substantially all its oil and natural gas operations through Nytis LLC. Nytis LLC also holds an interest in 46 consolidated partnerships and records the non-controlling owners’ interest in net assets and income.

Strategy

Our strategy is to create shareholder value through consistent growth in cash flows, production and reserves through drilling on existing properties and the acquisition of complementary properties. We emphasize the development of the Company’s existing leasehold which consists primarily of low risk, repeatable resource plays. We invest significantly in technical staff and geological and engineering technology to enhance the value of our properties.

Principal strategy components:

	●	Concentrate resources in core operating areas. Our focus on the Appalachian and Illinois Basins allows the Company to capitalize on its regional expertise to optimize drilling and completion techniques and to create production and reserve growth. Numerous objective reservoirs permit us to allocate capital among opportunities based on risked well economics, with a view to balancing the portfolio to achieve consistent and profitable growth in production and reserves.

		Some of our proved reserves and resources are classified as unconventional, including fractured shale formations, tight gas sands, and coalbed methane. Our technical team has significant experience in drilling vertical, horizontal and directional wells, as well as fracture stimulation of unconventional formations. We utilize geological, drilling and completion technologies to enhance the predictability and repeatability of finding and recovering hydrocarbons in these unconventional plays.

●

Oil development. The Company has, since 2011, focused on the drilling of its oil prospects and the Company expects to continue to allocate capital to oil drilling activities as economic conditions allow. During this time, we have enhanced our well performance, improved well drilling and completion performance, including reduced drilling days, increased horizontal lateral length, decreased cost per frac stage and reduced days from spud to first production. In addition we have established an infrastructure of oil and natural gas gathering and salt water handling and disposal facilities which will benefit the economics of future drilling. We continue to acquire leases and producing properties where we have identified additional potential to expand our oil development activities.

●

Gas development. Another area of focus of our drilling and completion activities is the development of a coalbed methane resource located in the Illinois Basin. The Company has approximately 62,000 net mineral acres in Indiana and Illinois which are prospective for the development of coalbed methane. The Company also owns an interest in related natural gas gathering and compression and salt water disposal facilities. Since 2006, we have conducted a drilling program in the Seelyville coal formation, including participating as a 50% joint venture partners in the drilling of 36 vertical and two horizontal wells. During 2015, the Company participated in the drilling of 25 stratigraphic wells to identify potential future horizontal locations in the Seelyville coal formation. If natural gas prices support further development of the resource, we may drill additional wells.

●

Acquisitions. Our strategy is to increase our reserves and operating cash flows through the acquisition of complementary properties. In October 2016, the Company completed an acquisition of approximately 2,300 natural gas wells located primarily in West Virginia. In February 2017, the Company through its ownership of Carbon California Company, LLC, completed acquisitions of oil and gas assets in the Ventura Basin of California. The Company will continue to focus on the acquisition of complementary properties.

●

Proven executive management team with track record of value creation . Our management and technical personnel have extensive experience operating in the Appalachian and Illinois Basins.

●

Low-risk development drilling in established resource plays, and flexibility in deployment of exploration, development and infrastructure capital. The Company’s acreage positions provide multiple resource play opportunities. At an appropriate level of oil and natural gas prices, the Company has a multi-year drilling inventory of potential horizontal drilling locations on existing acreage. Carbon has drilled or participated in over 166 vertical or horizontal wells from January 2005 through December 31, 2016. Our leasehold position has been delineated largely through drilling done by us, as well as with other industry players. Our leasehold position is largely comprised of leases held-by-production or long-term leases, neither of which require any near term obligatory capital expenditures.

●

Low cost operation . Our geographic and operating focus and the shallow nature of our drilling activities and producing wells results in relatively low finding and development and lease operating costs.

●

Maintain financial flexibility and conservative financial position . We typically use cash flow from operations and our bank credit facility with LegacyTexas Bank to fund drilling, completion and acquisition activities and in the past have accessed outside capital through the use of joint ventures or similar arrangements.

●

Control over operating decisions and capital program. At December 31, 2016, we operated approximately 96% of the wells in which we have a working interest. The high percentage of operated wells allows us to manage the timing of capital expenditures, lease operating expenses and the marketing of oil and natural gas production.

●

Manage commodity price exposure through an active hedging program . We maintain a hedging program designed to reduce exposure to fluctuations in commodity prices. As of December 31, 2016, we have outstanding natural gas hedges of approximately 3.4 million MMBtu for 2017 at an average price of $3.30 per MMBtu, approximately 3.1 million MMBtu for 2018 at an average price of $3.01 per MMBtu and approximately 1.3 million MMBtu for 2019 at an average price of $2.85 per MMBtu. In addition, as of December 31, 2016, we have outstanding oil hedges of 60,000 barrels for 2017 at an average price of $52.98 per barrel, 48,000 barrels for 2018 at an average price of $54.11 per barrel and 36,000 barrels for 2019 at an average price of $54.90 per barrel.

●

Manage midstream assets and secure firm takeaway capacity . We own natural gas gathering and compression facilities in the Appalachian and Illinois Basins. We believe that owning gathering and compression facilities allows us to decrease dependence on third parties, and to better manage the timing of our asset development and to receive higher netback pricing from the markets in which we sell our production. We have secured long-term firm takeaway capacity on various natural gas pipelines to accommodate the transportation and marketing of certain of our existing and expected production.

Core Operational Areas

Our oil and gas properties are located in Illinois, Indiana, Kentucky, Ohio, Tennessee, and West Virginia. The map below shows locations of the Company’s oil and natural gas properties as of December 31, 2016.

Appalachian Basin

As of December 31, 2016, Nytis LLC owns working interests in 3,155 gross wells (2,561 net) and royalty interests located in Kentucky, Ohio, Tennessee and West Virginia, and has leasehold positions in approximately 187,000 net developed acres and approximately 215,000 net undeveloped acres. As of December 31, 2016, net oil and natural gas sales were approximately 15,000 Mcfe per day. Objective formations are the Berea Sandstone, Chattanooga Shale, Devonian Shale, Lower Huron Shale and other zones which produce oil and natural gas.

Illinois Basin

As of December 31, 2016, Nytis LLC owns working interests in 56 gross (28 net) coalbed methane wells in the Illinois Basin and has a leasehold position in approximately 1,700 net developed acres and approximately 62,000 net undeveloped acres. As of December 31, 2016, net natural gas sales were approximately 400 Mcf per day.

Acquisition and Divestiture Activities

We pursue acquisitions that meet our criteria for investment returns and are consistent with our low-risk development focus. Acquisitions in and around our existing core areas enable us to leverage our cost control abilities, technical expertise, and existing land and infrastructure positions. Our acquisition program has focused on acquisitions of properties that have development drilling opportunities and undeveloped acreage. We have also evaluated producing oil properties with field development potential in California. The following is a summary of our significant acquisitions and divestitures that influenced the last two years. See “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and Note 4 to the Consolidated Financial Statements and “ Recent Developments ” for more information on our acquisitions and dispositions.

Acquisitions

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

The acquired assets significantly increased the natural gas production and reserves of the Company and are expected to increase cash flow, reduce general and administrative expenses (per unit of production) and provide an inventory of development projects. The acquired assets consisted of the following:

●

Approximately 2,300 natural gas wells and over 900 miles of associated natural gas gathering pipelines and compression facilities operated by the Company. As of December 31, 2016, these wells were producing approximately 9,000 net Mcfe per day (97% natural gas).

●

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

●

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

●

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

Divestitures

During December 2014, Nytis LLC together with Liberty Energy LLC (“Liberty”) (the “Sellers”) completed a preliminary closing in accordance with a Purchase and Sale Agreement (the “PSA”) entered into during October 2014 for the sale of a portion of Nytis LLC’s interest in rights below the base of the Clinton Formation (the “Deep Rights”) underlying certain oil and gas leases located in Kentucky and West Virginia.

Pursuant to the PSA, the Sellers reserved (i) a minority working interest in the Deep Rights, (ii) an overriding royalty interest in certain of the Deep Rights and (iii) all rights from the surface to the base of the Clinton formation underlying the leases. In connection with the closing of this transaction, Nytis LLC received approximately $12.4 million in cash with the proceeds from the sale recorded as a reduction of the Company’s investment in its proved and unevaluated oil and natural gas properties.

In June 2015, the final closing was completed. In connection with the final closing, Nytis LLC received an additional $42,000 in cash.

Reserves

Our proved reserves increased in 2016 primarily due to the acquisition of proved producing properties. The changes in our proved reserves during 2016 are as follows:

	2016
	Oil			Natural Gas			Total
	MBbls			MMcf			MMcfe

Proved reserves, beginning of year		598			29,958			33,546
Revisions of previous estimates		110			2,207			2,867
Extensions and discoveries		-			-			-
Production		(79	)		(2,823	)		(3,297	)
Purchases of reserves in-place		253			44,923			46,441
Sales of reserves in-place		-			-			-
Proved reserves, end of year		882			74,265			79,557

The Company holds an interest in 64 partnerships, 46 of which are consolidated. The following table summarizes our estimated quantities of proved reserves and the pre-tax present value of estimated future oil and natural gas revenues, net of direct expenses, discounted at an annual rate of 10% (“PV-10”) as of December 31, 2016 and 2015 after consolidating the partnerships in which the Company has a controlling interest. Pre-tax PV-10, which is not a financial measure accepted under GAAP, is shown because it is a widely used industry standard.

Estimated Consolidated Proved Reserves

Including Non-Controlling Interests of Consolidated Partnerships

	December 31,
	2016			2015

Proved developed reserves:
Natural gas (MMcf)		74,265			29,958
Oil and liquids (MBbl)		851			554
Total proved developed reserves (MMcfe)		79,371			33,282

Proved undeveloped reserves:
Natural gas (MMcf)		-			-
Oil and liquids (MBbl)		31			44
Total proved undeveloped reserves (MMcfe)		186			264

Total proved reserves (MMcfe)		79,557			33,546

Percent developed		99.8	%		99.2	%

PV-10 (thousands)	$	49,344		$	25,032

Average natural gas price used (per Mcf)	$	2.41		$	2.50
Average oil and liquids price used (per Bbl)	$	40.40		$	46.12

The estimated quantities of proved reserves for the non-controlling interests of the consolidated partnerships as of December 31, 2016 are approximately 3.1 Bcfe, which is approximately 4% of total consolidated proved reserves.

The following table summarizes our estimated quantities of proved reserves and the pre-tax PV10, excluding the non-controlling interests of the consolidated partnerships, as of December 31, 2016 and 2015.

Estimated Proved Reserves Excluding Non-Controlling Interests of Consolidated Partnerships

	December 31,
	2016			2015

Proved developed reserves:
Natural gas (MMcf)		71,125			26,972
Oil and liquids (MBbl)		851			554
Total proved developed reserves (MMcfe)		76,231			30,296

Proved undeveloped reserves:
Natural gas (MMcf)		-			-
Oil and liquids (MBbl)		31			44
Total proved undeveloped reserves (MMcfe)		186			264

Total proved reserves (MMcfe)		76,417			30,560

Percent developed		99.7	%		99.1	%

PV-10 (thousands)	$	47,659		$	23,301

Average natural gas price used (per Mcf)	$	2.41		$	2.50
Average oil and liquids price used (per Bbl)	$	40.40		$	46.12

Preparation of Reserves Estimates

Our proved oil and natural gas reserves estimates as of December 31, 2016 and 2015 were based on the average fiscal-year prices for oil and natural gas (calculated as the unweighted arithmetic average of the first-day-of-the month price for each month within the 12-month period ended December 31, 2016 and 2015 respectively). Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Proved undeveloped reserves on undrilled acreage are limited to those locations on development spacing areas that are offsetting economic producers that are reasonably certain of economic production when drilled. Proved undeveloped reserves for other undrilled development spacing areas are claimed only where it can be demonstrated with reasonable certainty that there is continuity of economic production from the existing productive formation. Proved undeveloped reserves are included when they are scheduled to be drilled within five years.

SEC rules dictate the types of technologies that a company may use to establish reserve estimates including the extraction of non-traditional resources, such as natural gas extracted from shales as well as bitumen extracted from oil sands. See Note 17 to the Consolidated Financial Statements for additional information regarding our estimated proved reserves.

Uncertainties are inherent in estimating quantities of proved reserves, including many factors beyond our control. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and its interpretation. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing, and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices or development and production expenses, may require revision of such estimates. Accordingly, quantities of oil and natural gas ultimately recovered will vary from reserve estimates. See “ Risk Factors ,” for a description of some of the risks and uncertainties associated with our business and reserves.

Reserve estimates are based on production performance, data acquired remotely or in wells, and are guided by petrophysical, geologic, geophysical, and reservoir engineering models. Estimates of our proved reserves were based on deterministic methods. In the case of mature developed reserves, reserve estimates are determined by decline curve analysis and in the case of immature developed and undeveloped reserves, by analogy, using proximate or otherwise appropriate examples in addition to volumetric analysis. The technologies and economic data used in estimating our proved reserves include empirical evidence through drilling results and well performance, well logs and test data, geologic maps and available downhole and production data. Further, the internal review process of our wells and related reserve estimates includes but is not limited to the following:

	●	A comparison is made and documented of actual data from our accounting system to the data utilized in the reserve database. Current production, revenue and expense information obtained from the Company’s accounting records are subject to external quarterly reviews, annual audits and additional internal controls over financial reporting. This process is designed to create assurance that production, revenues and expenses are accurately reflected in the reserve database.

	●	A comparison is made and documented of land and lease records to ownership interest data in the reserve database. This process is designed to create assurance that the costs and revenues utilized in the reserves estimation match actual ownership interests.

	●	A comparison is made of property acquisitions, disposals, retirements or transfers to the property records maintained in the reserve database to verify that all are accounted for accurately.

	●	Natural gas pricing for the first flow day of every month is obtained from Platts Gas Daily. Oil pricing for the first flow day of every month is obtained from the U.S. Energy Information Administration. At the reporting date, 12-month average prices are determined. Regional variations in pricing and related deductions are similarly obtained and a 12-month average is calculated at year end.

For the years ended December 31, 2016 and 2015, Carbon’s independent engineering firm, Cawley, Gillespie & Associates, Inc. (“CGA”) reviewed with Carbon technical personnel field performance and future development plans. Following these reviews, Carbon’s internal reserve database and supporting data was furnished to CGA in order for them to prepare their independent reserve estimates and final report. Access to the Company’s database containing reserve information is restricted to select individuals from our engineering department. CGA’s independent reserve estimates and final report is for the Company’s interest in the respective oil and gas properties and represents 100% of the total proved hydrocarbon reserves owned by the Company or 96% of the consolidated proved hydrocarbon reserves presented in the Company’s Consolidated Financial Statements. CGA’s report does not include the hydrocarbon reserves owned by the non-controlling interests of the consolidated partnerships. The Company calculated the estimated reserves and related PV-10 of the non-controlling interests of the consolidated partnerships’ oil and gas properties by multiplying CG&A’s independent reserve estimates for such properties by the respective non-controlling interests in those properties.

CGA is a Texas Registered Engineering Firm. Our primary contact at CGA is J. Zane Meekins, Executive Vice President. Mr. Meekins is a State of Texas Licensed Professional Engineer. See Exhibit 99.1 of the Annual Report on Form 10-K for the report of CGA.

Our Vice President of Engineering, Richard Finucane, is responsible for overseeing the preparation of the reserve estimates with consultations from our internal technical and accounting staff. He has been involved in reservoir engineering in the Appalachian Basin since 1982. Mr. Finucane has worked as an oil and natural gas engineer since 1978 and holds a B.S. in Civil Engineering from the University of Tennessee (highest honors) and is admitted as an expert in oil and natural gas matters in civil and regulatory proceedings in Kentucky, Virginia and West Virginia.

Drilling Activities

Based on current and expected prices for oil and natural gas during 2016 and 2015, we reduced our drilling activity to manage and optimize the utilization of our capital resources. During 2016, our capital expenditures, other than for oil and natural gas property acquisitions, consisted principally of expanding our gathering facilities to provide greater flexibility in moving our natural gas to markets with more favorable pricing.

The following table summarizes the number of wells drilled for the years ended December 31, 2016, 2015 and 2014. Gross wells reflect the sum of all wells in which we own an interest. Net wells reflect the sum of our working interests in gross wells.

	Year Ended December 31,
	2016				2015				2014
	Gross		Net		Gross		Net		Gross		Net

Development wells:
Productive (1)		-		-		-		-		17.0		10.5
Non-productive (2)		-		-		-		-		-		-
Total development wells		-		-		-		-		17.0		10.5

Exploratory wells:
Productive (1)		-		-		-		-		-		-
Non-productive (2)		-		-		-		-
Total exploratory wells		-		-		-		-		-		-

(1)	A well classified as productive does not always provide economic levels of activity.

(2)	A non-productive well is a well found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well; also known as a dry well (or dry hole).

Oil and Natural Gas Wells and Acreage

Productive Wells

Productive wells consist of producing wells and wells capable of production, including shut-in wells. A well bore with multiple completions is counted as only one well. The following table summarizes our productive wells as of December 31, 2016.

	December 31, 2016
	Gross		Net

Gas		2,759		2,170
Oil		452		419
Total		3,211		2,589

Acreage

The following table summarizes gross and net developed and undeveloped acreage by state as of December 31, 2016. Acreage related to royalty, overriding royalty, and other similar interests is excluded from this summary, as well as acreage related to any options held by us to acquire additional leasehold interests.

December 31, 2016
	Developed				Undeveloped				Total
	Acres				Acres				Acres
	Gross		Net		Gross		Net		Gross		Net
Indiana		-		-		43,364		43,364		43,364		43,364
Illinois		3,490		1,745		31,442		18,221		34,932		19,966
Kentucky		10,778		9,710		97,768		70,899		108,546		80,609
Ohio		338		338		6,703		6,703		7,041		7,041
Tennessee		160		40		93,683		93,599		93,843		93,639
Virginia		732		679		-		-		732		679
West Virginia		187,858		176,326		55,615		44,090		243,473		220,416
Total		203,356		188,838		328,575		276,876		531,931		465,714

Undeveloped Acreage Expirations

The following table sets forth gross and net undeveloped acres by state as of December 31, 2016 which are scheduled to expire through December 31, 2019 unless production is established within the spacing unit covering the acreage prior to the expiration date or if the Company extends the terms of a lease by paying delay rentals to the lessor.

December 31, 2016
	2017				2018				2019
	Gross		Net		Gross		Net		Gross		Net
Indiana		-		-		-		-		-		-
Illinois		6,547		3,274		928		464		999		499
Kentucky		5,056		3,034		9,910		5,946		10,035		6,180
Ohio		-		-		-		-		-		-
Tennessee		-		-		-		-		-		-
Virginia		-		-		-		-		-		-
West Virginia		5,270		1,666		46		34		3,625		3,625
Total		16,873		7,974		10,884		6,444		14,659		10,304

Production, Average Sales Prices and Production Costs

The following table reflects production, average sales price, and production cost information for the years ended December 31, 2016 and 2015.

	Year Ended December 31,
	2016			2015

Production data:
Natural gas (MMcf)		2,823			2,040
Oil and condensate (Bbl)		79,044			101,255
Combined (MMcfe)		3,297			2,646
Gas and oil production revenue (in thousands)	$	10,443		$	10,708
Commodity derivative (loss) gain (in thousands)	$	(2,259	)	$	852
Prices:
Average sales price before effects of hedging;
Natural gas (per Mcf)	$	2.53		$	2.78
Oil and condensate (per Bbl)	$	41.95		$	49.83
Average sale price after effects of hedging:
Natural gas (per Mcf)	$	1.89		$	3.01
Oil and condensate (per Bbl)	$	36.14		$	53.48
Average costs per Mcfe:
Lease operating costs	$	0.96		$	1.10
Transportation costs	$	0.50		$	0.65
Production and property taxes	$	0.25		$	0.33

The Company

Marketing and Delivery Commitments

Our oil and natural gas production is generally sold on a month-to-month basis in the spot market, priced in reference to published indices. We believe that the loss of one or more of our purchasers would not have a material adverse effect on our ability to sell our production, because any individual purchaser could be readily replaced by another purchaser, absent a broad market disruption.

The Company has historically sold a portion of its gas through fixed price physical delivery contracts to effectively provide gas price hedges.

The Company has entered into firm transportation contracts to ensure the transport of certain of its gas production to purchasers. Firm transportation volumes and related demand charges for the remaining term of these contracts at December 31, 2016 are summarized in the table below.

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

Competition

We encounter competition in all aspects of our business, including acquisition of properties and oil and natural gas leases, marketing oil and natural gas, obtaining services and labor, and securing drilling rigs and other equipment and materials necessary for drilling and completing wells. Our ability to increase reserves in the future will depend on our ability to generate successful prospects on our existing properties, execute development drilling programs, and acquire additional producing properties and leases for future development and exploration. A number of the companies with which we compete with have larger staffs and greater financial and operational resources than we have. Because of the nature of our oil and natural gas assets and management’s experience in developing our reserves and acquiring properties, we believe that we effectively compete in our markets. See — Risk Factor “Competition in the oil and natural gas industry is intense, making it more difficult for us to acquire properties, market oil and natural gas and secure trained personnel. ”

Regulation

Federal, state, and local agencies have extensive rules and regulations applicable to our oil and natural gas exploration, production and related operations. These laws and regulations may change in response to economic or political conditions. Matters subject to current governmental regulation and/or pending legislative or regulatory changes include the discharge or other release into the environment of wastes and other substances in connection with drilling and production activities (including fracture stimulation operations), bonds or other financial responsibility requirements to cover drilling risks and well plugging and abandonment, reclamation or restoration costs, reports concerning our operations, the spacing of wells, unitization and pooling of properties, taxation, and the use of derivative hedging instruments. Failure to comply with laws and regulations may result in the assessment of administrative, civil, and criminal penalties, the imposition of remedial obligations, and the issuance of injunctions that could delay, limit, or prohibit certain of our operations. In the past, regulatory agencies have imposed price controls and limitations on production. In order to conserve supplies of oil and gas, oil and gas conservation commissions and other agencies may restrict the rates of flow of wells below actual production capacity, generally prohibit the venting or flaring of natural gas, and may impose certain requirements regarding the ratability or fair apportionment of production from fields and individual wells. Further, a significant spill from one of our facilities could have a material adverse effect on our results of operations, competitive position, or financial condition. The laws regulate, among other things, the production, handling, storage, transportation, and disposal of oil and natural gas, by-products from each, and other substances and materials produced or used in connection with our operations. Although we believe we are in substantial compliance with applicable laws and regulations, such laws and regulations may be amended or reinterpreted. Therefore, we cannot predict the ultimate cost of compliance with these requirements or their effect on our operations.

Most states require drilling permits, drilling and operating bonds and the filing of various reports and impose other requirements relating to the exploration and production of oil and natural gas. Many states also have statutes or regulations regarding conservation matters including rules governing the size of drilling and spacing units, the density of wells and the unitization of oil and natural gas properties. The federal and state regulatory burden on the oil and natural gas industry increase our cost of doing business and affects our profitability.

Federal legislation and regulatory controls have historically affected the prices received for natural gas production. The Federal Energy Regulatory Commission (“FERC”) has jurisdiction over the transportation and sale or resale of natural gas in interstate commerce. In 2005, Congress enacted the Energy Policy Act of 2005 (“EPAct 2005”), which amends the Natural Gas Act (“NGA”) to make it unlawful for any entity, including non-jurisdictional producers such as Carbon, to use any deceptive or manipulative device or contrivance in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to regulation by the FERC, or contravention of rules prescribed by the FERC. EPAct 2005 also gives the FERC authority to impose civil penalties for violations of the NGA up to $1,000,000 per day per violation. The anti-manipulation rule does not apply to activities that relate only to intrastate or other non-jurisdictional sales or gathering, but does apply to activities of otherwise non-jurisdictional entities to the extent the activities are conducted “in connection with” natural gas sales, purchases or transportation subject to FERC jurisdiction. It therefore reflects a significant expansion of the FERC’s enforcement authority. We do not anticipate we will be affected any differently than other producers of natural gas in respect of EPAct 2005.

In 2007, the FERC issued rules requiring that any market participant, including a producer such as Carbon, that engages in physical sales for resale or purchases for resale of natural gas that equal or exceed 2.2 million MMBtus during a calendar year, must annually report such sales or purchases to the FERC, beginning on May 1, 2009. These rules are intended to increase the transparency of the wholesale natural gas markets and to assist the FERC in monitoring such markets and in detecting market manipulation. In 2008, the FERC issued its order on rehearing, which largely approved the existing rules, except the FERC exempted from the reporting requirement certain types of purchases and sales, including purchases and sales of unprocessed natural gas and bundled sales of natural gas made pursuant to state regulated retail tariffs. In addition, the FERC clarified that other end use purchases and sales are not exempt from the reporting requirements. The monitoring and reporting required by the rules have increased our administrative costs. Carbon does not anticipate it will be affected any differently than other producers of natural gas.

Additional proposals and proceedings that might affect the oil and natural gas industry are regularly considered by Congress, the states, the FERC, and the courts. For instance, legislation has been introduced in the U.S. Congress to amend the federal Safe Drinking Water Act to subject hydraulic fracturing operations—an important process used in the completion of our oil and natural gas wells—to regulation under the Safe Drinking Water Act. If adopted, this legislation could establish an additional level of regulation, and impose additional cost, on our operations. We cannot predict when or whether any such proposal, or any additional new legislative or regulatory proposal, may become effective. No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the federal government.

Our sales of oil and natural gas are affected by the availability, terms and cost of transportation. Interstate transportation of oil and natural gas by pipelines is regulated by the FERC pursuant to the Interstate Commerce Act, the Energy Policy Act of 1992 and the rules and regulations promulgated under those laws. Intrastate oil and natural gas pipeline transportation rates may also be subject to regulation by state regulatory commissions. We do not believe that the regulation of oil transportation rates will affect our operations in any way that is materially different that those of our competitors who are similarly situated.

Environmental

As an operator of oil and natural gas properties in the U.S., we are subject to federal, state and local laws and regulations relating to environmental protection as well as the manner in which various substances, including wastes generated in connection with exploration, production, and transportation operations, are released into the environment. Compliance with these laws and regulations can affect the location or size of wells and facilities, prohibit or limit the extent to which exploration and development may be allowed, and require proper closure of wells and restoration of properties when production ceases. Failure to comply with these laws and regulations may result in the assessment of administrative, civil, or criminal penalties, imposition of remedial obligations, incurrence of capital or increased operating costs to comply with governmental standards, and even injunctions that limit or prohibit exploration and production activities or that constrain the disposal of substances generated by oil field operations.

The most significant of these environmental laws that may apply to our operations are as follows:

●

The Comprehensive Environmental Response, Compensation and Liability Act, as amended (“CERCLA”) and comparable state statutes which impose liability on owners and operators of certain sites and on persons who dispose of or arrange for the disposal of hazardous substances at sites where hazardous substances releases have occurred or are threatening to occur. Parties responsible for the release or threatened release of hazardous substances under CERCLA may by subject to liability for the cost of cleaning up those substances and for damages to natural resources;

●

The Oil Pollution Act of 1990 (“OPA”), subjects owners and operators of facilities to strict and several liability for containment and cleanup costs and certain other damages arising from oil spills, including the government’s response costs. Spills subject to the OPA may result in varying civil and criminal penalties and liabilities;

●

The Resource Conservation and Recovery Act, as amended (“RCRA”), and comparable state statues which govern the treatment, storage and disposal of solid and hazardous waste and authorize the imposition of substantial fines and penalties for noncompliance;

●

The Federal Water Pollution Control Act, as amended, also known as the Clean Water Act (“CWA”), and analogous state laws that govern the discharge of pollutants, including natural gas wastes, into federal and state waters, including spills and leaks of hydrocarbons and produced water. In April 2015, the EPA proposed new CWA regulations that would prevent onshore unconventional oil and gas wells from discharging wastewater pollutants into public treatment facilities. In June 2015, the EPA adopted a new regulatory definition of “waters of the U.S.,” which governs which waters and wetlands are subject to the CWA. Implementation of the regulation has been stayed pending challenges to the regulation filed in federal court. Depending on whether and how the new definition is implemented, it could significantly expand the jurisdictional reach of the CWA in many states;

●

The Safe Drinking Water Act (“SDWA”), which governs the disposal of wastewater in underground injection wells; and

●

The Clean Air Act (“CAA”) and similar state and local requirements which govern the emission of pollutants into the air. Greenhouse gas record keeping and reporting requirements under the CAA took effect in 2011 and impose increased administrative and control costs. In August 2015, the EPA proposed new regulations under the CAA to reduce methane emissions from new and modified sources in the oil and gas sector. These regulations were finalized in May 2016.

We currently operate or lease, and have in the past operated or leased, a number of properties that have been subject to the exploration and production of oil and natural gas. Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties operated or leased by us or on or under other locations where such wastes have been taken for disposal. In addition, these properties may have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under our control. These properties and the wastes disposed thereon may be subject to laws and regulations imposing joint and several liability and strict liability without regard to fault or the legality of the original conduct that could require us to remove previously disposed wastes or remediate property contamination, or to perform well or pit closure or other actions of a remedial nature to prevent future contamination.

Oil and natural gas deposits exist in shale and other formations. It is customary in our industry to recover oil and natural gas from these formations through the use of hydraulic fracturing, combined with horizontal drilling. Hydraulic fracturing is the process of injecting substances such as water, sand, and other additives under pressure into subsurface formations to create or expand fractures, thus creating a passageway for the release of oil and natural gas.

Essentially all of our Appalachian Basin oil and natural gas reserves are subject to or have been subjected to hydraulic fracturing and we expect to continue to employ hydraulic fracturing extensively in future wells that we drill and complete. The reservoir rock in these areas, in general, has insufficient permeability to flow enough oil or natural gas to be economically viable without stimulation. The controlling regulatory agencies for well construction have standards that are designed specifically in anticipation of hydraulic fracturing. The cost of the stimulation process varies according to well location and reservoir.

We contract with established service companies to conduct our hydraulic fracturing. The personnel of these service companies are trained to handle potentially hazardous materials and possess emergency protocols and equipment to deal with potential spills and carry Material Safety Data Sheets for all chemicals. We require these service companies to carry insurance covering incidents that could occur in connection with their activities. In addition, these service companies are responsible for obtaining any regulatory permits necessary for them to perform their service in the relevant geographic location. We have not had any incidents, citations or lawsuits resulting from hydraulic fracture stimulation and we are not presently aware of any such matters.

In the well completion and production process, an accidental release could result in possible environmental damage. All wells have manifolds with escape lines to containment areas. High pressure valves for flow control are on the wellhead. Valves and piping are designed for higher pressures than are typically encountered. Piping is tested prior to any procedure and regular safety inspections and incident drill records are kept on those tests.

All fracturing is designed with the minimum water requirements necessary since there is a cost of accumulating, storing and disposing of the water recovered from fracturing. Water is drawn from nearby streams that are tributaries to the Ohio River and flow 365 days per year. Water recovered from the fracturing is injected into EPA or state approved water injection wells.

While hydraulic fracturing historically has been regulated by state and natural gas commissions, the practice has become increasingly controversial in certain parts of the country, resulting in increased scrutiny and regulation from federal agencies. For example the EPA has asserted that the SDWA applies to hydraulic fracturing involving diesel fuel and in February 2014 it issued final guidance on this subject. The guidance defines the term “diesel fuel”, describes the permitting requirements that apply under SDWA for the underground injection of diesel fuel in hydraulic fracturing and makes recommendations for permit writers. Although the guidance applies only in states where the EPA directly implements the Underground Injection Control Class II program, it could encourage state regulatory authorities to adopt permitting and other requirements for hydraulic fracturing. In April 2015, the EPA published in the Federal Register a proposed rule requiring federal pre-treatment standards for wastewater generated during the hydraulic fracturing process in shale and tight geologic formations (unconventional oil and gas resources). These rules were finalized in June 2016 and took effect in August 2016. Hydraulic fracturing requires the use of a significant volume of water with some resulting “flowback water” as well as “produced water.” The new pre-treatment rules require new and existing shale gas operations to pre-treat wastewater before transferring it to treatment facilities.

The EPA has conducted a nationwide study into the effects of hydraulic fracturing on drinking water. The EPA issued its final report in December 2016 and concluded that several factors affect the frequency and severity of impacts to drinking water from fracking including water availability, injection of fracking fluids into groundwater resources or into failing wells, and discharge of inadequately treated waste water to surface water or unlined pits. The EPA has indicated that it desires to continue to study the matter. Other governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could result in further regulation of hydraulic fracturing.

From time to time, Congress has considered the adoption of legislation to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process. Many producing states have adopted, or are considering adopting, regulations that could impose more stringent permitting, public disclosure and well construction requirements on hydraulic fracturing operations or otherwise seek to ban fracturing activities altogether.

Any of the above factors could have a material adverse effect on our financial position, results of operations or cash flows and could make it more difficult or costly for us to perform hydraulic fracturing

We believe that it is reasonably likely that the trend in environmental legislation and regulation will continue toward stricter standards. While we believe that we are in substantial compliance with applicable environmental laws and regulations in effect at the present time and that continued compliance with existing requirements will not have a material adverse impact on us, we cannot give any assurance that we will not be adversely affected in the future. We have established internal guidelines to be followed in order to comply with environmental laws and regulations in the U.S. Although we maintain pollution insurance against the costs of cleanup operations, public liability, and physical damage, there is no assurance that such insurance will be adequate to cover all such costs or that such insurance will continue to be available in the future.

Employees

As of December 31, 2016, our workforce (including those employed by our subsidiary Nytis LLC) consisted of 55 employees, all of which are full-time employees. None of the members of our workforce are represented by a union or covered by a collective bargaining agreement. We believe we have a good relationship with the members of our workforce.

Geographical Data

Carbon operates in one geographical area, the United States. See Note 1 to the Consolidated Financial Statements.

Offices

Our executive offices are located at 1700 Broadway, Suite 1170, Denver, Colorado 80290. We maintain an office in Lexington, Kentucky from which we conduct our oil and gas operations.

Title to Properties

Title to our oil and gas properties is subject to royalty, overriding royalty, carried, net profits, working, and similar interests customary in the oil and gas industry. Under the terms of our bank credit facility, we have granted the lender a lien on a substantial majority of our properties. In addition, our properties may also be subject to liens incident to operating agreements, as well as other customary encumbrances, easements, and restrictions, and for current taxes not yet due. Our general practice is to conduct title examinations on material property acquisitions. Prior to the commencement of drilling operations, a title examination and, if necessary, curative work is performed. The methods of title examination that we have adopted are reasonable in the opinion of management and are designed to ensure that production from our properties, if obtained, will be salable by us.

Glossary of Oil and Gas Terms

Many of the following terms are used throughout this Annual Report on Form 10-K. The definitions of proved developed reserves, proved reserves, and proved undeveloped reserves have been abbreviated from the applicable definitions contained in Rule 4-10(a) of Regulation S-X adopted by the Securities and Exchange Commission (the “SEC”). The entire definitions of those terms can be viewed on the SEC’s website at http://www.sec.gov.

*Bbl*	means one stock tank barrel, or 42 U.S. gallons liquid volume, of crude oil or liquid hydrocarbons.

*Bcf*	means one billion cubic feet of natural gas.

*Bcfe*	means one billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one bbl of crude oil, condensate, or natural gas liquids.

*Bbtu*	means one billion British Thermal Units.

*Btu*	means a British Thermal Unit, or the amount of heat necessary to raise the temperature of one pound of water one degree Fahrenheit.

*CBM*	means coalbed methane.

*Condensate*	means liquid hydrocarbons associated with the production of a primarily natural gas reserve.

*Dekatherm*	means one million British Thermal Units.

*Developed acreage*	means the number of acres which are allocated or held by producing wells or wells capable of production.

*Development well*	means a well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

*Equivalent volumes*	means equivalent volumes are computed with oil and natural gas liquid quantities converted to Mcf on an energy equivalent ratio of one barrel to six Mcf.

*Exploitation*	means ordinarily considered to be a form of development within a known reservoir.

*Exploratory well*	means a well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir. Generally, an exploratory well is any well that is not a development well or a service well.

*Farmout*	is an assignment of an interest in a drilling location and related acreage conditional upon the drilling of a well on that location or the undertaking of other work obligations.

*Field*	means an area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

*Full cost pool*	means the full cost pool consisting of all costs associated with property acquisition, exploration, and development activities for a company using the full cost method of accounting. Additionally, any internal costs that can be directly identified with acquisition, exploration, and development activities are included. Any costs related to production, general and administrative expense, or similar activities are not included.

*Gross acres or gross wells*	means the total acres or wells, as the case may be, in which a working interest is owned.

*Henry Hub*	means the natural gas pipeline located in Erath, Louisiana that serves as the official delivery location for futures contracts on the NYMEX.

*Lease operating expenses*	means the expenses of lifting oil or natural gas from a producing formation to the surface, constituting part of the current operating expenses of a working interest, and also including labor, superintendence, supplies, repairs, short-lived assets, maintenance, allocated overhead costs, and other expenses incidental to production, but not including lease acquisition or drilling or completion expenses.

*Liquids*	describes oil, condensate, and natural gas liquids.

*MBbls*	means one thousand barrels of crude oil or other liquid hydrocarbons.

*Mcf*	means one thousand cubic feet of natural gas.

*Mcfe*	means one thousand cubic feet equivalent determined using the ratio of six Mcf of natural gas to one bbl of crude oil, condensate, or natural gas liquids.

*MMBtu*	means one million British Thermal Units, a common energy measurement.

*MMcf*	means one million cubic feet of natural gas.

*MMcfe*	means one million cubic feet equivalent determined using the ratio of six Mcf of natural gas to one bbl of crude oil, condensate, or natural gas liquids.

*NGL*	means natural gas liquids.

*Net acres or net wells*	is the sum of the fractional working interest owned in gross acres or gross wells expressed in whole numbers and fractions of whole numbers.

*Non-productive well*	means a well found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well.

*NYMEX*	means New York Mercantile Exchange.

*Productive wells*	means producing wells and wells that are capable of production, and wells that are shut-in.

*Proved Developed Reserves*	means estimated proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.

*Proved Reserves*	means quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices that are the average price during the twelve-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

*Proved Undeveloped Reserves*	means estimated proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recovery to occur.

*PV-10*	means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect at the determination date, without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expense or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%. PV-10 is not a financial measure accepted under GAAP.

*Reservoir*	means a porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

*Royalty*	means an interest in an oil or natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.

*Standardized measure of present value of estimated future net revenues*	means an estimate of the present value of the estimated future net revenues from proved oil or natural gas reserves at a date indicated after deducting estimated production and ad valorem taxes, future capital costs, operating expenses and income taxes computed by applying year end statutory tax rates, with consideration of future tax rates already legislated. The estimated future net revenues are discounted at an annual rate of 10%, in accordance with the SEC’s practice, to determine their “present value.” The present value is shown to indicate the effect of time on the value of the revenue stream and should not be construed as being the fair market value of the properties. Estimates of future net revenues are made using oil and natural gas prices and operating costs at the estimation date and held constant for the life of the reserves.

*Undeveloped acreage*	means acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil or natural gas, regardless of whether such acreage contains proved reserves.

*Working interest*	means an operating interest which gives the owner the right to drill, produce, and conduct operating activities on the property, and to receive a share of production.

Available Information

You may read without charge, and copy at prescribed rates, all or any portion of the registration statement or any reports, statements or other information in the files at the public reference room at the SEC’s principal office at 100 F Street NE, Washington, D.C., 20549. You may request copies of these documents, for a copying fee, by writing to the SEC. You may call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including this Annual Report on Form 10-K, will also be available to you on the Internet website maintained by the SEC at http://www.sec.gov or on our website at http://www.carbonnaturalgas.com.

We are subject to the information and reporting requirements of the Securities Exchange Act and will file annual, quarterly and current reports, proxy statements and other information with the SEC. You can request copies of these documents, for a copying fee, by writing to the SEC. These reports, proxy statements and other information will also be available on the Internet websites of the SEC and the Company referred to above. We intend to furnish our stockholders with annual reports containing financial statements audited by our independent auditors.

F orward-Looking Statements

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

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

	●	estimates of our oil and natural gas reserves;

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

	●	our future financial condition and results of operations;

	●	our future revenues, cash flows, and expenses;

	●	our access to capital and our anticipated liquidity;

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

	●	our outlook on oil and natural gas prices;

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

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

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

	●	the impact of federal, state, and local political, regulatory, and environmental developments in the United States.

We believe the expectations and forecasts reflected in our forward-looking statements are reasonable, but we can give no assurance that they will prove to be correct. We caution you that these forward-looking statements can be affected by inaccurate assumptions and are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production, and sale of oil and natural gas. See " Competition" and "Regulation" above, as well as Part I, Item 1A— " Risk Factors ," and Part II, Item 7— " Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources " for a description of various, but by no means all, factors that could materially affect our ability to achieve the anticipated results described in the 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 Annual Report on Form 10-K and attributable to Carbon 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 1A. Risk Factors.

We are subject to certain risks and hazards due to the nature of the business activities we conduct, including the risks discussed below. Any of these risks could materially and adversely affect our business, financial condition, cash flows, and results of operations, and are not the only risks we face. We may experience additional risks and uncertainties not currently known to us; or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows, and results of operations.

Oil and natural gas prices are volatile. A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.

Our financial condition, operating results, and future rate of growth depend upon the prices that we receive for our oil and natural gas. Historically, the markets for oil and natural gas have been volatile and are likely to remain so in the future. Oil prices have fallen since reaching highs of over $105.00 per barrel in 2014 and dropped below $28.00 per barrel in February 2016. Natural gas prices have declined from over $4.80 per Mcf in 2014 to below $1.70 per Mcf in March 2016. Although oil and natural gas prices have recovered from the lows experienced during the first quarter of 2016, forecasted prices for both oil and natural gas remain low and uncertain, due to over-supply, substantial inventories and concern over global demand.

Prices also affect our cash flow available for capital expenditures and our ability to access funds under our bank credit facility and through the capital markets. The amount available for borrowing under our bank credit facility is subject to a borrowing base, which is determined by our lender taking into account our estimated proved developed reserves and is subject to periodic redeterminations based on pricing models determined by the lender at such time. Declines in oil and natural gas prices have in the past adversely impacted the value of our estimated proved developed reserves and, in turn, the market values used by our lenders to determine our borrowing base. Lower commodity prices may also make it more difficult for us to comply with the covenants and other restrictions under our bank credit facility. Future commodity price declines may have similar adverse effects on our reserves and borrowing base. See “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Bank Credit Facility ,” for more details. Further, because we have elected to use the full cost accounting method, each quarter we must perform a “ceiling test” that is impacted by declining prices. Future price declines could cause us to take additional ceiling test write-downs, which would be reflected as non-cash charges against current earnings. See Risk Factor below entitled “ Lower oil and natural gas prices and other factors have resulted in, and in the future may result in, ceiling test write-downs and other impairments of our asset carrying values .”

Alternatively, high commodity prices may result in significant mark-to-market losses on our commodity-based derivatives, which may in turn cause us to experience losses.

The prices we receive for our oil and natural gas depend upon factors beyond our control, including among others:

	●	worldwide, domestic and regional economic conditions impacting the global supply and demand for oil and natural gas;

	●	the price and quantity of imports and exports of foreign oil and natural gas, including liquefied natural gas;

	●	political conditions in or affecting other oil and natural gas producing countries;

	●	the level of global and domestic oil and natural gas exploration and production;

	●	the level of global and domestic oil and natural gas inventories;

	●	prevailing prices for local oil and natural gas price indexes in the areas in which we operate;

	●	global and domestic supply and demand fundamentals and transportation availability;

	●	weather conditions;

	●	technological advances affecting energy supply and consumption;

	●	the price and availability of alternative energy; and

	●	global, domestic, local and foreign governmental regulation and taxes.

These and other factors make it difficult to predict future commodity price movements with certainty. We sell the majority of our oil and natural gas production at current prices rather than through fixed-price contracts. However, we do enter into derivative instruments to reduce our exposure to fluctuations in oil and natural gas prices. See Risk Factor below entitled “ The use of derivative instruments used in hedging arrangements could result in financial losses or reduce income. ” At December 31, 2016, 93% of our estimated proved reserves were natural gas, and, as a result, our financial results will be more sensitive to fluctuations in natural gas prices than to fluctuations in oil prices

We have indebtedness and may incur more debt in the future. Our leverage may materially affect our operations and financial condition.

We have a $23.0 million bank credit facility with Legacy Texas Bank, the outstanding balance of which was approximately $16.2 million at December 31, 2016. We may incur more debt in the future. This indebtedness may have important effects on our business and operations. Among other things, it may:

	●	require us to use a significant portion of our cash flow to pay principal and interest on the debt, which will reduce the amount available to fund working capital, capital expenditures, and other general corporate purposes;

	●	limit our access to the capital markets;

	●	increase our borrowing costs, and impact the terms, conditions, and restrictions contained in our debt agreements, including the addition of more restrictive covenants;

	●	limit our flexibility in planning for and reacting to changes in our business as covenants and restrictions contained in our existing and possible future debt arrangements may require that we meet certain financial tests and place restrictions on the incurrence of additional indebtedness;

	●	place us at a disadvantage compared to similar companies in our industry that have less debt; and

	●	make us more vulnerable to economic downturns and adverse developments in our business.

Our bank credit facility contains various restrictive covenants. A failure on our part to comply with financial and other restrictive covenants contained in our bank credit facility could result in a default under these agreements. Any default under our bank credit facility could adversely affect our business and our financial condition and results of operations, and would impact our ability to obtain financing in the future. In addition, the borrowing base included in our bank credit facility is subject to periodic redetermination by our lender. A lowering of our borrowing base could require us to repay indebtedness in excess of the redetermined (lower) borrowing base. See “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Bank Credit Facility. ”

A higher level of debt will increase the risk that we may default on our financial obligations. Our ability to meet our debt obligations and other expenses will depend on our future performance. Our future performance will be primarily affected by oil and natural gas prices, financial, business, domestic and global economic conditions, governmental regulations and environmental regulations, and other factors, many of which we are unable to control. If our cash flow is not sufficient to service our debt, we may be required to refinance the debt, sell assets, or sell shares of our stock on terms that we do not find attractive, if it can be done at all.

A portion of our borrowings from time to time are at variable interest rates, making us vulnerable to increases in interest rates.

Our estimates of proved reserves at December 31, 2016 and 2015 have been prepared under SEC rules which could limit our ability to book additional proved undeveloped reserves in the future.

Estimates of our proved reserves as of December 31, 2016 and 2015 have been prepared and presented under the SEC’s rules relating to the reporting of oil and natural gas exploration activities. These rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years of the date of booking. This rule has limited and may continue to limit our potential to book additional proved undeveloped reserves. Moreover, we may be required to write down any proved undeveloped reserves that are not developed within the required five-year timeframe.

Neither the estimated quantities of proved reserves nor the discounted present value of future net cash flows attributable to those reserves included in this Annual Report on Form 10-K are intended to represent their fair, or current, market value.

Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to current and future economic conditions and commodity prices. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of our reserves. See “ Business—Reserves—Estimated Proved Reserves ” for information about our estimated oil and natural gas reserves and the PV-10 and standardized measure of discounted future net cash flows.

In order to prepare our estimates, we must project production rates, the level of our eventual working and net revenue interests and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.

Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of our reserves. In addition, we may adjust estimates of our proved reserves to reflect production history, results of exploration and development, prevailing commodity prices and other factors, many of which are beyond our control.

It should not be assumed that the present value of future net revenues from our proved reserves is the current market value of our estimated reserves. We base the estimated discounted future net cash flows from our proved reserves using SEC regulations. Actual future prices and costs may differ materially from those used in the present value estimate.

Less than 1% of our total proved reserves as of December 31, 2016 were undeveloped and those reserves may not ultimately be developed or produced.

As of December 31, 2016, less than 1% of our total proved reserves were undeveloped. Although we plan to develop and produce all our proved reserves, ultimately some may not be developed or produced. In addition, not all of the undeveloped reserves may begin producing at the expected times or within budget.

Lower oil and natural gas prices and other factors have resulted in, and in the future may result in, ceiling test write-downs and other impairments of our asset carrying values.

We use the full cost method of accounting to report our oil and natural gas operations. Under this method, we capitalize the cost to acquire, explore for, and develop oil and natural gas properties. Under full cost accounting rules, the net capitalized costs of proved oil and natural gas properties may not exceed a “ceiling limit,” which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10%. If net capitalized costs of proved oil and natural gas properties exceed the ceiling limit, we must charge the amount of the excess to earnings. This is called a “ceiling test write-down.” Under the accounting rules, we are required to perform a ceiling test each quarter. Because the ceiling calculation requires a rolling 12-month average commodity price, due to the effect of lower prices in 2016 and 2015, the Company recognized impairments of approximately $4.3 million and $5.4 million for the years ended December 31, 2016 and 2015, respectively. Impairment charges do not affect cash flows from operating activities, but do adversely affect net income and stockholders’ equity. See “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies, Estimates, Judgments, and Assumptions—Full Cost Method of Accounting, ” for further detail.

Investments in unproved properties are assessed periodically to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, and geographic and geologic data relating to the properties. The amount of impairment assessed, if any, is added to the costs to be amortized in the appropriate full cost pool. If an impairment of unproved properties results in a reclassification to proved reserves, the amount by which the ceiling limit exceeds the capitalized costs of proved reserves would be reduced.

In addition, impairments 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. 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 at a later date.

Our exploration and development projects and acquisitions require substantial capital expenditures. We may be unable to obtain required capital or financing on satisfactory terms, which could lead to a decline in our reserves.

The oil and natural gas industry is capital intensive. We make and expect to continue to make substantial capital expenditures for the development, exploitation, production and acquisition of oil and natural gas reserves. Cash used in investing activities related to acquisition, development and exploration expenditures was approximately $8.8 million and $3.1 million in 2016 and 2015, respectively.

The Company anticipates its budget for exploration and development work on existing acreage will range between $2.0 million and $5.0 million for 2017 and will be highly dependent on prices that we receive for our oil and natural gas sales. We intend to finance future capital expenditures through cash flow from operations, and to the extent that it is prudent, from borrowings under our bank credit facility. However, our financing needs, especially in regard to potential acquisitions, may exceed those resources and require a substantial increase in capitalization through the issuance of debt or equity securities, sale of assets, delays in planned exploration, development and completion activities or the use of outside capital through joint ventures or similar arrangements. The issuance of additional indebtedness may require that a portion of operating cash flow be used to service the debt, thereby reducing the amount of cash flow available for other purposes. The actual amount and timing of future capital expenditures may differ materially from estimates as a result of, among other things, availability of personnel, commodity prices, actual drilling results, the availability of drilling rigs and other services, materials and equipment, and regulatory, technological and competitive developments. A reduction in commodity prices from current levels may result in a decrease in our actual capital expenditures. Conversely, a significant improvement in commodity prices may result in an increase in our capital expenditures.

Our cash flow from operations and access to capital may be subject to a number of variables including the reliability of production, commodity prices, operating expenses, extraordinary and unanticipated expenses and the willingness and ability of our bank to lend.

Adverse events or trends related to these factors could reduce our ability to achieve or obtain the cash flow from operations or obtain the debt and/or equity capital necessary to sustain operations. Our Company, like the majority of smaller and mid-size independent oil and gas exploration companies must continue acquiring and developing properties to replace depleting reserves. The budget for these activities often will not be fully funded by operating cash flow. Accordingly, the inability to access capital could result in a curtailment of operations relating to the development of our properties, which in turn could lead to a decline in reserves and adversely affect the business, our financial condition and results of operations.

Distressed economic conditions may adversely affect the collectability of trade receivables. Our accounts receivable are primarily from purchasers of our oil and natural gas production and other exploration and production companies that own working interests in the properties that we operate. This industry concentration could adversely impact our overall credit risk, because customers and working interest owners may be similarly affected by the same adverse changes. In addition, the possibility of a credit crisis and turmoil in financial markets could cause our commodity derivative instruments to be ineffective because a counterparty might be unable to perform its obligations.

We cannot be certain that funding, if needed, will be available to the extent required, or on acceptable terms. If we are unable to access funding when needed on acceptable terms, we may not be able to fully implement our drilling and development, complete new property acquisitions to replace reserves, take advantage of business opportunities, respond to competitive pressures, or refinance debt obligations as they come due, any of which could have a material adverse effect on our operations and financial results.

Our identified drilling locations are scheduled for development only if oil and gas prices warrant drilling over a substantial number of years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling. In addition, we may not be able to provide the substantial amount of capital that would be necessary to drill our potential drilling locations.

At an appropriate level of oil and natural gas prices, the Company has a multi-year drilling inventory of horizontal and vertical drilling locations on existing acreage. These locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including oil and natural gas prices, the availability and cost of capital, availability of qualified personnel, drilling and production costs, availability of drilling services and equipment, drilling results, lease expirations, gathering systems and pipeline transportation constraints, regulatory approvals and other factors. Accordingly, we cannot predict when or if the identified drilling locations will be drilled.

We could lose our undeveloped mineral leases if we don’t drill and complete wells in a timely manner.

Leased mineral properties give the holder the right to drill and complete wells in a timely manner. Leases have a contract term that is negotiated with the mineral owners. Generally, if a well is drilled and completed (thus “held by production”), the lease term continues so long as there is production from the well.

Certain of our undeveloped leasehold acreage is subject to leases that will expire over the next several years. Renewing leases on undrilled acreage may not be feasible due to increased cost or other reasons. If we are unable to renew leases on undrilled acreage, we would have to write off the initial acquisition cost of such acreage, which could be substantial and our reserve estimates may be found to be inaccurate which could have a material adverse effect on us. The combined net acreage expiring in the next three years represents approximately 9% of our total net undeveloped acreage at December 31, 2016.

Some of these undeveloped leases will allow us to hold only a portion of the lease even after one or more wells have been completed. Management continually prioritizes the ranking and timing of drilling locations based on drilling and completion costs, available capital, expected returns on capital, and lease expirations.

Unless we replace our reserves, our reserves and production will decline, which would adversely affect our future cash flows and results of operations.

Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. As a result, we must locate, acquire and develop new reserves to replace those being depleted by production. Our business strategy is to grow production and reserves through acquisitions and through exploration and development drilling. Unless we conduct successful exploration, development and production activities or acquire properties containing proved reserves, our proved reserves will decline as our existing reserves are produced. Our future oil and natural gas reserves and production, and therefore our future cash flow and results of operations, are highly dependent on our success in efficiently developing our reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, exploit, find or acquire sufficient additional reserves to replace our current and future production. If we are unable to replace our current and future production, the value of our reserves will decrease, and our business, financial condition and results of operations will be adversely affected.

Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our business, financial condition and results of operations.

Our future financial condition and results of operations will depend on the success of our acquisition, exploration, development and production activities. These activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil and natural gas production. The Company’s decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. For a discussion of the uncertainty involved in these processes, see the Risk Factor “Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. ” In addition, drilling and completion costs may increase prior to completion of any particular project. Many factors may curtail, delay or cancel scheduled drilling and production projects, including:

	●	delays imposed by or resulting from compliance with regulatory requirements;

	●	pressure or irregularities in geological formations;

	●	shortages of or delays in obtaining equipment, materials and qualified personnel;

	●	equipment failures or accidents;

	●	adverse weather;

	●	declines in commodity prices;

	●	limited availability of financing under acceptable terms;

	●	title problems; and

	●	limitations in getting production to market due to transportation issues (see the Risk Factor entitled “ Our business depends on gathering and transportation facilities owned by others. Any limitation in the availability of those facilities would interfere with our ability to market the natural gas we produce .”)

Additionally, drilling, transportation and processing of hydrocarbons bear an inherent risk of loss of containment. Potential consequences include loss of reserves, loss of production, loss of economic value associated with an affected wellbore, contamination of soil, ground water, and surface water, as well as potential fines, penalties, or damages associated with any of the foregoing consequences.

As part of our ongoing operations, we may drill in new or emerging plays. As a result, drilling in these areas is subject to greater risk and uncertainty.

These activities are more uncertain as to ultimate profitability than drilling in areas that are developed and have established production, because of little or sometimes no past drilling results by third parties to guide lease acquisition and drilling work. We cannot assure you that our future drilling activities in emerging plays will be successful or, if successful, will achieve the potential reserve levels that we currently anticipate based on the drilling activities that have been completed, or that we will achieve the anticipated economic returns based on our current cost models.

We may suffer losses or incur liability for events for which we or the operator of a property have chosen not to obtain insurance.

Our operations are subject to hazards and risks inherent in drilling, producing and transporting production, such as fires, natural disasters, explosions, pipeline ruptures, spills, and acts of terrorism, all of which can result in the loss of hydrocarbons, environmental pollution, personal injury claims and other property damage. We maintain adequate insurance coverage against some, but not all, potential losses, including hydraulic fracturing. We do not believe that insurance coverage for every environmental damage that could occur is available at a reasonable cost. In the fracturing process, an accidental release could result in possible environmental damage. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. Existing insurance coverage may not be renewed. Contractors who perform services may cause claims or losses that result in liability to us. The occurrence of an event that is not covered, or not fully covered, by insurance could have a material adverse effect on our business, financial condition and results of operations.

We may suffer losses or incur environmental liability in hydraulic fracturing operations.

Oil and natural gas deposits exist in shale and other formations. It is customary in our industry to recover oil and natural gas from these shale formations through the use of hydraulic fracturing, combined with horizontal drilling. Hydraulic fracturing is the process of creating or expanding cracks, or fractures, underground where water, sand and other additives are pumped under high pressure into a shale formation. We contract with established service companies to conduct our hydraulic fracturing. The personnel of these service companies are trained to handle potentially hazardous materials and possess emergency protocols and equipment to deal with potential spills and carry Material Safety Data Sheets for all chemicals.

In the fracturing process, an accidental release could result in possible environmental damage. All wells have manifolds with escape lines to containment areas. High pressure valves for flow control are on the wellheads. Valves and piping are designed for higher pressures than are typically encountered. Piping is tested prior to any procedure and regular safety inspections and incident drill records are kept on those tests. Despite all of these safety procedures, there are many risks involved in hydraulic fracturing that could result in liability to the Company. In addition, our liability for environmental hazards may include conditions created by the previous owner of properties that we purchase or lease.

The use of derivative instruments used in hedging arrangements could result in financial losses or reduced income.

We may engage in the use of derivative instruments used in hedging arrangements for a significant part of our production to reduce exposure to price fluctuations in commodity prices. These arrangements would expose the Company to risk of financial loss in some circumstances, including when production is less than expected, the counterparty to the hedging contract defaults on its contract obligations, or there is a change in the expected differential between the underlying price in the hedging agreement and the actual price received. In addition, these hedging arrangements may limit the benefits we would otherwise receive from increased commodity prices.

The use of derivatives may, in some cases, require the posting of cash collateral with counterparties. If we enter into derivative instruments that require cash collateral and commodity prices or interest rates change in a manner adverse to us, additional collateral may be required and our cash available for use in our operations would be reduced. A lower amount of available cash could limit our ability to make future capital expenditures and to make payments on our indebtedness, which could also limit our ability to borrow funds. Future collateral requirements will depend on arrangements with our counterparties, oil and natural gas prices and interest rates.

As of December 31, 2016, the fair value of the contracts with our derivatives counterparty was a liability of approximately $1.9 million.

Our business depends on gathering and transportation facilities owned by others. Any limitation in the availability of those facilities would interfere with our ability to market natural gas we produce.

The marketability of our natural gas production depends in part on the availability, proximity and capacity of gathering and pipeline systems owned by third parties. The amount of natural gas that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage to gathering or transportation systems, or lack of contracted transportation capacity on such systems. The curtailments arising from these and similar circumstances may last from a few days to several months. We may be provided with only minimal, if any, notice as to when these circumstances will arise, or their duration. In addition, properties may be acquired which are not currently serviced by gathering and transportation pipelines, or the gathering and transportation pipelines in the area may not have sufficient capacity to transport additional production. As a result, we may not be able to sell production from these properties until the necessary facilities are built.

We may incur losses as a result of title deficiencies.

We typically do not retain attorneys to examine title before acquiring leases or mineral interests. Prior to drilling a well, however, we (or the company that is the operator) obtain a preliminary title review to initially determine that no obvious title deficiencies are apparent. As a result of some such examinations, certain curative work may be required to correct deficiencies in title, and such curative work may be expensive. In some instances, curative work may not be feasible or possible. In addition, it is possible that certain interests could have been bought in error from someone who is not the owner. In that event, our interest would be worthless.

In addition, the Company’s reserve estimates assume that we have proper title for the properties we have acquired. In the event we are unable to perform curative work to correct deficiencies and our interest is deemed to be worthless, our reserve estimates and the financial information related thereto may be found to be inaccurate, which could have a material adverse effect on us.

We may not be able to generate enough cash flow to meet our debt obligations and fund our other liquidity needs.

At December 31, 2016, our debt consisted of approximately $16.2 million in borrowings under the Company’s $23.0 million credit facility. In addition to interest expense and principal on our long-term debt, we have demands on our cash resources including, among others, operating expenses and capital expenditures.

Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, results of operations and other factors, many of which are beyond our control. Our ability to meet our debt service obligations also may be impacted by changes in prevailing interest rates, as borrowing under our existing revolving credit facility bears interest at floating rates.

We may not generate sufficient cash flow from operations. Without sufficient cash flow, there may not be adequate future sources of capital to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to service our indebtedness and fund our operating costs, we will be required to adopt alternative strategies that may include:

	●	reducing or delaying capital expenditures;

	●	seeking additional debt financing or equity capital;

	●	selling assets;

	●	restructuring or refinancing debt; or

	●	obtaining capital through joint ventures or similar arrangements.

We may not be able to complete such alternative strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations and fund our liquidity needs, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations. The formation of joint ventures or other similar arrangements to finance operations may result in dilution of the Company’s interest in the properties affected by such arrangements.

We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting our operations or expose us to significant liabilities.

Our exploration, production and transportation operations are subject to complex and stringent laws and regulations. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state and local governmental authorities. We may incur substantial costs in order to maintain compliance with these existing laws and regulations. In addition, our costs of compliance may increase if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations. Such costs could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to federal, state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction over various aspects of the exploration for, and the production and transportation of, oil and natural gas. Failure to comply with such laws and regulations, including any evolving interpretation and enforcement by governmental authorities, could have a material adverse effect on our business, financial condition and results of operations.

Changes to existing or new regulations may unfavorably impact the Company, could result in increased operating costs, and could have a material adverse effect on our financial condition and results of operations. For example, over the last few years, several bills have been introduced in Congress that, if adopted, would subject companies involved in oil and natural gas exploration and production activities to, among other items, additional regulation of and restrictions on hydraulic fracturing of wells, the elimination of certain U.S. federal tax incentives and deductions available for such activities, and the prohibition or additional regulation of private energy commodity derivative and hedging activities. Additionally, the Bureau of Land Management, acting under its authority pursuant to the Mineral Leasing Act of 1920, finalized new regulations in January 2017 that aim to reduce waste of natural gas from federal and tribal leasehold by imposing new venting, flaring, and leak detection and repair requirements. These and other potential regulations, particularly at the local level, could increase our operating costs, reduce our liquidity, delay or halt our operations or otherwise alter the way we conduct our business, which could in turn have a material adverse effect on our financial condition, results of operations and cash flows.

Operations may be exposed to significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our business activities.

We may incur significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our exploration, development and production activities. These delays, costs and liabilities could arise under a wide range of federal, state and local laws and regulations and enforcement policies relating to protection of the environment, health and safety. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, and, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain operations. We are often required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that a proposed project may have on the environment, threatened and endangered species, and cultural and archaeological artifacts. The public may comment on and otherwise engage in the permitting process, including through judicial intervention. As a result, the permits we need may not be issued, or if issued, may not be issued in a timely manner or may impose requirements that restrict our ability to conduct operations.

In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. Strict liability and joint and several liability may be imposed under certain environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken.

New laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. If we are not able to recover the resulting costs through increased revenues, our business, financial condition or results of operations could be adversely affected.

The adoption of climate change legislation or regulations restricting emissions of “greenhouse gases” could result in increased operating costs and reduced demand for the oil and natural gas we produce.

The U.S. Congress has considered legislation to mandate reductions of greenhouse gas emissions and certain states have already implemented, or may be in the process of implementing, similar legislation. Additionally, the U.S. Supreme Court has held in its decisions that carbon dioxide can be regulated as an “air pollutant” under the Clean Air Act, which could result in future regulations even if the U.S. Congress does not adopt new legislation regarding emissions. At this time, it is not possible to predict how legislation or new federal or state government mandates regarding the emission of greenhouse gases could impact our business; however, any such future laws or regulations could require us or our customers to devote potentially material amounts of capital or other resources in order to comply with such regulations. These expenditures could have a material adverse impact on our financial condition, results of operations, and cash flows.

Even though such legislation has not yet been adopted at the national level, regulatory agencies have begun taking actions to control and/or reduce emissions of greenhouse gases from oil and gas operations. In early 2016, the EPA announced it would commence a formal process requiring companies operating existing oil and gas sources to provide information to assist in the development of comprehensive regulations to reduce methane emissions. Any one of these climate change regulatory and legislative initiatives could have a material adverse effect on our business, financial condition and results of operations.

Environmental legislation and regulatory initiatives, including those relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

We are subject to extensive federal, state and local laws and regulations concerning environmental protection. Government authorities frequently add to those regulations. Both oil and gas development generally and hydraulic fracturing in particular, are receiving increased regulatory attention.

Essentially all of our reserves are subject to or have been subjected to hydraulic fracturing. The reservoir rock in these areas, in general, has insufficient permeability to flow enough oil or natural gas to be economically viable without stimulation. The controlling regulatory agencies for well construction have standards that are designed specifically in anticipation of hydraulic fracturing. The stimulation process cost varies according to well location and reservoir. To date, no incidents, citations or suits have resulted from our hydraulic fracturing operations. However, the regulatory environment may change with respect to the use of hydraulic fracturing. Any increase in compliance costs could negatively impact our ability to conduct our business.

Activists have attempted to link hydraulic fracturing to various environmental problems, including potential adverse effects on drinking water supplies as well as migration of methane and other hydrocarbons. While hydraulic fracturing historically has been regulated by state and natural gas commissions, the practice has become increasingly controversial in certain parts of the country, resulting in increased scrutiny and regulation from federal and state agencies. The EPA has conducted a nationwide study into the effects of hydraulic fracturing on drinking water. The draft report did not find evidence of widespread systemic impacts to drinking water, but did find site-specific impacts. The EPA noted that these results could indicate that such effects are rare or that other limiting factors exist. A public comment period on the report was open until August 25, 2015 and a series of public hearings were conducted by the EPA throughout the fall of 2015. The EPA issued its final report in December 2016 and concluded that several factors affect the frequency and severity of impacts to drinking water from fracking including water availability, injection of fracking fluids into groundwater resources or into failing wells, and discharge of inadequately treated waste water to surface water or unlined pits. The EPA has indicated that it desires to continue to study the matter. Other governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could result in further regulation of hydraulic fracturing.

From time to time Congress has considered the adoption of legislation to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process. Federal agencies have imposed limits on hydraulic fracturing activities on federal lands and many producing states have adopted, or are considering adopting, regulations that could impose more stringent permitting, public disclosure and well construction requirements on hydraulic fracturing operations.

The adoption of derivatives legislation could have an adverse impact on our ability to use derivatives as hedges against fluctuating commodity prices.

In July 2010, the Dodd-Frank Act was enacted, representing an extensive overhaul of the framework for regulation of U.S. financial markets. The Dodd-Frank Act called for various regulatory agencies, including the SEC and the Commodities Futures Trading Commission (“CFTC”), to establish regulations for implementation of many of its provisions. The Dodd-Frank Act contains significant derivatives regulations, including requirements that certain transactions be cleared on exchanges and that cash collateral (margin) be posted for such transactions. The Dodd-Frank Act provides for an exemption from the clearing and cash collateral requirements for commercial end-users, such as Carbon, and includes a number of defined terms used in determining how this exemption applies to particular derivative transactions and the parties to those transactions. We have satisfied the requirements for the commercial end-user exception to the clearing requirement and intend to continue to engage in derivative transactions. In December 2015, the CFTC approved final rules on margin requirements that may have an impact on our hedging counterparty and an interim final rule exemption from the margin requirements for certain uncleared swaps with commercial end-users. The final rules did not impose additional requirements on commercial end-users. The ultimate effect of these new rules and any additional regulations is uncertain. New rules and regulations in this area may result in significant increased costs and disclosure obligations as well as decreased liquidity as entities that previously served as hedge counterparties exit the market.

Competition in the oil and natural gas industry is intense, making it more difficult for us to acquire properties, market oil and natural gas and secure trained personnel.

Our ability to acquire oil and natural gas producing properties and leases and to find and develop reserves will depend on our ability to evaluate suitable properties and to consummate transactions in a highly competitive environment for acquiring properties. There is substantial competition for investment capital in the industry. Many of our competitors possess financial, technical and personnel resources greater than ours. Those companies may be able to pay more for productive properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. Other companies may be able to offer better compensation packages to attract and retain qualified personnel than we are able to offer. We may not be able to compete successfully in the future in acquiring and developing reserves, marketing produced hydrocarbons, attracting and retaining quality personnel and securing necessary additional capital, which could have a material adverse effect on our business, financial condition and results of operations.

The unavailability or high cost of drilling rigs, equipment, supplies, personnel and field services could adversely affect our ability to execute our exploration and development plans within our budget and on a timely basis.

The demand for qualified and experienced field personnel, geologists, geophysicists, engineers and other professionals in the industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing periodic shortages. Historically, there have been shortages of qualified personnel, drilling and workover rigs, pipe and other equipment and materials as demand for rigs and equipment increased along with the number of wells being drilled. We cannot predict whether these conditions will exist in the future and, if so, what their timing and duration will be. Such shortages could delay or cause us to incur significant expenditures that are not provided for in our capital budget, which could have a material adverse effect on our business, financial condition and results of operations.

The loss of senior management or technical personnel could adversely affect operations.

We depend on the services of our senior management and technical personnel. The loss of the services of our senior management or technical personnel, including Patrick McDonald, our Chief Executive Officer, Mark Pierce, our President, Kevin Struzeski, our Chief Financial Officer, Treasurer and Secretary could have a material adverse effect on our operations. We do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals.

The Company has limited control over activities on properties we do not operate, which could reduce our production and revenues.

A portion of our business is conducted through joint operating agreements under which we own partial interests in oil and gas properties. If we do not operate the properties in which we own an interest, we do not have direct control over normal operating procedures, expenditures or future development of the underlying properties. The failure of an operator of our wells to adequately perform operations or an operator’s breach of the applicable agreements could reduce our production and revenues. The success and timing of our drilling and development activities on properties operated by others, therefore, depends upon a number of factors outside of our control, including the operator’s timing and amount of capital expenditures, expertise and financial resources, inclusion of other participants in drilling wells and use of technology. Because we do not have a majority interest in most wells that we do not operate, we may not be in a position to remove the operator in the event of poor performance.

We may be subject to risks in connection with acquisitions of properties and may be unable to successfully integrate acquisitions.

The successful acquisition of producing properties requires an assessment of several factors, including:

	●	recoverable reserves;

	●	future commodity prices and their applicable differentials;

	●	future operating costs and capital expenditures;

	●	potential environmental and other liabilities; and

	●	accuracy of ownership and title

The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and liabilities. Inspections may not always be performed on every well, and potential environmental issues are not necessarily observable even with inspections. Additionally, when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. We may acquire properties on an “as is” basis and may not be entitled to contractual indemnification for unidentified environmental liabilities.

In the future we may make acquisitions of assets or businesses that complement or expand our current business. We may not be able to identify attractive acquisition opportunities. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms.

The success of any completed acquisition will depend on our ability to effectively integrate the acquired assets or business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve savings from consolidation, to successfully integrate the acquired assets or businesses into our existing operations or to minimize any unforeseen operational difficulties could have a material adverse effect on the business, financial condition and results of operations.

We may incur more taxes and certain of our projects may become uneconomic if certain federal income tax deductions currently available with respect to oil and natural gas exploration and development are eliminated as a result of future legislation.

Various proposals have been made recommending the elimination of certain key U.S. federal tax incentives that are currently available with respect to oil and natural gas exploration and development. Any such change could negatively impact our financial condition and results of operations by increasing the costs we incur which would in turn make it uneconomic to drill some prospects if commodity prices are not sufficiently high, resulting in lower revenues and decreases in production and reserves.

We depend on computer and telecommunications systems and failures in our systems or cyber security attacks could significantly disrupt our business operations.

We have entered into agreements with third parties for hardware, software, telecommunications and other information technology services in connection with our business. In addition, we have developed management processes and procedures and other information technologies which incorporate software licensed from third parties. It is possible we could incur interruption from cyber security attacks, computer viruses or malware. We believe that we maintain adequate anti-virus and malware software and controls, however, any interruptions to our arrangements with third parties for our computing and communication infrastructure or any other interruptions to our information systems could lead to data corruption, communication interruption or otherwise significantly disrupt our business.

Risks Related to the Ownership of our Common Stock

We have incurred and will continue to incur increased costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; any failure to establish and maintain adequate internal control over financial reporting or to recruit, train and retain necessary accounting and finance personnel could have an adverse effect on our ability to accurately and timely prepare our financial statements.

As a public company, we incur significant administrative, legal, accounting and other burdens and expenses beyond those of a private company, including those associated with corporate governance requirements and public company reporting obligations. We have had to and will continue to expend resources to supplement our internal accounting and financial resources, to obtain technical and public company training and expertise, and to develop and expand our quarterly and annual financial statement closing process in order to satisfy such reporting obligations.

Our management team must comply with various requirements of being a public company. We have devoted, and will continue to devote, significant resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations results in higher legal and financial compliance costs as compared to a public company. As we continue to acquire other properties and expand our business we expect these costs to increase.

An active, liquid and orderly trading market for our common stock does not exist and may not develop, and the price of our stock may be volatile and may decline in value.

There currently is not an active public market for our common stock. An active trading market may not develop or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares of common stock at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling shares of common stock and may impair our ability to acquire other companies or assets by using shares of our common stock as consideration.

Our common stock is not be eligible for listing on a national securities exchange.

Our common stock is not currently listed on a national securities exchange, and we do not currently meet the initial listing standards of a national securities exchange. We cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such initial listing standards, that we will be able to obtain any such listing. Until our common stock is listed on a national securities exchange, we expect that it will continue to be eligible to be quoted on the OTCQB. An investor may find it difficult to obtain accurate quotations as to the market value of our common stock. If we fail to meet the criteria set forth in SEC regulations, various requirements may be imposed on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This also makes it more difficult for us to raise additional equity capital in the public market.

Our common stock may be considered a “penny stock.”

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. Effective March 15, 2017 and pursuant to a reverse stock split, each 20 shares of issued and outstanding common stock became one share of common stock and no fractional shares were issued. As of March 17, 2017, the closing price for our common stock on the OTCQB was $10.62 per share. Despite this, in the future, the market price of our common stock may be less than $5.00 per share and therefore may be a “penny stock.” Broker and dealers effecting transactions in “penny stock” must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect your ability to sell shares of our common stock in the future.

Control of our stock by current stockholders is expected to remain significant.

Currently, our directors directly and indirectly beneficially own a majority of our outstanding common stock. As a result, these affiliates have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws and the approval of any business combination. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving an offer premium for their shares.

It is not likely that we will pay dividends.

We currently intend to retain our future earnings to support operations and to finance our business terms and, therefore, we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.

Terms of subsequent financings may adversely impact stockholder equity.

We may have to raise additional capital through the issuance of equity or debt in the future. In that event, the value of the stockholders’ equity in common stock could be reduced. If we need to raise more equity capital from the sale of common stock, institutional or other investors may negotiate terms more favorable than the current prices of the Company’s common stock. If we issue debt securities, the holders of the debt would have a claim to our assets that would be prior to the rights of shareholders until the debt is paid. Interest on these debt securities would increase costs and could negatively impact operating results.

Preferred stock could be issued from time to time with designations, rights, preferences, and limitations as needed to raise capital. The terms of preferred stock will be determined by our Board of Directors and could be more advantageous to those investors than to the holders of common stock.

The borrowing base under our secured lending facility presently is $23.0 million and all borrowings under the facility are secured by a majority of our oil and natural gas assets. Borrowings outside the facility may have to be unsecured, and such borrowings, if obtainable, may have a higher interest rate, which would increase debt service could negatively impact operating results.

The Company’s Certificate of Incorporation does not provide shareholders the pre-emptive right to buy shares from the Company. As a result, stockholders will not have the automatic ability to avoid dilution in their percentage ownership of the Company.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties.

Information on Properties is contained in Item 1 of this Annual Report on Form 10-K.

Item 3. Legal Proceedings.

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

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Common Stock

Carbon has one class of common shares outstanding, which has a par value of $0.01 per share. Our common stock is quoted through the OTC Markets (“OTCQB”) under the symbol CRBO. The limited and sporadic quotations of our stock may not constitute an established trading market for our stock. There can be no assurance that an active market will develop for our common stock in the future. Effective March 15, 2017 and pursuant to a reverse stock split approved by the shareholders and Board of Directors, each 20 shares of issued and outstanding common stock became one share of common stock and no fractional shares were issued. The table below sets forth the high and low bid prices per share of our common stock as quoted on the OTCQB for the periods indicated and gives retroactive effect to the reverse stock split for all periods presented. All OTCQB quotations included herein reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Year Ended December 31,	Quarter	High		Low

2016	First	$	14.00	$	3.60

	Second	$	6.00	$	5.00

	Third	$	6.40	$	4.00

	Fourth	$	9.40	$	4.00

2015	First	$	14.60	$	11.60

	Second	$	15.00	$	13.00

	Third	$	14.80	$	12.00

	Fourth	$	14.00	$	7.00

As of March 17, 2017, the closing price for our common stock on the OTCQB was $10.62 per share.

Holders

As of March 15, 2017, there were approximately 725 holders of record of our common stock. The number of holders does not include the shareholders for whom shares are held in a "nominee" or "street" name.

Dividend Policy and Restrictions

We have not to date paid any cash dividends on our common stock. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition, and will be within the discretion of our then-existing Board of Directors. We currently intend to retain our future earnings to support operations and to finance our business. Our Board of Directors do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.

The Company’s ability to pay dividends is currently limited by:

●

The terms of our credit facility with LegacyTexas Bank that prohibit us from paying dividends on our common stock while amounts are owed to LegacyTexas Bank; and

●

Delaware General Corporation Law which provides that a Delaware corporation may pay dividends either: 1) out of the corporation's surplus (as defined by Delaware law); or 2) if there is no surplus, out of the corporation's net profit for the fiscal year in which the dividend is declared or the preceding fiscal year. Any determination in the future to pay dividends will depend on the Company's financial condition, capital requirements, results of operations, contractual limitations, legal restrictions and any other factors the Board of Directors deem relevant.

Securities Authorized for Issuance Under Compensation Plans

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

The Company has two stock plans, the Carbon 2011 and 2015 Stock Incentive Plans (collectively the “Carbon Plans”). The Carbon Plans were approved by the shareholders of the Company and, in the aggregate, provide for the issuance of 1,130,000 million shares of common stock for participants eligible to receive awards under the Carbon Plans. See Note 9 of the Consolidated Financial Statements for a description of compensation plans adopted without the approval of the shareholders.

The following is provided with respect to compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance as of December 31, 2016:

Equity Compensation Plan Information
		Number of Securities
		Remaining Available
	Number of Securities	for Future Issuance
	to be Issued Upon	Under Equity
	Exercise of	Compensation Plans
	Outstanding Options,	(Excluding Securities
Plan Category	Warrants, and Rights	Reflected in Column (a))
and Description	(a)	(b)

Equity Compensation Plans Approved by Security Holders ⁽¹⁾	296,308	288,295

(1)

In 2011 and 2015, the Company’s shareholders approved the adoption of the Carbon Plans under which 1,130,000 shares, in the aggregate, were reserved for issuance. For the years ended December 31, 2016 and 2015, the Company granted 134,500 and 87,000 shares of restricted stock, respectively. As of December 31, 2016, there are approximately 268,000 shares of unvested restricted stock under the Carbon Plans. For each of the years ended December 31, 2016 and 2015, the Company granted 80,000 restricted performance units. As of December 31, 2016, there are approximately 296,000 shares of unvested performance units under the Carbon Plans.

Unregistered Sales of Equity Securities

All sales of unregistered equity securities that occurred during the period covered by this report, and through December 31, 2016, have been previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

Item 7. 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 in light of recent events and trends, 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 are likely to 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.” See “Forward-Looking Statements.” The following discussion should also be read in conjunction with our Consolidated Financial Statements, including the notes thereto appearing elsewhere in this Annual Report on Form 10-K.

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

At December 31, 2016, our proved developed reserves were comprised of 7% oil and 93% natural gas. Our current capital expenditure program is focused on the acquisition of oil and natural gas properties and the development of our oil and coalbed methane reserves. We believe that our drilling inventory and lease position, combined with our low operating expense structure, 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:

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

	●	Producing property and land acquisitions which provide attractive risk adjusted rates of return and complement our existing asset base.

Our revenue, profitability and future growth rate depend on many factors which are beyond our control, such as economic, political and regulatory developments and competition from other industry participants. Oil and gas prices historically have been volatile and may fluctuate widely in the future. Our financial results are sensitive to fluctuations in oil and natural gas prices. The following table highlights the quarterly average of NYMEX price trends for oil and natural gas prices since the first quarter of 2015:

	2015								2016
	Q1		Q2		Q3		Q4		Q1		Q2		Q3		Q4

Oil (Bbl)	$	48.57	$	57.96	$	46.44	$	42.17	$	33.51	$	45.60	$	44.94	$	49.33
Natural Gas (MMBtu)	$	2.99	$	2.61	$	2.74	$	2.17	$	2.06	$	1.98	$	2.93	$	2.98

Oil prices have fallen since reaching highs of over $105.00 per barrel in 2014 and dropping below $28.00 per barrel in February 2016. Natural gas prices have also declined from over $4.80 per Mcf in 2014 to below $1.70 per Mcf in March 2016. Although oil and natural gas prices have begun to recover from the lows experienced during the first quarter of 2016, forecasted prices for both oil and natural gas remain low.

Lower oil and natural gas prices may not only decrease our revenues, but may also reduce the amount of oil and natural gas that the Company can produce economically and potentially lower our oil and natural gas reserves. The Company’s estimated proved reserves may decrease as the economic life of the underlying producing wells may be shortened as a result of lower oil and natural gas prices. A substantial or extended decline in oil or natural gas prices may result in future impairments of our proved reserves and may materially and adversely affect our future business, financial condition, cash flows, results of operations or liquidity.

The Company uses the full cost method of accounting for its oil and gas properties and performs a ceiling test quarterly. Because the ceiling calculation requires a rolling 12 month average commodity price, due to the effect of lower prices in 2016 and 2015, the Company recognized an impairment of approximately $4.3 million and $5.4 million for the years ended December 31, 2016 and 2015, respectively.

Future write downs or impairments, if any, are difficult to reasonably 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 among other factors. There are numerous uncertainties inherent in the estimation of proved reserves and accounting for oil and natural gas properties in subsequent periods and the estimates described in this paragraph should not be construed as indicative of our future results.

Impairment charges do not affect cash flows from operating activities, but do adversely affect net income and stockholders’ equity. An extended decline in oil or natural gas prices may materially and adversely affect our future business, financial condition, cash flows and liquidity. Lower oil and natural gas prices may also reduce the amount of borrowing base under our bank credit facility, which is determined at the discretion of our lender and also may make it more difficult to comply with the covenants and other restrictions under our bank credit facility.

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

Operational Highlights

Weakness in commodity prices during 2015 and 2016 has had a significant adverse impact on our results of operations, our debt balance and the amount of cash flow available to invest in exploration and development activities. Based on current and expected future prices for oil and natural gas during 2016, we reduced our drilling activity to manage and optimize the utilization of our capital resources. During 2016, other than the EXCO Acquisition, our capital expenditures consisted principally of the expansion of our gathering facilities to provide greater flexibility in moving our natural gas production to markets with more favorable pricing.

At December 31, 2016, we had approximately 466,000 net acres of mineral leases located in the Appalachian and Illinois Basins of the United States. Approximately 68% of this acreage is held by production and of the remaining acreage, approximately 45% have lease terms of greater than five years remaining in the primary term or contractual extension periods.

The principal focus of our leasing, drilling and completion activities is directed at a Berea Sandstone formation horizontal oil drilling program in eastern Kentucky and western West Virginia. As of December 31, 2016, we have over 40,000 net mineral acres in the region. Since 2010, we have drilled 54 horizontal wells in the program. During the program, we have enhanced our well performance, improved well drilling and completion performance, including reduced drilling days, increased horizontal lateral length, decreased cost per frac stage and reduced days from spud to first production. In addition, we have established an infrastructure of oil and natural gas gathering and salt water handling and disposal facilities which will benefit the economics of future drilling. We continue to acquire leases and producing properties where we have identified additional potential to expand our activities.

Another area of focus of our drilling and completion activities is the development of a coalbed methane resource located in the Illinois Basin. The Company has approximately 63,000 net mineral acres in Indiana and Illinois which are prospective for the development of coalbed methane. The Company also owns interests in natural gas gathering, compression and salt water disposal facilities. Since 2006, we have conducted a drilling program in the Seelyville coal formation, including participating as a 50% joint venture partner in the drilling of 36 vertical and two horizontal wells. During 2015, the Company participated in the drilling of 25 stratigraphic wells to identify potential future horizontal locations in the Seelyville coal formation.

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

Recent Developments

Development of our oil properties and coalbed methane gas wells during 2017 is contingent on our expectation of future oil and natural gas prices. The Company is evaluating potential producing property and land acquisition opportunities that would expand the Company’s operations and provide attractive risk adjusted rates of returns.

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

Acquisitions

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

The acquired assets significantly increased the natural gas production and reserves of the Company and are expected to increase cash flow, reduced general and administrative expenses (per unit of production) and provide an inventory of development projects. The acquired assets consisted of the following:

●

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

●

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

●

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

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

On February 15, 2017, the Company entered into an Amended and Restated Limited Liability Company Agreement ( “LLC Agreement” ) of Carbon California Company, LLC, a Delaware limited liability company ( “Carbon California” ) established by the Company. Pursuant to the LLC Agreement, Carbon acquired a 17.813% interest in Carbon California represented by Class B Units and will be the sole manager of Carbon California. The Class B Units were acquired for no cash consideration. In connection with its role as the sole manager of Carbon California, $600,000 of general and administrative expenses will be allocated to and paid by Carbon California. The negotiation and diligence of the oil and gas acquisitions described below was led by the Company and at the closing of the acquisitions, the Company was reimbursed $500,000 for its time and expenditures related to such efforts.

On February 15, 2017, Carbon California (i) issued and sold Class A Units to two institutional investors for an aggregate cash consideration of $22 million, (ii) entered into a Note Purchase Agreement (the “Note Purchase Agreement” ) with two institutional investors for the issuance and sale of up to $25 million of Senior Secured Revolving Notes (the “Senior Revolving Notes” ) due February 15, 2022 and (iii) entered into a Securities Purchase Agreement (the “ Securities Purchase Agreement” ) with one institutional investor for the issuance and sale of $10 million of Senior Subordinated Notes (the “Subordinated Notes” ) due February 15, 2024. The closing of the Note Purchase Agreement and the Securities Purchase Agreement on February 15, 2017, resulted in the sale and issuance by Carbon California LLC of (xi) Senior Revolving notes in the principal amount of $10 million and (xii) Subordinated Notes in the original principal amount of $10 million. The maximum principal amount available under the Senior Revolving Notes is based upon the borrowing base attributable to Carbon California’s proved oil and gas reserves which is to be determined at least semi-annually. The current borrowing base is $15 million.

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

In connection with the Company entering into the LLC Agreement described above and Carbon California engaging in the transactions also described above, the Company issued to an affiliate of one of the institutional investors which purchased Class A Units of Carbon California (which is also an affiliate of the Company’s largest stockholders), a warrant to purchase shares of the Company’s common stock at an exercise price of $7.20 per share (the “Warrant” ). The exercise price for the Warrant is payable exclusively with Class A Units of Carbon California and the number of shares of the Company’s common stock for which the Warrant is exercisable is determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of the Warrantholder’s Class A Units of Carbon California by (b) the exercise price. The Warrant has a term of seven years and includes certain standard registration rights with respect to the shares of the Company’s common stock issuable upon exercise of the Warrant. If exercised, the Warrant provides the Company an opportunity to increase its ownership stake in Carbon California without requiring the payment of cash. As of the date hereof, the Warrant is exercisable for an aggregate of 1,527,778 shares of the Company’s common stock.

Divestitures

During December 2014, Nytis LLC together with Liberty Energy LLC (“Liberty”) (the “Sellers”) completed a preliminary closing in accordance with a purchase and sale agreement for the sale of a portion of Nytis LLC’s interest in rights below the base of the Clinton Formation (the “Deep Rights”) underlying certain oil and gas leases located in Kentucky and West Virginia.

Pursuant to the purchase and sale agreement, the Sellers reserved (i) a minority working interest in the Deep Rights, (ii) an overriding royalty interest in certain of the Deep Rights and (iii) all rights from the surface to the base of the Clinton formation underlying the leases. In connection with the preliminary closing of this transaction, Nytis LLC received approximately $12.4 million.

In June 2015, the final closing was completed. In connection with the final closing, Nytis LLC received an additional $42,000 in cash.

Principal Components of Our Cost Structure

	●	Lease operating and gathering, compression and transportation expenses. These are costs incurred to bring oil and natural gas out of the ground and to market, 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.

	●	Production taxes. Production taxes consist of severance and ad valorem taxes and 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.

	●	Depreciation, depletion, amortization and impairment . The Company uses 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. The Company performs a quarterly ceiling test. 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 the Company’s 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.

The Company performs its ceiling tests based on average first-of-the-month prices during the twelve-month period prior to the reporting date. For the years ended December 31, 2016 and 2015, the Company incurred ceiling test impairments of approximately $4.3 million and $5.4 million, respectively.

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. These costs include payroll and benefits for our corporate staff, non-cash stock based compensation, costs of maintaining our offices, costs of managing our production, 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 drilling and completion activities and acquisitions with borrowings under our bank credit facility. As a result, we incur interest expense that is affected by both fluctuations in interest rates and our financing decisions.

	●	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 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. The Company has net operating losses (“NOL”) of approximately $19.7 million available to reduce future years’ federal tax income. The federal net operating losses expire in 2036. The Company has NOL of approximately $34.4 million available to reduce future years’ state taxable income. These state NOL will expire in the future based upon each jurisdiction’s specific law surrounding NOL carry forwards.

Results of Operations

The following discussion and analysis relates to items that have affected our results of operations for the years ended December 31, 2016 and 2015. The following table sets forth for the periods presented selected historical statements of operations data. The information contained in the table should be read in conjunction with the Company’s Consolidated Financial Statements and the information under “Forward Looking Statements” above.

	Twelve Months Ended
	December 31,						Percent
(in thousands except per unit data)	2016			2015			Change
Revenue:
Natural gas sales	$	7,127		$	5,663			26	%
Oil sales		3,316			5,045			-34	%
Commodity derivative (loss) gain		(2,259	)		852			*
Other income		11			118			-91	%
Total revenues		8,195			11,678			-30	%

Expenses:
Lease operating expenses		3,175			2,910			9	%
Transportation costs		1,645			1,710			-4	%
Production and property taxes		820			887			-8	%
General and administrative		8,645			6,741			28	%
Depreciation, depletion and amortization		1,953			2,607			-25	%
Accretion of asset retirement obligations		176			123			43	%
Impairment of oil and gas properties		4,299			5,419			-21	%
Total expenses		20,713			20,397			2	%

Operating loss	$	(12,518	)	$	(8,719	)		29	%

Other income and (expense):
Interest expense	$	(367	)	$	(201	)		83	%
Investment income		49			16			206	%
Other income (expense)		17			(30	)		*
Total other expense	$	(301	)	$	(215	)		40	%

Production data:
Natural gas (MMcf)		2,823			2,040			38	%
Oil and liquids (MBbl)		79			101			-22	%
Combined (MMcfe)		3,297			2,646			25	%

Average prices before effects of hedges:
Natural gas (per Mcf)	$	2.53		$	2.78			-9	%
Oil and liquids (per Bbl)	$	41.95		$	49.83			-16	%
Combined (per Mcfe)	$	3.17		$	4.04			-22	%

Average prices after effects of hedges**:
Natural gas (per Mcf)	$	1.89		$	3.01			-37	%
Oil and liquids (per Bbl)	$	36.14		$	53.48			-32	%
Combined (per Mcfe)	$	2.48		$	4.37			-43	%

Average costs (per Mcfe):
Lease operating expenses	$	0.96		$	1.10			-13	%
Transportation costs	$	0.50		$	0.65			-23	%
Production and property taxes	$	0.25		$	0.33			-24	%
Depreciation, depletion and amortization	$	0.59		$	0.98			-40	%

* Not meaningful or applicable

** Includes realized and unrealized commodity derivative gains and losses

Oil and natural gas sales - Revenues from sales of oil and natural gas decreased 2% to approximately $10.4 million for the year ended December 31, 2016 from approximately $10.7 million for the year ended December 31, 2015. Oil revenues for the year ended December 31, 2016 decreased 34% compared to the year ended December 31, 2015, primarily due to a 16% decrease in oil prices and a 22% decrease in oil production. The oil volume decrease between periods was primarily attributable to normal production declines. Natural gas revenues in the year ended December 31, 2016 increased 26% over the same period in 2015 primarily due to an increase in gas production of 38% primarily due to the acquisition of producing oil and natural gas properties in the Appalachian Basin in the fourth quarter of 2016, partially offset by a 9% decrease in natural gas prices.

Commodity derivative (losses) gains - To achieve more predictable cash flows and to reduce our exposure to downward price fluctuations, we enter into derivative contracts using fixed price swap contracts and costless collars when our management believes that available futures prices for our oil and natural gas production are sufficient to warrant hedging to ensure predictable cash flows for a portion of the Company’s production. Because we do not designate these derivatives as cash flow hedges, they do not receive hedge accounting treatment and all mark-to-market gains or losses, as well as realized 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 years ended December 31, 2016 and 2015, we had commodity derivative losses of approximately $2.3 million and gains of approximately $852,000, respectively. On September 30, 2016, in connection with the termination and payoff of the Company’s credit facility with the Bank of Oklahoma, the Company closed all of its commodity derivative instruments in which Bank of Oklahoma was the counterparty.

Lease operating expenses - Lease operating expenses for the year ended December 31, 2016 increased 9% compared to the year ended December 31, 2015. This increase is principally attributed to the acquisition of producing oil and natural gas properties in the Appalachian Basin in the fourth quarter of 2016. On a per Mcfe basis, lease operating expenses decreased from $1.10 per Mcfe for the year ended December 31, 2015 to $0.96 per Mcfe for the year ended December 31, 2016. This decrease was primarily attributed to cost reduction measures implemented by the Company and lower water hauling and salt water disposal fees as a result of lower oil production.

Transportation costs - Transportation costs decreased 4% from the year ended December 31, 2015 to the year ended December 31, 2016, primarily attributed to the expiration of a higher priced firm transportation contract that expired in the fourth quarter of 2015 partially offset by transportation costs for the Appalachian Basin properties acquired in the fourth quarter of 2016. On a per Mcfe basis, transportation costs decreased from $0.65 per Mcfe for the year ended December 31, 2015 to $0.50 per Mcfe for the year ended December 31, 2016 primarily due to the expiration of the firm transportation contract mentioned above and lower average transportation costs for the Appalachian Basin properties acquired in the fourth quarter of 2016.

Production and property taxes - Production and property taxes decreased 8% from approximately $887,000 for the year ended December 31, 2015 to approximately $820,000 for the year ended December 31, 2016. This decrease is primarily attributed to the termination, effective July 1, 2016, of additional severance tax assessed on natural gas revenues in West Virginia and a reserve established by the Company in the third quarter of 2015 for potential additional production taxes on certain of its wells in Kentucky due to a court ruling. This decrease was partially offset by an increase in production taxes associated with the Company’s acquisition of producing oil and natural gas properties in the Appalachian Basin in the fourth quarter of 2016. Production taxes are generally calculated as a percentage of sales revenue, which averages approximately 4.1% for the Company. Ad valorem taxes rates, which can fluctuate by year, are determined by individual counties where the Company has production and are assessed on the Company’s oil and natural gas revenues one or two years in arrears depending upon the location of the production.

Depreciation, depletion and amortization (DD&A) - DD&A decreased from approximately $2.6 million for the year ended December 31, 2015 to approximately $2.0 million for the year ended December 31, 2016 primarily due to a reduction in the Company’s depletion rate. The decrease in the depletion rate is primarily attributable to the acquisition of producing oil and natural gas properties in the Appalachian Basin in the fourth quarter of 2016 which reduced the Company’s blended depletion rate. In addition, the depletion rate decreased due to impairment changes recognized by the Company during the first six months of 2016. On a per Mcfe basis, DD&A decreased from $0.98 per Mcfe for the year ended December 31, 2015 to $0.59 per Mcfe for the year ended December 31, 2016.

Impairment of oil and gas properties- Due to low commodity prices used in the ceiling calculation, the Company recorded impairment expenses of approximately $4.3 million during the first two quarters of 2016 in addition to recording an impairment expense of approximately $5.4 million for the fourth quarter of 2015. The ceiling limitation calculation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any recorded impairment is not reversible at a later date.

General and administrative expenses - Cash-based general and administrative expenses increased from approximately $5.3 million for the year ended December 31, 2015 to approximately $6.2 million for the year ended December 31, 2016. The increase was primarily attributed personnel related and third party costs associated with the EXCO Acquisition and other potential acquisition opportunities. Non-cash based compensation increased from approximately $1.4 million for the year ended December 31, 2015 to approximately $2.4 million for the year ended December 31, 2016. During 2016, the Company estimated that it was probable that certain of the performance units granted in 2014 and 2015 would vest and compensation costs of approximately $1.2 million related to those performance units were recognized for the year ended December 31, 2016. Non-cash stock based compensation and other general and administrative expenses for the years ended December 31, 2016 and 2015 are summarized in the following table:

	Year Ended December 31,				Increase/
	2016		2015		(Decrease)

General and administrative expenses
(in thousands)
Stock-based compensation	$	2,440	$	1,443	$	997
Other general and administrative expenses		6,205		5,298		907
Total general and administrative expenses	$	8,645	$	6,741	$	1,904

Interest expense - Interest expense increased from approximately $201,000 for the year ended December 31, 2015 to approximately $367,000 for the year ended December 31, 2016 primarily due to an increase in average effective interest rates and higher average outstanding debt during 2016 as compared to 2015. In October 2016, the Company increased its outstanding debt by approximately $9.5 million to fund the EXCO Acquisition and for other working capital needs of the Company.

Liquidity and Capital Resources

Our exploration, development, and acquisition activities require us to make significant operating and capital expenditures. Historically, we have used cash flow from operations and our bank credit facility as our primary sources of liquidity, and on occasion, we have engaged in the sale of assets.

Changes in the market prices for oil and natural gas directly impact our level of cash flow generated from operations. The prices we receive for our production are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, access to capital and future rate of growth. We employ a commodity hedging strategy in an attempt to moderate the effects of commodity price fluctuations on our cash flow.

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

The following table reflects the Company’s outstanding derivative hedges as of December 31, 2016:

	Natural Gas				Oil
			Weighted				Weighted
			Average Price				Average Price
Year	MMBtu		(a)		Bbl		(b)
2017		3,360,000	$	3.30		60,000	$	52.98
2018		3,120,000	$	3.01		48,000	$	54.11
2019		1,320,000	$	2.85		36,000	$	54.90

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

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

This level of hedging will provide a measure of certainty of the cash flow that we will receive for a portion of our production through 2019. However, 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 ,” for further details of the risks associated with our hedging activities. In the future, we may determine to increase or decrease our hedging positions. In the future, we may determine to increase or decrease our hedging positions.

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

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

After closing the EXCO Acquisition and entering into the credit facility with LegacyTexas Bank, we believe that we are adequately positioned for the current economic environment due to our projected cash flow, access to undrawn debt capacity, our large inventory of drilling locations and acreage position and minimal capital expenditure obligations.

In February 2017, the Company entered into an amended and restated limited liability company agreement of Carbon California and will be the sole manager of Carbon California. In connection with its role as sole manager of Carbon California, $600,000 of annual general and administrative expenses will be allocated to and paid by Carbon California. Pursuant to the limited liability company agreement, the Company acquired its interest in Carbon California for no cash consideration; however, the Company may have future capital expenditure obligations to Carbon California depending on future commodity prices and the level of drilling and development activity of Carbon California.

In February 2017, the Company entered into a limited liability agreement of Carbon Appalachian Company, LLC (“CAC”). CAC is currently actively engaged in negotiating a transaction to acquire oil and gas interests and related facilities in the Appalachia Basin and expects to pursue future complementary acquisitions. The Company expects that in its role as manager of CAC, it will have additional administrative responsibilities but will be able to allocate a portion of its general and administrative expense to CAC.

Based on our current outlook of commodity prices and our estimated production for 2017, we expect to fund our future activities primarily with cash flow from operations, our credit facility, sales of non-strategic properties or the issuance of additional equity or debt. Such transactions, if any, will depend on general economic conditions, domestic and global financial markets, the Company’s operational and financial performance, the value of our equity securities, prevailing commodity prices, and other macroeconomic factors outside of our control. Current market conditions may limit our ability to source attractive acquisition opportunities and to issue new debt or equity securities in the public or private markets. The ability of oil and gas companies to access the equity and high yield debt markets has been limited since the significant decline in commodity prices throughout 2015 and 2016. We expect that our net cash provided by operating activities may be adversely affected by continued low commodity prices. We believe that our expected future cash flows provided by operating activities will be sufficient to fund our normal recurring activities (other than the potential acquisition of additional oil and natural gas properties), and our contractual obligations. If low commodity prices continue, we may elect to continue to defer our planned capital expenditures. We believe that our financial flexibility to adjust our spending levels will provide us with sufficient liquidity to meet our financial obligations should economic conditions deteriorate. See “Risk Factors” , for a discussion of the risks and uncertainties that affect our business and financial and operating results.

Bank Credit Facility

On September 30, 2016, the Company terminated its credit facility with Bank of Oklahoma. On October 3, 2016, in connection with and concurrently with the closing of the EXCO Acquisition, Carbon entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank. LegacyTexas Bank is the initial lender and acts as administrative agent.

The credit facility has a maximum availability of $100.0 million (with a $0.5 million sublimit for letters of credit), which availability is subject to the amount of the borrowing base. The borrowing base under the credit facility is $17.0 million. The borrowing base is subject to semi-annual redeterminations in March and September commencing March 2017. On March 30, 2017, the borrowing base was increased to $23.0 million.

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

Interest is payable quarterly and accrues on borrowings under the credit facility at a rate per annum equal to either (i) the base rate plus an applicable margin between 0.50% and 1.50% or (ii) the Adjusted LIBOR rate plus an applicable margin between 3.50% and 4.50% at Carbon’s option. The actual margin percentage is dependent on the credit facility utilization percentage. Carbon is obligated to pay certain fees and expenses in connection with the credit facility, including a commitment fee for any unused amounts of 0.50%. The Company also paid an origination fee of .75% upon closing the credit facility.

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

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

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

As required under the terms of the credit facility, the Company has agreed to establish pricing for a certain percentage of its production through the use of derivative contracts. To that end, the Company entered into an ISDA Master Agreement with BP Energy Company that established standard terms for the derivative contracts and an inter-creditor agreement with Legacy Texas Bank and BP Energy Company whereby any credit exposure related to the derivative contracts entered into by the Company and BP Energy Company is secured by the collateral and backed by the guarantees supporting the credit facility.

Initial borrowings under the credit facility were used (1) to pay off and terminate Nytis LLC’s existing credit facility with Bank of Oklahoma, (ii) to pay the purchase price of the EXCO Acquisition, (iii) to pay costs and expenses associated with the EXCO Acquisition and (iv) to provide working capital for the Company. As of December 31, 2016, there was approximately $16.2 million in borrowings under the credit facility. The Company’s effective borrowing rate as of December 31, 2016 was approximately 5.4%.

Sources and Uses of Cash

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

The significant decline in year-over-year prices for our oil and natural gas production adversely impacted our operating cash flow for 2016 and consequently reduced the amount of cash available for development activities.

The following table presents net cash provided by or used in operating, investing and financing activities for the years ended December 31, 2016 and 2015.

	Years Ended
	December 31,
(in thousands)	2016			2015

Net cash (used in) provided by operating activities	$	(3,142	)	$	509
Net cash used in investing activities	$	(8,754	)	$	(2,435	)
Net cash provided by financing activities	$	12,449		$	1,099

Ne t cash used in or 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. O perating cash flows were approximately $3.7 million lower for the year ended December 31, 2016 as compared to the same period in 2015. This decrease was primarily due to a decrease in cash settlements received on our derivative contracts, an increase in working capital during 2016 and lower oil revenues, partially offset by higher natural gas revenues.

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 $6.3 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase is principally associated with the purchase of oil and natural gas properties in the Appalachian Basin in the fourth quarter of 2016, partially offset by a decrease in drilling and development expenditures. Due to continued low oil and natural gas prices, the Company continued to reduce its drilling and development programs in 2016.

The increase in financing cash flows of approximately $11.4 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 was primarily due to borrowings used to fund the purchase of Appalachian Basin producing properties and payoff the Company’s former credit facility.

Capital Expenditures

Capital expenditures for the years ended December 31, 2016 and 2015 are summarized in the following table:

	Years Ended December 31,
(in thousands)	2016		2015

Acquisition of oil and gas properties:
Unevaluated properties	$	97	$	341
Oil and natural gas producing properties		8,117		-

Drilling and development		360		2,106
Pipeline and gathering		42		578
Other		201		87
Total capital expenditures	$	8,817	$	3,112

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

In the fourth quarter of 2016, the Company acquired producing oil and natural gas properties located principally in West Virginia. Due to continued low commodity prices, the Company has significantly reduced its drilling programs in 2015 and 2016 and focused on expanding its gathering facilities to provide greater flexibility in moving natural gas production to markets with more favorable pricing. Other factors impacting the level of our capital expenditures include the cost and availability of oil field services, general economic and market conditions, and weather disruptions.

Off-balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of December 31, 2016, the off-balance sheet arrangements and transactions that we have entered into include (i) operating lease agreements, (ii) contractual obligations for which the ultimate settlement amounts are not fixed and determinable, such as natural gas transportation commitments, and (iii) oil and natural gas physical delivery contracts that are not expected to be net cash settled and are considered to be normal sales contracts and not derivatives. We do not believe that any of these arrangements are reasonably likely to materially affect our liquidity or availability of, or requirements for, capital resources.

Critical Accounting Policies, Estimates, Judgments, and Assumptions

Carbon prepares its financial statements and the accompanying notes in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompany notes. Carbon identifies certain accounting policies as critical based on, among other things, their impact on the portrayal of Carbon’s financial condition, results of operations, or liquidity and the degree of difficulty, subjectivity, and complexity in their deployment. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. The following is a discussion of Carbon’s most critical accounting policies.

Full Cost Method of Accounting

The accounting for our business is subject to special accounting rules that are unique to the oil and natural gas industry. There are two allowable methods of accounting for oil and natural gas business activities: the full cost method and the successful efforts method. The differences between the two methods can lead to significant variances in the amounts reported in financial statements. The Company uses the full cost method of accounting as defined by SEC Release No. 33-8995 and FASB ASC 932.

Under the full cost method, separate cost centers are maintained for each country in which we incur costs. All costs incurred in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes, and overhead related to exploration and development activities) are capitalized. The fair value of estimated future costs of site restoration, dismantlement, and abandonment activities is capitalized, and a corresponding asset retirement obligation liability is recorded.

Capitalized costs applicable to each full cost center are depleted using the units-of-production method based on conversion to common units of measure using one barrel of oil as an equivalent to six thousand cubic feet of natural gas. Changes in estimates of reserves or future development costs are accounted for prospectively in the depletion calculations. Based on this accounting policy, our December 31, 2016 and 2015 reserves estimates were used for our respective period depletion calculations. These reserves estimates were calculated in accordance with SEC rules. See “ Business—Reserves ” and Notes 1 and 3 to the Consolidated Financial Statements for a more complete discussion of the rule and our estimated proved reserves as of December 31, 2016 and 2015.

Companies that use the full cost method of accounting for oil and natural gas exploration and development activities are required to perform a quarterly ceiling test for each cost center. The full cost ceiling test is a limitation on capitalized costs prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is not a fair value based measurement. Rather, it is a standardized mathematical calculation. The test determines a limit, or ceiling, on the book value of our oil and natural gas properties. That limit is basically the after tax present value of the future net cash flows from proved oil and natural gas reserves. This ceiling is compared to the net book value of the oil and natural gas properties reduced by any related net deferred income tax liability. If the net book value reduced by the related deferred income taxes exceeds the ceiling, an impairment or non-cash write-down is required. Such impairments are permanent and cannot be recovered even if the sum of the components noted above exceeds capitalized costs in future periods. The two primary factors impacting this test are reserve levels and oil and natural gas prices and their associated impact on the present value of estimated future net revenues. In the first and second quarters of 2016 and the fourth quarter of 2015, the carrying value of our oil and gas properties subject to the ceiling test exceeded the calculated value of the ceiling limitation, and we recognized an impairment of approximately $4.3 million and $5.4 million for the years ended December 31, 2016 and 2015, respectively. These impairments resulted primarily from the impact of a decrease in the 12-month average trailing price for oil and natural gas utilized in determining the future net cash flows from proved reserves. Lower oil and natural gas prices may not only decrease our revenues, but may also reduce the amount of oil and natural gas that the Company can produce economically and potentially lower our oil and natural gas reserves. Negative revisions to estimates of oil and natural gas reserves and decreases in prices can have a material impact of the present value of estimated future net revenues which may require us to recognize additional impairments of our oil and natural gas properties in future periods.

In countries or areas where the existence of proved reserves has not yet been determined, leasehold costs, seismic costs, and other costs incurred during the exploration phase remain capitalized as unproved property costs until proved reserves have been established or until exploration activities cease. Investments in unproved properties are not depleted pending the determination of the existence of proved reserves. If exploration activities result in the establishment of proved reserves, amounts are reclassified as proved properties and become subject to depreciation, depletion, and amortization, and the application of the ceiling limitation. Unproved properties are assessed periodically to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, and geographic and geologic data obtained relating to the properties. Where it is not practicable to individually assess properties whose costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is added to the costs to be amortized in the appropriate full cost pool. Subject to industry conditions, evaluation of most of our unproved properties and inclusion of these costs in proved property costs subject to amortization are expected to be completed within five years.

Under the alternative successful efforts method of accounting, surrendered, abandoned, and impaired leases, delay lease rentals, exploratory dry holes, and overhead costs are expensed as incurred. Capitalized costs are depleted on a property-by-property basis. Impairments are also assessed on a property-by-property basis and are charged to expense when assessed.

The full cost method is used to account for our oil and natural gas exploration and development activities, because we believe it appropriately reports the costs of our exploration programs as part of an overall investment in discovering and developing proved reserves.

Oil and Natural Gas Reserve Estimates

Our estimates of proved reserves are based on the quantities of oil and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation, and judgment. For example, we must estimate the amount and timing of future operating costs, production and property taxes, development costs, and workover costs, all of which may in fact vary considerably from actual results. In addition, as prices and cost levels change from year to year, the estimate of proved reserves also changes. Any significant variance in these assumptions could materially affect the estimated quantity and value of our reserves. Despite the inherent uncertainty in these engineering estimates, our reserves are used throughout our financial statements. For example, since we use the units-of-production method to amortize our oil and natural gas properties, the quantity of reserves could significantly impact our DD&A expense. Our oil and natural gas properties are also subject to a “ceiling test” limitation based in part on the quantity of our proved reserves.

Reference should be made to “ Reserves” under “Description of Business ,” and “ Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves ,” under “Risk Factors”.

Accounting for Derivative Instruments

We recognize all derivative instruments as either assets or liabilities at fair value. Under the provisions of authoritative derivative accounting guidance, we may or may not elect to designate a derivative instrument as a hedge against changes in the fair value of an asset or a liability (a “fair value hedge”) or against exposure to variability in expected future cash flows (a “cash flow hedge”). The accounting treatment for the changes in fair value of a derivative instrument is dependent upon whether or not a derivative instrument is a cash flow hedge or a fair value hedge, and upon whether or not the derivative is designated as a hedge. Changes in fair value of a derivative designated as a cash flow hedge are recognized, to the extent the hedge is effective, in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of a derivative instrument designated as a fair value hedge, to the extent the hedge is effective, have no effect on the statement of operations, because changes in fair value of the derivative offsets changes in the fair value of the hedged item. Where hedge accounting is not elected or if a derivative instrument does not qualify as either a fair value hedge or a cash flow hedge, changes in fair value are recognized in earnings. We have elected not to use hedge accounting and as a result, all changes in the fair values of our derivative instruments are recognized in commodity derivative gain or loss in our Consolidated Statements of Operations.

As of December 31, 2016 and 2015, the fair value of the Company’s derivative agreements was a liability of approximately $1.9 million and an asset of approximately $559,000, respectively. The fair value measurement of commodity derivative assets and liabilities are measured based upon our valuation model that considers various inputs including (a) quoted forward prices for commodities, (b) time value, (c) notional quantities, (d) current market and contractual prices for the underlying instruments; and (e) the counterparty’s credit risk. Volatility in oil and natural gas prices could have a significant impact on the fair value of our derivative contracts. See Note 11 to the Consolidated Financial Statements for further discussion. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions or other factors, many of which are beyond our control.

Due to the volatility of oil and natural gas prices, the estimated fair values of our commodity derivative instruments are subject to large fluctuations from period to period and we expect the volatility to continue. Actual gains or losses recognized related to our commodity derivative instruments will likely differ from those estimated at December 31, 2016 and will depend exclusively on the price of the commodities on the specified settlement dates provided by the derivative contracts.

Valuation of Deferred Tax Assets

We use the asset and liability method of accounting for income taxes. Under this method, income tax assets and liabilities are determined based on differences between the financial statement carrying values of assets and liabilities and their respective income tax bases (temporary differences). Income tax assets and liabilities are measured using the tax rates expected to be in effect when the temporary differences are likely to reverse. The effect on income tax assets and liabilities of a change in tax rates is included in earnings in the period in which the change is enacted. The book value of income tax assets is limited to the amount of the tax benefit that is more likely than not to be realized in the future.

In assessing the need for a valuation allowance on our deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon whether future book income is sufficient to reverse existing temporary differences that give rise to deferred tax assets, as well as whether future taxable income is sufficient to utilize net operating loss and credit carryforwards. Assessing the need for, or the sufficiency of, a valuation allowance requires the evaluation of all available evidence, both positive and negative. Positive evidence considered by management includes current book income in 2013 and 2014, forecasted book income if commodity prices increase, and taxable proceeds from the Liberty participation agreements and the sale of the Company’s Deep Rights in leases in Kentucky and West Virginia in 2014. Negative evidence considered by management includes a recent history of book losses which were driven primarily from ceiling test write-downs, which are not fair value based measurements and current commodity prices which will impact forecasted income or loss.

As of December 31, 2016 and 2015, management assessed the available positive and negative evidence to estimate if sufficient future taxable income would be generated to use the Company’s deferred tax assets and determined that it is more-likely-than-not that the deferred tax assets will not be realized in the near future. Based on this assessment, the Company recorded a full valuation allowance of approximately $21.1 million and $16.7 million on its deferred tax assets as of December 31, 2016 and 2015, respectively.

Asset Retirement Obligations

We have obligations to remove tangible equipment and restore locations at the end of oil and natural gas production operations. FASB ASC Topic 410, Asset Retirement and Environmental Obligations , requires that the discounted fair value of a liability for an asset retirement obligation (“ARO”) be recognized in the period in which it is incurred with the associated asset retirement cost capitalized as part of the carrying cost of the oil and natural gas asset. Estimating the future restoration and removal costs, or ARO, is difficult and requires management to make estimates and judgments, because most of the obligations are many years in the future, and contracts and regulations often have vague descriptions of what constitutes removal. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety, and public relations considerations.

Inherent in the calculation of the present value of our ARO are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the oil and natural gas property balance. Increases in the discounted ARO liability resulting from the passage of time are reflected as accretion expense in the Consolidated Statements of Operations.

Purchase Price Allocation

Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets and liabilities acquired based on their estimated fair value as of the acquisition date. Various assumptions are made when estimating fair values assigned to proved and unproved oil and gas properties including: (i) reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices, including price differentials; (v) future cash flows; and (vi) a market participant-based weighted average cost of capital rate. These inputs require significant judgement by management at the time of the valuation.

Revenue Recognition

Oil and natural gas revenues are recognized when production volumes are sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectability is reasonably assured. Natural gas revenues are recognized on the basis of the Company’s net working revenue interest. Net deliveries in excess of entitled amounts are recorded as a liability, while net deliveries lower than entitled amounts are recorded as a receivable.

Non-GAAP Measures

EBITDA and Adjusted EBITDA

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

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

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

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

The following table represents a reconciliation of our net earnings, the most directly comparable GAAP measure to EBITDA and Adjusted EBITDA for the years ended December 31, 2016 and 2015.

	For the Year Ended
	December 31,
(in thousands)	2016			2015

Net loss	$	(12,819	)	$	(8,934	)

Adjustments:
Interest expense		367			201
Depreciation, depletion and amortization		1,953			2,607
Income taxes		-			-
EBITDA		(10,499	)		(6,126	)

Adjusted EBITDA
EBITDA		(10,499	)		(6,126	)
Adjustments:
Accretion of asset retirement obligations		176			123
Impairment of oil and gas properties		4,299			5,419
Non-cash stock compensation		2,440			1,443
Adjusted EBITDA	$	(3,584	)	$	859

PV-10

PV-10 is a non-GAAP financial measure. We believe that the presentation of PV-10 is relevant and useful to investors because it presents the discounted future net cash flows attributable to our estimated net proved reserves prior to taking into account future corporate income taxes, and it is a useful measure for evaluating the relative monetary significance of our oil and gas properties. It is not intended to represent the current market value of our estimated reserves. PV-10 should not be considered in isolation or as a substitute for the standardized measure reported in accordance with US GAAP, but rather should be considered in addition to the standardized measure.

PV-10 is derived from the standardized measure, which is the most directly comparable GAAP financial measure. PV-10 is calculated using the same inputs and assumptions as the standardized measure, with the exception that it omits the impact of future income taxes. It is considered to be a pre-tax measurement.

The following table provides a reconciliation of the standardized measure to PV-10 at December 31, 2016 and 2015 (in thousands):

	As of December 31,
	2016			2015
Standardized measure of discounted future net cash flows	$	44,711		$	25,032
Add: 10 percent annual discount, net of income taxes		51,522			30,172
Add: future undiscounted income taxes		14,858			-
Future pre-tax net cash flows	$	111,091		$	55,204
Less: 10 percent annual discount, pre-tax		(61,747	)		(30,172	)
PV-10	$	49,344		$	25,032

Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Carbon Natural Gas Company

Denver, Colorado

We have audited the accompanying consolidated balance sheets of Carbon Natural Gas Company and subsidiaries (the”Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carbon Natural Gas Company and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ EKS&H LLLP

Denver, Colorado
March 31, 2017

CARBON NATURAL GAS COMPANY

Consolidated Balance Sheets

(In thousands)

	December 31,			December 31,
	2016			2015
ASSETS

Current assets:
Cash and cash equivalents	$	858		$	305
Accounts receivable:
Revenue		2,369			1,082
Joint interest billings and other		2,251			778
Commodity derivative asset		-			408
Prepaid expense and deposits		305			213
Total current assets		5,783			2,786

Property and equipment (note 5)
Oil and gas properties, full cost method of accounting:
Proved, net		33,212			25,032
Unproved		1,999			3,194
Other property and equipment, net		325			238
		35,536			28,464

Investments in affiliates (note 6)		668			1,025
Other long-term assets		725			433
Total assets	$	42,712		$	32,708

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	9,121		$	5,621
Commodity derivative liability		1,341			-
Firm transportation contract obligations (note 13)		561			436
Total current liabilities		11,023			6,057
Non-current liabilities:
Firm transportation contract obligations (note 13)		261			416
Commodity derivative liability		591			-
Ad valorem taxes payable		628			-
Asset retirement obligations (note 3)		5,006			3,095
Notes payable (note 7)		16,230			3,500
Total non-current liabilities		22,716			7,011

Commitments and contingencies (note 13)

Stockholders’ equity:
Preferred stock, $0.01 par value; authorized 1,000,000 shares, no shares issued and outstanding at December 31, 2016 and 2015		-			-
Common stock, $0.01 par value; authorized 200,000,000 shares, 5,482,673 and 5,382,796 shares issued and outstanding at December 31, 2016 and 2015, respectively		1,096			1,077
Additional paid-in capital		56,548			54,394
Accumulated deficit		(50,536	)		(38,130	)
Total Carbon stockholders’ equity		7,108			17,341
Non-controlling interests		1,865			2,299
Total stockholders’ equity		8,973			19,640

Total liabilities and stockholders’ equity	$	42,712		$	32,708

See accompanying notes to Consolidated Financial Statements.

CARBON NATURAL GAS COMPANY

Consolidated Statements of Operations

(In thousands, except per share amounts)

	Twelve months ended December 31,
	2016			2015


Revenue:
Natural gas sales	$	7,127		$	5,663
Oil sales		3,316			5,045
Commodity derivative (loss) gain		(2,259	)		852
Other income		11			118
Total revenue		8,195			11,678

Expenses:
Lease operating expenses		3,175			2,910
Transportation costs		1,645			1,710
Production and property taxes		820			887
General and administrative		8,645			6,741
Depreciation, depletion and amortization		1,953			2,607
Accretion of asset retirement obligations		176			123
Impairment of oil and gas properties		4,299			5,419
Total expenses		20,713			20,397

Operating loss		(12,518	)		(8,719	)

Other income and (expense):
Interest expense		(367	)		(201	)
Investment income		49			16
Other income (expense)		17			(30	)
Total other expense		(301	)		(215	)

Loss before income taxes		(12,819	)		(8,934	)

Income tax expense:
Current		-			-

Net loss		(12,819	)		(8,934	)

Net loss attributable to non-controlling interests		413			636

Net loss attributable to controlling interest	$	(12,406	)	$	(8,298	)

Net loss per common share:
Basic	$	(2.27	)	$	(1.56	)
Diluted	$	(2.27	)	$	(1.56	)
Weighted average common shares outstanding (in thousands):
Basic		5,468			5,335
Diluted		5,468			5,335

See accompanying notes to Consolidated Financial Statements.

CARBON NATURAL GAS COMPANY

Consolidated Statements of Stockholders’ Equity

(In thousands)

							Additional			Non-						Total
	Common Stock						Paid-in			Controlling			Accumulated			Stockholders’
	Shares			Amount			Capital			Interests			Deficit			Equity
Balances, December 31, 2014		5,344		$	1,069		$	53,160		$	3,035		$	(29,832	)	$	27,432
Stock-based compensation		-			-			1,443			-			-			1,443
Restricted stock activity including vesting and shares exchanged for tax withholding		39			8			(209	)		-			-			(201	)
Non-controlling interests distributions, net		-			-			-			(100	)		-			(100	)
Net loss		-			-			-			(636	)		(8,298	)		(8,934	)
Balances, December 31, 2015		5,383		$	1,077		$	54,394		$	2,299		$	(38,130	)	$	19,640
Stock-based compensation		-			-			2,440			-			-			2,440
Restricted stock vested		65			13			(13	)		-			-			-
Performance units vested		84			17			(17	)		-			-			-
Restricted stock and performance units exchanged for tax withholding		(50	)		(11	)		(256	)		-			-			(267	)
Non-controlling interests distributions, net		-			-			-			(14	)		-			(14	)
Non-controlling interest purchase		-			-			-			(7	)		-			(7	)
Net loss		-			-			-			(413	)		(12,406	)		(12,819	)
Balances, December 31, 2016		5,482		$	1,096		$	56,548		$	1,865		$	(50,536	)	$	8,973

See accompanying notes to Consolidated Financial Statements.

CARBON NATURAL GAS COMPANY

Consolidated Statements of Cash Flows

(In thousands)

	Twelve months ended December 31,
	2016			2015

Cash flows from operating activities:
Net loss	$	(12,819	)	$	(8,934	)
Items not involving cash:
Depreciation, depletion and amortization		1,953			2,607
Accretion of asset retirement obligations		176			123
Impairment of oil and gas properties		4,299			5,419
Unrealized derivative loss		2,490			763
Stock-based compensation expense		2,440			1,443
Equity investment loss (income)		17			(16	)
Other		(47	)		(12	)
Net change in:
Accounts receivable		(2,925	)		1,631
Prepaid expenses, deposits and other current assets		(93	)		(72	)
Accounts payable, accrued liabilities and firm transportation contracts		1,367			(2,443	)
Net cash (used in) provided by operating activities		(3,142	)		509

Cash flows from investing activities:
Development of oil and gas properties and other capital expenditures		(700	)		(3,112	)
Acquisition of oil and gas properties		(8,117	)		-
Proceeds from sale of other fixed assets		8			213
Equity investment distributions		340			-
Other long-term assets		(285	)		464
Net cash used in investing activities		(8,754	)		(2,435	)

Cash flows from financing activities:
Vested restricted stock exchanged for tax withholding		(267	)		(201	)
Proceeds from notes payable		16,937			2,000
Payments on notes payable		(4,207	)		(600	)
Distribution to non-controlling interests		(14	)		(100	)
Net cash provided by financing activities		12,449			1,099

Net increase (decrease) in cash and cash equivalents		553			(827	)

Cash and cash equivalents, beginning of period		305			1,132

Cash and cash equivalents, end of period	$	858		$	305

See Note 15 – Supplemental Cash Flow Disclosure

See accompanying notes to Consolidated Financial Statements.

Note 1 – Organization

Carbon Natural Gas Company (“Carbon” or the “Company”) is an independent oil and gas company engaged in the exploration, development and production of oil and natural gas in the United States. The Company’s business is comprised of the assets and properties of Nytis Exploration (USA) Inc. (“Nytis USA”) and its subsidiary Nytis Exploration Company LLC (“Nytis LLC”) which conduct the Company’s operations in the Appalachian and Illinois Basins. Collectively, Carbon, Nytis USA and Nytis LLC are referred to as the Company.

Note 2 – Reverse Stock Split

Effective March 15, 2017 and pursuant to a reverse stock split approved by the shareholders and Board of Directors, each 20 shares of issued and outstanding common stock became one share of common stock and no fractional shares were issued. The accompanying financial statements and related disclosures give retroactive effect to the reverse stock split for all periods presented.

Note 3 – Summary of Significant Accounting Policies

Accounting policies used by the Company reflect industry practices and conform to accounting principles generally accepted in the United States of America. The more significant of such accounting policies are briefly discussed below.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Carbon and its consolidated subsidiaries. The Company owns 100% of Nytis USA. Nytis USA owns approximately 99% of Nytis LLC. Nytis LLC also holds interests in various oil and gas partnerships.

For partnerships where the Company has a controlling interest, the partnerships are consolidated. The Company is currently consolidating 46 partnerships and the Company reflects the non-controlling ownership interest in partnerships and subsidiaries as non-controlling interests on its Consolidated Statements of Operations and also reflects the non-controlling ownership interest in the net assets of the partnerships as non-controlling interests within stockholders’ equity on its Consolidated Balance Sheets. All significant intercompany accounts and transactions have been eliminated.

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

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

Cash and Cash Equivalents

Cash and cash equivalents, if any, in excess of daily requirements have been generally invested in money market accounts, certificates of deposits and other cash equivalents with maturities of three months or less. Such investments are deemed to be cash equivalents for purposes of the Consolidated Financial Statements. The carrying amount of cash equivalents approximates fair value because of the short maturity and high credit quality of these investments.

Accounts Receivable

The Company’s accounts receivable are primarily comprised of oil and natural gas revenues from producing activities and from other exploration and production companies and individuals who own working interests in the properties that the Company operates. The Company grants credit to all qualified customers, which potentially subjects the Company to credit risk resulting from, among other factors, adverse changes in the industries in which the Company operates and the financial condition of its customers. The Company continuously monitors collections and payments from its customers and maintains an allowance for doubtful accounts based upon its historical experience and any specific customer collection issues that it has identified. At December 31, 2016 and 2015, the Company had not identified any collection issues related to its oil and gas operations and as a consequence no allowance for doubtful accounts was provided for on those dates. In addition, accounts receivable included a deposit of $1.7 million made by the Company on the purchase of assets in the Ventura Basin of California through Carbon California Company, LLC (“Carbon California”). The deposit was reimbursed to the Company upon the consummation of the acquisition by Carbon California Company LLC on February 15, 2017. See Note 16 for additional information.

Note 3 – Summary of Significant Accounting Policies (continued)

Oil and Natural Gas Sales

The Company sells its oil and natural gas production to various purchasers in the industry. The table below presents purchasers that account for 10% or more of total oil and natural gas sales for the years ended December 31, 2016 and 2015. There are a number of purchasers in the areas where the Company sells its production. Management does not believe that changing its primary purchasers or a loss of any other single purchaser would materially impact the Company’s business.

Purchaser	2016			2015
Purchaser A		18	%		18	%
Purchaser B		17	%		24	%
Purchaser C		16	%		15	%
Purchaser D		15	%		15	%

The Company recognizes an asset or a liability, whichever is appropriate, for revenues associated with over-deliveries or under-deliveries of natural gas to purchasers. A purchaser imbalance asset occurs when the Company delivers more natural gas than it nominated to deliver to the purchaser and the purchaser pays only for the nominated amount. Conversely, a purchaser imbalance liability occurs when the Company delivers less natural gas than it nominated to deliver to the purchaser and the purchaser pays for the amount nominated. As of December 31, 2016 and 2015, the Company had a purchaser imbalance payable of approximately $25,000 and a receivable of approximately $270,000, respectively, which are recognized as a current liability and current asset, respectively, in the Company’s Consolidated Balance Sheets.

Accounting for Oil and Gas Operations

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

Unproved properties are excluded from amortized capitalized costs until it is determined whether or not proved reserves can be assigned to such properties. The Company assesses its unproved properties for impairment at least annually. Significant unproved properties are assessed individually.

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

No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves. See Note 4 regarding the Company’s 2015 divestitures. All costs related to production activities, including work-over costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred.

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

For the years ended December 31, 2016 and 2015, the Company recognized a ceiling test impairment of approximately $4.3 million and $5.4 million, respectively. Future declines in oil and natural gas prices could result in impairments of our oil and gas properties in future periods. Because the ceiling test used previous twelve month period average commodity prices, the effect of declining prices since mid-2014 had a negative impact on the average price used to value our reserves which will lower the ceiling test value in future periods and may result in additional impairments of our oil and gas properties. The effect of price declines will impact the ceiling test value until such time commodity prices stabilize or improve. Impairment changes are a non-cash charge and accordingly would not affect cash flows but would adversely affect our net income and shareholders’ equity.

Note 3 – Summary of Significant Accounting Policies (continued)

Other Property and Equipment

Other property and equipment are recorded at cost upon acquisition. Depreciation of other property and equipment is calculated over three to seven years using the straight-line method.

Long-Lived Assets

The Company reviews its long-lived assets other than oil and gas properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the estimated undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired.

Investments in Affiliates

Investments in non-consolidated affiliates are accounted for under either the equity or cost method of accounting as appropriate. The cost method of accounting is used for investments in affiliates in which the Company has less than 20% of the voting interests of a corporate affiliate or less than 5% interest of a partnership or limited liability company and does not have significant influence. Investments in non-consolidated affiliates, accounted for using the cost method of accounting, are recorded at cost and an impairment assessment of each investment is made annually to determine if a decline in the fair value of the investment, other than temporary, has occurred. A permanent impairment is recognized if a decline in the fair value occurs. If the Company holds between 20% and 50% of the voting interest in non-consolidated corporate affiliates or greater than a 5% interest of a partnership or limited liability company and exercises significant influence or control, the equity method of accounting is used to account for the investment. The Company’s investment in an affiliate that is accounted for using the equity method of accounting increases or decreases by the Company’s share of the affiliate’s profits or losses and such profits or losses are recognized in the Company’s Consolidated Statements of Operations. The Company reviews equity method investments for impairment whenever events or changes in circumstances indicate that an other than temporary decline in value has occurred. The amount of the impairment is based on quoted market prices, where available, or other valuation techniques.

Asset Retirement Obligations

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

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

Note 3 – Summary of Significant Accounting Policies (continued)

The following table is a reconciliation of the ARO for the years ended December 31, 2016 and 2015.

	Year Ended December 31,
(in thousands)	2016			2015

Balance at beginning of year	$	3,095		$	2,968
Accretion expense		176			123
Additions during period		1,849			4
		5,120			3,095
Less: ARO recognized as a current liability		(114	)		-
Balance at end of year	$	5,006		$	3,095

For the year ended December 31, 2016, the addition of approximately $1.8 million to ARO is primarily due to the acquisition of producing oil and natural gas properties in the Appalachian Basin in the fourth quarter of 2016.

Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivables, accounts payables, accrued liabilities, commodity derivative instruments and its notes payable. The carrying value of cash and cash equivalents, accounts receivables, payables and accrued liabilities are considered to be representative of their fair value, due to the short maturity of these instruments. The Company’s commodity derivative instruments are recorded at fair value, as discussed below and in Note 11. The carrying amount of the Company’s notes payable approximated fair value since borrowings bear interest at variable rates, which are representative of the Company’s credit adjusted borrowing rate.

Commodity Derivative Instruments

The Company enters into commodity derivative contracts to manage its exposure to oil and natural gas price volatility with an objective to reduce our exposure to downward price fluctuations. Commodity derivative contracts may take the form of futures contracts, swaps, collars or options. The Company has elected not to designate its derivatives as cash flow hedges. All derivatives are initially and subsequently measured at estimated fair value and recorded as assets or liabilities on the Consolidated Balance Sheets and the changes in fair value are recognized as gains or losses in revenues in the Consolidated Statements of Operations.

Income Taxes

Carbon accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as the future tax consequences attributable to the future utilization of existing tax net operating losses and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company accounts for uncertainty in income taxes for tax positions taken or expected to be taken in a tax return. Only tax positions that meet the more likely than not recognition threshold are recognized.

Stock - Based Compensation

Compensation cost is measured at the grant date, based on the fair value of the awards and is recognized on a straight-line basis over the requisite service period (usually the vesting period).

Revenue Recognition

Note 3 – Summary of Significant Accounting Policies (continued)

Earnings Per Common Share

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

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

	For the Year Ended December 31,
(in thousands except per share amounts)	2016			2015

Net loss	$	(12,406	)	$	(8,298	)

Basic weighted-average common shares outstanding during the period		5,468			5,335

Add dilutive effects of stock options, warrants and non-vested shares of restricted stock		-			-

Diluted weighted-average common shares outstanding during the period		5,468			5,335

Basic net (loss) income per common share	$	(2.27	)	$	(1.56	)
Diluted net (loss) income per common share	$	(2.27	)	$	(1.56	)

For the year ended December 31, 2016, the Company had a net loss and therefore the diluted loss per common share calculation excludes the anti-dilutive effects of approximately 13,000 warrants and approximately 268,000 non-vested shares of restricted stock. In addition, approximately 296,000 restricted performance units subject to future contingencies were excluded from the basic and diluted loss per share calculations. For the year ended December 31, 2015, the Company had a net loss and therefore the loss per common share calculation excludes the anti-dilutive effects of approximately 8,000 stock options, 13,000 warrants and 248,000 non-vested shares of restricted stock. In addition, approximately 314,000 restricted performance units subject to future contingencies were excluded from the basic and diluted loss per share calculation.

Use of Estimates in the Preparation of Financial Statements

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

Adopted and Recently Issued Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows-Classification of Certain Cash Receipts and Cash Payments . The objective of this update is intended to reduce the diversity in practice as to how certain cash receipts and cash payments are presented and classified in the statement of cash flows by providing guidance for several specific cash flow issues. ASU 2016-15 is effective for the annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the impact of adopting this standard.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes . The objective of this update is to require deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The standard will be adopted retrospectively, effective January 1, 2017, and will not have a significant impact on the Company's disclosures and financial statements.

Note 3 – Summary of Significant Accounting Policies (continued)

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern . The objective of this update requires an entity’s management to evaluate, for each reporting period, including interim periods, of whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. Additional disclosures are required if management concludes that conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The new guidance was effective for the Company in the fourth quarter of 2016. The Company adopted the standard for this annual report ending December 31, 2016 and it did not have a significant impact on the Company’s disclosures and financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) . This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is to be applied using a prospective method and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted as outlined in ASU 2017-01. The Company is currently evaluating the provisions of this guidance and assessing its potential impact on the Company’s financial statements and disclosures.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805) . This ASU simplifies the accounting for measurement period adjustments by eliminating the requirements to restate prior period financial statements for these adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new standard, which should be applied prospectively to measurement period adjustments that occur after the effective date, was effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.

Note 4 – Acquisitions and Divestitures

Acquisitions

On October 3, 2016 (the “Closing Date”), Nytis LLC completed an acquisition (the “EXCO Acquisition”) consisting of producing natural gas wells and natural gas gathering facilities located in the Company’s Appalachian Basin operating area. The natural gas gathering facilities are primarily used to gather the Company’s natural gas production. The acquisition was pursuant to a purchase and sale agreement effective October 1, 2016 (the “EXCO Purchase Agreement”) by and among EXCO Production Company (WV), LLC, BG Production Company (WV), LLC and EXCO Resources (PA) LLC (collectively the “Sellers”) and Nytis LLC, as the buyer. The purchase price of the acquired assets pursuant to the EXCO Purchase Agreement was $9.0 million subject to customary closing adjustments and the assumption of certain obligations.

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

The EXCO Acquisition qualified as a business combination and as such, the Company estimated the fair value as of the Closing Date of the assets acquired and liabilities assumed as of the Closing Date. The Company considered various factors in its estimate of fair value of the acquired assets including (i) reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices, including price differentials, (v) future cash flows, and (vi) a market participant-based weighted average cost of capital.

The Company expensed approximately $501,000 of transaction and due diligence costs related to the EXCO Acquisition that were included in general and administrative expenses in the accompanying Consolidated Statement of Operations for the year ended December 31, 2016.

The following table summarizes the preliminary consideration paid to the Sellers and the estimated fair value of the assets acquired and liabilities assumed.

Consideration paid to Sellers:
Cash consideration	$	8,117

Recognized amounts of identifiable assets acquired and liabilities assumed:
Proved oil and gas properties and related support facilities	$	12,656
Asset retirement obligations		(1,845	)
Working capital		(2,694	)
Total identified net assets	$	8,117

The estimated fair value of the asset acquired and liabilities assumed will be adjusted to reflect any changes in the consideration paid pursuant to the final closing statement.

Note 4 – Acquisitions and Divestitures (continued)

The EXCO Acquisition was funded through borrowings from the Company’s credit facility with LegacyTexas Bank.

EXCO Acquisition Unaudited Pro Forma Results of Operations

Below are consolidated results of operations for the years ended December 31, 2016 and 2015 as though the EXCO Acquisition made during 2016 had been completed as of January 1, 2015. The EXCO Acquisition closed October 3, 2016, and accordingly, the Company’s consolidated statements of operations for the year ended December 31, 2016 includes the results of operations for the three months ended December 31, 2016 of the EXCO properties acquired, including approximately $2.4 million of revenue.

	Unaudited Pro Forma Consolidated Results
	For Years Ended December 31,
(in thousands, except per share amounts )		2016			2015
Revenue	$	13,963		$	22,178
Net (loss) income before non-controlling interests		(6,825	)		(3,627	)
Net loss (income) attributable to non-controlling interests		413			636
Net (loss) income attributable to controlling interests		(6,412	)		(2,991	)

Net (loss) income per share (basic)		(1.17	)		(0.56	)
Net (loss) income per share (diluted)		(1.17	)		(0.56	)

Divestitures

During December 2014, Nytis LLC together with Liberty Energy LLC (the “Sellers”) completed a preliminary closing in accordance with a purchase and sale agreement for the sale of a portion of Nytis LLC’s interest in rights below the base of the Clinton Formation (the “Deep Rights”) underlying certain oil and gas leases located in Kentucky and West Virginia.

During 2015, the final closing was completed. In connection with the final closing, Nytis LLC received an additional $42,000 in cash.

Note 5 – Property and Equipment

Net property and equipment at December 31, 2016 and 2015 consists of the following:

(in thousands)	As of December 31,
	2016			2015
Oil and gas properties:
Proved oil and gas properties	$	111,771		$	97,453
Unproved properties not subject to depletion		1,999			3,194
Accumulated depreciation, depletion, amortization and impairment		(78,559	)		(72,421	)
Net oil and gas properties		35,211			28,226

Furniture and fixtures, computer hardware and software, and other equipment		990			825
Accumulated depreciation and amortization		(665	)		(587	)
Net other property and equipment		325			238

Total net property and equipment	$	35,536		$	28,464

The Company had approximately $2.0 million and $3.2 million, at December 31, 2016 and 2015, respectively, of unproved oil and gas properties not subject to depletion. At December 31, 2016 and 2015, the Company’s unproved properties consist principally of leasehold acquisition costs in the following areas:

	As of December 31,
(in thousands)	2016		2015

Illinois Basin:
Indiana	$	431	$	433
Illinois		298		309
Appalachian Basin:
Kentucky		750		1,523
Ohio		66		66
West Virginia		454		863

Total unproved properties not subject to depletion	$	1,999	$	3,194

Note 5 – Property and Equipment (continued)

During the years ended December 31, 2016 and 2015, expiring leasehold costs reclassified into proved property were approximately $1.3 million and $189,000, respectively. The costs not subject to depletion relate to unproved properties that are excluded from amortized capital costs until it is determined whether or not proved reserves can be assigned to such properties. These costs do not relate to any individually significant projects. The excluded properties are assessed for impairment at least annually.

The Company capitalized overhead applicable to acquisition, development and exploration activities of approximately $562,000 and $576,000 for the years ended December 31, 2016 and 2015, respectively.

Depletion expense related to oil and gas properties for the years ended December 31, 2016 and 2015 was approximately $1.8 million and $2.5 million or $0.56 and $0.93 per Mcfe, respectively. Depreciation and amortization expense related to furniture and fixtures, computer hardware and software and other equipment for the years ended December 31, 2016 and 2015 was approximately $114,000 and $140,000, respectively.

Note 6 – Equity and Cost Method Investment

The Company has a 50% interest in Crawford County Gas Gathering Company, LLC (“CCGGC”) which owns and operates pipelines and related gathering and treating facilities. The Company’s gas production located in Illinois is gathered and transported on CCGGC’s gathering facilities. The Company’s investment in CCGGC is accounted for under the equity method of accounting, and its share of the income or loss is recognized. For the years ended December 31, 2016 and 2015, the Company recorded equity method loss of approximately $17,000 and income of approximately $16,000, respectively, related to this investment. In addition, during 2016, the Company received cash distributions totaling $340,000 from CCGGC.

During 2016, the Company received distributions of approximately $65,000 from its investment in Sullivan Energy which it accounts for using the cost method of accounting and as such the Company recognized investment income of $65,000 for the year ended December 31, 2016.

Note 7 – Bank Credit Facility

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

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

Note 7 – Bank Credit Facility (continued)

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

Initial borrowings under the credit facility were used (i) to pay off and terminate Nytis LLC’s existing credit facility with Bank of Oklahoma, (ii) to pay the purchase price of the EXCO Acquisition, (iii) to pay costs and expenses associated with the EXCO Acquisition and (iv) to provide working capital for the Company.

As of December 31, 2016, there were approximately $16.2 million in outstanding borrowings and approximately $800,000 of additional borrowing capacity available under the credit facility. The Company’s effective borrowing rate at December 31, 2016 was approximately 5.4%.

Note 8 – Income Taxes

The provision for income taxes for the years ended December 31, 2016 and 2015 consists of the following:

(in thousands)	Year Ended
	December 31, 2016			December 31, 2015

Current income tax expense	$	-		$	-
Deferred income tax (benefit) expense		(4,472	)		(3,733	)
Change in valuation allowance		4,472			3,773

Total income tax expense	$	-		$	-

Note 8 – Income Taxes (continued)

The effective income tax rate for the years ended December 31, 2016 and 2015 differed from the statutory U.S. federal income tax rate as follows:

	Year Ended
	December 31, 2016			December 31, 2015

Federal income tax rate		35.0	%		35.0	%
State income taxes, net of federal benefit		3.5			3.5
Percentage depletion in excess of basis		1.1			1.3
Non-controlling interest in consolidated partnerships		(.4	)		(.4	)
True-up of prior year depletion in excess of basis		.2			.2
Stock-based compensation deficiency		(2.9	)		(1.8	)
Rate changes of prior year deferreds		(1.6	)		4.2
Increase in valuation allowance and other		(34.9	)		(42.0	)

Total income tax expense		-			-

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 2016 and 2015 are presented below:

(in thousands)	December 31, 2016			December 31, 2015

Deferred tax assets
Net operating loss carryforwards	$	8,274		$	5,433
Depletion carryforwards		2,740			2,570
Accrual and other		1,694			1,318
Derivatives		730			(213	)
Asset retirement obligations		1,936			1,168
Property, plant and equipment		6,439			7,185
Total deferred tax assets		21,813			17,461

Deferred tax liability
Interest in partnerships		(762	)		(757	)

Less valuation allowance		(21,051	)		(16,704	)

Net deferred tax asset	$	-		$	-

The Company has net operating losses (“NOL”) of approximately $19.7 million available to reduce future years’ federal taxable income. The federal net operating losses expire beginning in 2031 through 2036. The Company has NOL of approximately $34.4 million available to reduce future years’ state taxable income. These state NOL carryforwards will expire beginning in 2023 through 2036 depending on each jurisdiction’s specific law surrounding NOL carryforwards. Tax returns are subject to audit by various taxation authorities. The results of any audits will be accounted for in the period in which they are determined.

The Company believes that the tax positions taken in the Company's tax returns satisfy the more likely than not threshold for benefit recognition. Accordingly, no liabilities have been recorded by the Company. Any potential adjustments for uncertain tax positions would be a reclassification between the deferred tax asset related to the Company’s NOL and another deferred tax asset.

The Company’s policy is to classify accrued penalties and interest related to unrecognized tax benefits in the Company’s income tax provision. As of December 31, 2016, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the current year.

Note 9 – Stockholders’ Equity

Authorized and Issued Capital Stock

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

As of December 31, 2016, the Company had 200,000,000 shares of common stock authorized with a par value of $0.01 per share, of which approximately 5.5 million were issued and outstanding and 1,000,000 shares of preferred stock with a par value of $0.01 per share, none of which were issued and outstanding. During the year ended December 31, 2016, the increase in the Company’s issued and outstanding common stock reflect restricted stock, and performance units net of shares exchanged for payroll tax obligations paid by the Company, that vested during the year.

Equity Plans Prior to Merger

In 2011, pursuant to an Agreement and Plan of Merger by and among St. Lawrence Seaway Corporation (“SLSC”), St. Lawrence Merger Sub, Inc. (“Merger Co.”) and Nytis USA, Merger Co. merged with and into Nytis USA with Nytis USA remaining as the surviving subsidiary of SLSC.

Pursuant to the merger, all options, warrants and restricted stock were adjusted to reflect the conversion ratio used in the merger. As of December 31, 2016, the Company has 12,500 warrants granted by SLSC prior to the merger outstanding and exercisable and approximately 24,000 shares of common stock outstanding that are subject to restricted stock agreements.

Nytis USA Warrants

As of December 31, 2016, the Company has 12,500 warrants outstanding and exercisable, which were granted by SLSC prior to the merger. These warrants have an exercise price of $20.00 and expire on August 31, 2017.

Nytis USA Restricted Stock Plan

Under Nytis USA’s restricted stock plan, participants were granted stock without cost to the participant.

As of December 31, 2016, there were approximately 24,000 shares of unvested restricted stock granted under the Nytis USA Restricted Stock Plan (“Nytis USA Plan”). The Company accounted for these grants at their intrinsic value. From the dates of grant through March 31, 2013, the Company estimated that none of these shares would vest and accordingly, no compensation cost had been recorded through March 31, 2013.

In June 2013, the vesting terms of these restricted stock grants were modified so that 25% of the shares would vest on the first of January from 2014 through 2017. As such, the Company is recognizing compensation expense for these restricted stock grants based on the fair value of the shares on the date the vesting terms were modified. Compensation costs recognized for these restricted stock grants were approximately $335,000 for the years ended December 31, 2016 and 2015. As of December 31, 2016, compensation costs relative to these restricted stock have been fully recognized.

Carbon Stock Incentive Plans

The Company has two stock plans, the Carbon 2011 Stock Incentive Plan and the Carbon 2015 Stock Incentive Plan (collectively the “Carbon Plans”). The Carbon Plans were approved by the shareholders of the Company and in the aggregate provide for the issuance of approximately 1.1 million shares of common stock to Carbon officers, directors, employees or consultants eligible to receive the awards under the Carbon plans. The Carbon Plans provide for granting Director Stock Awards to non-employee directors and for granting Incentive Stock Options, Non-qualified Stock Options, Restricted Stock Awards, Performance Awards and Phantom Stock Awards, or a combination of the foregoing, as is best suited to the circumstances of the particular employee, officer, director or consultant.

Note 9 – Stockholders’ Equity (continued)

Restricted Stock

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 the Company or the date their membership on the Board of Directors is terminated other than for cause. The Company recognizes compensation expense for these restricted stock grants based on the grant date fair value of the shares, amortized ratably over three years for employee awards (based on the required service period for vesting) and seven years for non-employee director awards (based on a market survey of the average tenure of directors among U.S. public companies). For restricted stock granted between 2014 and 2016, the Company recognized compensation expense based on the grant date fair value of the shares, utilizing an enterprise value approach, using valuation metrics primarily based on multiples of cash flow from operations, production and reserves. For restricted stock and performance units granted in 2013, the Company utilized the closing price of the Company’s stock on the date of grant to recognize compensation expense. The following table shows a summary of the Company’s unvested restricted stock under the Carbon Plans as of December 31, 2016 and 2015 as well as activity during the years then ended.

				Weighted Avg
	Number			Grant Date
		of Shares			Fair Value
Restricted stock awards, nonvested, January 1, 2015		176,167		$	12.26

Granted		87,000			8.00

Vested		(64,167	)		12.33

Restricted stock awards, nonvested, December 31, 2015		199,000			10.37

Granted		134,501			5.40

Vested		(64,668	)		10.84

Forfeited		(1,083	)		6.20

Restricted stock awards, nonvested, December 31, 2016		267,750		$	7.78

Compensation costs recognized for these restricted stock grants were approximately $742,000 and $762,000 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there was approximately $1.2 million of unrecognized compensation costs related to these restricted stock grants which the Company expects to be recognized over the next 6.3 years.

Restricted Performance Units

Performance units represent a contractual right to receive one share of the Company’s common stock subject to the terms and conditions of the agreements including the achievement of certain performance measures relative to a defined peer group or the growth of certain performance measures over a defined period of time for the Company as well as the lapse of forfeiture restrictions pursuant to the terms and conditions of the agreements including for certain of the grants, the requirement of continuous employment by the grantee prior to a change in control of the Company. The following table shows a summary of the Company’s unvested performance units as of December 31, 2016 and 2015 as well as activity during the years then ended.

Note 9 – Stockholders’ Equity (continued)

	Number
	of Shares
Restricted performance units, non-vested, January 1, 2015		234,311

Granted		80,000

Restricted performance units, non-vested, December 31, 2015		314,311

Granted		80,000

Vested		(84,480	)

Forfeited		(13,520	)

Restricted performance units, non-vested, December 31, 2016		296,311

The Company accounts for the performance units granted during 2012 and 2014 through 2016 at their fair value determined at the date of grant, which were $12.80, $11.80, $8.00 and $5.40 per share, respectively. The final measurement of compensation cost will be based on the number of performance units that ultimately vest. At December 31, 2016, the Company estimated that none of the performance units granted in 2012 and 2016 would vest whether due to change in control or other performance provisions and accordingly, no compensation cost has been recorded for these performance units. During 2016, the Company estimated that it was probable that a portion of the performance units granted in 2014 and 2015 would vest and therefore compensation costs of approximately $1.2 million related to these performance units were recognized for the year ended December 31, 2016. As of December 31, 2016, if change in control and other performance provisions pursuant to the terms and conditions of these agreements are met in full, the estimated unrecognized compensation cost related to the performance units granted in 2012, 2014 through 2016 would be approximately $2.5 million.

The performance units granted in 2013 contained specific vesting provisions, and did not contain change in control provisions nor any performance conditions other than stock price performance. Due to different earning requirements compared to the performance units granted in 2012 and 2014-2016, the Company recognizes compensation expense for the performance units granted in 2013 based on the grant date fair value of the performance units, amortized ratably over three years (the performance period). The fair value of the performance units granted in 2013 was estimated using a Monte Carlo simulation (“MCS”) valuation model. MCS is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility was calculated based on the historical volatility of the Company’s common stock and those of the Company’s defined peer group and was determined to be 92.92%. A risk free interest rate of .39% was determined based on the yield of U.S. Treasury strips with maturities similar to those of the expected term of the performance units which was determined to be 2.87 years. The grant date fair value of these performance units as determined by the valuation model was $10.80 per share. Compensation costs recognized for these performance units were approximately $127,000 and $346,000 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, compensation costs relative to these performance units have been fully recognized.

Note 10 – Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at December 31, 2016 and 2015 consist of the following:

(in thousands)	As of December 31,
	2016		2015

Accounts payable	$	2,315	$	577
Oil and gas revenue payable to oil and gas property owners		1,415		862
Gathering and transportation payables		468		359
Production taxes payable		113		59
Drilling advances received from joint venture partner		955		2,115
Accrued drilling costs		4		112
Accrued lease operating costs		282		76
Accrued ad valorem taxes		1,552		496
Accrued general and administrative expenses		1,572		833
Accrued income taxes payable		-		-
Accrued interest		184		3
Other liabilities		261		129

Total accounts payable and accrued liabilities	$	9,121	$	5,621

Note 11 – Fair Value Measurements

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

	Level 1:	Quoted prices are available in active markets for identical assets or liabilities;

	Level 2:	Quoted prices in active markets for similar assets or liabilities that are observable for the asset or liability; or

	Level 3:	Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

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

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2016 and 2015 by level within the fair value hierarchy:

(in thousands)	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
December 31, 2016
Liabilities:
Commodity derivatives	$	-	$	1,932	$	-	$	1,932

December 31, 2015
Assets:
Commodity derivatives	$	-	$	559	$	-	$	559

As of December 31, 2016, the Company’s commodity derivative financial instruments are comprised of eight natural gas and nine oil swap agreements. As of December 31, 2015, the Company’s commodity derivative financial instruments were comprised of three natural gas swap agreements and one gas and four oil costless collar agreements. 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. The Company’s estimates of fair value of derivatives include consideration of the counterparty’s credit worthiness, the Company’s credit worthiness and the time value of money. The consideration of these factors results in an estimated exit-price for each derivative asset or liability under a market place participant’s view. All of the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy. The counterparty for all of the Company’s outstanding commodity derivative financial instruments as of December 31, 2016 is BP Energy Company.

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

The fair value of each of the following assets and liabilities measured and recorded at fair value on a non-recurring basis are based on unobservable pricing inputs and therefore, are included within the Level 3 fair value hierarchy.

The Company uses the income valuation technique to estimate the fair value of asset retirement obligations using the amounts and timing of expected future dismantlement costs, credit-adjusted risk-free rates and time value of money. During the years ended December 31, 2016 and 2015, the Company recorded asset retirement obligations for additions of approximately $1.8 million and $4,000, respectively. See Note 3 for additional information.

To determine the fair value of the proved developed properties acquired in 2016, the Company primarily used the income approach and made market assumptions as to projections of estimated quantities of oil and natural gas reserves, future production rates, future commodity prices including price differentials as of the Closing Date, future operating and development costs and a market participant weighted average cost of capital.

The fair value of the non-controlling interest in the partnerships the Company is required to consolidate, was determined based on the net discounted cash flows of the proved developed producing properties attributable to the non-controlling interests in these partnerships.

The Company assumed certain firm transportation contracts as part of an acquisition in 2011. The fair value of the firm transportation obligations were determined based upon the contractual obligations assumed by the Company and discounted based upon the Company’s effective borrowing rate. These contractual obligations are being amortized on a monthly basis as the Company pays these firm transportation obligations in the future.

Note 12 – Physical Delivery Contracts and Commodity Derivatives

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

Pursuant to the terms of the Company’s credit facility with LegacyTexas Bank, the Company has entered into swap derivative agreements to hedge certain of its oil and natural gas production for 2017 through 2019. As of December 31, 2016, these derivative agreements consisted of the following:

	Natural Gas				Oil
			Weighted				Weighted
			Average				Average
Year	MMBtu		Price (a)		Bbl		Price (b)

2017		3,360,000	$	3.30		60,000	$	52.98
2018		3,120,000	$	3.01		48,000	$	54.11
2019		1,320,000	$	2.85		36,000	$	54.90

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

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

For its swap instruments, the Company receives a fixed price for the hedged commodity and pays a floating price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

The following table summarizes the fair value of the derivatives recorded in the Consolidated Balance Sheets. These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

(in thousands)	As of December 31,
	2016		2015
Commodity derivative contracts:
Current assets	$	-	$	408
Non-current assets	$	-	$	151

Current liabilities	$	1,341	$	-
Non-current liabilities	$	591	$	-

Note 12 – Physical Delivery Contracts and Commodity Derivatives (continued)

The table below summarizes the commodity settlements and unrealized gains and losses related to the Company’s derivative instruments for the years ended December 31, 2016 and 2015. These commodity settlements and unrealized gains and losses are recorded and included in commodity derivative gain or loss in the accompanying Consolidated Statements of Operations.

(in thousands)	For the year ended December 31,
	2016			2015
Commodity derivative contracts:
Settlement gains	$	231		$	1,615
Unrealized losses		(2,490	)		(763	)

Total settlement and unrealized (losses) gains, net	$	(2,259	)	$	852

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

The counterparty in all of the Company’s derivative instruments is BP Energy Company. T he Company has entered into an ISDA Master Agreement with BP Energy Company that establishes standard terms for the derivative contracts and an inter-creditor agreement with LegacyTexas Bank and BP Energy Company whereby any credit exposure related to the derivative contracts entered into by the Company and BP Energy Company is secured by the collateral and backed by the guarantees supporting the credit facility.

The Company nets its derivative instrument fair value amounts executed with its counterparty pursuant to an ISDA master agreement, which provides for the net settlement over the term of the contracts and in the event of default or termination of the contracts. The following table summarizes the location and fair value amounts of all derivative instruments in the Consolidated Balance Sheet, as well as the gross recognized derivative assets, liabilities and amounts offset in the Consolidated Balance Sheet as of December 31, 2016.

							Net
		Gross					Recognized
		Recognized		Gross			Fair Value
		Assets/		Amounts			Assets/
	Balance Sheet Classification	Liabilities		Offset			Liabilities

Commodity derivative assets:
	Current assets	$	-	$	-		$	-
	Other long-term assets		249		(249	)		-
Total derivative assets		$	249	$	(249	)	$	-

Commodity derivative liabilities:
	Current liability	$	1,341	$	-		$	1,341
	Non-current liabilities		840		(249	)		591
Total derivative liabilities		$	2,181	$	(249	)	$	1,932

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

Note 13 – Commitments and Contingencies

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

The Company has entered into long-term firm transportation contracts to ensure the transport for certain of its gas production to purchasers. Firm transportation volumes and the related demand charges for the remaining term of these contracts at December 31, 2016 are summarized in the table below.

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

Note 13 – Commitments and Contingencies (continued)

A liability of approximately $822,000 related to firm transportation contracts assumed in a 2011 asset acquisition and the EXCO Acquisition in 2016, which represents the remaining commitment, is reflected on the Company’s Consolidated Balance Sheet as of December 31, 2016. The fair value of these firm transportation obligations were determined based upon the contractual obligations assumed by the Company and discounted based upon the Company’s effective borrowing rate. These contractual obligations are being amortized on a monthly basis as the Company pays these firm transportation obligations in the future.

The Company leases, under an operating lease arrangement, approximately 5,500 square feet of administrative office space in Denver, Colorado and approximately 5,300 square feet of office space in Lexington, Kentucky, both of which expire in 2019. For the years ended December 31, 2016 and 2015, the Company incurred rental expenses of $220,000 and $236,000, respectively. The Company has minimum lease payments for its office space and equipment of approximately $260,000 for 2017, $263,000 for 2018 and $263,000 for 2019.

Note 14 – Retirement Savings Plan

The Company has a 401(k) plan available to eligible employees. The plan provides for 6% matching which vests immediately. For the years ended December 31, 2016 and 2015, the Company paid approximately $99,000 and $277,000, respectively, for 401(k) contributions and related administrative expenses. During 2016, as part of a cost reduction measure, the Company temporarily suspended its 401 (k) match from August through December.

Note 15 – Supplemental Cash Flow Disclosure

Supplemental cash flow disclosures for the years ended December 31, 2016 and 2015 are presented below:

(in thousands)	For the Year Ended December 31,
	2016		2015

Cash paid during the period for:
Interest payments	$	156	$	166
Income taxes		-		325

Non-cash transactions:
Increase in net asset retirement obligations	$	1,849	$	4
Increase (decrease) in accounts payable and accrued liabilities included in oil and gas properties	$	1,099	$	(215	)
Obligations assumed with acquisitions	$	2,694	$	-

Note 16 – Subsequent Events

On February 15, 2017, the Company entered into an Amended and Restated Limited Liability Company Agreement ( “LLC Agreement” ) of Carbon California, a Delaware limited liability company established by the Company. Pursuant to the LLC Agreement, Carbon acquired a 17.813% interest in Carbon California represented by Class B Units and will be the sole manager of Carbon California. The Class B Units were acquired for no cash consideration. In connection with its role as the sole manager of Carbon California, a portion of the Company’s general and administrative expenses will be allocated to and paid by Carbon California. The negotiation and diligence of the oil and gas acquisitions described below was led by the Company and at the closing of the acquisitions, the Company was reimbursed $500,000 for its time and expenditures related to such efforts.

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

Note 16 – Subsequent Events (continued)

The borrowing base under the Company’s credit facility is subject to semi-annual redeterminations in March and September, commencing March 2017. On March 30, 2017, the borrowing base was increased from $17.0 million to $23.0 million.

Note 17– Supplemental Financial Data – Oil and Gas Producing Activities (unaudited)

Estimated Proved Oil and Gas Reserves

The reserve estimates as of December 31, 2016 and 2015 presented herein were made in accordance with oil and gas reserve estimation and disclosure authoritative accounting guidance.

Proved oil and gas reserves as of December 31, 2016 and 2015 were calculated based on the prices for oil and gas during the twelve month period before the reporting date, determined as an un-weighted arithmetic average of the first-day-of-the month price for each month within such period. This average price is also used in calculating the aggregate amount and changes in future cash inflows related to the standardized measure of discounted future cash flows. Undrilled locations can be classified as having proved undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. SEC rules dictate the types of technologies that a company may use to establish reserve estimates, including the extraction of non-traditional resources, such as bitumen extracted from oil sands as well as oil and gas extracted from shales.

The Company’s estimates of its net proved, net proved developed, and net proved undeveloped oil and gas reserves and changes in its net proved oil and gas reserves for 2016 and 2015 are presented in the table below. Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain. Existing economic conditions include the average prices for oil and gas during the twelve month period prior to the reporting date of December 31, 2016 and 2015 unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. Prices do not include the effects of commodity derivatives. The independent petroleum engineering firm, Cawley, Gillespie & Associates, Inc. (“CGA”), evaluated and prepared independent estimated proved reserves quantities and related pre-tax future cash flows as of December 31, 2016 and 2015. To facilitate the preparation of an independent reserve study, we provided CGA our reserve database and related supporting technical, economic, production and ownership information. Estimated reserves and related pre-tax future cash flows for the non-controlling interests of the consolidated partnerships included in the Company’s Consolidated Financial Statements, were based on CGA’s estimated reserves and related pre-tax future cash flows for the specific properties in the partnerships and have been added to CGA’s reserve estimates for December 31, 2016 and 2015. See Note 3 for additional information.

Proved developed oil and gas reserves are proved reserves that can be expected to be recovered (i) through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well or (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Proved undeveloped oil and gas reserves are proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

A summary of the Company’s changes in quantities of proved oil and gas reserves for the years ended December 31, 2016 and 2015 are as follows:

	2016									2015
	Oil			Natural Gas			Total			Oil			Natural Gas			Total
	MBbls			MMcf			MMcfe			MBbls			MMcf			MMcfe

Proved reserves, beginning of year		598			29,958			33,546			853			36,948			42,066
Revisions of previous estimates		110			2,207			2,867			(185	)		(4,670	)		(5,780	)
Extensions and discoveries		-			-			-			31			-			186
Production		(79	)		(2,823	)		(3,297	)		(101	)		(2,040	)		(2,646	)
Purchases of reserves in-place		253			44,923			46,441			-			138			138
Sales of reserves in-place		-			-			-			-			(418	)		(418	)
Proved reserves, end of year		882			74,265			79,557			598			29,958			33,546

Proved developed reserves at:
End of Year		851			74,265			79,371			554			29,958			33,282
Proved undeveloped reserves at:
End of Year		31			-			186			44			-			264

Note 17 – Supplemental Financial Data – Oil and Gas Producing Activities (unaudited) (continued)

The estimated proved reserves for December 31, 2016 and 2015 includes approximately 3.1 and 3.0 Bcfe, respectively, attributed to non-controlling interests of consolidated partnerships.

Aggregate Capitalized Costs

The aggregate capitalized costs relating to oil and gas producing activities at the end of each of the years indicated were as follows:

	2016			2015
	(in thousands)
Oil and gas properties
Proved oil and gas properties	$	112,579		$	97,453
Unproved properties not subject to depletion		1,999			3,194
Accumulated depreciation, depletion, amortization and impairment		(78,596	)		(72,421	)
Net oil and gas properties	$	35,982		$	28,226

Costs Incurred in Oil and Gas Property Acquisition, Exploration, and Development Activities

The following costs were incurred in oil and gas property acquisition, exploration, and development activities during the years ended December 31, 2016 and 2015:

	2016		2015
	(in thousands)
Property acquisition costs:
Unevaluated properties	$	97	$	341
Proved properties and gathering facilities		8,117		-
Development costs		360		2,106
Gathering facilities		42		578
Asset retirement obligation		1,849		4
Total costs incurred	$	10,465	$	3,029

The Company’s investment in unproved properties as of December 31, 2016, by the year in which such costs were incurred is set forth in the table below:

	2016		2015		2014 and Prior
	(in thousands)

Acquisition costs	$	97	$	341	$	1,561

Results of Operations from Oil and Gas Producing Activities

Results of operations from oil and gas producing activities for the years ended December 31, 2016 and 2015 are presented below:

	2016			2015
	(in thousands)

Oil and gas sales, including commodity derivative gains and losses	$	8,184		$	11,560
Expenses:
Production expenses		5,640			5,507
Depletion expense		1,839			2,466
Accretion of asset retirement obligations		176			123
Impairment of oil and gas properties		4,299			5,419
Total expenses		11,954			13,515
Results of operations from oil and gas producing activities	$	(3,770	)	$	(1,955	)

Depletion rate per Mcfe	$	0.56		$	0.93

Note 17 – Supplemental Financial Data – Oil and Gas Producing Activities (unaudited) (continued)

Standardized Measure of Discounted Future Net Cash Flows

Future oil and gas sales are calculated applying the prices used in estimating the Company’s proved oil and gas reserves to the year-end quantities of those reserves. Future price changes were considered only to the extent provided by contractual arrangements in existence at each year-end. Future production and development costs, which include costs related to plugging of wells, removal of facilities and equipment, and site restoration, are calculated by estimating the expenditures to be incurred in producing and developing the proved oil and gas reserves at the end of each year, based on year-end costs and assuming continuation of existing economic conditions. Future income tax expenses are computed by applying the appropriate year-end statutory tax rates to the estimated future pretax net cash flows relating to proved oil and gas reserves, less the tax basis of the properties involved. The future income tax expenses give effect to tax deductions, credits, and allowances relating to the proved oil and gas reserves. All cash flow amounts, including income taxes, are discounted at 10%.

Changes in the demand for oil and natural gas, inflation, and other factors make such estimates inherently imprecise and subject to substantial revision. This table should not be construed to be an estimate of the current market value of the Company’s proved reserves. Management does not rely upon the information that follows in making investment decisions.

	December 31,
	2016			2015
	(in thousands)

Future cash inflows	$	214,658		$	102,741
Future production costs		(103,252	)		(47,117	)
Future development costs		(315	)		(420	)
Future income taxes		(14,858	)		-
Future net cash flows		96,233			55,204
10% annual discount		(51,522	)		(30,172	)
Standardized measure of discounted future net cash flows	$	44,711		$	25,032

Changes in the Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves

An analysis of the changes in the standardized measure of discounted future net cash flows during each of the last two years is as follows:

	December 31,
	2016			2015
	(in thousands)

Standardized measure of discounted future net cash flows, beginning of year	$	25,032		$	65,006
Sales of oil and gas, net of production costs and taxes		(4,804	)		(5,283	)
Price revisions		(786	)		(37,490	)
Extensions, discoveries and improved recovery, less related costs		-			384
Changes in estimated future development costs		248			3,290
Development costs incurred during the period		102			-
Quantity revisions		2,091			(4,282	)
Accretion of discount		2,503			6,702
Net changes in future income taxes		(4,633	)		2,010
Purchases of reserves-in-place		26,776			115
Sales of reserves-in-place		-			(380	)
Changes in production rate timing and other		(1,818	)		(5,040	)
Standardized measure of discounted future net cash flows, end of year	$	44,711		$	25,032

The twelve month weighted averaged adjusted prices in effect at December 31, 2016 and 2015 were as follows:

	2016		2015
Oil (per Bbl)	$	40.40	$	46.12
Natural Gas (per Mcf)	$	2.41	$	2.50

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

We have established disclosure controls and procedures to ensure that material information relating to Carbon and its consolidated subsidiaries is made known to the officers who certify Carbon's 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 the end of the period covered by this Annual Report on Form 10-K (the "Evaluation Date"). Based on this evaluation, they believe that as of the Evaluation Date 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 (i) is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms; and (ii) is accumulated and communicated to Carbon's 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 has not been any change in our internal control over financial reporting that occurred during the quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management's Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing internal control over financial reporting as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934.

The Company’s internal controls over financial reporting are intended to be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal controls over financial reporting are expected to include those policies and procedures that management believes are necessary that:

(i)	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

As of December 31, 2016, management assessed the effectiveness of the Company's internal control over financial reporting based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management believes that, as of December 31, 2016, our internal control over financial reporting was effective based on these criteria.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to the permanent exemption from such requirement for smaller reporting companies.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide assurance that all control issues, if any, within a company have been detected.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The following persons serve as executive officers and directors of Carbon.

Name	Age	Position

Patrick R. McDonald	60	Chief Executive Officer, Director

Mark D. Pierce	63	President

Kevin D. Struzeski	58	Chief Financial Officer, Treasurer and Secretary

James H. Brandi	68	Chairman of the Board

David H. Kennedy	67	Director

Bryan H. Lawrence	74	Director

Peter A. Leidel	60	Director

Edwin H. Morgens	75	Director

Executive Officer/Director

Patrick R. McDonald . Mr. McDonald is Chief Executive Officer of the Company and has been Chief Executive Officer, President and Director of Nytis USA since 2004. From 1998 to 2003, Mr. McDonald was Chief Executive Officer, President and Director of Carbon Energy Corporation, an oil and gas exploration and production company which in 2003 was merged with Evergreen Resources, Inc. From 1987 to 1997 Mr. McDonald was Chief Executive Officer, President and Director of Interenergy Corporation, a natural gas gathering, processing and marketing company which in December 1997 was merged with KN Energy Inc. Prior to that he worked as an exploration geologist with Texaco International Exploration Company where he was responsible for oil and gas exploration efforts in the Middle East and Far East. Mr. McDonald served as Chief Executive Officer of Forest Oil Corporation from June 2012 until the completion of its business combination with Sabine Oil & Gas in December 2014. Mr. McDonald also is Chairman of the Board of Prairie Provident Resources (TSX: PPR), an exploration and production company based in Calgary, Alberta, Canada. Mr. McDonald received a Bachelor’s degree in both Geology and Economics from Ohio Wesleyan University and a Masters degree in Business Administration (Finance) from New York University. Mr. McDonald is a Certified Petroleum Geologist and is a member of the American Association of the Petroleum Geologists and of the Canadian Society of Petroleum Geologists.

Our Board of Directors believes that Mr. McDonald, as our Chief Executive Officer and as the founder of Nytis USA, should serve as a director because of his unique understanding of the opportunities and challenges that we face and his in-depth knowledge about the oil and natural gas business, and our long-term growth strategies.

Other Directors

The following information pertains to our non-employee directors, their principal occupations and other public company directorships for at least the last five years and information regarding their specific experiences, qualifications, attributes and skills.

James H. Brandi . Mr. Brandi has been a Director of the Company since March 2012 and Chairman of the Board since October 2012. Mr. Brandi retired from a position as Managing Director of BNP Paribas Securities Corp., an investment banking firm, where he served from 2010 until late 2011. From 2005 to 2010, Mr. Brandi was a partner of Hill Street Capital, LLC, a financial advisory and private investment firm which was purchased by BNP Paribas in 2010. From 2001 to 2005, Mr. Brandi was a Managing Director at UBS Securities, LLC, where he was the Deputy Global Head of the Energy and Power Groups. Prior to 2001, Mr. Brandi was a Managing Director at Dillon, Read & Co. Inc. and later its successor firm, UBS Warburg, concentrating on transactions in the energy and consumer goods areas. Mr. Brandi currently serves as a director of Approach Resources Inc. (NASDAQ:AREX) and OGE Energy Corp (NYSE:OGE). Mr. Brandi is a trustee of The Kenyon Review and a former trustee of Kenyon College.

Our Board of Directors believes that Mr. Brandi should serve as director and our Chairman because of his experience on the board of directors of other public companies, which our Board believes is beneficial to us as we move forward as a public company. He also has extensive financial expertise from his education background (Harvard MBA) and his 35 year career in investment banking. His background is important in his role as Chairman of the Audit Committee and its oversight responsibility regarding the quality and integrity of our accounting and financial reporting process and the auditing of our financial statements.

David H. Kennedy . Mr. Kennedy has been a Director of the Company since December 2014 and previously served as a director of the Company from February 2011 to March 2012. Mr. Kennedy has served as Executive Advisor to Cadent Energy Partners since 2005. He was director and chairman of the audit committee of Logan International Inc. from 2006 until the sale of the company in 2016. From 2001 - 2004, Mr. Kennedy served as an advisor to RBC Energy Fund and served on the boards of several of its portfolio companies. From 1999 to 2003, Mr. Kennedy was a director of Carbon Energy Corporation before its merger with Evergreen Resources in 2003. From 1996 to 2006, Mr. Kennedy was a director and chairman of the Audit Committee of Maverick Tube Corporation, which was sold to Tenaris SA in 2006. He was a managing director of First Reserve Corporation from its founding in 1981 until 1998, serving on numerous boards of its portfolio companies. From 1974 to 1981, Mr. Kennedy was with Price Waterhouse in San Francisco and New York in audit and tax services before leaving to join First Reserve. He was a Certified Public Accountant.

Our Board of Directors believes that Mr. Kennedy should serve as director because of his current and prior experience as a director of the Company together with his experience on the board of directors of other public companies. His energy industry knowledge and financial expertise contributes to the Board of Directors oversight responsibility regarding the quality and integrity of our accounting and financial reporting process and the auditing of our financial statements.

Bryan H. Lawrence . Mr. Lawrence has been a Director of the Company since February 2011 and of Nytis USA since 2005. Mr. Lawrence is a founder and member of Yorktown Partners LLC which was established in September 1990. Yorktown Partners LLC is the manager of private equity partnerships that invest in the energy industry. Mr. Lawrence had been employed at Dillon, Read & Co. Inc. since 1966, serving as a Managing Director until the merger of Dillon Read with SBC Warburg in September 1997. Mr. Lawrence also serves as a Director of Star Gas Partners, L.P. (NYSE:SGU), Hallador Energy Company (NASDAQ:HNRG) and certain non-public companies in the energy industry in which Yorktown partnerships hold equity interests. Mr. Lawrence served as a director of Approach Resources, Inc., Carbon Energy Corporation and Interenergy Corporation.

Our Board of Directors believes that Mr. Lawrence should serve as a director because of his experience on the board of directors of other public companies, which our Board of Directors believes is beneficial to us as we move forward as a public company, as well as Mr. Lawrence’s relevant business experience in the energy industry and his extensive financial expertise, which he has acquired through his years of experience in the investment banking industry.

Peter A. Leidel . Mr. Leidel has been a Director of the Company since February 2011 and of Nytis USA since 2005. Mr. Leidel is a founder and member of Yorktown Partners LLC which was established in September 1990. Yorktown Partners LLC is the manager of private equity partnerships that invest in the energy industry. Previously, he was a Senior Vice President of Dillon, Read & Co. Inc. He was previously employed in corporate treasury positions at Mobil Corporation and worked for KPMG Peat Marwick and the U.S. Patent and Trademark Office. Mr. Leidel is a director of Mid-Con Energy Partners, L.P. (NASDAQ:MCEP), Extraction Oil & Gas, Inc. (NASDAQ: XOG) and certain non-public companies in the energy industry in which Yorktown partnerships hold equity interests. Mr. Leidel served as a director of Carbon Energy Corporation and Interenergy Corporation. He was a Certified Public Accountant.

Our Board of Directors believes that Mr. Leidel should serve as a director because of his significant knowledge of our industry, his prior experience with our business and his financial expertise, which is important as our Board of Directors exercises its oversight responsibility regarding the quality and integrity of our accounting and financial reporting processes and the auditing of our financial statements.

Edwin H. Morgens . Mr. Morgens has been a Director of the Company since May 2012. Mr. Morgens is Chairman and Co-founder of Morgens, Waterfall, Vintiadis & Company, Inc., a New York City investment firm that he founded in 1967. He is a former director of Wayside Technology Group, Inc., TransMontaigne, Inc., Sheffield Exploration, Scientific American Magazine Inc. and the Henry J. Kaiser Family Foundation. He is currently a trustee of the American Museum of Natural History, an Overseer of the Weill Cornell Medical College and emeritus trustee of Cornell University.

Our Board of Directors believes that Mr. Morgens should serve as director because of his current and prior experience on the board of directors of other public companies and his extensive financial expertise, which he has acquired through his years of experience in the financial investment advisory industry.

Other Executive Officers

Mark D. Pierce . Mr. Pierce has been President of the Company since October 2012 and was Senior Vice President for Nytis LLC from 2009 to 2012. From 2005 until 2009, he was Operations Manager for Nytis LLC. He began his career at Texaco, Inc. in 1975 and from 1977 until 1997 was employed by Ashland Exploration, Inc. attaining the position of Vice President Eastern Region and Gas Marketing. His experience includes both domestic and international work. He is a registered Petroleum Engineer in Kentucky, West Virginia and Ohio.

Kevin D. Struzeski . Mr. Struzeski has been the Company’s Treasurer and Secretary since 2011 and has been the Chief Financial Officer, Treasurer and Secretary of Nytis USA since 2005. From 2003 to 2004, Mr. Struzeski was the Director of Treasury at Evergreen Resources, Inc., and from 1998 to 2003, he was Chief Financial Officer, Secretary and Treasurer of Carbon Energy Corporation. Mr. Struzeski was also Chief Financial Officer, Secretary and Treasurer of Carbon Energy Canada Corporation. Mr. Struzeski served as Accounting Manager for Media One Group from 1997 to 1998 and prior to that was employed as Controller for Interenergy Corporation from 1995 to 1997. Mr. Struzeski is a Certified Public Accountant.

Terms of Office

Our Board of Directors currently consists of six directors, each of whom is elected annually at the annual meeting of our stockholders or through the affirmative vote of the holders of a majority of the Company’s voting stock in lieu of a meeting. Each director will continue to serve as a director until such director’s successor is duly elected and qualified or until their earlier resignation, removal or death.

Family Relationships

There are no family relationships between or among any of the current directors or executive officers.

Involvement in Certain Legal Proceedings

During the past ten years, none of the persons serving as executive officers or directors of the Company have been the subject matter of any of the following legal proceedings that are required to be disclosed pursuant to Item 401(f) of Regulation S-K including: (a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (b) any criminal convictions; (c) any order, judgment, or decree permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (d) any finding by a court, the SEC or the CFTC to have violated a federal or state securities or commodities law, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud; or (e) any sanction or order of any self-regulatory organization or registered entity or equivalent exchange, association or entity. Further, no such legal proceedings are believed to be contemplated by governmental authorities against any director or executive officer.

In July 2015, Sabine Oil and Gas filed for bankruptcy protection under Chapter 11. Mr. McDonald was a director of Sabine Oil and Gas. The Board does not believe this disclosure is material to an evaluation of the ability or integrity of Mr. McDonald because of the extenuating circumstances relating to Sabine Oil and Gas’ business and industry.

Section 16(a) Beneficial Ownership Reporting Compliance:

Section 16(a) of the 1934 Act requires the Company’s directors and officers and any persons who own more than ten percent of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the “SEC”). All directors, officers and greater than ten-percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports files. Based solely on our review of the copies of Forms 3, 4 and 5, and any amendments thereto furnished to us during the fiscal year ended December 31, 2016, we believe that during the Company’s 2016 fiscal year all filing requirements applicable to our officers, directors and greater-than-ten-percent stockholders were complied with.

Code of Ethics

The Board of Directors has adopted a Code of Business Conduct and Ethics that applies to all directors of the Company. A copy of the Code of Business Conduct and Ethics is available on our website at http://www.carbonnaturalgas.com .

Board Committees

The Board has a standing Audit Committee and a Compensation, Nominating and Governance Committee. The Board has adopted a formal written charter for each of these committees that is available on our website at www.carbonnaturalgas.com .

The table below provides the current composition of each standing committee of our Board:

		Compensation/
		Nominating/
Name	Audit	Governance
James H. Brandi	X	X
David H. Kennedy	X	X
Peter A. Leidel	X	X
Edwin H. Morgens	X	X

The Audit Committee’s primary duties and responsibilities are to assist the Board in monitoring the integrity of our financial statements, the independent registered public accounting firm’s qualifications, performance and independence, management’s effectiveness of internal controls and our compliance with legal and regulatory requirements. The Audit Committee is directly responsible for the appointment, retention, compensation, evaluation and termination of our independent registered public accounting firm and has the sole authority to approve all audit and permitted non-audit engagement fees and terms. The Audit Committee is presently comprised of Messrs. Brandi (Chairmen), Kennedy, Leidel and Morgens of which Messrs. Brandi, Kennedy and Morgens are independent directors under Nasdaq listing rules. The Board has determined that Mr. Brandi qualifies as an “audit committee financial expert” as defined by Securities and Exchange Commission rules.

The Audit Committee was formed in September 2012 and held four meetings during 2016.

The Compensation, Nominating and Governance Committee discharges the responsibilities of the Board with respect to our compensation programs and compensation of our executives and directors. The Compensation, Nominating and Governance Committee has overall responsibility for determining the compensation of our executive officers and reviewing director compensation. The Compensation, Nominating and Governance Committee is also charged with the administration of our stock incentive plans. The Compensation, Nominating and Governance Committee is presently comprised of Messrs. Morgens (Chairman), Brandi, Kennedy and Leidel, each of whom is an outside director for purposes of Section 162(m) of the Internal Revenue Code and a non-employee director for purposes of Rule 16b-3 under the Exchange Act.

Other functions of the Compensation, Nominating and Governance Committee is to identify individuals qualified to become directors and recommend to the Board nominees for all directorships, identify directors qualified to serve on Board committees and recommend to the Board members for each committee, develop and recommend to the Board a set of corporate governance guidelines and otherwise take a leadership role in shaping our corporate governance.

In identifying and evaluating nominees for directors, the Compensation, Nominating and Governance Committee seeks to ensure that the Board possesses, in the aggregate, the strategic, managerial and financial skills and experience necessary to fulfill its duties and to achieve its objectives, and seeks to ensure that the Board is comprised of directors who have broad and diverse backgrounds, possessing knowledge in areas that are of importance to us. In addition, the Compensation, Nominating and Governance Committee believes it is important that at least one director have the requisite experience and expertise to be designated as an “audit committee financial expert.” The Compensation, Nominating and Governance Committee looks at each nominee on a case-by-case basis regardless of who recommended the nominee. In looking at the qualifications of each candidate to determine if their election would further the goals described above, the Compensation, Nominating and Governance Committee takes into account all factors it considers appropriate, which may include strength of character, mature judgment, career specialization, relevant technical skills or financial acumen, diversity of viewpoint and industry knowledge. Each director nominee must display high personal and professional ethics, integrity and values and sound business judgment.

The Compensation, Nominating and Governance Committee also monitors corporate governance for the Board, which includes reviewing the Code of Business Conduct and Ethics and evaluation of board and committee performance.

The Compensation, Nominating and Governance Committee was formed in September 2012 and held five meetings during 2016.

Item 11. Executive Compensation.

Summary Compensation Table

Effective March 15, 2017 and pursuant to the reverse stock split approved by the shareholders and Board of Directors, each 20 shares of issued and outstanding common stock became one share of common stock and no fractional shares were issued. The tables under Item 11, Executive Compensation , give retroactive effect to the reverse stock split for all periods presented.

The following table sets forth information relating to compensation awarded to, earned by or paid to our Chief Executive Officer, President and Chief Financial Officer, Treasurer and Secretary by the Company during the fiscal years ended December 31, 2016 and 2015.

Name and Principal Position	Year	Salary ($)		Stock Awards ($) ⁽¹⁾		Non-Equity Incentive Plan Compensation ($)		All Other Compensation ($) ⁽²⁾		Total ($)
Patrick R. McDonald	2016		350,000		108,000		194,947		77,480		730,427
Chief Executive Officer	2015		350,000		160,000		346,140		99,876		956,016

Mark D. Pierce	2016		236,000		108,000		85,442		9,264		438,706
President	2015		235,662		80,000		155,763		24,168		495,593

Kevin D. Struzeski	2016		247,000		108,000		89,425		46,335		490,760
Chief Financial Officer, Treasurer and Secretary (1)	2015		247,000		80,000		162,686		75,636		565,322

(1)	Reflects the full grant date fair value of restricted stock awards granted in 2016 and 2015 calculated in accordance with FASB ASC Topic 718.

(2)	All other compensation in 2016 and 2015 was comprised of (i) unused vacation, (ii) contributions made by the Company to its 401(k) plan, (iii) premiums paid on life insurance policies on such employee’s life, and (iv) other taxable fringe benefits.

Narrative Disclosure to Summary Compensation Table

The Compensation, Nominating and Governance Committee is charged with reviewing and approving the terms and structure of the compensation of the Company’s executive officers. The Company has not retained an independent compensation consultant to assist the Company to review and analyze the structure and terms of the compensation of the Company’s executive officers.

The Company considers various factors when evaluating and determining the compensation terms and structure of its executive officers, including the following:

The executive’s leadership and operational performance and potential to enhance long-term value to the Company’s stockholders;

The Company’s financial resources, results of operations, and financial projections;

	3.	Performance compared to the financial, operational and strategic goals established for the Company;
	4.	The nature, scope and level of the executive’s responsibilities;
	5.	Competitive market compensation paid by other companies for similar positions, experience and performance levels; and
	6.	The executive’s current salary and the appropriate balance between incentives for long-term and short-term performance.

Company management is responsible for reviewing the base salary, annual bonus and long-term compensation levels for other Company employees, and the Company expects this practice to continue going forward. The Compensation, Nominating and Governance Committee is responsible for significant changes to, or adoption of, employee benefit plans.

The Company believes that the compensation environment for qualified professionals in the industry in which we operate is highly competitive. In order to compete in this environment, the compensation of our executive officers is primarily comprised of the following four components:

	Ø	Base salary;
	Ø	Stock incentive plan benefits;
	Ø	Annual Incentive Plan Payments; and
	Ø	Other employment benefits.

Base Salary. Base salary, paid in cash, is the first element of compensation to our officers. In determining base salaries for our key executive officers, the Company aims to set base salaries at a level we believe enables us to hire and retain individuals in a competitive environment and to reward individual performance and contribution to our overall business goals. The Board of Directors and the Compensation, Nominating and Governance Committee believe that base salary should be relatively stable over time, providing the executive a dependable, minimal level of compensation, which is approximately equivalent to compensation that may be paid by competitors for persons of similar abilities. The Board of Directors and the Compensation, Nominating and Governance Committee believe that base salaries for our executive officers are appropriate for persons serving as executive officers of public companies similar in size and complexity to the Company.

Stock Incentive Plan Benefits. Each of the Company’s executive officers is eligible to be granted awards under the Company’s equity compensation plans. The Company believes that equity based compensation helps align management and executives’ interests with the interests of our stockholders. Our equity incentives are also intended to reward the attainment of long-term corporate objectives by our executives. We also believe that grants of equity-based compensation are necessary to enable us to be competitive from a total remuneration standpoint. We have no set formula for granting awards to our executives or employees. In determining whether to grant awards and the amount of any awards, we take into consideration discretionary factors such as the individual’s current and expected future performance, level of responsibilities, retention considerations and the total compensation package.

Annual Incentive Plan. Cash payments made under the provisions of the Company’s Annual Incentive Plan (“AIP”) is another component of our compensation plan. The Board of Directors and the Compensation, Nominating and Governance Committee believes that it is appropriate that executive officers and other employees have the potential to receive a portion of their annual compensation based upon the achievement of defined objectives in order to encourage performance to achieve these key corporate objectives and to be competitive from a total remuneration standpoint.

In general terms, the Annual Incentive Plans are designed to meet the following objectives:

	●	Provide an incentive plan framework that is performance-driven and focused on objectives that were critical to Carbon’s success during the plan period dates;

	●	Offer competitive cash compensation opportunities to the executive officers and all employees;

	●	Incentivize and reward outstanding achievement; and

●

Incentivize the creation of new assets, plays and values.

In addition, the Annual Incentive Plans provided cash pools for all employees. Once the pools were established, awards were allocated by the executive officers to individuals based on their assessment as to individual or group performances.

Payments in 2016 were determined under the provisions of the Carbon Natural Gas Company 2015 Annual Incentive Plan whereby seventy percent of the AIP payments were determined at the discretion of the Board taking into consideration the factors listed above and thirty percent of the AIP payments were determined and weighted based upon the performance measures and objectives as follows:

Performance Measure	Weighting	Objective
Lease Operating Expense	33 1/3%	$.87/Mcfe (15:1 equivalent basis)
General and Administrative Expenses	33 1/3%	$5.4 million of cash-based general and administrative expenses
Debt/EBITDA Ratio	33 1/3%	Debt/EBITDA ratio of 1.6

Payments in 2015 were determined under the provisions of the Carbon Natural Gas Company 2014 Annual Incentive Plan whereby forty percent of the AIP payments were determined at the discretion of the Board taking into consideration the factors listed above and sixty percent of the AIP payments were determined and weighted based upon the performance measures and objectives as follows:

Performance Measure	Weighting	Objective
EBITDA per Debt Adjusted Share Growth	20%	20% increase
Net Total Proved Reserve Growth	10%	5% increase
Net Annual Production Growth	20%	10% increase
Lease Operating Expenses ($/unit)	20%	$1.10/Mcfe (6:1 equivalent basis)
G&A per Unit of Production ($/unit)	10%	$.80 per unit of production equivalent
F&D cost per Unit of Reserves	20%	$1.70 per unit of reserve equivalent
Total of Performance Measures	100.00%

Other Compensation/Benefits. Another element of the overall compensation is to provide our executive officers various employment benefits, such as the payment of health and life insurance premiums on behalf of the executive officers. Our executive officers are also eligible to participate in our 401(k) plan on the same basis as other employees and the Company historically has made matching contributions to the 401(k) plan, including for the benefit of our executive officers.

Pursuant to the employment agreements with Messrs. McDonald, Pierce and Struzeski, such officers are entitled to certain payments upon termination of employment. Other than these arrangements, we currently do not have any compensatory plans or arrangements that provide for any payments or benefits upon the resignation, retirement or any other termination of any of our executive officers, as the result of a change in control, or from a change in any executive officer’s responsibilities following a change in control.

Director Compensation

We use a combination of cash and equity incentive compensation in the form of restricted stock to attract and retain qualified and experienced candidates to serve on the Board. In setting this compensation, our Compensation, Nominating and Governance Committee considers the significant amount of time and energy expended and the skill level required by our directors in fulfilling their duties. Grants of shares of restricted stock vest upon the earlier of a change in control of the Company or the date a non-management director’s membership on the Board is terminated other than for cause. We also reimburse expenses incurred by our non-employee directors to attend Board and Board committee meetings.

The following table reports compensation earned by or paid to our non-employee directors during 2016.

	Fees Earned or
	Paid in Cash
Name ⁽¹⁾	($)
James H. Brandi		30,000
David H. Kennedy		20,000
Bryan H. Lawrence		-
Peter A. Leidel		-
Edwin H. Morgens		20,000

(1)

Mr. McDonald, our Chief Executive Officer, is not included in this table as he is an employee of ours and receives no separate compensation for his services as a director. The compensation received by Mr. McDonald as an employee is shown above under “Executive Compensation – Summary Compensation Table.”

During 2016, Mr. Brandi was awarded 5,000 restricted shares of our common stock and Messrs. Kennedy, Lawrence, Leidel and Morgens were each awarded 4,000 restricted shares of our common stock. The aggregate number of unvested restricted stock awards outstanding at December 31, 2016 for each of our non-employee directors is as follows:

	Unvested
	Restricted Stock Awards
Name	December 31, 2016
James H. Brandi		22,000
David H. Kennedy		8,000
Bryan H. Lawrence		20,000
Peter A. Leidel		20,000
Edwin H. Morgens		20,000

Outstanding Equity Awards at December 31, 2016

The following tables sets forth information concerning unexercised warrants and unvested restricted stock and performance unit awards, each as held by our executive officers as of December 31, 2016.

WARRANT AWARDS

Award Recipient

Option

for # of

Shares

# Vested

Exercise

Price per Share

Date Granted

Expiration

Former SLSC Officers and Directors

12,500

20.00

01/10/2007

08/31/2017

STOCK AWARDS
	Equity Incentive Plan Awards					Market Value
	# of Unvested Shares					of Unvested
	Restricted			Performance		Shares
Award Recipient	Stock			Units		$ ⁽²⁾

Patrick R. McDonald		18,880	⁽¹⁾		-		169,920
		40,000			78,080		1,062,720
		58,880			78,080		1,232,640

Mark D. Pierce		510	⁽¹⁾		-		4,590
		30,000			46,540		688,860
		30,510			46,540		693,450

Kevin D. Struzeski		5,096	⁽¹⁾		-		45,864
		30,000			46,540		688,860
		35,096			46,540		734,724

The following table reflects unvested stock awards held by our executive officers as of December 31, 2016 that have time-based vesting. These stock awards will vest as follows if the named executive officer has remained in continuous employment through each such date:

Award Recipient	2017		2018		2019		Thereafter

Patrick R. McDonald		38,881		13,333		6,666		-

Mark D. Pierce		10,509		6,667		13,334		-

Kevin D. Struzeski		15,095		6,667		13,334		-

The following table reflects unvested performance stock awards held by our executive officers as of December 31, 2016 that vest upon 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 for the Company and the lapse of forfeiture restrictions pursuant to the terms and conditions of the agreements including for certain of the grants, the requirement of continuous employment by the grantee prior to a change in control of the Company. These performance stock awards will vest as follows if the named executive officer has remained in continuous employment with the Company through the date of a change in control and if the executive officer earns 100% of the performance stock awards based upon 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 for the Company.

			Stock Price and Defined Performance Measures
Stock Award Recipient	Change of Control		Relative to Peer Group

Patrick R. McDonald		18, 080		60,000

Mark D. Pierce		9,040		37,500

Kevin D. Struzeski		9,040		37,500

⁽¹⁾	Awards made by Nytis USA prior to the Merger and were assumed as a result of the Merger, the number of shares and the exercise price, when applicable, have been adjusted in line with the exchange ratio of Nytis USA shares for Company shares in the Merger.

⁽²⁾	Reflects the value of unvested shares of restricted stock and performance unit awards held by our executive officers as of December 31, 2016 measured by the closing market price of our common stock on December 31, 2016, which was $9.00 per share.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

Effective March 30, 2013, Messrs. McDonald, Pierce and Struzeski entered into employment agreements with the Company. These agreements superseded employment agreements between Messrs. McDonald and Struzeski and Nytis Exploration Company and between Mr. Pierce and Nytis LLC.

The agreement between the Company and Patrick R. McDonald has a term through December 31, 2017, which term shall automatically be extended for successive terms of one-year provided, however, that the Board of Directors may terminate the agreement at the end of the term or any additional term by giving written notice of termination at least three months preceding the end of the then current term. In the event of the termination of Mr. McDonald’s employment, Mr. McDonald is to receive an amount equal to 150% of his "Compensation,” defined as the arithmetic average of Mr. McDonald’s annual base salary, bonus and other cash compensation for each of the three years prior to the termination and for a period of 24 months from the date of termination, his medical, dental, disability and life insurance coverage at the same levels of coverage as in effect immediately prior to his termination. In the event of termination within two years after a change in control of the Company, he is to receive 275% of the Compensation (as defined above).

The agreements between the Company and Messrs. Pierce and Struzeski have a term through December 31, 2017, which term shall automatically be extended for successive terms of one-year provided, however, that the Board of Directors may terminate the agreement at the end of the term or any additional term by giving written notice of termination at least three months preceding the end of the then current term. In the event of the termination of Mr. Pierce’s or Mr. Struzeski's employment, they would receive an amount equal to 100% of his "Compensation,” defined as the arithmetic average of their annual base salary, bonus and other cash compensation for each of the three years prior to the termination and the cost to provide benefits for a period of 12 months from the date of termination at the same levels of coverage as in effect immediately prior to the date of termination. In the event of termination within two years after a change in control of the Company, they would receive 200% of their Compensation (as defined above) and 100% of the annual cost to the Company of the benefits provided to Messrs. Pierce and Struzeski.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Effective March 15, 2017 and pursuant to the reverse stock split approved by the shareholders and Board of Directors, each 20 shares of issued and outstanding common stock became one share of common stock and no fractional shares were issued. The table under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters , give retroactive effect to the reverse stock split for all periods presented.

As of March 17, 2017 the Company had 5,482,673 shares of common stock outstanding. The following sets forth certain information about the number of common shares owned by (i) each person (including any group) known to us that beneficially owns five percent or more of the common shares (the only class of the Company’s voting securities), (ii) each of our directors and named executive officers, and (iii) all named executive officers and directors as a group. Unless otherwise indicated, the stockholders possess sole voting and investment power with respect to the shares shown. The business address for each of the Company’s officers and directors is 1700 Broadway, Suite 1170, Denver, Colorado 80290.

Name and Address of Beneficial Owner	Amount of Beneficial Ownership ⁽¹⁾		Percent of Class ⁽²⁾

5% Stockholders
Yorktown Energy Partners V, L.P. 410 Park Avenue 19th Floor New York, NY 10022		896,915		16.4	%

Yorktown Energy Partners VI, L.P. 410 Park Avenue 19th Floor New York, NY 10022		896,915		16.4	%

Yorktown Energy Partners IX, L.P. 410 Park Avenue 19th Floor New York, NY 10022		1,111,111		20.3	%

Arbiter Partners Capital Management LLC ⁽³⁾ 530 Fifth Avenue 20 ^th Floor New York, NY 10036		655,733		12.0	%

AWM Investment Company Inc. ⁽⁴⁾ c/o Special Situation Funds 527 Madison Avenue Suite 2600 New York, New York 10022		706,553		12.9	%

Name of Beneficial Owner	Amount of Beneficial Ownership ⁽¹⁾		Percentage ⁽²⁾

Executive Officers and Directors

James H. Brandi, Director ⁽⁵⁾		-		*

David H. Kennedy, Director ⁽⁶⁾		8,154		*

Bryan H. Lawrence, Director ⁽ ⁷⁾		2,904,941		53.0	%

Peter A. Leidel, Director ⁽⁸⁾		2,904,941		53.0	%

Patrick R. McDonald, Chief Executive Officer and Director ⁽⁹⁾		160,246		2.9	%

Edwin H. Morgens, Director ⁽¹⁰⁾		83,333		1.5	%

Mark D. Pierce, President ⁽¹¹⁾		45,594		*

Kevin D. Struzeski, Chief Financial Officer, Treasurer and Secretary ⁽¹²⁾		67,231		2.9	%

All directors and executive officers as a group (eight persons) ⁽¹³⁾		3,269,499		59.2	%

*	less than 1%

(1)

Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights.

(2)	Calculated in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. Percentages are rounded to the nearest one-tenth of one percent.

(3)

Includes 444,444 shares owned by Arbiter Partners QP, LP. Arbiter Partners QP, LP holds sole voting and investment power over these shares. Arbiter Partners Capital Management LLC acts as investment advisor on behalf of Arbiter Partners QP, LP and on behalf of certain other managed accounts none of which hold more than five percent of the common stock of the Company.

(4)

Consists of (i) 490,188 common stock shares owned by Special Situations Fund III QP, L.P. (“SSFQP”), (ii) 144,135 common stock shares owned by Special Situations Cayman Fund, L.P. (“Cayman”), and (iii) 72,230 common stock shares owned by Special Situations Private Equity Fund L.P. (“SSPE”). AWM Investment Company, Inc., a Delaware Corporation (“AWM”) is the investment advisor to SSFQP, Cayman and SSPE. AWM holds sole voting and investment power over these shares.

(5)	Does not include 22,000 restricted shares of our common stock, which vest upon the earlier of a change in control of the Company or the date the director’s membership on the Board is terminated other than for cause.

(6)	Does not include 8,000 restricted stock shares of our common stock which vest upon the earlier of a change in control of the Company or the date the director’s membership on the Board is terminated other than for cause.

(7)

Includes (i) 896,915 common stock shares owned by Yorktown Energy Partners V, L.P., (ii) 896,915 common stock shares owned by Yorktown Energy Partners VI, L.P. and (iii) 1,111,111 common stock shares owned by Yorktown Energy Partners IX, L.P. over which Mr. Lawrence and Mr. Leidel have voting and investment power. Does not include 20,000 restricted shares of our common stock, which vest upon the earlier of a change in control of the Company or the date the director’s membership on the Board is terminated other than for cause.

(8)

(9)	Includes (i) 24,135 shares owned by McDonald Energy, LLC over which Mr. McDonald has voting and investment power, and (ii) 20,000 shares of restricted stock that will vest within 60 days. Does not include 20,000 and 78,080 shares of unvested restricted and performance units, respectively.

(10)	Does not include 20,000 restricted shares of our common stock, which vest upon the earlier of a change in control of the Company or the date the director’s membership on the Board is terminated other than for cause.

(11)	Includes 10,000 shares of restricted stock that will vest within 60 days. Does not include 20,000 and 46,500 shares of unvested restricted stock and performance units, respectively.

(12)	Includes 10,000 shares of restricted stock that will vest within 60 days. Does not include 20,000 and 46,500 shares of unvested restricted stock and performance units, respectively.

(13)	The shares over which both Mr. Lawrence and Mr. Leidel have voting and investment power are the same shares and the percentage of total shares has not been aggregated for purposes of these calculations.

Equity Compensation Plans

Our Board of Directors adopted the 2011 Stock Incentive Plan and the 2015 Stock Incentive Plan (collectively the “Plans”) and such Plans were approved by the stockholders during annual stockholders’ meetings on December 8, 2011 and June 25, 2015, respectively. As of December 31, 2016 the Company has issued 462,000 restricted shares and 400,500 restricted performance units under the Plans. Information regarding options outstanding at December 31, 2016 is set forth under the heading “ Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Securities Authorized for Issuance Under Compensation Plans ” above.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Certain Relationships

None

Related Transactions

The following sets forth information regarding transactions between the Company (and its subsidiaries) and its officers, directors and significant stockholders since January 1, 2016.

Employment Agreements

See the Executive Compensation section of this Annual Report for a discussion of the employment agreements between Messrs. McDonald, Pierce and Struzeski and the Company.

Director Independence

The Company’s Board consists of Messrs. Brandi, Kennedy, Lawrence, Leidel, McDonald and Morgens. The Company utilizes the definition of “independent” as it is set forth in Rule 5605(a)(2) of the Nasdaq Listing Rules. Further, the Board considers all relevant facts and circumstances in its determination of independence of all members of the Board (including any relationships). Based on the foregoing criteria, Messrs. Brandi, Kennedy and Morgens are considered to be independent directors.

Item 14. Principal Accountant Fees and Services.

Audit and Audit Related Service Fees

Our independent registered public accounting firm, EKS&H LLLP (“EKSH”) billed us aggregate fees in the amount of approximately $168,000 and $178,000 for the fiscal years ended December 31, 2016 and 2015, respectively. These amounts were billed for professional services that EKSH provided for the audit of our annual financial statements, an audit related to the statements of revenues and direct operating expenses for the interests acquired in the EXCO Acquisition, review of the interim Consolidated Financial Statements included in our reports on Forms 10-Q, and other services typically provided by an auditor in connection with statutory and regulatory filings or engagements for those fiscal years.

Tax Fees

EKSH did not bill us for any tax fees for the fiscal years ended December 31, 2016 and 2015.

All Other Fees

EKSH billed us for permitted, pre-approved information technology support fees of approximately $54,000 and $64,000 for the fiscal years ended December 31, 2016 and 2015, respectively.

Audit Committee’s Pre-Approval Practice

Section 10A(i) of the 1934 Act prohibits our auditors from performing audit services for us as well as any services not considered to be “audit services” unless such services are pre-approved by the Audit Committee.

The Board of Directors adopted resolutions that provided that the Board must:

Pre-approve all audit services that the auditor may provide to us or any subsidiary (including, without limitation, providing comfort letters in connection with securities underwritings or statutory audits) as required by §10A(i)(A) of the 1934 Act.

Pre-approve all non-audit services (other than certain de minimis services described in §10A(i)(1)(B) of the 1934 Act that the auditors propose to provide to us or any of our subsidiaries.

The Audit Committee considers at each of its meetings whether to approve any audit services or non-audit services. In some cases, management may present the request; in other cases, the auditors may present the request. The Board of Directors approved EKSH performing our audit for the 2016 fiscal year.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this report or are incorporated by reference:

(1) Financial Statements:

1. Report of Independent Registered Public Accounting Firm

2. Consolidated Balance Sheets—December 31, 2016 and 2015

3. Consolidated Statements of Operations—Years Ended December 31, 2016 and 2015

4. Consolidated Statements of Shareholders' Equity—Years Ended December 31, 2016 and 2015

5. Consolidated Statements of Cash Flows—Years Ended December 31, 2016 and 2015

6. Notes to Consolidated Financial Statements—Years Ended December 31, 2016 and 2015

(2) Financial Statement Schedules: All schedules have been omitted because the information is either not required or is set forth in the financial statements or the notes thereto.

(3) Exhibits: See the Index of Exhibits listed in Item 15(b) hereof for a list of those exhibits filed as part of this Annual Report on Form 10-K.

(b) Index of Exhibits:

Exhibit No.		Description

2.1		Participation Agreement by and between the Company, Nytis Exploration Company LLC and Liberty Energy LLC, dated February 25, 2014, incorporated by reference to Exhibit 2.3 to Form 10-Q filed on November 14, 2014.
2.2		Addendum to Participation Agreement by and between the Company, Nytis Exploration Company LLC and Liberty Energy LLC, dated February 26, 2014, incorporated by reference to Exhibit 2.4 to Form 10-Q filed on November 14, 2014.
2.3		Purchase and Sale Agreement by and among Nytis Exploration Company LLC, Liberty Energy, LLC and Continental Resources, Inc., dated October 15, 2014, incorporated by reference to Exhibit 2.5 to Form 10-K filed on March 31, 2015. Portions of the Purchase and Sale Agreement have been omitted pursuant to a request for confidential treatment.
2.4*		Purchase and Sale Agreement by and among Nytis Exploration Company LLC, EXCO Production Company (WV), LLC, BG Production Company (WV), LLC and EXCO Resources (PA), dated October 1, 2016, filed herewith.
3(i)(a)*		Amended and Restated Certificate of Incorporation of Carbon Natural Gas Company, as amended, filed herewith.
3(ii)		Amended and Restated Bylaws, incorporated by reference to Exhibit 3(i) to Form 8-K filed on May 5, 2015.
10.1*		Credit Agreement, by and between the Company, Nytis Exploration Company LLC, Nytis Exploration (USA) Inc. and LegacyTexas Bank, dated October 3, 2016, filed herewith. Portions of the Schedules to the Credit Agreement have been omitted pursuant to a request for confidential treatment.
10.1(a)*		Unconditional Guaranty from Nytis Exploration Company, LLC and Nytis Exploration Company (USA) Inc. to LegacyTexas Bank, dated October 3, 2016, filed herewith.
10.1(b)*		Security Agreement from Carbon Natural Gas Company, Nytis Exploration Company LLC and Nytis Exploration Company (USA) Inc. to LegacyTexas Bank, dated October 3, 2016, filed herewith. Portions of the Schedules to the Security Agreement have been omitted pursuant to a request for confidential treatment.
10.2		Employment Agreement between the Company and Patrick McDonald, incorporated by reference to Exhibit 10.2 to Form 8-K filed on April 5, 2013.
10.3		Employment Agreement between the Company and Mark Pierce, incorporated by reference to Exhibit 10.3 to Form 8-K filed on April 5, 2013.
10.4		Employment Agreement between the Company and Kevin Struzeski, incorporated by reference to Exhibit 10.4 to Form 8-K filed on April 5, 2013.
10.5		Carbon Natural Gas Company 2015 Annual Incentive Plan, incorporated by reference to exhibit 10.2 to Form 10-Q filed on May 14, 2015.
10.6		Carbon Natural Gas Company 2015 Stock Incentive Plan incorporated by reference to exhibit 10.12 to Form 10-K filed on March 28, 2016.
10.7		Carbon Natural Gas Company 2016 Annual Incentive Plan, incorporated by reference to exhibit 10.1 to Form 10-Q filed on May 23, 2016.
21.1*		Subsidiaries of the Company.
23.1*		Consent of EKS&H LLLP regarding the Form S-8 Financials.
23.2*		Consent of Cawley, Gillespie & Associates, Inc.
31.1*		Rule 13a-14(a)/15d-14(a) - Certification of Chief Executive Officer.
31.2*		Rule 13a-14(a)/15d-14(a) - Certification of Chief Financial Officer.
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 Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
99.1*		Report of Cawley, Gillespie & Associates, Inc., Independent Petroleum Engineers.
101*		Interactive data files pursuant to Rule 405 of Regulation S-T.

*	Filed herewith.

†	Not considered to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the limitations of that section.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: March 31, 2017	CARBON NATURAL GAS COMPANY
	(Registrant)

	By:	/s/ Patrick R. McDonald
		Patrick R. McDonald
		Chief Executive Officer

	By:	/s/ Kevin D. Struzeski
		Kevin D. Struzeski
		Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signatures	Title	Date

/s/ Patrick R. McDonald	Director and Chief Executive Officer	March 31, 2017
Patrick R. McDonald	(Principal Executive Officer)

/s/ James H. Brandi	Chairman and Director	March 31, 2017
James H. Brandi

/s/ Peter A. Leidel	Director	March 31, 2017
Peter A. Leidel

/s/ Bryan H. Lawrence	Director	March 31, 2017
Bryan H. Lawrence

/s/ Edwin H. Morgens	Director	March 31, 2017
Edwin H. Morgens

/s/ David H. Kennedy	Director	March 31, 2017
David H. Kennedy

Exhibit 2.4

Execution Version

PURCHASE AND SALE AGREEMENT

BY AND AMONG

EXCO PRODUCTION COMPANY (WV), LLC,

bg PRODUCTION COMPANY (WV), LLC,

EXCO Resources (PA) LLC

and

NYTIS EXPLORATION COMPANY LLC

TABLE OF CONTENTS

ARTICLE 1 DEFINITIONS		1

1.1	Definitions	1
1.2	References and Rules of Construction	1

ARTICLE 2 PURCHASE AND SALE		2

2.1	Purchase and Sale	2
2.2	Excluded Assets	2
2.3	Revenues and Expenses	2

ARTICLE 3 CONSIDERATION		2

3.1	Consideration; Purchase Price; Closing Amounts	2
3.2	Purchase Price Adjustments	2
3.3	Preliminary Settlement Statement	4
3.4	Final Settlement Statement	4
3.5	Disputes	5
3.6	Post-Final Settlement Statement Revenues and Expenses	6
3.7	Consideration Allocation	6
3.8	Consideration Allocation for Tax Purposes	6

ARTICLE 4 CLOSING		7

4.1	Closing	7
4.2	Obligations of Sellers at Closing	7
4.3	Obligations of Buyer at Closing	9

ARTICLE 5 DISCLAIMERS; CONFIDENTIALITY		10

5.1	Post-Closing Insurance	10
5.2	Confidentiality	10
5.3	Disclaimers	10
5.4	NORM, Wastes and Other Substances	12

ARTICLE 6 BG SELLER AND EXCO SELLER REPRESENTATIONS AND WARRANTIES		12

6.1	Organization and Good Standing	12
6.2	Authority; Authorization of Agreement	12
6.3	Bankruptcy	12
6.4	Fair Market Value	13
6.5	Brokers’ Fees	13
6.6	No Violations	13
6.7	Foreign Person	13
6.8	Taxes	13
6.9	Title	14
6.10	No Violation of Laws	14

ARTICLE 7 OPERATOR REPRESENTATIONS AND WARRANTIES		14

7.1	Organization and Good Standing	14
7.2	Bankruptcy	14
7.3	Fair Market Value	14
7.4	Authority; Authorization of Agreement	14
7.5	Brokers’ Fees	15
7.6	No Violations	15
7.7	Foreign Person	15
7.8	Taxes	15
7.9	Title	16
7.10	No Violation of Laws	16
7.11	Litigation	16
7.12	Material Contracts	16
7.13	Transfer Restrictions	17
7.14	Royalties	17
7.15	Imbalances	17
7.16	Current Commitments	17
7.17	Environmental	17
7.18	Permits and Licenses	18
7.19	Subsequent Events	18
7.20	Current Bonds	18
7.21	Plugging and Abandonment Obligations	18

ARTICLE 8 BUYER’S REPRESENTATIONS AND WARRANTIES		19

8.1	Organization and Good Standing	19
8.2	Authority; Authorization of Agreement	19
8.3	No Violations	19
8.4	SEC Disclosure	19
8.5	Independent Evaluation	20
8.6	Financing	20
8.7	Brokers’ Fees	20
8.8	Anti-Bribery	20

ARTICLE 9 CERTAIN COVENANTS		20

9.1	Names	20
9.2	Tax Matters	21
9.3	Records	21
9.4	Transfer Restrictions	22
9.5	Cooperation with Audits	23
9.6	Data Privacy	23

ARTICLE 10 ALLOCATION OF RESPONSIBILITIES AND INDEMNITIES		24

10.1	Buyer Acknowledgement of Obligations	24
10.2	Sellers’ Indemnity Obligation	24
10.3	Buyer’s Indemnity Obligation	25
10.4	Survival, Claim Periods, Threshold, Deductible and Cap	25
10.5	Notice of Claims	26

10.6	Waiver of Certain Damages	27
10.7	Exclusive Remedy	28
10.8	Express Negligence	28
10.9	Waiver of Right of Rescission	28
10.10	Insurance	28

ARTICLE 11 MISCELLANEOUS		29

11.1	Notices	29
11.2	Transaction Costs; Filing	30
11.3	Further Assurances	30
11.4	Amendments	30
11.5	Successors and Assigns	30
11.6	Headings	30
11.7	Governing Law	31
11.8	No Partnership Created	31
11.9	Public Announcements	31
11.10	Appendices, Exhibits and Schedules	31
11.11	No Third Party Beneficiaries	32
11.12	Construction	32
11.13	Execution in Counterparts	32
11.14	Entire Agreement; Conflicts	32
11.15	Waiver; Rights Cumulative	33
11.16	Severability	33
11.17	Several Liability	33

EXHIBITS AND SCHEDULES

APPENDIX I	DEFINITIONS

EXHIBIT A-1	LEASES
EXHIBIT A-2(a)	CONVENTIONAL WELLS
EXHIBIT A-2(b)	OTHER WELLS
EXHIBIT A-3(c)	WELLBORE LEASE WELLS
EXHIBIT A-3	RIGHTS-OF-WAY
EXHIBIT A-4	GATHERING SYSTEM(S)
EXHIBIT A-5	FIELD OFFICES
EXHIBIT A-6	VEHICLES
EXHIBIT A-7	SUSPENSE ACCOUNTS
EXHIBIT B-1	SELLER EXCLUDED ASSETS
EXHIBIT B-2	CONSENT WELLS
EXHIBIT C	NON-FOREIGN CERTIFICATE
EXHIBIT D-1	FORM OF BG ASSIGNMENT
EXHIBIT D-2	FORM OF EXCO ASSIGNMENT
EXHIBIT D-3	FORM OF OPERATOR ASSIGNMENT
EXHIBIT D-4	FORM OF WELLBORE LEASE
EXHIBIT E	FORM OF JOINT USE AGREEMENT

EXHIBIT F	DATA PRIVACY
EXHIBIT G	FORM OF TRANSITION SERVICES AGREEMENT
EXHIBIT H	FORM OF ROYALTY SIDE LETTER
EXHIBIT I	FORM OF FARMOUT AGREEMENT

SCHEDULE 1.1(a)	BG SELLER’S KNOWLEDGE
SCHEDULE 1.1(b)	EXCO SELLER’S KNOWLEDGE
SCHEDULE 1.1(c)	OPERATOR’S KNOWLEDGE
SCHEDULE 1.1(d)	BUYER’S KNOWLEDGE
SCHEDULE 3.7	ALLOCATED VALUES
SCHEDULE 6.9	BG SELLER AND EXCO SELLER TITLE
SCHEDULE 7.6	OPERATOR NO VIOLATIONS
SCHEDULE 7.9	OPERATOR TITLE
SCHEDULE 7.10	NO VIOLATION OF LAW
SCHEDULE 7.11	LITIGATION
SCHEDULE 7.12(a)	MATERIAL CONTRACTS
SCHEDULE 7.12(b)	MATERIAL CONTRACT DEFAULT
SCHEDULE 7.13	TRANSFER RESTRICTIONS
SCHEDULE 7.15	IMBALANCES
SCHEDULE 7.16	CURRENT COMMITMENTS
SCHEDULE 7.17	ENVIRONMENTAL
SCHEDULE 7.20	BONDS
SCHEDULE 9.4	UNOBTAINED HARD CONSENT ASSETS

PURCHASE AND SALE AGREEMENT

This PURCHASE AND SALE AGREEMENT (as the same may be amended or modified from time to time, this “ Agreement ”) is dated as of October 3, 2016 (the “ Execution Date ”), by and among EXCO Production Company (WV), LLC, a Delaware limited liability company (“ EXCO Seller ”), BG Production Company (WV), LLC, a Delaware limited liability company (“ BG Seller ”), EXCO Resources (PA) LLC, a Delaware limited liability company (“ Operator ” and together with EXCO Seller and BG Seller, the “ Sellers ” and individually, each such Person, a “ Seller ”), and Nytis Exploration Company LLC, a Delaware limited liability company (“ Buyer ”). Sellers, on the one hand, and Buyer, on the other hand, are sometimes hereinafter referred to individually as a “ Party ” and collectively as the “ Parties .”

RECITALS

WHEREAS , Sellers desire to sell, assign and convey, and Buyer desires to purchase and pay for, the Assets (as hereinafter defined).

NOW, THEREFORE , based on the mutual covenants and agreements herein contained, the benefits to be derived by each Party hereunder, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

Article 1

DEFINITIONS

1.1 Definitions . Capitalized terms used herein and not otherwise defined shall have the meanings given such terms in Appendix I attached hereto.

1.2 References and Rules of Construction . All references in this Agreement to Exhibits, Schedules, Articles, Sections, subsections and other subdivisions refer to the corresponding Exhibits, Schedules, Articles, Sections, subsections and other subdivisions of or to this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any Articles, Sections, subsections and other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement and shall be disregarded in construing the language hereof. The words “this Agreement”, “herein”, “hereby”, “hereunder” and “hereof”, and words of similar import, refer to this Agreement as a whole and not to any particular Article, Section, subsection or other subdivision unless expressly so limited. The word “including” (in its various forms) means “including without limitation”. All references to “$” or “dollars” shall be deemed references to United States dollars. Each accounting term not defined herein, and each accounting term partly defined herein to the extent not defined, shall have the meaning given to it under GAAP. Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. Except as expressly provided otherwise in this Agreement, references to any Law or Contract means such Law or Contract as it may be amended from time to time. The word “will” shall be construed to have the same meaning and effect as the word “shall” and vice versa. References to any date and/or time shall mean such date or time, as applicable, in Houston, Texas and for purposes of calculating the time period in which any notice or action is to be given or undertaken hereunder, such period shall be deemed to begin at 12:01 a.m. on the applicable date in Houston, Texas.

Article 2

PURCHASE AND SALE

2.1 Purchase and Sale . Subject to the terms and conditions of this Agreement, Sellers agree to sell, and Buyer agrees to purchase and pay for, the Assets.

2.2 Excluded Assets . Sellers shall reserve and retain all of the Excluded Assets.

2.3 Revenues and Expenses . Sellers are entitled to all rights of ownership attributable to the Assets, including all rights to production and proceeds from production, in each case, to the extent the same relate to the period prior to the Effective Time, and are responsible for payment of all Property Expenses to the extent the same relate to the period prior to the Effective Time. Buyer is entitled to all income, proceeds and other receivables attributable to the Assets, including all rights to production and proceeds from production, and is responsible for payment of all Property Expenses, in each case, to the extent the same relate to the period from and after the Effective Time. Subject to Section 9.2 , all Property Expenses that are: (a) incurred with respect to operations conducted or production prior to the Effective Time shall be paid by or allocated to Sellers and (b) incurred with respect to operations conducted or production from and after the Effective Time shall be paid by or allocated to Buyer. After Closing, each Party shall be entitled to participate in all joint interest audits and other audits of Property Expenses for which such Party is entirely or in part responsible under the terms of this Section 2.3 .

Article 3

CONSIDERATION

3.1 Consideration; Purchase Price; Closing Amounts . The total consideration for the Assets is $9,000,000 (the “ Purchase Price ”), adjusted in accordance with Section 3.2 and payable by Buyer by wire transfer in same day funds (a) 49.75% to BG Seller at Closing (the “ BG Closing Amount ”); (b) 49.75% to EXCO Seller at Closing (the “ EXCO Closing Amount ”) and (c) 0.5% to Operator at Closing (the “ Operator Closing Amount ” and together with the BG Closing Amount and the EXCO Closing Amount, the “ Closing Amounts ”).

3.2 Purchase Price Adjustments. The Purchase Price shall be adjusted as follows (and the resulting amount shall be herein called the “ Adjusted Purchase Price ”):

(a) The Purchase Price shall be adjusted upward by the following amounts (without duplication):

(i) an amount equal to all Property Expenses and all other costs and expenses paid by Sellers or their Affiliates that are attributable to the ownership or operation of the Assets from and after the Effective Time up to Closing (whether paid before or after the Effective Time), including (A) rentals and other lease maintenance payments, (B) bonuses and costs of Lease renewals and/or extensions of the Leases, (C) costs of acquiring necessary Rights-of-Way and (D) cash calls and advances to Non-Party operators for expenses not yet incurred, in each case net of any sales, excise or similar Taxes in connection and therewith reimbursed to Sellers or their Affiliates, as applicable, by any Non-Party purchaser;

(ii) an amount equal to all Asset Taxes prorated to Buyer in accordance with Section 9.2 but paid or payable by Sellers or their Affiliates;

(iii) to the extent that proceeds for such volumes have not been received by a Seller, an amount equal to (A) the aggregated volumes of Hydrocarbons stored in stock tanks, pipelines or other storage as of the Effective Time that are attributable to the ownership and operation of the Assets multiplied by (B) the contract price therefor as of the Effective Time;

(iv) to the extent that Sellers are underproduced as of the Effective Time with respect to the net Well Imbalances, an amount equal to the product of (A) the Well Imbalances times (B) the Monthly Bidweek Spot Gas Price, October 2016, for Columbia Gas, App. as published by Platts in the Gas Daily Price Guide, October 2016;

(v) to the extent that Sellers are overdelivered as of the Effective Time, with respect to the net Pipeline Imbalances, an amount equal to the product of (A) the Pipeline Imbalances times (B) the Monthly Bidweek Spot Gas Price, October 2016, for Columbia Gas, App. as published by Platts in the Gas Daily Price Guide, October 2016;

(vi) an amount equal to $35,000 per month during the period from the Effective Time up to the Closing (prorated for any period less than an entire month) representing Operator’s overhead for the operation of the Assets during such period; and

(vii) any other amount provided for elsewhere in this Agreement or otherwise agreed upon by Sellers and Buyer.

(b) The Purchase Price shall be adjusted downward by the following amounts (without duplication):

(i) an amount equal to all proceeds received by Sellers or their Affiliates attributable to the ownership or operation of the Assets from and after the Effective Time up to Closing, including the sale of Hydrocarbons produced from the Assets or allocable thereto, net of any sales, excise or similar Taxes in connection therewith not reimbursed to Sellers or their Affiliates, as applicable, by a Non-Party purchaser and net of the Burdens on production;

(ii) the amount of all Asset Taxes prorated to Sellers in accordance with Section 9.2 but paid or payable by Buyer;

(iii) all funds held in suspense by any Seller with respect to the operation or ownership of the Assets;

(iv) to the extent that Sellers are overproduced as of the Effective Time with respect to the net Well Imbalances, an amount equal to the product of (A) the Well Imbalances times (B) the Monthly Bidweek Spot Gas Price, October 2016, for Columbia Gas, App. as published by Platts in the Gas Daily Price Guide, October 2016;

(v) to the extent that Sellers are underdelivered as of the Effective Time, with respect to the net Pipeline Imbalances, an amount equal to the product of (A) the Pipeline Imbalances times (B) the Monthly Bidweek Spot Gas Price, October 2016, for Columbia Gas, App. as published by Platts in the Gas Daily Price Guide, October 2016;

(vi) an amount equal to the Allocated Value of any Assets excluded from the transactions contemplated by this Agreement pursuant to Sections 9.4(a)(i) and 9.4(b)(i) ; and

(vii) any other amount provided for elsewhere in this Agreement or otherwise agreed upon by Sellers and Buyer.

3.3 Preliminary Settlement Statement . Sellers have prepared and the Parties have agreed on a draft settlement statement (the “ Preliminary Settlement Statement ”) that sets forth an estimate of (a) the Adjusted Purchase Price, reflecting each proposed adjustment to be made in accordance with Section 3.2 as of the date of preparation of such Preliminary Settlement Statement and the calculation of the adjustments used to determine such amount, (b) the BG Closing Amount, (c) the EXCO Closing Amount, (d) the Operator Closing Amount and (e) the designation of each Seller’s account for the wire transfers of funds.

3.4 Final Settlement Statement . On or before the date that is 150 days following the Closing, a final settlement statement (the “ Final Settlement Statement ”) shall be prepared by Sellers, based on actual proceeds and expenses attributable to the Assets during the period from and after the Effective Time and that takes into account all final adjustments made to the Purchase Price and the Closing Amounts and shows the resulting final Adjusted Purchase Price, final BG Closing Amount, final EXCO Closing Amount and final Operator Closing Amount. Buyer shall afford to members of the Seller Group, upon reasonable prior notice, reasonable access, during normal business hours or such other times as may be reasonably accommodated by Buyer, to employees of Buyer or their Affiliates and all Records in Buyer’s or their Affiliates’ possession or control for purposes of preparing the Final Settlement Statement. As soon as practicable, and in any event within 15 days after its receipt of the Final Settlement Statement, Buyer shall deliver to each Seller a written report containing any proposed changes to the Final Settlement Statement and an explanation of any such changes and the reasons therefor (the “ Dispute Notice ”). Any changes not included in the Dispute Notice shall be deemed waived, and Sellers’ determinations with respect to all such adjustments in the Final Settlement Statement that are not addressed in the Dispute Notice shall prevail. If Buyer fails to timely deliver a Dispute Notice to each Seller containing changes Buyer proposes to be made to the Final Settlement Statement, the Final Settlement Statement as delivered by Sellers shall be deemed to be mutually agreed upon by Sellers and Buyer and shall be final and binding on Sellers and Buyer. If the final Adjusted Purchase Price, final BG Closing Amount, final EXCO Closing Amount and final Operator Closing Amount set forth in the Final Settlement Statement are mutually agreed upon by Sellers and Buyer, the Final Settlement Statement and the final Adjusted Purchase Price shall be final and binding on Sellers and Buyer. Once the final Adjusted Purchase Price, final BG Closing Amount, final EXCO Closing Amount and final Operator Closing Amount have been agreed (or deemed agreed) upon by Sellers and Buyer pursuant to this Section 3.4 or determined by the Accounting Referee pursuant to Section 3.5 , as applicable, then, if the final Closing Amounts are (a) more than the Closing Amounts in the Preliminary Settlement Statement, then Buyer shall pay 49.75% of the amount of such difference to an account designated by BG Seller, 49.75% of the amount of such difference to an account designated by EXCO Seller and 0.5% of the amount of such difference to an account designated by Operator or (b) less than the Closing Amounts in the Preliminary Settlement Statement, then each of BG Seller and EXCO Seller shall pay 49.75% and Operator shall pay 0.5% of the amount of such difference to an account designated by Buyer, in each case, by wire transfer in immediately available funds no later than five Business Days after the date such final Closing Amounts are agreed, or deemed agreed, pursuant to this Section 3.4 or determined pursuant to Section 3.5 , as applicable.

3.5 Disputes . If Sellers and Buyer are unable to resolve all of the matters addressed in the Dispute Notice (if any) within 15 Business Days of Buyer’s delivery of the Dispute Notice, then either Buyer or any Seller can initiate arbitration to resolve such matters in the Dispute Notice by requesting that the Accounting Referee agree to serve in the capacity provided hereunder (or if the initial Accounting Referee designated hereunder pursuant to the definition thereof does not so agree to serve, then requesting that the alternative Accounting Referee, when appointed as contemplated pursuant to the definition thereof, agree to serve such capacity). Each of Buyer, on the one hand, and Sellers, on the other hand, shall (a) summarize their position with regard to the disputed adjustments in a written document and (b) within ten Business Days after the Accounting Referee has agreed to serve, submit such summaries to the Accounting Referee, together with the Dispute Notice, the Final Settlement Statement and any other documentation such Party may desire to submit. Sellers shall also furnish the Accounting Referee with a copy of this Agreement. Sellers and Buyer shall instruct the Accounting Referee that, within 15 Business Days after receiving the submissions of Sellers and Buyer, the Accounting Referee shall render a decision choosing either Sellers’ position or Buyer’s position with respect to each disputed adjustment addressed in any Dispute Notice, whichever is most accurate based on the terms of this Agreement and the materials described above. The Accounting Referee shall calculate only the disputed adjustments addressed in the Dispute Notice that are not otherwise resolved and agreed upon in writing by Sellers and Buyer after delivery of the Dispute Notice. Each choice between Sellers’ position and Buyer’s position with respect to any disputed adjustment that is rendered by the Accounting Referee in accordance with this Section 3.5 shall be final, conclusive and binding on Sellers and Buyer and shall be enforceable against each of the Sellers and Buyer in any court of competent jurisdiction. The costs of such Accounting Referee shall be borne one-half by Buyer and one-half by Sellers. The final Adjusted Purchase Price set forth in the Final Settlement Statement incorporating the adjustment amounts determined by the Accounting Referee in accordance with this Section 3.5 , in addition to the adjustment amounts agreed to in writing by Sellers and Buyer, shall be final and binding on Sellers and Buyer (other than with respect to amounts not accounted for therein or settled thereby, which amounts shall be subject to the provisions of Section 3.6 ). The Accounting Referee shall be authorized to resolve only the specific disputed aspects of the Final Settlement Statement submitted by Sellers and Buyer as provided above and may not award damages, interest, penalties or attorneys’ fees to any Party with respect to any matter.

3.6 Post-Final Settlement Statement Revenues and Expenses . If, after agreement (or deemed agreement) by Sellers and Buyer upon the Final Settlement Statement or the Accounting Referee’s decision with respect to any disputed adjustments in accordance with Section 3.5 , with respect to amounts not included in the agreed (or deemed agreed) Final Settlement Statement,

(a) Buyer or its Affiliates receives monies belonging to Sellers, including proceeds of production, then Buyer shall pay 49.75% of such amount to EXCO Seller, 49.75% of such amount to BG Seller and 0.5% of such amount to Operator, in each case, within ten Business Days after the end of the month in which such amount was received,

(b) any Seller or its Affiliates receives monies belonging to Buyer, including proceeds of production, then such Seller shall pay such amount to Buyer or Buyer’s designee within ten Business Days after the end of the month in which such amounts were received,

(c) Buyer or its Affiliates pays monies for expenses or obligations that are the obligation of any Seller, then such Seller shall, within ten Business Days after the end of the month in which the applicable invoice and proof of payment of such invoice were received by Buyer, reimburse Buyer,

(d) any Seller pays monies for expenses or obligations that are the obligation of Buyer or its Affiliates, then Buyer shall, within ten Business Days after the end of the month in which the applicable invoice and proof of payment of such invoice were received by Buyer, reimburse such Seller,

(e) a Party or its Affiliates receives an invoice of an expense or obligation that is owed by another Party or its Affiliates, such Party receiving the invoice shall promptly forward such invoice to the Party obligated to pay the same, and

(f) an invoice or other evidence of an obligation is received by a Party or its Affiliates that is partially an obligation of Sellers, on the one hand, and Buyer, on the other hand, then Sellers and Buyer shall consult with each other, and each shall promptly pay its portion of such obligation to the obligee.

3.7 Consideration Allocation . Sellers and Buyer agree that the Purchase Price shall be allocated in accordance with the allocation schedule attached as Schedule 3.7 (the “ Allocated Values ”). Buyer and Sellers also agree (a) that the Allocated Values, as adjusted, shall be used by Sellers and Buyer as the basis for reporting asset values and other items for purposes of this Section 3.7 , and (b) that neither they nor their Affiliates will take positions inconsistent with such Allocated Values in notices to Governmental Authorities, in audit or other proceedings with respect to Taxes, in notices to preferential purchase right holders or in other documents or notices relating to the transactions contemplated by this Agreement.

3.8 Consideration Allocation for Tax Purposes . The Parties agree that the Adjusted Purchase Price shall be allocated among the various Assets for Tax purposes (the “ Allocation ”). The initial draft of the Allocation shall be prepared by Sellers in a manner consistent with the related Allocated Values of the Assets and shall be provided to Buyer no later than 150 days after the Closing. Sellers and Buyer shall then cooperate to prepare an Internal Revenue Service Form 8594 (Asset Acquisition Statement under Section 1060), which Form will be timely filed separately by Sellers and Buyer with the Internal Revenue Service pursuant to the requirements of Section 1060(b) of the Code. Any dispute or disagreement regarding the Allocation or the filing of Form 8594 shall be resolved using the dispute resolution procedures in Section 3.5 and Section 3.6 , as applicable. Neither Buyer nor Sellers and Buyer shall take any Tax position inconsistent with such Allocation and neither Buyer nor Sellers shall agree to any proposed adjustment to the Allocation by any Governmental Authority without first giving the other Parties prior written notice; provided, however, that nothing contained herein shall prevent Buyer or Sellers from settling any proposed deficiency or adjustment by any Governmental Authority based upon or arising out of the Allocation, and neither Buyer nor Sellers shall be required to litigate before any court any proposed deficiency or adjustment by any taxing authority challenging such Allocation.

Article 4

CLOSING

4.1 Closing. Closing shall take place electronically on the Execution Date; provided that with respect to any documents or instruments set forth in Section 4.2 or Section 4.3 which require original signatures for recording purposes, the Parties have provided an appropriate number of original executed and acknowledged signature pages to the offices of Latham & Watkins LLP, 811 Main Street, Suite 3700, Houston, Texas 77002, on or before the day before the Execution Date to be held in escrow pending release by such executing Party on the Execution Date.

4.2 Obligations of Sellers at Closing.

(a) At Closing, each Seller shall deliver or cause to be delivered to Buyer, unless waived by Buyer, the following:

(i) the Wellbore Lease executed by an authorized Person of such Seller, in sufficient counterparts to facilitate recording in the applicable counties where the Wellbore Lease Wells are located;

(ii) the Joint Use Agreement and the memorandum thereof (for recording purposes) executed by an authorized Person of such Seller;

(iii) the Farmout Agreement executed by an authorized Person of such Seller;

(iv) the Royalty Side Letter executed by an authorized Person of such Seller;

(v) change of operator forms, including applicable state forms with regard to the transfer of the Wells and/or the Leases and/or operatorship thereof, for the Assets;

(vi) deeds for the field offices described in Exhibit A-5 and all real property (including office leases) associated therewith; and

(vii) any other agreements, instruments and documents which are required by other terms of this Agreement to be executed and/or delivered at the Closing.

(b) BG Seller shall deliver or cause to be delivered to Buyer, unless waived by Buyer, the following:

(i) the BG Assignment executed by an authorized Person of BG Seller, in sufficient counterparts to facilitate recording in the applicable counties where the Assets are located; and

(ii) those assignments, on appropriate forms, required to consummate the transactions contemplated by this Agreement by BG Seller with respect to state and other Leases of Governmental Authorities included in the Assets in sufficient counterparts to facilitate filing with the applicable Governmental Authorities.

(i) the EXCO Assignment executed by an authorized Person of EXCO Seller, in sufficient counterparts to facilitate recording in the applicable counties where the Assets are located;

(ii) those assignments, on appropriate forms, required to consummate the transactions contemplated by this Agreement by EXCO Seller with respect to state and other Leases of Governmental Authorities included in the Assets in sufficient counterparts to facilitate filing with the applicable Governmental Authorities; and

(iii) releases of any mortgages, deeds of trust, pledges, financing statements and security agreements made by EXCO Seller or its Affiliates affecting EXCO Seller’s interest in the Assets.

(d) At Closing, Operator shall cause to be delivered to Buyer, unless waived by Buyer, the following:

(i) the Operator Assignment executed by an authorized Person of Operator, in sufficient counterparts to facilitate recording in the applicable counties where the Assets are located;

(ii) those assignments, on appropriate forms, required to consummate the transactions contemplated by this Agreement by Operator with respect to state and other Leases of Governmental Authorities included in the Assets in sufficient counterparts to facilitate filing with the applicable Governmental Authorities;

(iii) the Non-Foreign Certificate executed by an authorized Person of the Tax Partnership;

(iv) certificates of title to all owned vehicles included in the Assets; and

(v) the Transition Services Agreement executed by an authorized Person of Operator.

4.3 Obligations of Buyer at Closing. At Closing, Buyer shall deliver or cause to be delivered to Sellers, unless waived by Sellers, the following:

(a) the Closing Amounts by wire transfer of immediately available funds to the accounts set forth in the Preliminary Settlement Statement;

(b) the BG Assignment executed by an authorized Person of Buyer, in sufficient counterparts to facilitate recording in the applicable counties where the Assets are located;

(c) the EXCO Assignment executed by an authorized Person of Buyer, in sufficient counterparts to facilitate recording in the applicable counties where the Assets are located;

(d) the Operator Assignment executed by an authorized Person of Buyer, in sufficient counterparts to facilitate recording in the applicable counties where the Assets are located;

(e) those assignments, on appropriate forms, required to consummate the transactions contemplated by this Agreement with respect to state and other Leases of Governmental Authorities included in the Assets in sufficient counterparts to facilitate filing with the applicable Governmental Authorities;

(f) the Wellbore Lease executed by an authorized Person of Buyer, in sufficient counterparts to facilitate recording in the applicable counties where the Wellbore Lease Wells are located;

(g) the Joint Use Agreement and the memorandum thereof (for recording purposes) executed by an authorized Person of Buyer;

(h) the Farmout Agreement executed by an authorized Person of Buyer;

(i) the Royalty Side Letter executed by an authorized Person of Buyer;

(j) the Transition Services Agreement executed by an authorized Person of Buyer;

(k) counterparts of change of operator forms, including applicable state forms with regard to the transfer of the Wells and/or the Leases and/or operatorship thereof, for the Assets, executed by an authorized Person of Buyer;

(l) a summary of the accepted and/or outstanding offers of employment that Buyer has made to any employee of a Seller prior to the Closing; provided that if Buyer makes any additional offers of employment to any employee of a Seller within 90 days following the Closing, then Buyer shall also promptly provide notice of such offer to the applicable Seller;

(m) evidence of the posting of replacements (at Buyer’s sole expense) for such bonds, letters of credit and guaranties to the extent such replacements are necessary to permit the cancellation of the bonds, letters of credit and guaranties posted by any Seller or its Affiliates relating to the Assets; and

(n) any other agreements, instruments and documents which are required by other terms of this Agreement to be executed and/or delivered at the Closing.

Article 5

DISCLAIMERS; CONFIDENTIALITY

5.1 Post-Closing Insurance . Buyer understands and agrees that from and after the Closing, (a) no insurance coverage shall be provided to Buyer under any insurance policy issued to any Seller or any Affiliate of any Seller (the “ Seller Insurance ”), and (b) no Claims regarding any matter whatsoever, whether or not arising from events occurring prior to or after the Effective Time, shall be made by Buyer or its Affiliates directly against or under any of the Seller Insurance.

5.2 Confidentiality . Notwithstanding any termination of this Agreement or any other provision of this Agreement to the contrary, Buyer acknowledges that, pursuant to its right of access to the Records and/or the Assets, Buyer shall become privy to confidential and other information of Sellers and that such information shall be held confidential by Buyer and the other members of the Buyer Group in accordance with the terms of the Confidentiality Agreement.

5.3 Disclaimers .

(a) Except as and to the LIMITED extent expressly set forth in ARTICLE 6 and Article 7 and except for the warranty of title set forth in the assignments, (i) NONE OF SELLERS OR ANY MEMBER OF THE SELLER GROUP MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS, STATUTORY OR IMPLIED, AND (II) EACH Seller (ON ITS OWN BEHALF AND ON BEHALF OF THE MEMBERS OF THE SELLER GROUP) EXPRESSLY DISCLAIMS ALL LIABILITY AND RESPONSIBILITY (OTHER THAN AS PROVIDED IN Section 10.2 ) FOR, IN EACH CASE, ANY REPRESENTATION, WARRANTY, STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO ANY MEMBER OF THE BUYER GROUP (INCLUDING ANY OPINION, INFORMATION, PROJECTION OR ADVICE THAT MAY HAVE BEEN PROVIDED TO ANY MEMBER OF THE BUYER GROUP BY A MEMBER OF THE Seller GROUP).

(b) EXCEPT AS AND TO THE LIMITED EXTENT EXPRESSLY SET FORTH IN ARTICLE 6 and Article 7 AND WITHOUT LIMITING THE GENERALITY OF SECTION 5.3( a ) , and except for the warranty of title set forth in the assignments, EACH SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS, STATUTORY OR IMPLIED, BY sellerS or ANY other MEMBER OF THE SELLER GROUP, AS TO (I) SELLERS’ TITLE TO ANY OF THE ASSETS, (II) THE CONTENTS, CHARACTER OR NATURE OF ANY REPORT OF ANY PETROLEUM ENGINEERING CONSULTANT, OR ANY ENGINEERING, GEOLOGICAL OR SEISMIC DATA OR INTERPRETATION, RELATING TO THE ASSETS, (III) THE QUANTITY, QUALITY OR RECOVERABILITY OF HYDROCARBONS IN OR FROM THE ASSETS, (IV) ANY ESTIMATES OF THE VALUE OF THE ASSETS OR FUTURE REVENUES GENERATED BY THE ASSETS, (V) THE PRODUCTION OF HYDROCARBONS FROM THE ASSETS, (VI) THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR MARKETABILITY OF THE ASSETS, (VII) THE CONTENT, CHARACTER OR NATURE OF ANY INFORMATION MEMORANDUM, REPORTS, BROCHURES, CHARTS OR STATEMENTS PREPARED BY OR ON BEHALF OF SELLERS or any other member of the SELLER GROUP, WITH RESPECT TO THE ASSETS, (VIII) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE TO BUYER OR ANY OTHER MEMBER OF THE BUYER GROUP IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO AND (IX) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT. EXCEPT AS AND TO THE LIMITED EXTENT EXPRESSLY SET FORTH IN ARTICLE 6 and Article 7 AND WITHOUT LIMITING THE GENERALITY OF SECTION 5.3( a ) , EACH SELLER FURTHER DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS, STATUTORY OR IMPLIED, BY SELLERS OR ANY OTHER MEMBER OF THE SELLER GROUP, REGARDING MERCHANTABILITY, FREEDOM FROM LATENT VICES OR DEFECTS, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY ASSETS, OR RIGHTS OF A PURCHASER UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR RETURN OF THE TOTAL CONSIDERATION; IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES THAT SUBJECT TO SUCH EXCEPTION above, BUYER SHALL BE DEEMED TO BE ACQUIRING THE ASSETS IN THEIR PRESENT STATUS, CONDITION AND STATE OF REPAIR, “AS IS” AND “WHERE IS” WITH ALL FAULTS OR DEFECTS (KNOWN OR UNKNOWN, LATENT, DISCOVERABLE OR UNDISCOVERABLE), AND THAT BUYER HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS BUYER DEEMS APPROPRIATE.

(c) EXCEPT AS AND TO THE LIMITED EXTENT EXPRESSLY SET FORTH IN Section 7.17 , NO MEMBER OF THE SELLER GROUP, HAS MADE OR SHALL MAKE ANY REPRESENTATION OR WARRANTY REGARDING ANY MATTER OR CIRCUMSTANCE RELATING TO ENVIRONMENTAL LAWS, THE RELEASE OF MATERIALS INTO THE ENVIRONMENT OR THE PROTECTION OF HUMAN HEALTH, SAFETY, NATURAL RESOURCES OR THE ENVIRONMENT, OR ANY OTHER ENVIRONMENTAL CONDITION OF THE ASSETS, AND NOTHING IN THIS AGREEMENT OR OTHERWISE SHALL BE CONSTRUED AS SUCH A REPRESENTATION OR WARRANTY, AND SUBJECT TO BUYER’S RIGHTS UNDER SECTION 10.2(c) WITH RESPECT TO A BREACH OF SECTION 7.17 , BUYER SHALL BE DEEMED TO BE ACQUIRING THE ASSETS “ AS IS” AND “WHERE IS” WITH ALL FAULTS OR DEFECTS (KNOWN OR UNKNOWN, LATENT, DISCOVERABLE OR UNDISCOVERABLE) FOR PURPOSES OF THEIR ENVIRONMENTAL CONDITION AND THAT BUYER HAS MADE OR CAUSED TO BE MADE SUCH ENVIRONMENTAL INSPECTIONS AS BUYER DEEMS APPROPRIATE .

(d) Sellers and Buyer agree that, to the extent required by applicable Law to be effective, the disclaimers of certain representations and warranties contained in this Section 5.3 are conspicuous disclaimers for the purpose of any applicable Law.

5.4 NORM, Wastes and Other Substances . Buyer acknowledges that the Assets have been used for exploration, development, production, gathering and transportation of oil and gas and there may be petroleum, produced water, wastes or other substances or materials located in, on or under the Assets or associated with the Assets. Equipment and sites included in the Assets may contain NORM. NORM may affix or attach itself to the inside of wells, pipelines, materials and equipment as scale, or in other forms. For the avoidance of doubt NORM shall not constitute the basis of a breach of Operator’s representations and warranties set forth in Section 7.17 .

Article 6

BG Seller and EXCO SELLER REPRESENTATIONS AND WARRANTIES

Each of BG Seller and EXCO Seller, severally and not jointly, represents and warrants to Buyer, solely as to itself and its interest in the Assets, the following as of the Execution Date:

6.1 Organization and Good Standing . Such Seller is a limited liability company duly formed, validly existing and in good standing under the Laws of the state of Delaware and has all requisite limited liability company power and authority to own and operate its interests in the Assets. Such Seller is duly licensed or qualified to do business as a foreign limited liability company in all jurisdictions in which the Assets are located, except where the failure to qualify would not have a Material Adverse Effect.

6.2 Authority; Authorization of Agreement . Such Seller has all requisite limited liability company power and authority to execute and deliver this Agreement and the Transaction Documents to which it is a party, to consummate the transactions contemplated by this Agreement and the Transaction Documents to which it is a party and to perform all of its obligations under this Agreement and the Transaction Documents to which it is a party. This Agreement constitutes, and the Transaction Documents to which it is a party, when executed and delivered by such Seller, shall constitute, the valid and binding obligations of such Seller, enforceable against it in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency or other Laws relating to or affecting the enforcement of creditors’ rights and general principles of equity (regardless of whether such enforceability is considered in a proceeding at Law or in equity).

6.3 Bankruptcy . There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by or, to such Seller’s Knowledge, threatened against such Seller or its Affiliates. Seller is not insolvent, nor will the completion of the transaction contemplated by this Agreement cause it to be insolvent.

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

6.5 Brokers’ Fees . Such Seller has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement or the Transaction Documents for which Buyer or any Affiliate of Buyer shall have any responsibility.

6.6 No Violations . Assuming the receipt of all consents and the waiver of all preferential purchase rights and maintenance of uniform interest provisions (in each case) applicable to the transactions contemplated hereby, such Seller’s execution and delivery of this Agreement and the Transaction Documents to which it is a party and such Seller’s consummation of the transactions contemplated hereby and thereby shall not: (a) violate any provision of the organizational documents of such Seller; (b) violate any provision of, or require any filing, consent or approval under, any Laws applicable to such Seller,; (c) result in the creation or imposition of any Encumbrance (other than a Permitted Encumbrance) upon one or more of the Assets; or (d) conflict with, result in a breach of, constitute a default under or constitute an event that with notice or lapse of time or both would constitute a default under, accelerate or permit the acceleration of the performance required by any Material Contract.

6.7 Foreign Person . Such Seller is not a “foreign person” within the meaning of Section 1445 of the Code.

6.8 Taxes .

(a) To such Seller’s Knowledge, all Asset Taxes that have become due and payable with respect to such Seller’s interests in the Assets have been properly paid.

(b) To such Seller’s Knowledge, all Tax Returns with respect to Asset Taxes with respect to such Seller’s interests in the Assets that are required to be filed have been duly and timely filed, and all such Tax Returns are correct and complete in all material respects.

(c) To such Seller’s Knowledge, there are no Encumbrances for Taxes (including any interest, fine, penalty or additions to Tax imposed by a Taxing Authority in connection with such Taxes) on such Seller’s interests in the Assets, other than Permitted Encumbrances.

(d) Such Seller has not received any written notice of any pending claim (which remains outstanding) from any applicable Taxing Authority for assessment of Asset Taxes and no such claim has been made or threatened.

(e) No audit, administrative, judicial or other proceeding with respect to Asset Taxes with respect to such Seller’s interests in the Assets has been commenced or is presently pending.

(f) Notwithstanding any provision in this Agreement to the contrary, this Section 6.8 shall be the exclusive representations and warranties of Sellers with respect to Tax Laws and other tax matters, and no other representations or warranties are made with respect to such matters.

6.9 Title . Except as shown in Schedule 6.9 , such Seller has such right, title and interest in and to its interests in the Leases and Wells that as of Closing, subject to the Permitted Encumbrances, is free and clear of all Encumbrances.

6.10 No Violation of Laws . To such Seller’s Knowledge, as of the Execution Date, such Seller is not in violation of any applicable Laws with respect to its ownership of the Assets. This Section 6.10 does not include any matters with respect to any environmental matter, such matters being addressed exclusively in Section 7.17 or any Tax matter, such matters being addressed exclusively in Section 6.8 .

Article 7

OPERATOR REPRESENTATIONS AND WARRANTIES

Operator represents and warrants to Buyer the following as of the Execution Date:

7.1 Organization and Good Standing . Operator is a limited liability company duly formed, validly existing and in good standing under the Laws of the state of Delaware and has all requisite limited liability company power and authority to own and operate its interests in the Assets. Operator is duly licensed or qualified to do business as a foreign limited liability company in all jurisdictions in which the Assets are located, except where the failure to qualify would not have a Material Adverse Effect.

7.2 Bankruptcy . There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by or to Operator’s Knowledge, threatened against Operator or its Affiliates. Operator is not insolvent, nor will the completion of the transaction contemplated by this Agreement cause it to be insolvent.

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

7.4 Authority; Authorization of Agreement . Operator has all requisite limited liability company power and authority to execute and deliver this Agreement and the Transaction Documents to which it is a party, to consummate the transactions contemplated by this Agreement and the Transaction Documents to which it is a party and to perform all of its obligations under this Agreement and the Transaction Documents to which it is a party. This Agreement constitutes, and the Transaction Documents to which it is a party, when executed and delivered by Operator, shall constitute, the valid and binding obligations of Operator, enforceable against it in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency or other Laws relating to or affecting the enforcement of creditors’ rights and general principles of equity (regardless of whether such enforceability is considered in a proceeding at Law or in equity).

7.5 Brokers’ Fees . Operator has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement or the Transaction Documents for which Buyer or any Affiliate of Buyer shall have any responsibility.

7.6 No Violations . Except as shown in Schedule 7.6 , assuming the receipt of all consents and the waiver of all preferential purchase rights and maintenance of uniform interest provisions (in each case) applicable to the transactions contemplated hereby, Operator’s execution and delivery of this Agreement and the Transaction Documents to which it is a party and Operator’s consummation of the transactions contemplated hereby and thereby shall not: (a) violate any provision of the organizational documents of Operator; (b) violate any provision of, or require any filing, consent or approval under, any Laws applicable to Operator; (c) result in the creation or imposition of any Encumbrance (other than a Permitted Encumbrance) upon one or more of the Assets; or (d) conflict with, result in a breach of, constitute a default under or constitute an event that with notice or lapse of time or both would constitute a default under, accelerate or permit the acceleration of the performance required by any Material Contract.

7.7 Foreign Person . Neither Operator nor the Tax Partnership is a “foreign person” within the meaning of Section 1445 of the Code.

7.8 Taxes .

(a) To Operator’s Knowledge, all Asset Taxes that have become due and payable with respect to Operator’s interests in the Assets have been properly paid.

(b) To Operator’s Knowledge, all Tax Returns with respect to Asset Taxes with respect to Operator’s interests in the Assets that are required to be filed have been duly and timely filed, and all such Tax Returns are correct and complete in all material respects.

(c) To Operator’s Knowledge, there are no Encumbrances for Taxes (including any interest, fine, penalty or additions to Tax imposed by a Taxing Authority in connection with such Taxes) on Operator’s interests in the Assets, other than Permitted Encumbrances.

(d) Operator has not received any written notice of any pending claim (which remains outstanding) from any applicable Taxing Authority for assessment of Asset Taxes and no such claim has been made or threatened.

(e) No audit, administrative, judicial or other proceeding with respect to Asset Taxes with respect to Operator’s interests in the Assets has been commenced or is presently pending.

(f) Notwithstanding any provision in this Agreement to the contrary, this Section 7.8 shall be the exclusive representations and warranties of Operator with respect to Tax Laws and other tax matters, and no other representations or warranties are made with respect to such matters.

7.9 Title . Except as shown in Schedule 7.9 , Operator has such right, title and interest in and to its interests in the Leases and Wells that as of Closing, subject to the Permitted Encumbrances, is free and clear of all Encumbrances.

7.10 No Violation of Laws . To Operator’s Knowledge, except as set forth in Schedule 7.10 , as of the Execution Date, Operator is not in violation of any applicable Laws with respect to its ownership of, and the operation of, the Assets. This Section 7.10 does not include any matters with respect to any environmental matter, such matters being addressed exclusively in Section 7.17 or any Tax matter, such matters being addressed exclusively in Section 7.8 .

7.11 Litigation . Except as set forth in Schedule 7.11 , as of the Execution Date, there is no Legal Proceeding pending, or to Operator’s Knowledge threatened in writing, against any Seller with respect to the Assets.

7.12 Material Contracts.

(a) Schedule 7.12(a) sets forth all Applicable Contracts of the types described below to which any Seller is a party as of the Execution Date (collectively, the “ Material Contracts ”):

(i) any Applicable Contract that can reasonably be expected to result in aggregate payments by Sellers (in the aggregate) of more than $100,000 during any twelve month period from and after January 1, 2016 (based solely on the terms thereof and without regard to any expected increase in volumes or revenues);

(ii) any Applicable Contract that can reasonably be expected to result in aggregate revenues to the Sellers (in the aggregate) of more than $100,000 during any twelve month period from and after January 1, 2016 (based solely on the terms thereof and without regard to any expected increase in volumes or revenues);

(iii) any Applicable Contract that is an Hydrocarbon purchase and sale, transportation, processing or similar Contract that is not terminable without penalty on 90 days or less notice;

(iv) any Applicable Contract that is an indenture, mortgage, loan, credit or sale-leaseback or similar Contract;

(v) any Applicable Contract that is an Hedge Contract;

(vi) any Applicable Contract that is or creates any partnership or joint venture;

(vii) any Applicable Contract that (A) is with a Seller or an Affiliate of a Seller or (B) that is a security interest, indenture, mortgage, loan, credit or sale-leaseback or similar Contract, in each case, that will not be terminated prior to or at Closing; and

(viii) any Applicable Contract that is a lease or title retention agreement, affecting any of the Assets.

(b) Except as shown in Schedule 7.12(b) , as of the Execution Date (i) there exist no material defaults under any Material Contract by any Seller or, to Operator’s Knowledge, by any other Person that is a party to such Material Contract and (ii) to Operator’s Knowledge, no party to any of the Material Contracts has given written notice of any material default under any Material Contract. Prior to the execution of this Agreement, Operator has made available to Buyer copies of each Material Contract.

7.13 Transfer Restrictions . Except as shown in Schedule 7.13 , there are no preferential rights to purchase relating to the Assets or that are applicable to the consummation by Sellers of the transactions contemplated hereby. Except for (a) as shown in Schedule 7.13 , (b) Customary Post-Closing Consents, (c) any consent required in connection with obtaining the release of any mortgages, financing statements, fixture filings, security agreements or pledges made by a Seller or its Affiliates affecting the Assets that will be released or terminated at Closing, (d) Contracts that are terminable upon not greater than 90 days’ notice without payment of any fee and (e) notices to co-owners, operators and purchasers of production that are customarily delivered after Closing, there are no prohibitions on assignment or requirements to obtain consents from Non-Parties, in each case, that would be applicable in connection with the transfer of the Assets by Sellers.

7.14 Royalties . Except for such items that are being held in suspense as permitted pursuant to applicable Law or Contract, to Operator’s Knowledge, Operator has paid (or caused to be paid) all royalties due with respect to the Assets as would a reasonably prudent owner, or, if not paid, is contesting such royalties in good faith in the normal course of business.

7.15 Imbalances . Schedule 7.15 sets forth all material Imbalances associated with the Assets as of October 1, 2016.

7.16 Current Commitments . To Operator’s Knowledge, Schedule 7.16 sets forth, as of March 1, 2016, all authorities for expenditures (“ AFEs ”) relating to the Assets that cover amounts in excess of $50,000 (net to Sellers’ collective interest) and relate to the drilling or reworking wells or other material capital expenditures pursuant to any applicable joint operating agreement, in each case, for which all of the activities anticipated in such AFEs have not been completed by the Execution Date.

7.17 Environmental . Operator has made available to Buyer the E.Vironment Group Report. Except as shown in Schedule 7.17 or as set forth in the E.Vironment Group Report:

(a) no Seller has entered into nor is a party (directly or as successor in interest) to, any agreement with, or consent, order, decree or judgment of, any Governmental Authority that (i) is in existence as of the Execution Date, (ii) is based on any Environmental Laws that relate to the future use of any of the Assets and (iii) requires any remediation or change in the existing conditions of any of the Assets;

(b) as of the Execution Date, to Operator’s Knowledge, no Seller has received written notice from any Person of any actual or alleged event, condition, practice or incident concerning any Asset that (i) interferes with or prevents compliance by any Seller with any Environmental Law or the terms of any permit issued pursuant thereto or (ii) results in any liability of any Seller to any Person under any Environmental Law; and

(c) except as would not reasonably be expected to have a Material Adverse Effect, as of the Execution Date, to Operator’s Knowledge, there is no Environmental Condition with respect to the Assets.

Notwithstanding any provision in this Agreement to the contrary, this Section 7.17 shall be the exclusive representations and warranties of Sellers with respect to Environmental Laws and other environmental matters, and no other representations or warranties are made with respect to such matters.

7.18 Permits and Licenses. With respect to any of the Assets for which Operator is the operator, Operator (i) has acquired all permits, licenses, approvals and consents from appropriate Governmental Authorities to conduct operations on the Assets in material compliance with applicable Laws, and (ii) is in material compliance with all such permits, licenses, approvals and consents. To the Knowledge of Operator, with respect to any of the Assets not operated by Operator, the operator thereof (x) has acquired all permits, licenses, approvals and consents from appropriate Governmental Authorities to conduct operations on the Assets in compliance with applicable Laws, and (y) is in material compliance with all such permits, licenses, approvals and consents.

7.19 Subsequent Events . Since the Effective Time:

(a) to Operator’s Knowledge, there has not been any destruction, damage to, or loss of any Assets that (after giving effect to any insurance coverage with regard thereto), would have a Material Adverse Effect on the value of Assets; and

(b) there has not been any sale or other disposition of any of the Assets except in the ordinary course of business.

7.20 Current Bonds . Schedule 7.20 lists all bonds, letters of credit and other similar instruments maintained by any Seller or any of their respective Affiliates with respect to the Assets.

7.21 Plugging and Abandonment Obligations . No Seller is currently obligated by the Consent Order (or by any written instruction of a Governmental Authority) to plug and abandon any of the Wells. With respect to the Wells that have been plugged and abandoned, all such Wells have been plugged or reclaimed in accordance with all applicable requirements of each Governmental Authority having jurisdiction over the Assets.

Article 8

BUYER’S REPRESENTATIONS AND WARRANTIES

Buyer represents and warrants to Sellers the following as of the Execution Date:

8.1 Organization and Good Standing . Buyer is a limited liability company duly formed, validly existing and in good standing under the Laws of the state of its formation and has all requisite corporate power and authority to own and operate the Assets. Buyer is duly licensed or qualified (i) to hold and operate the Assets in all jurisdictions in which the Assets are located and (ii) to do business in all jurisdictions in which the Assets are located and where required by Law.

8.2 Authority; Authorization of Agreement . Buyer has all requisite corporate power and authority to execute and deliver this Agreement and the Transaction Documents to which it is a party, to consummate the transactions contemplated by this Agreement and the Transaction Documents to which it is a party and to perform all of its obligations under this Agreement and the Transaction Documents to which it is a party. This Agreement constitutes, and the Transaction Documents to which it is a party, when executed and delivered by Buyer, shall constitute, the valid and binding obligation of Buyer, enforceable against it in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency or other Laws relating to or affecting the enforcement of creditors’ rights and general principles of equity (regardless of whether such enforceability is considered in a proceeding at Law or in equity).

8.3 No Violations . Buyer’s execution and delivery of this Agreement and the Transaction Documents to which it is a party and Buyer’s consummation of the transactions contemplated hereby and thereby shall not: (a) conflict with or require the consent of any Person under any of the terms, conditions or provisions of the organizational documents of Buyer; (b) violate any provision of, or require any filing, consent or approval under, any Laws applicable to Buyer; (c) result in the creation or imposition of any Encumbrance (other than a Permitted Encumbrance); or (d) conflict with, result in a breach of, constitute a default under or constitute an event that with notice or lapse of time, or both, would constitute a default under, accelerate or permit the acceleration of the performance required by, or require any consent, authorization or approval under any material agreement or any mortgage, indenture, loan, credit agreement or other agreement evidencing indebtedness for borrowed money to which Buyer is a party or by which Buyer is bound, except (in each case) where such conflict, breach or default would make impossible the consummation of the transactions contemplated hereby by Buyer.

8.4 SEC Disclosure . Buyer is acquiring the Assets for its own account for use in its trade or business and not with a view toward any sale or distribution thereof, or with any present intention of making a distribution thereof within the meaning of the Securities Act of 1933, as amended, and the rules and regulations thereunder, any applicable state “blue sky” Laws or other applicable securities Laws.

8.5 Independent Evaluation . Buyer is sophisticated in the evaluation, purchase, ownership and operation of oil and gas properties and related facilities. In making its decision to enter into this Agreement and to consummate the transaction contemplated herein, subject to the express representations of BG Seller and EXCO Seller set forth in Article 6 and Operator in Article 7 , Buyer (a) has relied or shall rely solely on its own independent investigation and evaluation of the Assets and the express provisions of this Agreement and (b) has satisfied or shall satisfy itself as to the environmental and physical condition of and contractual arrangements affecting the Assets. As of the Execution Date, Buyer has no Knowledge of any fact that results in the breach of any representation, warranty or covenant of a Seller given hereunder.

8.6 Financing . Buyer has, as of the Closing, sufficient funds with which to pay the Purchase Price and consummate the transactions contemplated by this Agreement. There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by or, to Buyer’s Knowledge, threatened against Buyer or its Affiliates.

8.7 Brokers’ Fees . Buyer has incurred no liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement or the Transaction Documents for which Sellers or any Affiliate of Sellers shall have any responsibility.

8.8 Anti-Bribery . In relation to the transactions the subject of this Agreement, none of Buyer and any of its Affiliates has made, offered or authorized or will make, offer or authorize any payment, gift, promise or other advantage, whether directly or through any other person or entity, to or for the use or benefit of any Government Official or any entity or other person where such payment, gift, promise or other advantage would (i) comprise an unlawful gratuity, facilitation payment or other benefit prohibited by Anti-Bribery and Money-Laundering Laws and Obligations; or (ii) violate the Anti-Bribery and Money-Laundering Laws and Obligations or any other applicable Law.

Article 9

CERTAIN COVENANTS

9.1 Names . As soon as reasonably possible after the Closing, but in no event later than 90 days after Closing, Buyer shall remove the names and other identifying marks of Sellers and their Affiliates, including “BG” or “EXCO” and all variations thereof, from the Assets. As soon as reasonably possible after the Closing, Buyer shall make the requisite filings with, and provide the requisite notices to, the appropriate Governmental Authorities to accomplish the forgoing and to place the title or other indicia of ownership of the Assets in a name other than any name of Sellers or any of their Affiliates, or any variations thereof.

9.2 Tax Matters .

(a) All required stamp, documentary, filing and recording fees and expenses in connection with the filing and recording of the assignments (including the Assignments), conveyances or other instruments required to convey title to the Assets to Buyer shall be borne by Buyer. Sellers shall assume responsibility for, and shall bear and pay, all income Tax liabilities and franchise Tax liabilities incurred or imposed on Sellers with respect to the ownership of the Assets through the Closing and the transactions described in this Agreement. Sellers shall bear and pay all state transfer, well transfer and similar Taxes (including any applicable interest or penalties) incurred or imposed with respect to the transactions described in this Agreement. Buyer shall assume responsibility for, and shall bear and pay, state sales and use and similar Taxes (including any applicable interest or penalties) incurred or imposed with respect to the transactions described in this Agreement (the “ Sales Taxes ”). Sellers shall assume responsibility for, and shall bear and pay, all Asset Taxes assessed with respect to the ownership and operation of the Assets for (i) any period ending prior to the Effective Time, and (ii) the portion of any Straddle Period ending immediately prior to the Effective Time. All Asset Taxes with respect to the ownership or operation of the Assets arising on or after the Effective Time (including all Straddle Period Asset Taxes not apportioned to Sellers) shall be allocated to and borne by Buyer. Upon determination of the actual amount of Asset Taxes, payments will be made to the extent necessary to cause the appropriate Party to bear the Asset Taxes allocable to such Person under this Section 9.2(a) . For purposes of allocation between the Parties of Asset Taxes that are payable with respect to Straddle Periods, the portion of any such Taxes that are attributable to the portion of the Straddle Period that ends immediately prior to the Effective Time shall (A) in the case of Taxes that are based upon or related to income or receipts or imposed on a transactional basis, be deemed equal to the amount that would be payable if the Tax year or period ended immediately prior to the Effective Time; and (B) in the case of other Taxes, be allocated pro rata per day between the period immediately prior to the Effective Time and the period beginning on the Effective Time. For purposes of clause (A) of the preceding sentence, any exemption, deduction, credit or other item that is calculated on an annual basis shall be allocated pro rata per day between the period ending immediately prior to the Effective Time and the period beginning on the Effective Time.

(b) Sellers shall timely file any Tax Return with respect to Asset Taxes due on or before the Closing or that otherwise relates solely to periods before the Closing (a “ Pre-Closing Tax Return ”) and shall pay any Asset Taxes shown due and owing on such Pre-Closing Tax Return, subject to Sellers’ right of reimbursement for any Asset Taxes for which Buyer is responsible under Section 9.2(a) . Within 15 days prior to filing, Sellers shall deliver to Buyer a draft of any such Pre-Closing Tax Return for Buyer’s review and approval (which approval will not be unreasonably withheld or delayed).

(c) The Parties shall cooperate fully, as and to the extent reasonably in connection with the filing of any Tax Returns, state and federal regulatory reports, royalty payments including related deduction and any audit, litigation or other proceeding with respect to these matters for the Assets. Such cooperation shall include the retention of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Buyer agrees to allow access (upon request) to the Assets by Sellers, Seller representatives, auditors and State or Federal representatives relevant to any such audit, litigation or other proceeding.

(d) Sellers and Buyer agree that any payments made pursuant to Section 3.3 , Section 3.4 , Section 3.6 , this Section 9.2 or Article 10 shall be treated for all Tax purposes as an adjustment to the Purchase Price unless otherwise required by Law.

9.3 Records . Within 30 days after the Closing (except as provided below), Sellers shall furnish to Buyer the Records that are maintained by Sellers or their Affiliates; provided, however, Sellers may retain copies of any or all Records. Sellers will provide to Buyer (upon reasonable notice and during normal business hours) access in Sellers’ offices to any copies of the Records retained by Sellers. Buyer shall maintain the Records it acquires for a period of seven years after Closing and shall afford Sellers full access to the Records as reasonably requested by Sellers. If Buyer desires to destroy any Records within such seven year period, Buyer shall notify Sellers in writing prior to such destruction and provide Sellers the opportunity to take possession of the same at Sellers’ sole cost.

9.4 Transfer Restrictions .

(a) Prior to Closing, Sellers have sent to each holder of a right to consent to the transactions contemplated pursuant to this Agreement set forth on Schedule 7.13 a notice seeking such holder’s consent to, or waiver of applicable rights with respect to, the transactions contemplated hereby.

(i) If Sellers have failed to obtain prior to the Closing a consent to the assignment of any Asset(s) set forth in Schedule 9.4 , which Assets are subject to a Hard Consent, then (A) such Asset(s) shall be excluded from the Assets assigned to Buyer at Closing, (B) such Asset(s) shall not be considered part of the Assets for all other purposes of this Agreement, and (C) the Purchase Price shall be reduced as a result of such non-conveyance by the Allocated Value of such Asset(s).

(ii) In the event that a Hard Consent (with respect to any applicable Asset(s) excluded from the conveyance to Buyer at Closing pursuant to Section 9.4(a)(i) ) that was not obtained prior to Closing is obtained within 180 days following Closing, then, within 10 days after such Hard Consent is obtained, (A) Sellers shall assign to Buyer such affected Asset(s) pursuant to an assignment in form substantially similar to the applicable Assignment; (B) Buyer shall pay an amount equal to the Allocated Value of such Asset to Sellers; and (C) such affected Asset shall be considered part of the Assets for all other purposes of this Agreement.

(iii) If Sellers have failed to obtain a consent set forth in Schedule 7.13 that is not a Hard Consent prior to the Closing, then (A) the Asset(s) subject to such un-obtained consent shall be acquired by Buyer at Closing as part of the Assets, (B) Sellers shall indemnify and hold harmless Buyer from any Claim for, the failure to obtain such consent, and (C) Sellers shall be solely responsible from and after the Closing for any and all Claims arising from the failure to obtain such consent.

(b) Prior to Closing, Sellers have sent to each holder of a preferential right to purchase provisions relative to any Asset (“ PPR ”) set forth on Schedule 7.13 a notice seeking such holder’s waiver of such PPR.

(i) If, as of the Closing, a Non-Party holder of a PPR has timely and properly notified Sellers that it elects to exercise its PPR with respect to the Assets to which its PPR applies (determined by and in accordance with the agreement in which the PPR arises), then (A) the Assets covered by that PPR will be sold to such holder of the PPR, will be deemed to be Excluded Assets and, subject to Section 9.4(b)(ii) and will not be sold to the Party originally executing this Agreement as “Buyer” and (B) the Purchase Price will be reduced by the Allocated Value of such Assets. Buyer shall remain obligated to purchase the remainder of the Assets not affected by an exercised PPR.

(ii) For a period of 90 days after the Closing, if for any reason the purchase and sale of the Assets covered by a PPR exercised prior to Closing under Section 9.4(b)(i) is not or cannot be consummated with the holder of the PPR that exercised its PPR, Sellers shall so notify Buyer and within 10 Business Days after Buyer’s receipt of such notice, Sellers shall sell, assign and convey to Buyer (pursuant to a form of assignment substantially similar to the applicable Assignment) and Buyer shall purchase and accept from Sellers such Assets pursuant to the terms of this Agreement and for the Allocated Value of such Assets (except the Closing with respect to such Assets will be the date of assignment of such Assets from Sellers to Buyer).

(iii) Any interest in the Assets that is covered by any unexercised PPRs for which the PPR exercise period has not expired as of Closing shall be included in the Assets assigned to Buyer at Closing subject to any PPRs, and Buyer shall assume all duties, obligations and liabilities arising from the PPR. Without limiting the foregoing, if any Non-Party elects to purchase all or a part of an interest in any Asset subject to a PPR after the Closing, Buyer shall be obligated to convey that interest to that Non-Party and shall be entitled to the consideration for the sale of that interest.

(c) Subject to the consummation of the transactions contemplated hereby, each of BG Seller, EXCO Seller and Operator, in each case, on its own behalf and on behalf of its Affiliates, hereby waives all transfer restrictions (if any) set forth in that certain Joint Development Agreement by and among BG Seller, EXCO Seller, BG Production Company (PA), LLC, a Delaware limited liability company, EXCO Production Company (PA), LLC, a Delaware limited liability company, and Operator, dated as of June 1, 2010, as amended from time to time (the “ JDA ”), that may be applicable to the transfer of the Assets. Effective as of Closing, each of BG Seller, EXCO Seller and Operator, in each case, on its own behalf and on behalf of its Affiliates, hereby releases its interest in the Assets from any and all obligations that may be applicable under the JDA to the Assets.

9.5 Cooperation with Audits . Following Closing through the date that is two years after Closing, Sellers shall fully cooperate with Buyer and its Affiliates in connection with any revenue and direct operating expense audit of Buyer and its Affiliates to the extent related to the Assets in 2014, 2015 and 2016, provided that any non-Party expenses incurred by Sellers or Buyer in connection with any such audit shall be the sole responsibility of Buyer. For the avoidance of doubt, this Section 9.5 does not apply to, and Sellers shall not be required to assist Buyer with, the preparation of any financial statements, including those that may be required in connection with filings and/or disclosures to be made with the United States Securities and Exchange Commission.

9.6 Data Privacy. The agreement of the Parties concerning certain data privacy matters is attached hereto as Exhibit F .

Article 10

ALLOCATION OF RESPONSIBILITIES AND INDEMNITIES

10.1 Buyer Acknowledgement of Obligations . Without limiting Sellers’ obligations to indemnify Buyer Group pursuant to Section 10.2 , Buyer assumes and hereby agrees to fulfill, perform, pay and discharge (or cause to be fulfilled, performed, paid and discharged) all obligations and Claims, known or unknown, with respect to the Assets, regardless of whether such obligations or Claims arose prior to, on or after the Effective Time, including obligations and Claims relating in any manner to the use, ownership or operation of the Assets, including obligations to (a) furnish makeup gas and/or settle Imbalances according to the terms of applicable gas sales, processing, gathering or transportation Applicable Contracts included in the Assets, (b) pay working interests, royalties, overriding royalties and other interests, owners’ revenues or proceeds attributable to sales of Hydrocarbons, including those held in suspense to the extent attributable to the Assets, (c) properly plug and abandon any and all wells and pipelines, inactive wells or temporarily abandoned wells, drilled on the Assets, (d) to re-plug any well, wellbore or previously plugged Well on the Assets to the extent required or necessary under applicable Laws or under Applicable Contracts, (e) dismantle or decommission and remove any Personal Property and other property of whatever kind located on the Assets related to or associated with operations and activities conducted by whomever on the Assets, (f) clean up and/or remediate the Assets in accordance with any Applicable Contracts and applicable Laws, including all Environmental Laws and (g) perform all obligations applicable to or imposed on the lessee, owner, or operator under the Leases and the Applicable Contracts, or as required by Laws (all of said obligations and Claims herein being referred to as the “ Assumed Obligations ”).

10.2 Sellers’ Indemnity Obligation . Effective from and after the Closing, and subject to the limitations set forth in Section 10.4 ,

(a) BG Seller hereby defends, indemnifies and holds Buyer Group harmless from and against any and all Claims arising out of, resulting from or relating to any breach by BG Seller of (i) BG Seller’s representations and warranties set forth in Article 6 or (ii) BG Seller’s covenants in this Agreement;

(b) EXCO Seller hereby defends, indemnifies and holds Buyer Group harmless from and against any and all Claims arising out of, resulting from or relating to any breach by EXCO Seller of (i) EXCO Seller’s representations and warranties set forth in Article 6 or (ii) EXCO Seller’s covenants in this Agreement;

(c) EXCO Seller and BG Seller (severally according to each Party’s proportionate ownership in Operator, and not jointly) hereby defend, indemnify and hold Buyer Group harmless from and against any and all Claims arising out of, resulting from or relating to any breach by Operator of (i) Operator’s representations and warranties set forth in Article 7 or (ii) Operator’s covenants in this Agreement; and

(d) EXCO Seller and BG Seller (severally according to each Party’s proportionate ownership in Operator, and not jointly) hereby defend, indemnify and hold Buyer Group harmless from and against any and all Claims arising out of, resulting from or relating to the Specified Obligations.

In no event shall Sellers have any obligation to provide indemnification for any matters to the extent adjustments therefor are taken into account in the Preliminary Settlement Statement or the Final Settlement Statement. For the avoidance of doubt, (x) BG Seller shall have no liability to Buyer for EXCO Seller’s representations and warranties set forth in Article 6 or EXCO Seller’s covenants in this Agreement and (y) EXCO Seller shall have no liability to Buyer for BG Seller’s representations and warranties set forth in Article 6 or BG Seller’s covenants in this Agreement.

10.3 Buyer’s Indemnity Obligation . From and after the Closing, Buyer hereby releases, defends, indemnifies and holds Seller Group harmless from and against any and all Claims arising out of, resulting from or relating to:

(a) any breach by Buyer of (i) Buyer’s representations and warranties set forth in Article 8 or (ii) Buyer’s covenants in this Agreement; and/or

(b) any of the Assumed Obligations.

10.4 Survival, Claim Periods, Threshold, Deductible and Cap .

(a) The representations and warranties (other than the Fundamental Representations) of (i) the BG Seller and EXCO Seller in Article 6 and (ii) Operator in Article 7 shall, in each case, survive Closing for a period of twelve months. The Fundamental Representations shall survive Closing without time limit. The representations and warranties of Buyer in Article 8 shall survive Closing without time limit.

(b) Except for those covenants and agreements of Sellers set forth in (i) Section 9.2 (which covenants and agreements shall survive the Closing for the applicable statute of limitations), (ii) set forth in Section 10.2(a) , Section 10.2(b) and Section 10.2(c) (which covenants and agreements, in each case, shall terminate as of the termination date of each respective representation, warranty, covenant or agreement that is subject to indemnification), and (iii) set forth in Sections 9.4 and 10.2(d) (which covenants and agreements shall survive the Closing for 24 months), the covenants and agreements of Sellers contained herein shall survive the Closing for a period of twelve months. Except for those covenants and agreements of Buyer set forth in Section 10.3(a) (which covenants and agreements shall terminate as of the termination date of each respective representation, warranty, covenant or agreement that is subject to indemnification), the covenants of Buyer shall survive Closing without time limit.

(c) Representations, warranties, covenants and agreements shall be of no further force and effect after the date of their expiration; provided that there shall be no termination of any bona fide claim asserted pursuant to this Agreement with respect to such a representation, warranty, covenant or agreement prior to its expiration date.

(d) A Seller shall not have any obligation or liability under Section 10.2 (other than with respect to a breach of the Fundamental Representations) for any Claim asserted by Buyer hereunder,

(i) subject to Section 10.5(b) , if Buyer has not provided such Seller with a Claim Notice on or before the expiration of the applicable survival period set forth in Section 10.4(a) or Section 10.4(b) with respect to such Claim;

(ii) if such Claim has a value of $25 ,000 or less (the “ Threshold Amount ”) (and these types of Claims shall not be counted in determining whether the Indemnity Deductible has been reached);

(iii) unless the aggregate amount of all Claims validly asserted by Buyer hereunder against such Seller that are in excess of the Threshold Amount are in excess of 1% of the Closing Amount paid to such Seller (the “ Indemnity Deductible ”) and then such Seller shall only be liable to Buyer to the extent such Claims are in excess of the Indemnity Deductible; or

(iv) to the extent such Claim is, individually or in the aggregate with all other Claims validly asserted by Buyer hereunder against such Seller, in excess of 10% of the Closing Amount paid to such Seller.

10.5 Notice of Claims . All claims for indemnification under Section 10.2 and Section 10.3 shall be asserted and resolved as follows:

(a) For purposes of this Article 10 , the term “ Indemnifying Party ” when used in connection with particular Claims shall mean the Part(ies) having an obligation to indemnify another Part(ies) or Person(s) with respect to such Claims pursuant to this Article 10 , as applicable, and the term “ Indemnified Party ” when used in connection with particular Claims shall mean the Part(ies) or Person(s) having the right to be indemnified with respect to such Claims by another Party pursuant to this Article 10 , as applicable.

(b) To make claim for indemnification under Section 10.2 or Section 10.3 , an Indemnified Party shall notify the Indemnifying Party of its claim under this Section 10.5 , including the specific details of and specific basis under this Agreement for its claim (the “ Claim Notice ”). In the event that the claim for indemnification is based upon an inaccuracy or breach of a representation, warranty, covenant or agreement, the Claim Notice shall specify the representation, warranty, covenant or agreement that was inaccurate or breached. In the event that the claim for indemnification is based upon a claim by a Non-Party against the Indemnified Party (a “ Non-Party Claim ”), the Indemnified Party shall provide its Claim Notice promptly after the Indemnified Party has actual knowledge of the Non-Party Claim and shall enclose a copy of all papers (if any) served with respect to the Non-Party Claim; provided that the failure of any Indemnified Party to give notice of a Non-Party Claim as provided in this Section 10.5 shall not relieve the Indemnifying Party of its obligations under Section 10.2 or Section 10.3 , as applicable, except to the extent such failure results in insufficient time being available to permit the Indemnifying Party to effectively defend against the Non-Party Claim or otherwise materially prejudices the Indemnifying Party’s ability to defend against the Non-Party Claim.

(c) The Indemnified Party is authorized, following notice to the Indemnifying Party of a Non-Party Claim but prior to the assumption of the defense of such Non-Party Claim by the Indemnifying Party, at the expense of the Indemnifying Party, to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party and that is not prejudicial to the Indemnifying Party.

(d) If the Indemnifying Party shall have assumed the defense of the Non-Party Claim, the Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof. If requested by the Indemnifying Party, the Indemnified Party shall cooperate in contesting any Non-Party Claim that the Indemnifying Party elects to contest. The Indemnified Party may participate in, at its own expense, but subject to the Indemnifying Party’s full control of, any defense or settlement of any Non-Party Claim controlled by the Indemnifying Party pursuant to this Section 10.5(d) ; provided, however, that the Indemnified Party shall not be required to bring any counterclaim or cross complaint against any Person. An Indemnifying Party shall not, without the written consent of the Indemnified Party, (i) settle any Non-Party Claim or consent to the entry of any judgment with respect thereto that does not include an unconditional written release of the Indemnified Party from all Claims in respect of such Non-Party Claim or (ii) settle any Non-Party Claim or consent to the entry of any judgment with respect thereto in any manner that may materially and adversely affect the Indemnified Party (other than as a result of money damages covered by the indemnity).

(e) If the Indemnifying Party does not admit its liability, then the Indemnified Party shall have the right to defend against the Non-Party Claim at the sole cost and expense of the Indemnifying Party, with counsel of its choosing, subject to the right of the Indemnifying Party to admit its liability and assume the defense of the Non-Party Claim at any time prior to settlement or final determination thereof. Any settlement of the Non-Party Claim by the Indemnified Party shall require the consent of the Indemnifying Party (which shall not be unreasonably withheld, conditioned or delayed), unless the settlement is solely for money damages and results in a final resolution.

(f) In the case of a claim for indemnification not based upon a Non-Party Claim, the Indemnifying Party shall (i) cure the Claims complained of, (ii) admit its liability for such Claim or (iii) dispute the claim for such Claims.

10.6 Waiver of Certain Damages . NO MEMBER OF THE BUYER GROUP OR SELLER GROUP SHALL BE ENTITLED TO RECOVER FROM SELLERS OR BUYER, OR THEIR RESPECTIVE AFFILIATES, ANY INDIRECT, CONSEQUENTIAL, PUNITIVE, EXEMPLARY, REMOTE OR SPECULATIVE DAMAGES OR DAMAGES FOR LOST PROFITS OF ANY KIND, IN EACH CASE, ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, EXCEPT TO THE EXTENT ANY SUCH PARTY SUFFERS SUCH DAMAGES TO A NON-PARTY, WHICH DAMAGES (INCLUDING COSTS OF DEFENSE AND REASONABLE ATTORNEY FEES INCURRED IN CONNECTION WITH DEFENDING AGAINST SUCH DAMAGES) SHALL NOT BE EXCLUDED BY THIS PROVISION AS TO RECOVERY HEREUNDER. SUBJECT TO THE PRECEDING SENTENCE, BUYER, ON BEHALF OF EACH MEMBER OF THE BUYER GROUP, AND SELLERS, ON BEHALF OF EACH MEMBER OF THE SELLER GROUP, WAIVE ANY RIGHT TO RECOVER PUNITIVE, SPECIAL, INDIRECT, EXEMPLARY, CONSEQUENTIAL DAMAGES, REMOTE OR SPECULATIVE OR DAMAGES FOR LOST PROFITS OF ANY KIND, ARISING IN CONNECTION WITH OR WITH RESPECT TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

10.7 Exclusive Remedy . Notwithstanding anything to the contrary contained in this Agreement, except with respect to Sellers’ and Buyer’s rights and remedies at Law or in equity for any breach of the provisions of Section 9.2 , from and after Closing, Section 10.2 and Section 10.3 contain the Parties’ exclusive remedies against each other or each Party’s Affiliates with respect to the transactions contemplated hereby, including any breaches of the representations, warranties, covenants and agreements of the Parties contained in this Agreement. Except for the remedies contained in Section 10.2 and Section 10.3 and the rights and remedies at Law or in equity of Sellers and Buyer for any breach of the provisions of Section 9.2 , from and after Closing, Buyer (on its own behalf and on behalf of the other members of the Buyer Group) releases, remises and forever discharges Sellers and their Affiliates and all of the other members of the Seller Group from any and all Claims in Law or in equity, known or unknown, that any member of the Buyer Group might now or subsequently may have, based on, relating to or arising out of this Agreement or the transactions contemplated hereby, the ownership, use or operation of the Assets, or the condition, quality, status or nature of the Assets, including rights to contribution under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, breaches of statutory or implied warranties, nuisance or other tort actions, rights to punitive damages, common law rights of contribution and rights under insurance maintained by Sellers or any of their Affiliates.

10.8 Express Negligence . THE INDEMNIFICATION, RELEASE, ASSUMED OBLIGATIONS, WAIVER AND LIMITATION OF LIABILITY PROVISIONS PROVIDED FOR IN THIS AGREEMENT SHALL BE APPLICABLE WHETHER OR NOT THE CLAIMS, LIABILITIES, LOSSES, COSTS, EXPENSES AND DAMAGES IN QUESTION AROSE OR RESULTED SOLELY OR IN PART FROM THE GROSS, SOLE, ACTIVE, PASSIVE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OR VIOLATION OF LAW OF OR BY ANY INDEMNIFIED PARTY. BUYER AND SELLERS ACKNOWLEDGE THAT THIS STATEMENT COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND IS CONSPICUOUS.

10.9 Waiver of Right of Rescission . Sellers and Buyer acknowledge that, subject to any express rights Sellers and Buyer may have hereunder to seek and obtain equitable remedies for any breach of the provisions of Section 9.2 , following Closing, the payment of money, as limited by the terms of this Agreement, shall be adequate compensation for breach of any representation, warranty, covenant or agreement contained herein or for any other claim arising in connection with or with respect to the transactions contemplated by this Agreement. As such, Buyer and Sellers waive any right to rescind this Agreement or any of the transactions contemplated hereby.

10.10 Insurance . The amount of any Claims for which any Indemnified Party is entitled to indemnification under this Agreement or in connection with or with respect to the transactions contemplated by this Agreement shall be reduced by any corresponding insurance proceeds, from insurance policies carried by such Indemnified Party or its Affiliates, that are realized by such Indemnified Party from Non-Party insurers with respect to such Claims.

Article 11

MISCELLANEOUS

11.1 Notices . All notices and communications to be given to a Party hereunder shall be in writing and shall be deemed to have been duly given upon the earliest of: (a) if by personal delivery, then the date of delivery if such date is a Business Day during normal business hours, or, if such date is not a Business Day during normal business hours, then the next Business Day, (b) if sent by U.S. certified mail, postage prepaid, return receipt requested, then the date shown as received on the return notice, (c) if by facsimile transmission (with a copy of such notice or other communication also delivered by electronic mail), then upon written confirmation of receipt or (d) if by Federal Express overnight delivery (or other reputable overnight delivery service), the date shown on the notice of delivery if such date is a Business Day during normal business hours, or, if such date is not a Business Day during normal business hours, then on the next Business Day:

If to Sellers:

BG Production Company (WV), LLC

12377 Merit Drive

Dallas, Texas 75251

Attn: Asset General Manager, US Lower 48

Fax: 713-599-3794

EXCO Production Company (WV), LLC

12377 Merit Drive

Dallas, Texas 75251

Attn: General Counsel

Fax: 214-706-3409

EXCO Resources (PA) LLC

12377 Merit Drive

Dallas, Texas 75251

Attn: General Counsel

Fax: 214-706-3409

If to Buyer:

Nytis Exploration Company LLC

2480 Fortune Drive, Suite 300

Lexington, KY 40509

Attn: Mark Pierce

Fax: (859) 299-0772

Email: MPierce@NytisKy.com

With copies to:

Carbon Natural Gas Company

1700 Broadway

Suite 1170

Denver, CO 80290

Attn: Patrick R. McDonald

Fax: (720) 407-7031

Email: pmcdonald@carbonnaturalgas.com

The Parties may change the address and facsimile numbers to which such communications are to be addressed by giving written notice to the other Parties in the manner provided in this Section 11.1 .

11.2 Transaction Costs; Filing . Except as otherwise specifically provided, all fees, costs and expenses incurred by Sellers or Buyer in negotiating this Agreement or in consummating the transactions contemplated by this Agreement shall be paid by the Person incurring the same, including, legal and accounting fees, costs and expenses. Buyer shall be responsible for recording and filing documents associated with its acquisition of the Assets contemplated by this Agreement, including filing (a) the EXCO Assignment, BG Assignment and Operator Assignment in the real property records in the counties in which the Assets are located and with any applicable Governmental Authorities and (b) any notifications, forms or instruments with appropriate Governmental Authorities as may be required by applicable Law, including for the avoidance of doubt W. Va. Code R. §35-4-10, to transfer the ownership and/or operatorship of the Assets. As soon as practicable after recording or filing, Buyer shall furnish each Seller with all recording data and evidence of all required filings. Buyer shall also be responsible for obtaining Customary Post-Closing Consents applicable to the transaction contemplated hereunder and all costs and fees associated therewith.

11.3 Further Assurances . From and after Closing, at the request of any Party but without further consideration, the Parties shall execute and deliver or use reasonable efforts to cause to be executed and delivered such other instruments of conveyance and take such other actions as any Party reasonably may request to give effect to the transaction contemplated by this Agreement.

11.4 Amendments . No amendments or other modifications to this Agreement shall be effective or binding on any of the Parties unless the same are in writing, designated as an amendment or modification and signed by both Sellers and Buyer.

11.5 Successors and Assigns . This Agreement may not be assigned, either in whole or in part, without the express written consent of the non-assigning Part(ies). Any assignment in violation of the foregoing shall be deemed void ab initio . No assignment by any Party of this Agreement shall relieve such Party of any of its obligations and responsibilities hereunder. The terms, covenants and conditions contained in this Agreement are binding upon and inure to the benefit of Sellers and Buyer and their respective successors and permitted assigns.

11.6 Headings . The titles and headings set forth in this Agreement have been included solely for ease of reference and may not be considered in the interpretation or construction of this Agreement.

11.7 Governing Law . THIS AGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE State of Texas , EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER CONSTRUCTION OF SUCH PROVISIONS TO THE LAWS OF ANOTHER JURISDICTION. EACH OF THE PARTIES CONSENTS TO THE EXERCISE OF JURISDICTION IN PERSONAM BY THE UNITED STATES FEDERAL DISTRICT COURTS IN DALLAS COUNTY, TEXAS (AND ALL APPELLATE COURTS HAVING JURISDICTION THEREOVER) OR, IF SUCH FEDERAL DISTRICT COURTS DO NOT HAVE JURISDICTION, THEN THE STATE COURTS LOCATED IN DALLAS COUNTY, TEXAS (AND ALL APPELLATE COURTS HAVING JURISDICTION THEREOVER) FOR ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS or any transaction contemplated hereby or thereby. ALL SUCH ACTIONS, SUITS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS or any transaction contemplated hereby or thereby SHALL BE EXCLUSIVELY LITIGATED IN THE UNITED STATES FEDERAL DISTRICT COURTS IN DALLAS COUNTY, TEXAS (AND ALL APPELLATE COURTS HAVING JURISDICTION THEREOVER) OR, IF THE FEDERAL COURTS DO NOT HAVE JURISDICTION, THEN THE STATE COURTS LOCATED IN DALLAS COUNTY, TEXAS (AND ALL APPELLATE COURTS HAVING JURISDICTION THEREOVER). EACH PARTY WAIVES ANY OBJECTION TO LAYING VENUE IN ANY SUCH ACTION, SUIT OR PROCEEDING IN SUCH COURTS AND WAIVEs ANY OBJECTION THAT SUCH COURTS ARE AN INCONVENIENT FORUM OR DO NOT HAVE JURISDICTION OVER SUCH PARTY. EACH PARTY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, the other transaction documents or any transaction contemplated hereby or thereby.

11.8 No Partnership Created . It is not the purpose or intention of this Agreement to create (and it should not be construed as creating) a joint venture, partnership or any type of association, and the Parties are not authorized to act as an agent or principal for each other with respect to any matter related hereto.

11.9 Public Announcements . Sellers and Buyer and their respective Affiliates, if applicable, shall consult with each other with regard to all press releases or other public or private announcements issued or made at or prior to the Closing concerning this Agreement or the transactions contemplated herein, and, except as may be required by applicable Laws or the applicable rules and regulations of any Governmental Authority or stock exchange, neither Buyer nor any Sellers shall issue, and each of them shall not permit any Affiliate to issue, any such press release or other publicity without the prior written consent of the other Parties (other than Operator), which consent shall not be unreasonably withheld, conditioned or delayed.

11.10 Appendices, Exhibits and Schedules . All of the Appendices, Exhibits and Schedules hereto constitute a part of this Agreement for all purposes. Each Party to this Agreement and its counsel has received a complete set of Appendices, Exhibits and Schedules prior to and as of the execution of this Agreement.

11.11 No Third Party Beneficiaries . Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any Person other than the Parties, the Seller Group and the Buyer Group any rights, remedies, obligations or liabilities under or by reason of this Agreement; provided that only a Party shall have the right to enforce the provisions of this Agreement on its own behalf or on behalf of any of the other members of the Seller Group or Buyer Group, as applicable (but shall not be obligated to do so).

11.12 Construction . The Parties acknowledge that they have had an adequate opportunity to review each and every provision contained in this Agreement and to submit the same to legal counsel for review and comment. Moreover, the Parties have participated jointly in the negotiation and drafting of this Agreement. Based on the foregoing, the Parties agree that the rule of construction that a Contract be construed against the drafter, if any, not be applied in the interpretation or construction of this Agreement.

11.13 Execution in Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, all of which when taken together shall constitute one and the same agreement. Any signature hereto delivered by a Party by facsimile transmission or other electronic transmission shall be deemed an original signature hereto.

11.14 Entire Agreement; Conflicts . THIS AGREEMENT, THE EXHIBITS AND SCHEDULES HERETO AND THE TRANSACTION DOCUMENTS COLLECTIVELY CONSTITUTE THE ENTIRE AGREEMENT AMONG THE PARTIES PERTAINING TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ALL PRIOR AGREEMENTS, UNDERSTANDINGS, NEGOTIATIONS AND DISCUSSIONS, WHETHER ORAL OR WRITTEN, OF THE PARTIES PERTAINING TO THE SUBJECT MATTER of this Agreement. THERE ARE NO WARRANTIES, REPRESENTATIONS OR OTHER AGREEMENTS AMONG THE PARTIES RELATING TO THE SUBJECT MATTER of this Agreement EXCEPT AS specifically set FORTH IN THIS AGREEMENT and the transaction documents, AND no party SHALL BE BOUND BY OR LIABLE FOR ANY ALLEGED REPRESENTATION, PROMISE, INDUCEMENT OR STATEMENTS OF INTENTION NOT SO SET FORTH. IN THE EVENT OF A CONFLICT BETWEEN: (a) THE TERMS AND PROVISIONS OF THIS AGREEMENT AND THE TERMS AND PROVISIONS OF ANY SCHEDULE OR EXHIBIT HERETO, THE TERMS AND PROVISIONS OF THIS AGREEMENT SHALL GOVERN AND CONTROL; OR (b) the terms and provision of this Agreement and the terms and provisions of any transaction document, THE TERMS AND PROVISIONS OF THIS AGREEMENT SHALL GOVERN AND CONTROL; PROVIDED, HOWEVER, THAT THE INCLUSION IN ANY OF THE SCHEDULES OR EXHIBITS HERETO or any transaction document OF TERMS AND PROVISIONS NOT ADDRESSED IN THIS AGREEMENT SHALL NOT BE DEEMED A CONFLICT, AND ALL SUCH ADDITIONAL PROVISIONS SHALL BE GIVEN FULL FORCE AND EFFECT, SUBJECT TO THE PROVISIONS OF THIS SECTION 11.14 .

11.15 Waiver; Rights Cumulative . Any of the terms, covenants, representations, warranties or conditions hereof may be waived only by a written instrument executed by or on behalf of the Party waiving compliance. No course of dealing on the part of any Party, or their respective officers, employees, agents or representatives, and no failure by a Party to exercise any of its rights under this Agreement shall, in either case, operate as a waiver thereof or affect in any way the right of such Party at a later time to enforce the performance of such provision. No waiver by any Party of any condition or any breach of any term, covenant, representation or warranty contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of any breach of any other term, covenant, representation or warranty. The rights of the Parties under this Agreement shall be cumulative, and the exercise or partial exercise of any such right shall not preclude the exercise of any other right.

11.16 Severability . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any adverse manner to any Party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

11.17 Several Liability . For the avoidance of doubt the representations, warranties, covenants and agreements of each of the Sellers are several and not joint, and except as expressly provided in Section 10.2(c), no Seller shall have any liability for a breach by any other Seller of any of such other Seller’s representations, warranties, covenants and/or agreements.

[ Signature page follows ]

IN WITNESS WHEREOF, the Parties have executed this Agreement on the Execution Date.

	BG SELLER:

	BG PRODUCTION COMPANY (WV), LLC

	By:
	Name:	Michael Larimer
	Title:	Vice President – Operations

	EXCO SELLER:

	EXCO PRODUCTION COMPANY (WV), LLC

	By:
	Name:	Harold L. Hickey
	Title:	Chief Executive Officer & President

	OPERATOR:

	EXCO RESOURCES (PA) LLC

	By:
	Name:	Harold L. Hickey
	Title:	Chief Executive Officer & President

	BUYER:

	NYTIS EXPLORATION COMPANY LLC

	By:
	Name:
	Title:

Signature Page to Purchase and Sale Agreement

APPENDIX I

DEFINITIONS

Capitalized terms used herein and not otherwise defined shall have the meanings given such terms as set forth below.

“ AAA ” means the American Arbitration Association.

“ Accounting Referee ” means a nationally recognized United States based accounting firm as is mutually agreed upon by Sellers, on the one hand, and Buyer, on the other hand; provided such accounting firm shall not have served as an auditor or accountant of any of the Parties or their respective Affiliates for the preceding five (5) years.

“ Adjusted Purchase Price ” has the meaning set forth in Section 3.2 .

“ AFEs ” has the meaning set forth in Section 7.16 .

“ Affiliate ” means any Person that, directly or indirectly, through one or more entities, Controls or is Controlled by or is under common Control with the Person specified.

“ Agreement ” has the meaning set forth in the introductory paragraph.

“ Allocated Values ” has the meaning set forth in Section 3.7 .

“ Allocation ” has the meaning set forth in Section 3.8 .

“ Anti-Bribery and Money-Laundering Laws and Obligations ” means for each Party: (a) the Laws relating to combating bribery and corruption, and/or the principles described in the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, signed in Paris on December 17, 1997, which entered into force on February 15, 1999, and the Convention’s Commentaries; (b) the Laws relating to combating bribery, corruption and money laundering in the countries of such Party’s place of incorporation, principal place of business, and/or place of registration as an issuer of securities, and/or in the countries of such Party’s ultimate parent company’s place of incorporation, principal place of business, and/or place of registration as an issuer of securities; (c) the United States Foreign Corrupt Practices Act of 1977; (d) the United Kingdom Bribery Act 2010 (as amended from time to time); and (e) and all other applicable national, regional, provincial, state, municipal or local Laws and regulations that prohibit the bribery of, or the providing of unlawful gratuities, facilitation payments or other benefits to, any Government Official or any other Person.

“ Applicable Contracts ” shall mean all Contracts (a) to which any Seller is a party (or is a successor or assign of a party), (b) that pertain to any of the Assets, and (c) that will be binding on Buyer after the Closing other than any such Contracts that may be terminable without penalty on 30 days or less notice.

Appendix I - 1

“ Asset Taxes ” shall mean ad valorem, property, excise, severance, production or similar Taxes (including any interest, fine, penalty or additions to Tax imposed by a Governmental Authority in connection with such Taxes) based upon operation or ownership of the Assets or the production of Hydrocarbons therefrom but excluding, for the avoidance of doubt, (a) income, capital gains, franchise Taxes and similar Taxes, and (b) Sales Taxes.

“ Assets ” means, collectively, all of Sellers’ right, title and interest in and to the following, less and except the Excluded Assets:

(a) each of the oil, gas and mineral leases shown in Exhibit A-1 , in each case, INSOFAR AND ONLY INSOFAR, as Sellers’ interest in such leases cover or relate to the Conventional Depths (Sellers’ interest in such leases as limited to such depths, the “ Leases ”);

(b) all units or pooling arrangements wherein any Lease is pooled or unitized in each case, INSOFAR AND ONLY INSOFAR, as Sellers’ interest in such units or pooling arrangements cover or relate to the Conventional Depths (the “ Units ”);

(c) all oil and gas wells, fresh water wells, injection wells, salt water disposal wells and each other well of every nature and kind:

(i) located on the Leases or Units or otherwise located in the State of West Virginia, including those shown in Exhibit A-2(a) , INSOFAR AND ONLY INSOFAR, as Sellers’ interest in such wells cover or relate to the ownership or operation of the Conventional Depths or were drilled to produce any of the Conventional Depths (the “ Conventional Wells ”); and

(ii) shown in Exhibit A–2(b) (the “ Other Wells ” and collectively with the Conventional Wells, the “ Wells ”);

(d) subject to the terms of the Joint Use Agreement, concurrent rights in and to all Rights-of-Way that are used primarily in connection with the ownership or operation of any of the Leases, Wells, Units or other Assets, including the Rights-of-Way set forth in Exhibit A-3 ;

(e) all equipment, machinery, fixtures and other personal and mixed property, operational and nonoperational, known or unknown, located on any of the Leases, Wells, Units, or other Assets, that are primarily used or held for use in connection with the ownership, operation or development of the Leases, Well, Units or other Assets, including, the gathering systems described in Exhibit A-4 , well equipment, casing, tubing, pumps, motors, fixtures, machinery, compression equipment, flow lines, processing and separation facilities, structures, materials and other items primarily used in the ownership, operation or development of the Leases, Well, Units or other Assets (the “ Personal Property ”);

(f) all Hydrocarbons attributable to the Leases, Wells and/or Units to the extent such Hydrocarbons were produced from and after the Effective Time and all Imbalances relating to the Assets;

(g) to the extent assignable, all Permits that are used in connection with the ownership or operation of the other Assets;

Appendix I - 2

(h) to the extent and only to the extent relating to the other Assets, all Applicable Contracts;

(i) the field offices described in Exhibit A-5 and all real property (including office leases) and any office furniture or office supplies located in or on such offices;

(j) the vehicles described in Exhibit A-6 and any vehicular leases associated therewith;

(k) to the extent and only to the extent relating to the other Assets, electronic copies of all files, records and data that are in Sellers’ or their Affiliates’ possession; provided, however, that (i) those items that are subject to a valid legal privilege or to disclosure restrictions, (ii) those items that are not transferable without payment of additional consideration (and Buyer has not agreed in writing to pay such additional consideration), and (iii) all e-mails and other electronic files on Sellers’ servers and networks relating to the foregoing items, in each case, shall be excluded (the foregoing items, taking into account the exclusions listed above, collectively, the “ Records ”);

(l) all funds held in suspense by any Sellers, which amounts are described on Exhibit A-7 ;

(m) all personal computers and associated peripherals and all radio and telephone equipment; and

(n) all geophysical, seismic and related technical data pertaining to the Conventional Depths, to the extent such data is assignable without the payment of a fee, penalty or other costs (unless Buyer has agreed in writing to pay such fee, penalty or other costs).

“ Assignments ” means the BG Assignment, the EXCO Assignment and the Operator Assignment.

“ Assumed Obligations ” has the meaning set forth in Section 10.1 .

“ BG Assignment ” means an assignment and bill of sale from BG Seller to Buyer in substantially the form attached as Exhibit D-1 .

“ BG Closing Amount ” has the meaning set forth in Section 3.1 .

“ BG Seller ” has the meaning set forth in the introductory paragraph.

“ Burden ” means any and all royalties (including lessors’ royalties and non-participating royalties), overriding royalties and other burdens upon, measured by or payable out of production.

“ Business Day ” means any day other than Saturday or Sunday or a day on which banking institutions in Houston, Texas are authorized by Law to close.

“ Buyer ” has the meaning set forth in the introductory paragraph.

Appendix I - 3

“ Buyer Group ” means (a) Buyer and its managers, officers, directors, agents, representatives and employees and (b) Buyer’s Affiliates and their respective managers, officers, directors, agents, representatives and employees.

“ Claim ” means any claim, demand, suit, cause of action, loss, damage, liability, fine, penalty and cost (including reasonable attorneys’ fees and costs of litigation), including any loss or damage attributable to personal injury, death, property damage or environmental damage or remediation.

“ Claim Notice ” has the meaning set forth in Section 10.5(b) .

“ Close ” or “ Closing ” means the consummation of the sale by Sellers and the purchase by Buyer of the Assets, including the execution and delivery of all documents and other legal consideration as provided for in this Agreement pursuant to Section 4.2 and Section 4.3 .

“ Closing Amounts ” have the meaning set forth in Section 3.1 .

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

“ Confidentiality Agreement ” means that certain Confidentiality Agreement, dated as of October 20, 2015, among BG US Production Company, LLC, EXCO Resources, Inc., Operator and Buyer, as the same may be amended or modified from time to time.

“ Consent Order ” means that certain Consent Order Issued Under West Virginia Code, Chapter 22, Article 6, dated April 25, 2013, by the West Virginia Department of Environmental Protection to Operator.

“ Contract ” means any written or oral contract or agreement, but excluding, however, any (a) oil and gas lease, easement, right-of-way, permit or other instrument creating or evidencing an interest in real property, and (b) unit or pooling agreement.

“ Control ” and its derivatives mean, with respect to any Person, the possession, directly or indirectly, of the power to exercise or determine the voting of more than 50% of the voting rights in a corporation, and, in the case of any other type of entity, the right to exercise or determine the voting of more than 50% of the equity interests having voting rights, or otherwise direct or cause the direction of the management and policies of a Person, whether through the ownership of voting shares, by Contract or otherwise.

“ Conventional Depths ” means with respect to the Leases and Wells those depths from the surface down to a measured depth of 4,242’ then from the top of the Oriskany Sandstone at a measured depth of 4,622’ to the base of the Oriskany Sandstone at a depth of 4,654’. All depths and identifications are referenced to the compensated density log dated October 8, 1979 drilled by Kaiser Exploration and Mining Co. (KEM-10, API 47-053-001800) located in Mason County, West Virginia. It is the intent to allow the Buyer to produce from the existing horizons and to develop those same horizons except for the Marcellus and horizons below the base of the Oriskany Sandstone. The depth reference for the Marcellus is the measured depth of 4,249’ to the top of the Oriskany Sandstone at a measured depth of 4,622’. For the avoidance of doubt, it is the Parties’ intent that for future development, Sellers will retain the Marcellus formation and formations below the Oriskany Sandstone.

Appendix I - 4

“ Customary Post-Closing Consents ” means those consents and approvals from Governmental Authorities that are customarily obtained after Closing in connection with a transaction similar to the transactions contemplated by this Agreement.

“ Dispute Notice ” has the meaning set forth in Section 3.4 .

“ E.Vironment Group Report ” means that certain Environmental Assessment of Certain Assets of EXCO Resources, Inc. in West Virginia and Pennsylvania Prepared By E.Vironment, LLC, dated November 2015.

“ Effective Time ” means 12:01 a.m. on October 1, 2016.

“ Encumbrance ” means any lien, mortgage, security interest, defect, pledge, charge or encumbrance.

“ Environmental Condition ” means (a) a condition existing on the Execution Date with respect to the air, soil, subsurface, surface waters, ground waters and/or sediments that causes an Asset not to be in compliance with any Environmental Law or (b) the existence on the Execution Date, with respect to an Asset or the operation thereof, of any environmental pollution, contamination, degradation, damage or injury caused by or related to an Asset for which remedial or corrective action is presently required (or if known, would be presently required) under Environmental Laws

“ Environmental Laws ” means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq.; the Clean Air Act, 42 U.S.C. § 7401 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. § 5101 et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 through 2629; the Oil Pollution Act, 33 U.S.C. § 2701 et seq.; the Emergency Planning and Community Right to Know Act, 42 U.S.C. § 11001 et seq.; and the Safe Drinking Water Act, 42 U.S.C. §§ 300f through 300j, in each case, as amended to the Execution Date, and all similar Laws or statutes existing as of the Execution Date of any Governmental Authority having jurisdiction over the Oil and Gas Properties and addressing pollution or protection of the environment or biological or cultural resources and all regulations implementing the foregoing. The term “Environmental Laws” does not include any changes in Laws occurring on or after the Execution Date.

“ Excluded Assets ” means:

(a) the Seller Excluded Assets;

(b) all of Sellers’ corporate minute books and corporate financial and tax records that relate to Sellers’ business generally (including the ownership and operation of the Assets);

Appendix I - 5

(c) all trade credits, all accounts receivables and all other proceeds, income or revenues attributable to the Assets with respect to any period of time prior to the Effective Time;

(d) except to the extent relating to an Assumed Obligation, all claims and causes of action of any Seller arising under or with respect to any Applicable Contracts that are attributable to periods of time prior to the Effective Time (including claims for adjustments or refunds);

(e) all rights and interests of Sellers (i) under any Seller Insurance, (ii) under any bond held by Sellers or their Affiliates or (iii) to any insurance or condemnation proceeds or awards arising, in each case, from acts, omissions or events, or damage to or destruction of property, prior to the Closing;

(f) all Hydrocarbons produced and sold from the Assets with respect to all periods prior to the Effective Time;

(g) all claims of Sellers or their Affiliates for refunds of or loss carry forwards with respect to (i) production or any other Taxes paid by Sellers or their Affiliates attributable to any period prior to the Effective Time, (ii) income Taxes paid by Sellers or their Affiliates or (iii) any Taxes attributable to the Excluded Assets;

(h) all of Seller’s proprietary computer software, patents, trade secrets, copyrights, names, trademarks, logos and other intellectual property;

(i) all documents and instruments of Sellers that may be protected by an attorney-client privilege (other than title opinions);

(j) all data and Contracts that cannot be disclosed to Buyer as a result of confidentiality arrangements under agreements with Non-Parties;

(k) all audit rights arising under any of the (i) Applicable Contracts or otherwise with respect to any period prior to the Effective Time or (ii) Excluded Assets, except for any Imbalances;

(l) documents prepared or received by Sellers or their Affiliates with respect to (i) lists of prospective purchasers for the Assets, (ii) bids submitted by other prospective purchasers of the Assets, (iii) analyses by Sellers or their Affiliates of any bids submitted by any prospective purchaser, (iv) correspondence between or among Sellers, their representatives and any prospective purchaser other than Buyer, and (v) correspondence between Sellers or any of their representatives with respect to any of the bids, the prospective purchasers or the transactions contemplated by this Agreement;

(m) any assets that are excluded pursuant to the provisions of Section 9.4 ;

(n) any master service agreements, blanket agreements or similar Contracts;

(o) the Retained Interest;

Appendix I - 6

(p) all geophysical, seismic and related technical data (i) pertaining to depths other than the Conventional Depths or (ii) pertaining to the Conventional Depths that may not be assigned without the payment of a fee, penalty or other costs (unless Buyer has agreed in writing to pay such fee, penalty or other costs);

(q) all fee mineral interests;

(r) subject to the terms of the Joint Use Agreement, concurrent rights with Buyer in the Assets described in subsection (d) of the definition of Assets;

(s) the Subsurface Easement; and

(t) all wells subject to the Consent Order as set forth on Exhibit B-2 .

“ EXCO Assignment ” means an assignment and bill of sale from EXCO Seller to Buyer in substantially the form attached as Exhibit D-2 .

“ EXCO Closing Amount ” has the meaning set forth in Section 3.1 .

“ EXCO Seller ” has the meaning set forth in the introductory paragraph.

“ Execution Date ” has the meaning set forth in the introductory paragraph.

“ Farmout Agreement ” means the Farmout Agreement in substantially the form attached as Exhibit I .

“ Final Settlement Statement ” has the meaning set forth in Section 3.4 .

“ Fundamental Representations ” means the representations and warranties of BG Seller and EXCO Seller set forth in Sections 6.1-6.5 and Section 6.7 and Operator in Sections 7.1-7.5 and Section 7.7 .

“ GAAP ” means United States generally accepted accounting principles.

“ Government Official ” means (a) any official or employee of any government, or any agency, ministry, department of a government (at any level), Person acting in an official capacity for a government regardless of rank or position, official or employee of a company wholly or partially controlled by a government (for example, a state owned oil company), political party and any official of a political party; and (b) any candidate for political office, any officer or employee of a public international organization, such as the United Nations or the World Bank, or any immediate family member (meaning a spouse, dependent child or household member) of any of the foregoing.

“ Governmental Authority ” means any federal, state, local, municipal, tribal or other government; any governmental, regulatory or administrative agency, commission, body or other authority exercising or entitled to exercise any administrative, executive, judicial, legislative, regulatory or taxing authority or power; and any court or governmental tribunal, including any tribal authority having or asserting jurisdiction.

Appendix I - 7

“ Hard Consent ” means any consent for which the failure to obtain such consent would cause (a) the assignment of the Asset(s) affected thereby to Buyer to be void, (b) the termination of a Lease, Unit or Right-of-Way under the express terms thereof or (c) violate a maintenance of an applicable uniform interest provision.

“ Hazardous Materials ” means any explosives, radioactive materials, asbestos material, urea formaldehyde, hydrocarbon contaminants, underground tanks, pollutants, contaminants, hazardous, corrosive or toxic substances, special waste or waste of any kind, including compounds known as chlorobiophenyls and any material or substance the storage, manufacture, disposal, treatment, generation, use, transport, mediation or release into the environment of which is prohibited, controlled, regulated or licensed under Environmental Laws, including, but not limited to, (i) all “hazardous substances” as that term is defined in Section 101(14) of the Comprehensive Environmental Response, Compensation and Liability Act, as amended, and (ii) petroleum and petroleum products.

“ Hedge Contract ” means any swap, forward, future or derivative transaction or option or similar Contract, whether exchange traded, “over-the-counter” or otherwise, involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions.

“ Hydrocarbons ” means oil, gas and other hydrocarbons (including condensate) produced or processed in association therewith (whether or not such item is in liquid or gaseous form), including all crude oils, condensates and natural gas liquids at atmospheric pressure and all gaseous hydrocarbons (including wet gas, dry gas and residue gas) or any combination thereof, and any minerals produced in association therewith.

“ Imbalance ” means all Well Imbalances and Pipeline Imbalances.

“ Indemnified Party ” has the meaning set forth in Section 10.5(a) .

“ Indemnifying Party ” has the meaning set forth in Section 10.5(a) .

“ Indemnity Deductible ” has the meaning set forth in Section 10.4(d)(iii) .

“ Joint Use Agreement ” means the Joint Use Agreement in substantially the form attached as Exhibit E .

“ Knowledge ” means (a) with respect to BG Seller, the actual knowledge (after reasonable investigation) of the individuals shown in Schedule 1.1(a) ; (b) with respect to EXCO Seller, the actual knowledge (after reasonable investigation) of the individuals shown in Schedule 1.1(b) ; (c) with respect to Operator, the actual knowledge (after reasonable investigation) of the individuals shown in Schedule 1.1(c) and (d) with respect to Buyer, the actual knowledge (after reasonable investigation) of the individuals shown in Schedule 1.1(d) .

“ Laws ” means any applicable statute, law, rule, regulation, ordinance, order, code, ruling, writ, injunction, decree or other official act of or by any Governmental Authority.

Appendix I - 8

“ Leases ” has the meaning set forth in the definition of Assets.

“ Legal Proceedings ” means any and all proceedings, suits and causes of action by or before any Governmental Authority and all arbitration proceedings.

“ Material Adverse Effect ” means an event or circumstance that (a) results in a material adverse effect on the ownership or operation of the Assets, taken as a whole and as owned and operated as of the Execution Date, or (b) makes impossible the consummation of the transactions contemplated by this Agreement by Sellers; provided, however, that “Material Adverse Effect” shall not include any material adverse effects resulting from any of the following: (i) entering into this Agreement or the announcement of the transactions contemplated by this Agreement; (ii) changes in general market, economic, financial or political conditions (including changes in commodity prices, fuel supply or transportation markets, interest or rates) in the area in which the Assets are located, the United States or worldwide; (iii) changes in conditions or developments generally applicable to the oil and gas industry in the area where the Assets are located; (iv) acts of God, including hurricanes, storms or other naturally occurring events; (v) acts or failures to act of Governmental Authorities; (vi) civil unrest, any outbreak of disease or hostilities, terrorist activities or war or any similar disorder; (vii) matters that are cured or no longer exist by the earlier of Closing and the termination of this Agreement; (viii) any change in Laws and any interpretations thereof from and after the Execution Date; (ix) any reclassification or recalculation of reserves in the ordinary course of business; (x) changes in the prices of Hydrocarbons; (xi) any effect arising out of any action permitted, required or requested by the Buyer to be taken pursuant to this Agreement, or any effect of not taking any action that is prohibited to be taken under this Agreement and (xii) natural declines in well performance.

“ Material Contracts ” has the meaning set forth in Section 7.12(a) .

“ Non-Foreign Certificate ” means a document in substantially the form attached hereto as Exhibit C .

“ Non-Party ” means any Person other than (a) a Party and (b) any Party’s respective Affiliates.

“ Non-Party Claim ” has the meaning set forth in Section 10.5(b) .

“ Operator ” has the meaning set forth in the introductory paragraph.

“ Operator Assignment ” means an assignment and bill of sale from Operator to Buyer in substantially the form attached as Exhibit D-3 .

“ Operator Closing Amount ” has the meaning set forth in Section 3.1 .

“ Other Wells ” has the meaning set forth in the definition of Assets.

“ Party ” or “ Parties ” has the meaning set forth in the introductory paragraph.

“ Permit ” shall mean any permits, licenses, authorizations, registrations, consents or approvals granted or issued by any Governmental Authority.

Appendix I - 9

“ Permitted Encumbrances ” means:

(a) defects arising out of (i) the failure to recite marital status in a document or omissions of successions of heirship or estate proceedings or (ii) lack of corporate or other entity authorization in the public records, unless Buyer provides affirmative evidence that such failure results in another Person’s superior claim of title to the relevant Asset;

(b) defects arising out of lack of survey, unless a survey is expressly required by applicable Laws;

(c) defects based on a gap in the Sellers’ chain of title to any Asset in the applicable federal, state or county records, unless such gap (i) is affirmatively shown to exist in such records by an abstract of title, title opinion or landman’s title chain or runsheet or (ii) relates a non-consent interest held by Sellers;

(d) defects that have been cured by applicable Laws of limitations or prescription;

(e) any Encumbrance or loss of title resulting from Sellers’ conduct of business after the Execution Date pursuant to actions specifically required of Sellers pursuant to this Agreement or otherwise in compliance with this Agreement;

(f) defects arising from any Encumbrance created by a mineral owner that has not been subordinated to the lessee’s interest, except to the extent the same is, as of the Execution Date, subject to a proceeding to enforce said Encumbrance;

(g) defects based solely on (i) lack of information in Sellers’ files or (ii) references to an unrecorded document(s) to which a Seller is not a party, if such document is not in Sellers’ files.

(h) consents to assignment and similar contractual provisions affecting the Assets, preferential rights to purchase and similar contractual provisions affecting the Assets and required notices to, and filings with, a Governmental Authority in connection with the consummation of the transactions contemplated by this Agreement;

(i) all applicable Permits and Laws and all rights reserved to or vested in any Governmental Authority (i) to control or regulate any Asset in any manner, (ii) by the terms of any right, power, franchise, grant, license or permit, or by any provision of Law, to terminate such right, power, franchise grant, license or permit or to purchase, condemn, expropriate or recapture or to designate a purchaser of any Asset, (iii) to use such property in a manner which does not materially impair the use of such property for the purposes for which it is currently owned and operated, or (iv) to enforce any obligations or duties affecting the Assets to any Governmental Authority with respect to any franchise, grant, license or permit;

(j) easements, rights-of-way, permits, licenses, servitudes, surface leases, sub-surface leases, grazing rights, logging rights, ponds, lakes, waterways, canals, ditches, reservoirs, equipment, pipelines, utility lines, railways, streets, roads and structures on, over or through the Assets that do not materially affect or impair the ownership, use or operation of the Assets (as currently owned, used or operated);

Appendix I - 10

(k) conventional rights of reassignment upon final intention to abandon or release any of the Assets;

(l) rights of a common owner of any interest in Rights-of-Way, Permits, or other property held by a Seller and such common owner as tenants in common or through common ownership;

(m) any (i) liens for Taxes or assessments, (ii) liens of operators, (iii) undetermined or inchoate liens; or (iv) vendors’, warehousemen’s, materialman’s, mechanics’, repairmans’, employees’, contractors’ or other similar liens, in each case, that are not yet delinquent or, if delinquent, are being contested in good faith in the normal course of business;

(n) any Encumbrances created by Law or reserved in the Leases for royalty, bonus or rental, or created to secure compliance with the terms of the Leases or any assignment thereof;

(o) any obligations or duties affecting the Assets to any municipality or public authority, including zoning and planning ordinances and municipal regulations;

(p) the terms and conditions of the instruments creating the Assets (including the Leases, Units, Rights-of-Way, Permits and Applicable Contracts) and all Burdens created or in existence as of the Effective Time;

(q) the terms and conditions of the Applicable Contracts and production sales contracts; division orders; contracts for sale, purchase, exchange, refining or processing of Hydrocarbons; farm-out or farm-in agreements; participation agreements; unitization and pooling designations, declarations, orders and agreements; operating agreements; agreements of development; area of mutual interest agreements; gas balancing and deferred production agreements; plant agreements; pipeline, gathering and transportation agreements; injection, repressuring and recycling agreements; carbon dioxide purchase or sale agreements; salt water or other disposal agreements; and seismic or geophysical permits or agreements, in each case, to the extent the same are ordinary and customary to the oil, gas and mineral exploration, development, processing or extraction businesses;

(r) any Encumbrance affecting the Assets that is discharged by Sellers at or prior to Closing;

(s) the terms and conditions of this Agreement; and

(t) the litigation, suits, actions and proceedings, if any, set forth in Schedule 7.11 .

“ Person ” means any individual, corporation, company, partnership, limited partnership, limited liability company, trust, estate, Governmental Authority or any other entity.

Appendix I - 11

“ Pipeline Imbalance ” means any imbalance between the quantity of Hydrocarbons attributable to the Assets required to be delivered by a Seller under any Contract relating to the purchase and sale, gathering, transportation, storage or processing (including any production handling and processing at a separation facility) of Hydrocarbons and the quantity of Hydrocarbons attributable to the Assets actually delivered by such Seller pursuant to the relevant Contract, together with any appurtenant rights and obligations concerning production balancing at the delivery point into the relevant sale, gathering, transportation, storage or processing facility.

“ PPR ” has the meaning set forth in Section 9.4(b) .

“ Pre-Closing Tax Return ” has the meaning set forth in Section 9.2(b) .

“ Preliminary Settlement Statement ” has the meaning set forth in Section 3.3 .

“ Property Expenses ” means all operating expenses (including Asset Taxes and costs of insurance) and capital expenditures, in each case, incurred in the ownership and/or operation of the Assets in the ordinary course of business and, where applicable, under and pursuant to the relevant operating or unit agreement, if any, and overhead costs charged to the Assets under the relevant operating agreement or unit agreement, if any, but excluding Claims attributable to (a) personal injury or death, property damage, torts, breach of contract or violation of any Law, (b) obligations relating to the abandonment or plugging of wells, dismantling or decommissioning facilities, closing pits and restoring the surface around such wells, facilities and pits, (c) environmental liabilities (provided that for the purposes of this definition of “Property Expenses,” environmental liabilities shall not include any cost or expense incurred in the ordinary course of business to achieve or maintain ongoing compliance with Environmental Laws), (d) obligations with respect to Imbalances, (e) obligations to pay royalty owners, overriding royalty owners or other interest owners revenues or proceeds attributable to sales of Hydrocarbons relating to the Assets, including those held in suspense, (f) obligations with respect to Hedge Contracts, (g) obligations to pay working interests, and (h) claims for indemnification or reimbursement from any Non-Party with respect to costs of the types described in the preceding clauses (a) through (g), whether such claims are made pursuant to Contract or otherwise.

“ Purchase Price ” has the meaning set forth in Section 3.1 .

“ Records ” has the meaning set forth in the definition of Assets.

“ Related Parties ” means in relation to a Party:

(a) any of its Affiliates;

(b) any person employed by that Party or its Affiliates;

(d) any person or entity acting for or on behalf of that Party or its Affiliates.

Appendix I - 12

“ Retained Interest ” means all of Sellers’ rights in and to the oil, gas and/or mineral leases described in Exhibit A-1 and all associated rights, obligations and liabilities, insofar and only insofar as the foregoing pertain to any depths or formations outside of the Conventional Depths, including all rights, obligations and liabilities regarding use of the surface and installation of pipelines and gathering systems in connection with the ownership or operation of such leases and interests with respect to such depths or formations, and all wells, facilities and other infrastructure to the extent associated therewith.

“ Rights-of-Way ” shall mean all permits, licenses, servitudes, easements, fee surface, surface leases and rights-of-way primarily used or held for use in connection with the ownership or operation of the Assets, other than Permits.

“ Royalty Side Letter ” means the royalty side letter agreement in substantially the form attached as Exhibit H .

“ Sales Taxes ” has the meaning set forth in Section 9.2(a) .

“ Seller Excluded Assets ” means those properties shown in Exhibit B-1 .

“ Seller Group ” means, collectively, (a) EXCO Seller and its Affiliates and its and their managers, officers, directors, agents, representatives and employees; (b) BG Seller and its Affiliates and its and their managers, officers, directors, agents, representatives and employees and (c) Operator and its Affiliates and its and their managers, officers, directors, agents, representatives and employees.

“ Seller Insurance ” has the meaning set forth in Section 5.1 .

“ Sellers ” has the meaning set forth in the introductory paragraph.

“ Specified Obligations ” mean all obligations and Liabilities, arising from, based upon, related to or associated with:

(a) claims for bodily injury or wrongful death attributable to the ownership or operation by Operator of the Assets (net to Sellers’ interest) prior to the Closing;

(b) the disposal of, or transportation to, an off-site Third Party commercial disposal facility of any Hazardous Materials in connection with Operator’s operation of the Assets (net to Sellers’ interest) that are attributable to the period prior to the Closing;

(c) the gross negligence or willful misconduct of Operator in connection with the operation of the Assets prior to the Closing;

(d) any litigation relating to Sellers’ ownership and/or operation of the Assets that is pending prior to the Closing; and

(e) Operator’s failure to properly pay Burdens attributable to the Assets operated by a Seller and due by any Seller and attributable to the Sellers’ ownership of the Assets operated by a Seller prior to the Closing (other than amounts held in suspense).

Appendix I - 13

“ Straddle Period ” means shall mean any Tax period beginning before and ending after the Effective Time.

“ Subsurface Easement ” means a subsurface easement through the Assets for the purposes of accessing the Retained Interests reserved by each Seller in the Assignments.

“ Tax ” or “ Taxes ” means all federal, state, local and foreign income, profits, franchise, sales, use, ad valorem, property, severance, production, excise, stamp, documentary, real property transfer or gain, gross receipts, goods and services, registration, capital, transfer or withholding taxes or other assessments, duties, fees or charges imposed by any Governmental Authority, including any interest, penalties or additional amounts that may be imposed with respect thereto.

“ Tax Partnership ” means that certain tax partnership by and between BG Seller, BG Production Company (PA), LLC, EXCO Seller, EXCO Production Company (PA), LLC and Operator by which the Assets are owned for U.S. federal income tax purposes.

“ Tax Return ” means any return (including any information return), report, statement, schedule, notice, form, election, estimated Tax filing, claim for refund or other document (including any attachments thereto and amendments thereof) filed with or submitted to, or required to be filed with or submitted to, any Governmental Authority with respect to any Tax.

“ Threshold Amount ” has the meaning set forth in Section 10.4(d)(ii) .

“ Transaction Documents ” means those documents executed and/or delivered pursuant to or in connection with this Agreement, including the Confidentiality Agreement.

“ Transition Services Agreement ” means the transition services agreement in substantially the form attached as Exhibit G .

“ Units ” has the meaning set forth in the definition of Assets.

“ Well Imbalances ” means any imbalance at the wellhead between the amount of Hydrocarbons produced from a Well and allocable to the interests of Sellers therein and the shares of production from the relevant Well to which Sellers are entitled, together with any appurtenant rights and obligations concerning future in kind and/or cash balancing at the wellhead.

“ Wellbore Lease ” means the wellbore lease in substantially the form attached as Exhibit D-4 .

“ Wellbore Lease Wells ” means those certain oil and gas well shown in Exhibit A-3(c) .

“ Wells ” has the meaning set forth in the definition of Assets.

Appendix I - 14

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

EXHIBIT A-1	LEASES - a description of the leases subject to this Agreement
EXHIBIT A-2(a)	CONVENTIONAL WELLS- a description of the conventional wells subject to this Agreement
EXHIBIT A-2(b)	OTHER WELLS- a description of the other wells subject to this Agreement
EXHIBIT A-3(c)	WELLBORE LEASE WELLS- a description of the wellbore lease wells subject to this Agreement
EXHIBIT A-3	RIGHTS-OF-WAY- a description of the rights-of-way subject to this Agreement
EXHIBIT A-4	GATHERING SYSTEM(S) - a description of the gathering systems subject to this Agreement
EXHIBIT A-5	FIELD OFFICES- a description of the field offices subject to this Agreement
EXHIBIT A-6	VEHICLES- a description of the vehicles subject to this Agreement
EXHIBIT A-7	SUSPENSE ACCOUNTS- a description of the suspense accounts subject to this Agreement
EXHIBIT B-1	SELLER EXCLUDED ASSETS- a description of the excluded assets subject to this Agreement
EXHIBIT B-2	CONSENT WELLS- a description of the consent wells subject to this Agreement
EXHIBIT C	NON-FOREIGN CERTIFICATE – tax certificate of domestic status
EXHIBIT D-1	FORM OF BG ASSIGNMENT
EXHIBIT D-2	FORM OF EXCO ASSIGNMENT
EXHIBIT D-3	FORM OF OPERATOR ASSIGNMENT
EXHIBIT D-4	FORM OF WELLBORE LEASE
EXHIBIT E	FORM OF JOINT USE AGREEMENT
EXHIBIT F	DATA PRIVACY – data privacy policy
EXHIBIT G	FORM OF TRANSITION SERVICES AGREEMENT
EXHIBIT H	FORM OF ROYALTY SIDE LETTER
EXHIBIT I	FORM OF FARMOUT AGREEMENT

SCHEDULE 1.1(a)	BG SELLER’S KNOWLEDGE – knowledgeable persons of the BG Seller
SCHEDULE 1.1(b)	EXCO SELLER’S KNOWLEDGE – knowledgeable persons of EXCO the Seller
SCHEDULE 1.1(c)	OPERATOR’S KNOWLEDGE – knowledgeable persons of the Operator
SCHEDULE 1.1(d)	BUYER’S KNOWLEDGE – knowledgeable persons of the Buyer
SCHEDULE 3.7	ALLOCATED VALUES – allocation of purchase price
SCHEDULE 6.9	BG SELLER AND EXCO SELLER TITLE – exceptions to Seller’s title interest
SCHEDULE 7.6	OPERATOR NO VIOLATIONS – exceptions to violations of certain matters by the Operator
SCHEDULE 7.9	OPERATOR TITLE – exceptions to Operator’s title interest
SCHEDULE 7.10	NO VIOLATION OF LAW – violations of applicable laws by Operator
SCHEDULE 7.11	LITIGATION – litigation matters with respect to the assets
SCHEDULE 7.12(a)	MATERIAL CONTRACTS – listing of applicable contracts
SCHEDULE 7.12(b)	MATERIAL CONTRACT DEFAULT – listing of material contract defaults
SCHEDULE 7.13	TRANSFER RESTRICTIONS – preferential purchase rights with respect to the assets
SCHEDULE 7.15	IMBALANCES – material imbalances associated with the assets
SCHEDULE 7.16	CURRENT COMMITMENTS – authorized expenditures
SCHEDULE 7.17	ENVIRONMENTAL – listing of environmental matters
SCHEDULE 7.20	BONDS – list of bonds, letters of credit and the like
SCHEDULE 9.4	UNOBTAINED HARD CONSENT ASSETS – required consents to assignment of the assets

Exhibit 3(i)(a)

State of Delaware
Secretary of State
Division of Corporations
Delivered 05:00 PM 04/28/2011
FILED 05:00 PM 04/28/2011
SRV 110470267 - 4411454 FILE

Amended And Restated

Certificate Of Incorporation

St. Lawrence Seaway Corporation
( to Be Known a s Carbon Natural Gas Company)

introduction

St. Lawrence Seaway Corporation was incorporated upon the filing of its original Certificate of Incorporation in the office of the Secretary of State of Delaware on August 22, 2007.

This Amended and Restated Certificate of Incorporation of St. Lawrence Seaway Corporation (the “ Corporation ”), a corporation organized and existing under the laws of the State of Delaware, is hereby duly adopted pursuant to and in accordance with the provisions of Section 242 and 245 of the Delaware General Corporation Law.

ARTICLE 1

Name

The name of the corporation is Carbon Natural Gas Company .

ARTICLE 2

Registered Office and Address

The address of the Corporation’s registered office in the State of Delaware is 2711 Centerville Road, Suite 400, Wilmington, County of New Castle, Delaware 19808. The name of its registered agent at such address is Corporation Service Company.

ARTICLE 3

Purpose and Powers

The nature of the business or purpose to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law and to possess and employ all powers and privileges now or hereafter granted or available under the laws of the State of Delaware to such corporations.

ARTICLE 4
Capitalization

4.1 Authorized Shares . The total number of shares of stock that the Corporation shall have authority to issue is One Hundred One Million (101,000,000) shares, consisting of (i) One Hundred Million (100,000,000) shares of common stock, each with par value of $0.01 (the “ Common Stock ” and (ii) One Million (1,000,000) shares of preferred Stock, each with par value of $0.01 (the “ Preferred Stock ”).

4.2 Preferred Stock: The shares of Preferred Stock may be issued from time to time in one or more series, The Board of Directors is hereby vested with authority to fit by resolution or resolutions the designations and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations, or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of such Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any series of Preferred Stock (but not below the number of shares thereof then outstanding). If the number of shares of any series is to be so decreased, the shares constituting such decrease shall resume the status of undesignated shares of Preferred Stock.

4.3 Dividends on Common Stock. Subject to applicable law and rights, if any, of the holders of any outstanding class or series of Preferred Stock, dividends on the Common Stock may be declared and paid out of funds of the Corporation legally available therefor and shall be paid solely in the discretion of the Board of Directors.

4.4 Liquidation Rights. In the event of the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of the outstanding, Shares of Common Stock shall be entitled to receive the funds of the Corporation remaining for distribution to its stockholders (after any distribution required to be made to the holders of Preferred Stock). for purposes, of this Section 4.4, the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the assets of the Corporation or a consolidation or merger of the Corporation with one or more other corporations or other persons (whether or not the Corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntarily or involuntarily.

4.5 Voting Rights . Each holder of record of Common Stock shall have one vote for each share of Common Stock which is outstanding in his, her or its name on the books of the Corporation and which is entitled to vote. Except as otherwise required by law or this Certificate of Incorporation (including any Certificate of Designation relating to Preferred Stock) holders of any class or series of Preferred Stock, shall not be entitled to voting rights. Except as otherwise required by this Certificate of Incorporation (including any Certificate of Designation relating to Preferred Stock), no holders of Common Stock or Preferred Stock shall have preemptive rights. In the election of directors, no stockholder shall be entitled to cumulate votes on behalf of any candidate.

ARTICLE 5
Directors

5.1 Management . The business and affairs of the Corporation shall the managed by or under the direction of the Board of Directors.

5.2 Number of Directors . Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors of the Corporation shall initially be not less than one nor more than twelve as fixed from time to time by or pursuant to the Bylaws of the Corporation. Each director, other than a director who may be elected by the holders of any series of Preferred Stock under specified circumstances, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Election of directors need not be by written ballot unless the Bylaws of the Corporation so provide.

ARTICLE 6
Bylaws

In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized to make, alter, amend and repeal the Bylaws of the Corporation, but such authorization shall not divest the stockholders of the power, nor limit their power, to make, alter, amend or repeal the Bylaws.

ARTICLE 7

Limitations of Directors’ Liability

No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of duty as a director, except as to liability (i) for any breach of the director’s duty of loyalty to the Corporation, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for violations of Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit If the Delaware General Corporation Law is hereafter amended to authorize corporate action further eliminating or limiting the personal liability of directors, then, in addition to the elimination and limitation of liability provided by the preceding sentence, the liability of each director of the Corporation shall be eliminated or limited to the fullest extent provided or permitted by the Delaware General Corporation Law, as so amended Any repeal or modification of this Article 7 shall not adversely affect any right or protection of a director of the Corporation under this Article 7 as in effect immediately prior to such repeal or modification with respect to any liability that would have accrued, but for this Article 7, prior to such repeal or modification.

ARTICLE 8
Indemnification

8.1 The Corporation shall indemnify its directors and officers to the fullest extent authorized or permitted by law, as now or hereafter in effect, and such right to indemnification shall continue as to a person who has teased to be a director or officer of the Corporation and shall inure to the benefit of his or her heirs, executors and personal and legal representatives; provided, however, that except for proceedings to enforce rights to indemnification, the Corporation shall not be obligated to indemnify any director or officer (or his or her heirs, executors or personal or legal representatives) in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors.

8.2 Expenses (including attorneys’ fees) incurred by a director or officer in defending or otherwise participating in any proceeding in advance of its final disposition shall be paid by the Corporation upon its receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation under applicable law. Such expenses (including attorneys’ fees) incurred by former directors, officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate.

8.3 The rights to indemnification and to the advance of expenses conferred by this Article 8 shall not be exclusive of any other right which any person may have or hereafter acquire under this Certificate of Incorporation, the Bylaws of the Corporation, any statute, agreement, vote of stockholders or disinterested directors or otherwise.

8.4 Any repeal or modification of this Article 8 by the stockholders of the Corporation shall not adversely affect any rights to indemnification and to the advancement of expenses of a director or officer of the Corporation existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.

ARTICLE 9
Amendments

The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, as from time to time amended, in the manner now or hereafter prescribed by law; and all rights preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by or pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article 9. Expect as otherwise provided by law and this Certificate of Incorporation, the provisions of this Certificate of Incorporation shall not be modified, revised, altered or amended, repealed or rescinded in whole or in part, without the approval of a majority of votes entitled to be cast by the holders of Common Stock; provided, however, that with respect to any proposed amendment of this Certificate of Incorporation (including any Certificate of Designation relating to any series or class of Preferred Stock) which would alter or change the powers, preferences or special rights of any class or series of Preferred Stock so as to adversely affect them, the approval of a majority of the votes entitled to be cast by the holders of the shares of such class or series of Preferred Stock affected by the proposed amendment, voting separately as a class, shall be obtained in addition to the approval of a majority of the votes entitled to be cast by the holders of the Common Stock.

ARTICLE 10.

Transactions with Directors and Officers

The Corporation shall have the authority, to the fullest extent now or hereafter permitted by the Delaware General Corporation Law or by any other applicable law, to enter into any contract. or ^. transaction with one or more of its directors or officers, or with any corporation, partnership, joint venture, trust, association or other entity in which one or more of its directors or officers are directors or officers or have a financial interest, notwithstanding such relationships and notwithstanding the fact that the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction.

ARTICLE 11

Compromise with Creditors

Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of the Delaware General Corporation Law or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 79 of the Delaware General Corporation Law order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three - fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may he, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation.

This Amended and Restated Certificate of Incorporation shall have a delayed effective date of May 2, 2011.

IN WITNESS WHEREOF, the undersigned authorized officer of the Corporation, for the purpose of amending and restating the Certificate of Incorporation pursuant to the Delaware General Corporation Law, does hereby make and file this Amended and Restated Certificate of Incorporation, hereby declaring and certifying that the facts herein stated are true, and accordingly has hereunto set his hand this 27th day of April, 2011.

	/s/ Kevin D. Struzeski
	Kevin D. Struzeski,
	Secretary and Treasurer

State of Delaware
Secretary of State
Division of Corporations
Delivered 10:16 AM 06/27/2011
FILED 10:16 AM 06/27/2011
SRV 110763196 - 4411454 FILE

Amended And Restated
Certificate Of Designation
Of Relative Rights And Preferences
Of The
Series A Convertible Preferred Stock
Of
Carbon Natural Gas Company
a Delaware corporation

WHEREAS, on June 16, 2011, CARBON NATURAL GAS COMPANY, a Delaware Corporation (the “ Corporation ”), pursuant to the provisions of Section 151 of the Delaware General Corporation Law (the “ DGCL ”), filed with the Delaware Secretary of State a Certificate of Designation of Relative Rights and Preferences for the Series A Convertible Preferred Stock (the “ Certificate of Designation ”); and

WHEREAS, in accordance with Section 151(g), the Corporation states that no shares of the Series A Convertible Preferred Stock have been issued; and

WHEREAS, the Corporation does hereby amend and restate the Certificate of Designation and does hereby state and certify that pursuant to the authority expressly vested in the Board of Directors of the Corporation by the Amended and Restated Certificate of Incorporation of the Corporation, as amended to date (the “ Certificate of Incorporation ”) the Board of Director duly adopted the following resolutions, which resolutions remain in full force and effect as of the date hereof:

WHEREAS, the Certificate of Incorporation provides for a class of its authorized shares of stock known as Preferred Stock, par value $0.01 per share (the “ Preferred Stock ”), 1,000,000 shares are authorized for issuance from time to time in one or more series; and

WHEREAS, the Board of Directors (the “ Board ”) of the Corporation is authorized to fix by resolution the number of shares of any series of Preferred Stock, to determine the designation of any such series, and to determine the powers, preferences, and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference of any series of Preferred Stock; and

WHEREAS, it is the desire of the Board, pursuant to its authority under the Certificate of Incorporation, to fix the designation and preferences and relative rights, and qualifications, limitations and restrictions and other matters relating to a series of Preferred Stock to be designated Series A Convertible Preferred Stock as follows.

RESOLVED, that, pursuant to Article 4 of the Certificate of Incorporation, the Board of Directors hereby authorizes the issuance of, and fixes the designation and preferences and relative rights, and qualifications, limitations and restrictions, of a series of the Corporation’s Preferred Stock to consist of 100 shares, par value $0.01 per share, and designated “Series A Convertible Preferred Stock”;

- 1 -

FURTHER RESOLVED, that all shares of Series A Convertible Preferred Stock shall rank equally in all respects and shall be subject to the following terms and provisions:

1. Determination . The first series of the Corporation’s Preferred Stock, par value $0.01 per share (the “ Preferred Stock ”), is designated Series A Convertible Preferred Stock (the “ Series A Preferred Stock ”).

2. Authorized Shares . The number of authorized shares of Preferred Stock constituting the Series A Preferred Stock shall be 100 shares.

3. Dividends .

(a) Participating . Shares of Series A Preferred Stock will participate in Distributions (as such term is defined below) payable in respect of Common Stock such that each share of Series A Preferred Stock shall be entitled to receive, out of funds legally available therefor, an amount of any Distribution equal to a fraction, the numerator of which shall equal the number of shares of Common Stock into which such share of Series A Preferred Stock are to be converted pursuant to Section 6 and the denominator of which shall equal the sum of (a) the aggregate number of shares of Common Stock outstanding on the record date for the determination of the stockholders entitled to receive such Distribution as determined by the Board, plus (b) the number of shares of Common Stock into which all shares of Series A Preferred Stock are to be converted pursuant to Section 6. “Distribution” in this Section means the distribution or transfer of cash or property without consideration, whether by payment of a dividend or otherwise, or the purchase, redemption or acquisition of shares of the Corporation for cash or property.

(b) Form of Dividend . All dividends payable on the Series A Preferred Stock shall be paid in the same form and manner as paid to the holders of shares of Common Stock, as determined in the discretion of the Board.

(c) Dividend Priority . The Corporation shall make no Distribution to the holders of the Series A Preferred Stock apart from a Distribution payable in respect of Common Stock in which the holders of the Series A Preferred Stock shall participate pursuant to Section 3(a) above.

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4. Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntarily or involuntarily, distributions to the stockholders of the Corporation will be made in the following manner:

(a) Common Stock and Series A Preferred Stock . Prior to any payment to holders of Common Stock or any other class or series of stock ranking junior to the Series A Preferred Stock on liquidation, the holders of the Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, an amount equal to $0.01 per share (the “ Liquidation Preference ”). Following payment of the Liquidation Preference, the entire remaining assets and surplus funds of the Corporation legally available for distribution upon liquidation will be distributed ratably among the holders of the Common Stock and the holders of the Series A Preferred Stock in proportion to the shares of Common Stock then held, or, with respect to the holders of Series A Preferred Stock, deemed held by them. The holders of the Series A Preferred Stock shall be deemed to hold the number of shares of Common Stock into which their shares of Series A Preferred Stock are to be converted pursuant to Section 6.

(b) Merger or Sale Deemed a Liquidation . For purposes of this Section 4, the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the transfer of 50% or more of the voting power of the Corporation, outstanding immediately prior to such transaction, or a sale of all or substantially all of the assets of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation.

(c) Valuation . Assets to be distributed pursuant to this Section 4, insofar as the same shall be property other than cash, if not liquidated, shall be valued at the fair market value thereof upon the occurrence of the liquidation event, as determined in good faith by the Board.

5. Voting Rights. Except as provided in Section 9, the holder of each share of Series A Preferred Stock issued and outstanding will be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Series A Preferred Stock are to be converted pursuant to Section 6 at the record date for the determination of the stockholders entitled to vote on the matter in question, or, if no such record date is established, at the record date provided by the Delaware General Corporation Law (the “ DGCL ”) for any vote or action by written consent. If the shares of Series A Preferred Stock held by a holder are convertible into a non-integral number of shares of Common Stock as of the date of determination, the number of votes to which such stockholder will be entitled will, after aggregating all such shares of Series A Preferred Stock, be rounded down to the nearest whole vote. Except as provided in Section 9 or as otherwise provided by the DGCL or the Certificate of Incorporation, the Series A Preferred Stock shall be entitled to vote on all matters submitted to a vote of stockholders, voting together with the Common Stock as a single class.

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6. Conversion.

(a) Automatic Conversion . Each share of Series A Preferred Stock will be automatically converted into Common Stock upon the effectiveness of the filing of the Certificate of Amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware which amends Section 4.1 of the Certificate of Incorporation to provide as follows:

“ Authorized Shares . The total number of shares of stock that the Corporation shall have authority to issue is Two Hundred One Million (201,000,000) shares, consisting of (i) Two Hundred Million (200,000,000) shares of common stock, each with par value of $0.01 (the “ Common Stock ”) and (ii) One Million (1,000,000) shares of preferred stock, each with par value of $0.01 (the “ Preferred Stock ”)”

(the “ Certificate of Amendment ”).

The number of shares of Common Stock into which each share of Series A Preferred Stock shall be converted will be determined by dividing $100,000 (the price at which each share of Series A Preferred Stock was sold) by $0.45 (the “ Conversion Price ”).

(b) Mechanics of Conversion . Upon the effectiveness of the Certificate of Amendment, the outstanding shares of Series A Preferred Stock will be converted automatically without any action by the holders of such shares and whether or not the certificate or certificates representing such shares are surrendered to the Corporation or its transfer agent; provided , however , that the Corporation will not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Series A Preferred Stock are either delivered to the Corporation or its transfer agent, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation will, as soon as practicable after such delivery, or such agreement and indemnification in the case of a lost certificate, issue and deliver to such holder of Series A Preferred Stock a certificate or certificates representing the number of shares of Common Stock to which such holder will be entitled as aforesaid. Such conversion will be deemed to have been made upon the effectiveness of the filing of the Certificate of Amendment, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion will be treated for all purposes as the record holder or holders of such shares of Common Stock at such time.

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(c) Adjustments to Conversion Prices of Series A Preferred Stock . If the outstanding shares of Common Stock shall be subdivided, by stock split, stock dividend or otherwise, into a greater number of shares of Common Stock, the Conversion Price of the Series A Preferred Stock then in effect shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. If the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price of the Series A Preferred Stock then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased.

(d) Certificates as to Adjustments . Upon the occurrence of each adjustment or readjustment of a Conversion Price pursuant to this Section 6, the Corporation at its expense will promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation will, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such applicable adjustments and readjustments, (ii) the applicable Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Series A Preferred Stock. Any certificate sent to the holders of Series A Preferred Stock pursuant to this Section 6(d) will be signed by an officer of the Corporation.

(e) Notices of Record Date . In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any security or right convertible into or entitling the holder thereof to receive Common Stock, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation will mail to each holder of Series A Preferred Stock, at the address for such holder shown on the books of the Corporation, at least 10 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right, and the amount and character of such dividend, distribution, security or right.

(f) Payment of Taxes . The Corporation will pay all transfer taxes and other governmental charges that may be imposed in respect of the issue or delivery of shares of Common Stock upon conversion of shares of Series A Preferred Stock.

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7. No Reissuance of Series A Preferred Stock. Any shares of Series A Preferred Stock acquired by the Corporation by reason of purchase, conversion or otherwise shall be cancelled, retired, and eliminated from the shares of Series A Preferred Stock that the Corporation shall be authorized to issue. All such shares of Series A Preferred Stock shall upon their cancellation become authorized but unissued shares of the Corporation’s preferred stock and may be reissued as part of a new series of the Corporation’s Preferred Stock subject to the conditions and restriction on issuance set forth in any certificate of designation creating a series of preferred stock or any similar stock or as otherwise required by law.

8. Severability. If any right, preference or limitation of the Series A Preferred Stock set forth herein is invalid, unlawful or incapable of being enforced by reason of any rule, law or public policy, all other rights, preferences and limitations set forth herein that can be given effect without the invalid, unlawful or unenforceable right preference or limitation shall nevertheless remain in full force and effect, and no right, preference or limitation herein shall be deemed dependent upon any other such right, preference or limitation unless so expressed herein.

9. Amendment of the Terms of the Series A Preferred Stock. Except as otherwise provided by the DGCL, the terms of the Series A Preferred Stock set forth herein may be amended only by the holders of the Series A Preferred Stock voting as a single class, with the consent of a majority of the issued and outstanding Common Stock held by Disinterested Stockholders. As used herein and solely with respect to the amendment of the terms of the Series A Preferred Stock, “Disinterested Stockholders” means holders of the Corporation’s issued and outstanding Common Stock, excluding the holders of the Series A Preferred Stock and their Affiliates. As used herein, “Affiliate” means, with respect to a holder of the Series A Preferred Stock, any person that controls, is controlled by or under common control with such holder of the Series A Preferred Stock.

FURTHER RESOLVED, that the Chief Executive Officer and the Secretary of the Corporation be, and each hereby is, authorized and directed to execute, acknowledge, file and record an Amended and Restated Certificate of Designation in accordance with the foregoing resolutions and the provisions of Delaware law.

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IN WITNESS WHEREOF, the undersigned authorized officers of the Corporation, for the purpose of amending the Certificate of Incorporation pursuant to Delaware General Corporation Law, do hereby make and file this Amended and Restated Certificate of Designation on behalf of the Corporation, hereby declaring and certifying that the facts stated here in are true, and accordingly have hereunto set their respective hands this 24th day of June, 2011.

	CARBON NATURAL GAS COMPANY

	By:	/s/ Patrick R. McDonald
		Patrick R. McDonald,
		Chief Executive Officer

	By:	/s/ Kevin D. Struzeski
		Kevin D. Struzeski,
		Secretary and Treasurer

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State of Delaware
Secretary of State
Division of Corporations
Delivered 01:08 PM 07/14/2011
FILED 01:08 PM 07/14/2011
SRV 110822116 - 4411454 FILE

Certificate of Amendment

To The

Certificate Of Incorporation

Carbon Natural gas Company

This Certificate of Amendment to the Certificate of Incorporation of Carbon Natural Gas Company (the “ Corporation ”), a corporation organized and existing under the laws of the State of Delaware, is hereby duly adopted pursuant to and in accordance with the provisions of Section 242 of the Delaware General Corporation Law.

1. Section 4.1 of Article 4 of the Certificate of Incorporation of Carbon Natural Gas Company is hereby deleted and replaced in its entirety by the following:

“4.1 Authorized. Shares. The total number of shares of stock that the Corporation shall have authority to issue is Two Hundred One Million (201,000,000) shares, consisting of (i) Two Hundred Million (200,000,000) shares of common stock, each with par value of $0.01 (the “ Common Stock ”) and (ii) One Million (1,000,000) shares of preferred stock, each with par value of $0.01 (the “ Preferred Stock ”).”

2. This Certificate of Amendment shall have a delayed effective date of July 18, 2011.

IN WITNESS WHEREOF, the undersigned authorized officer of the Corporation, for the purpose of amending the Certificate of Incorporation pursuant to the Delaware General Corporation Law, does hereby make and file this Certificate of Amendment, hereby declaring and certifying that the facts herein stated are true, and accordingly has hereunto set his hand this 14th day of July, 2011.

	Kevin D. Struzeski
	Kevin D. Struzeski,
	Secretary and Treasurer

State of Delaware
Secretary of State
Division of Corporations
Delivered 11:57 AM 02/22/2017
FILED 11:57 AM 02/22/2017
SR 20171125562 - File Number 4411454

Certificate of Amendment

To The

Amended And Restated

Certification Of Incorporation

Carbon Natural gas Company

This Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Carbon Natural Gas Company (the “ Corporation ”), a corporation organized and existing under the laws of the State of Delaware, is hereby duly adopted pursuant to and in accordance with the provisions of Section 242 of the Delaware General Corporation Law.

A new paragraph immediately following existing Section 4.1 of Article 4 of the Amended and Restated Certificate of Incorporation of Carbon Natural Gas Company is hereby added to Section 4.1 and shall read as follows:

“Upon the filing and effectiveness of this Certificate of Amendment (the “ Effective Time ”), the shares of Common Stock of the Corporation issued and outstanding immediately prior to the Effective Time and the shares of Common Stock of the Corporation issued and held in the treasury of the Corporation, if any, immediately prior to the Effective Time are reclassified into a lesser number of shares such that each TWENTY (20) shares of such Common Stock are reclassified into ONE (I) share of Common Stock, without any further action by the Corporation or the holder thereof, subject to the treatment of fractional share interests described below (the “ Reverse stock split” ), No certificates representing fractional shares of Common Stock shall be issued in connection with the Reverse Stock Split; any fractional shares which result from the Reverse Stock Split will be rounded up to the next whole share.”

IN WITNESS WHEREOF, the undersigned authorized officer of the Corporation, for the purpose of amending the Amended and Restated Certificate of Incorporation pursuant to the Delaware General Corporation Law, does hereby make and file this Certificate of Amendment, hereby declaring and certifying that the facts herein stated are true, and accordingly has hereunto set his hand this 21 ^st day of February, 2017. This Certificate of Amendment shall become effective March 15, 2017.

	Kevin D. Struzeski
	Kevin D. Struzeski,
	Secretary and Treasurer

Exhibit 10.1

CREDIT AGREEMENT

among

CARBON NATURAL GAS COMPANY,
as Borrower

THE LENDERS FROM TIME TO TIME PARTY HERETO

and

LEGACYTEXAS BANK,
as Administrative Agent and L/C Issuer

LEGACYTEXAS BANK,
as Sole Lead Arranger and Sole Book Runner

DATED AS OF OCTOBER 3, 2016

TABLE OF CONTENTS

	Page
ARTICLE 1 DEFINITIONS	1
Section 1.1 Definitions	1
Section 1.2 Accounting Matters	27
Section 1.3 ERISA Matters	28
Section 1.4 Letter of Credit Amounts	28
Section 1.5 Other Definitional Provisions	28
Section 1.6 Interpretative Provision	28
Section 1.7 Times of Day	28
Section 1.8 Other Loan Documents	28
ARTICLE 2 THE COMMITMENTS AND CREDIT EXTENSIONS	29
Section 2.1 The Loans	29
Section 2.2 Letters of Credit	30
Section 2.3 Fees	37
Section 2.4 Payments Generally; Administrative Agent’s Clawback	38
Section 2.5 Evidence of Debt	39
Section 2.6 Cash Collateral	39
Section 2.7 Interest; Payment Terms	40
Section 2.8 Voluntary Termination or Reduction of Commitments; Prepayments	42
Section 2.9 Borrowing Base	43
ARTICLE 3 TAXES, YIELD PROTECTION AND INDEMNITY	47
Section 3.1 Increased Costs	47
Section 3.2 Illegality	48
Section 3.3 Inability to Determine Rates	49
Section 3.4 Taxes	49
Section 3.5 Compensation for Losses	53
Section 3.6 Mitigation of Obligations; Replacement of Lenders	53
Section 3.7 Survival	54
ARTICLE 4 SECURITY	54
Section 4.1 Mortgaged Properties	54
Section 4.2 Collateral	55
Section 4.3 Setoff	55
Section 4.4 Authorization to File Financing Statements	55
ARTICLE 5 CONDITIONS PRECEDENT	56
Section 5.1 Initial Extension of Credit	56
Section 5.2 All Extensions of Credit	58
ARTICLE 6 REPRESENTATIONS AND WARRANTIES	59
Section 6.1 Entity Existence	59
Section 6.2 Financial Statements; Etc	59
Section 6.3 Action; No Breach	60
Section 6.4 Operation of Business	60
Section 6.5 Litigation and Judgments	60
Section 6.6 Rights in Properties; Liens	60

Section 6.7 Enforceability	61
Section 6.8 Approvals	61
Section 6.9 Taxes	61
Section 6.10 Use of Proceeds; Margin Securities	62
Section 6.11 ERISA	62
Section 6.12 Disclosure	62
Section 6.13 Subsidiaries	62
Section 6.14 Agreements	63
Section 6.15 Compliance with Laws	63
Section 6.16 Inventory	63
Section 6.17 Regulated Entities	63
Section 6.18 Environmental Matters	63
Section 6.19 Intellectual Property	64
Section 6.20 Anti-Corruption Laws and Sanctions	64
Section 6.21 Patriot Act	64
Section 6.22 Insurance	64
Section 6.23 Solvency	65
Section 6.24 Security Documents	65
Section 6.25 Businesses	65
Section 6.26 Labor Matters	65
Section 6.27 Gas Balancing Agreements and Advance Payment Contracts	65
Section 6.28 Material Agreements	65
Section 6.29 Hedging Agreements and Transactions	65
Section 6.30 Flood Matters	65
ARTICLE 7 AFFIRMATIVE COVENANTS	66
Section 7.1 Reporting Requirements	66
Section 7.2 Maintenance of Existence; Conduct of Business	68
Section 7.3 Maintenance and Operation of Properties	69
Section 7.4 Taxes and Claims	69
Section 7.5 Insurance	70
Section 7.6 Inspection Rights	71
Section 7.7 Keeping Books and Records	71
Section 7.8 Compliance with Laws	71
Section 7.9 Compliance with Agreements	71
Section 7.10 Further Assurances	71
Section 7.11 ERISA	71
Section 7.12 Depository Relationship	71
Section 7.13 Additional Guarantors	72
Section 7.14 Title Assurances	72
Section 7.15 Commodity Hedging Transactions	72
Section 7.16 Concerning Operator’s Liens	73
Section 7.17 Post-Closing Obligation	73
ARTICLE 8 NEGATIVE COVENANTS	73
Section 8.1 Debt	73
Section 8.2 Limitation on Liens	73
Section 8.3 Mergers, Etc	76
Section 8.4 Restricted Payments	76
Section 8.5 Loans and Investments	77
Section 8.6 Limitation on Issuance of Equity	78

Section 8.7 Transactions With Affiliates	78
Section 8.8 Disposition of Assets	78
Section 8.9 Sale and Leaseback	79
Section 8.10 Prepayment of Debt	79
Section 8.11 Nature of Business	79
Section 8.12 Environmental Protection	79
Section 8.13 Accounting	80
Section 8.14 Burdensome Agreements	80
Section 8.15 Subsidiaries	80
Section 8.16 Amendments of Constituent Documents	80
Section 8.17 Hedging Agreements and Transactions	80
Section 8.18 Gas Balancing Agreements and Advance Payment Contracts	81
Section 8.19 Certain Accounts Payable	81
Section 8.20 Use of Proceeds	81
Section 8.21 Joint Operating Agreements	81
Section 8.22 Excluded Subsidiaries	81
ARTICLE 9 FINANCIAL COVENANTS	82
Section 9.1 Leverage Ratio	82
Section 9.2 Current Ratio	82
ARTICLE 10 DEFAULT	82
Section 10.1 Events of Default	82
Section 10.2 Remedies Upon Default	84
Section 10.3 Application of Funds	85
Section 10.4 Performance by Administrative Agent	85
ARTICLE 11 AGENCY	86
Section 11.1 Appointment and Authority	86
Section 11.2 Rights as a Lender	86
Section 11.3 Exculpatory Provisions	87
Section 11.4 Reliance by Administrative Agent	88
Section 11.5 Delegation of Duties	88
Section 11.6 Resignation of Administrative Agent	88
Section 11.7 Non-Reliance on Administrative Agent and Other Lenders	90
Section 11.8 Administrative Agent May File Proofs of Claim	90
Section 11.9 Collateral and Guaranty Matters	91
Section 11.10 Bank Product Agreements	91
ARTICLE 12 MISCELLANEOUS	92
Section 12.1 Expenses	92
Section 12.2 INDEMNIFICATION	93
Section 12.3 Limitation of Liability	94
Section 12.4 No Duty	94
Section 12.5 Lenders Not Fiduciary	94
Section 12.6 Equitable Relief	94
Section 12.7 No Waiver; Cumulative Remedies	94
Section 12.8 Successors and Assigns	95
Section 12.9 Survival	98
Section 12.10 Amendment	99
Section 12.11 Notices	100

iii

Section 12.12 Governing Law; Venue; Service of Process	101
Section 12.13 Counterparts	102
Section 12.14 Severability	102
Section 12.15 Headings	102
Section 12.16 Construction	102
Section 12.17 Independence of Covenants	102
Section 12.18 WAIVER OF JURY TRIAL	102
Section 12.19 Additional Interest Provision	103
Section 12.20 Ceiling Election	104
Section 12.21 USA Patriot Act Notice	104
Section 12.22 Defaulting Lenders	104
Section 12.23 Sharing of Payments by Lenders	106
Section 12.24 Payments Set Aside	107
Section 12.25 Confidentiality	107
Section 12.26 Electronic Execution of Assignments and Certain Other Documents	108
Section 12.27 Intercreditor Agreement	108
Section 12.28 NOTICE OF FINAL AGREEMENT	108

INDEX TO SCHEDULES

Schedule	Description of Schedule	Section
2.1	Commitments and Applicable Percentages	2.1
6.5	Litigation and Judgments	6.5
6.6(b)	Oil and Gas Properties	6.6(b)
6.13	Subsidiaries	6.13
6.13(b)	Excluded Subsidiaries	6.13(b)
6.18	Environmental Matters	6.18
6.19	Intellectual Property	6.19
6.28	Material Agreements	6.28
6.29	Hedging Agreements and Hedging Transactions	6.29
8.1	Existing Debt	8.1
8.2	Existing Liens	8.2
8.5	Existing Investments	8.5
12.11	Notices	12.11

INDEX TO EXHIBITS

Exhibit	Description of Exhibit	Section
A	Assignment and Assumption	1.1
B	Compliance Certificate	1.1
C	Borrowing Request	1.1
D	Note	1.1
E	Tax forms	3.4(g)
F	Borrowing Base Adjustment Letter	2.9(d)

CREDIT AGREEMENT

THIS CREDIT AGREEMENT, dated as of October 3, 2016, is among CARBON NATURAL GAS COMPANY, a Delaware corporation (“ Borrower ”), the lenders from time to time party hereto (collectively, “ Lenders ” and individually, a “ Lender ”), and LEGACYTEXAS BANK, a Texas state bank, as Administrative Agent and L/C Issuer.

RECITALS

Borrower has requested that Lenders extend credit to Borrower as described in this Agreement. Lenders are willing to make such credit available to Borrower upon and subject to the provisions, terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows:

ARTICLE 1

DEFINITIONS

Section 1.1 Definitions . As used in this Agreement, all exhibits, appendices and schedules hereto and in any note, certificate, report or other Loan Documents made or delivered pursuant to this Agreement, the following terms will have the meanings given such terms in this Section 1.1 or in the provision, section or recital referred to below:

“ Acceptable Commodity Hedging Transactions ” means:

(a) Commodity Hedging Transactions meeting each of the following criteria unless a variation therefrom is consented to in writing by Administrative Agent:

(i) The quantity of gaseous and liquid hydrocarbons owned by Borrower and its Subsidiaries subject to Commodity Hedging Transactions (other than floors covered by clause (b) below) at the time of entering into such Commodity Hedging Transactions shall not, without the prior written approval of Administrative Agent, be greater than (A) for natural gas, 90% of the monthly Projected Production of natural gas from the Oil and Gas Properties of Borrower and its Subsidiaries used in determining the Borrowing Base and not the subject of Commodity Hedging Transactions under clause (b) below, (B) for oil, 90% of the monthly Projected Production of oil from the Oil and Gas Properties of Borrower and its Subsidiaries used in determining the Borrowing Base and not the subject of Commodity Hedging Transactions under clause (b) below and (C) for condensate and natural gas liquids, including gas processing plant products, 90% of the monthly Projected Production of such liquids from the Oil and Gas Properties of Borrower and its Subsidiaries used in determining the Borrowing Base and not the subject of Commodity Hedging Transactions under clause (b) below.

(ii) The “strike prices” under any Commodity Hedging Transactions (and the “strike price ceiling” under any collar), at the time of entering into such Commodity Hedging Transactions, shall not be less than the lowest prices utilized in the most recent base case evaluation of the Oil and Gas Properties used by Administrative Agent in determining the Borrowing Base, except that under certain downside conditions such lower strike price as Administrative Agent may approve in writing following a written request by Borrower may be used.

CREDIT AGREEMENT - Page 1

(iii) The counterparty or counterparties thereunder must be Approved Commodity Swap Counterparties.

(iv) The Commodity Hedging Transaction is a standard commodity hedging arrangement entered into in the ordinary course of business for the principal purpose of protecting against fluctuations in commodity prices or commodity basis risk and not for the purpose of speculation.

(v) The Commodity Hedging Transaction does not have a term longer than 4 years.

(vi) The Commodity Hedging Transaction is unsecured except as specifically permitted by the Loan Documents or the Intercreditor Agreement.

(vii) The Commodity Hedging Transaction is otherwise acceptable to Administrative Agent in its reasonable discretion.

(b) Commodity Hedging Transactions in the form of minimum price guarantees or “floors,” limited to 100% (or such greater percentage as Administrative Agent may approve in writing from time to time) of the monthly Projected Production from any commodity category of Borrower’s and its Subsidiaries’ Proved Oil and Gas Properties not subject to Commodity Hedging Transactions under clause (a) above and otherwise satisfying the requirements of subclauses (ii) through (vii) of clause (a) of this definition.

“ Account ” means an account, as defined in the UCC.

“ Acquisition ” means the acquisition by any Person of (a) a majority of the Equity Interests of another Person, (b) all or substantially all of the assets of another Person or (c) all or substantially all of a business unit or line of business of another Person, in each case (i) whether or not involving a merger or consolidation with such other Person and (ii) whether in one transaction or a series of related transactions.

“ Acquisition Agreement ” means that certain Purchase and Sale Agreement, dated as of the Closing Date, by and among the Sellers, as sellers, and Nytis, as buyer, and all modifications, supplements and amendments thereof.

“ Acquisition Documents ” means the Acquisition Agreement and all agreements, assignments, deeds, conveyances, certificates or other documents and instruments now or hereafter executed and delivered by any Seller and/or Nytis pursuant to the Acquisition Agreement or in connection with the transactions contemplated by the Acquisition Agreement.

“ Adjusted LIBOR ” means, with respect to any LIBOR Portion for any Interest Period or day, as applicable, an interest rate per annum equal to LIBOR for such Interest Period or day multiplied by the Statutory Reserve Rate.

“ Administrative Agent ” means LegacyTexas Bank, in its capacity as administrative agent under any of the Loan Documents, until the appointment of a successor administrative agent pursuant to the terms of this Agreement and, thereafter, shall mean such successor administrative agent.

“ Administrative Questionnaire ” means an administrative questionnaire in a form supplied by Administrative Agent.

CREDIT AGREEMENT - Page 2

“ Advance Payment Contract ” means any take-or-pay or similar contract whereby Borrower or any of its Subsidiaries agrees to accept a defined payment (whether at the time the contract is entered into or in the future) as payment-in-full for the purchase of present or future production of Hydrocarbons from its Oil and Gas Properties (each, an “ Advance Payment ”) and to deliver such Hydrocarbons at some future time without then or thereafter receiving full payment therefor at the prevailing market price for such Hydrocarbons as of the date of delivery thereof.

“ Affiliate ” means, as to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, Controls or is Controlled by, or is under common Control with, such Person; (b) that directly or indirectly beneficially owns or holds 10% or more of any class of voting Equity Interests of such Person; or (c) 10% or more of the voting Equity Interests of which is directly or indirectly beneficially owned or held by such Person; provided , however , in no event shall any Lender be deemed an Affiliate of Borrower or any of its Subsidiaries or Affiliates.

“ Agent Parties ” means, collectively, Administrative Agent and its Related Parties.

“ Aggregate Commitments ” means, at any time, the aggregate amount of the Commitments of the Lenders at such time, which aggregate amount shall be the lesser of (a) the aggregate amount set forth on Schedule 2.1 and (b) the Borrowing Base in effect at such time.

“ Aggregate Revolving Credit Exposure ” means, at any time, the aggregate Revolving Credit Exposures of all Lenders at such time.

“ Agreement ” means this Credit Agreement, together with all schedules, exhibits and appendices attached to or otherwise identified herewith, in each case as amended, restated supplemented or otherwise modified from time to time.

“ Anti-Corruption Laws ” means all Laws, rules, and regulations of any jurisdiction applicable to Borrower and its Affiliates from time to time concerning or relating to bribery or corruption.

“ Applicable Margin ” means the applicable percentages per annum set forth below based upon the Utilization applicable from time to time. The Applicable Margin shall immediately and automatically change when and as the Utilization changes.

Pricing Level	Utilization	Base Rate Portion			LIBOR Portion and Letter of Credit Fee			Commitment Fee
1	< 25%		0.50	%		3.50	%		0.50	%
2	> 25% but < 50%		0.75	%		3.75	%		0.50	%
3	> 50% but < 75%		1.00	%		4.00	%		0.50	%
4	> 75% but < 90%		1.25	%		4.25	%		0.50	%
5	> 90%		1.50	%		4.50	%		0.50	%

CREDIT AGREEMENT - Page 3

“ Applicable Percentage ” means, with respect to any Lender at any time, the percentage (carried out to the ninth decimal place) of the Aggregate Commitments represented by such Lender’s Commitment at such time; provided that if the Aggregate Commitments have been terminated pursuant to the terms hereof, then the Applicable Percentage of each Lender shall be determined based upon the Applicable Percentage of such Lender immediately prior to such termination and after giving effect to any subsequent assignments made pursuant to the terms hereof.

“ Applicable Rate ” means (a) in the case of a Portion bearing interest based upon the Base Rate, the Base Rate plus the Applicable Margin; and (b) in the case of a Portion bearing interest based upon LIBOR, Adjusted LIBOR plus the Applicable Margin.

“ Approved Commodity Swap Counterparty ” means (a) each Bank Product Provider, (b) BP Energy Company, a Delaware corporation, and (c) each other swap counterparty approved in writing from time to time by Administrative Agent; provided , however , Administrative Agent may, by giving written notice to Borrower (with respect to clauses (b) and (c) ), elect to revoke such swap counterparty’s status as an Approved Commodity Swap Counterparty for purposes of any Commodity Hedging Transactions entered into following such notice if the Administrative Agent has any concerns about the long or short term financial well-being or creditworthiness of such swap counterparty.

“ Approved Fund ” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

“ Arranger ” means LegacyTexas Bank in its capacity as sole lead arranger and sole book runner.

“ ASC 410 ” means the Accounting Standards Codification No. 410 (Asset Retirement and Environmental Obligations), as issued by the Financial Accounting Standards Board, as amended.

“ ASC 815 ” means the Accounting Standards Codification No. 815 (Derivatives and Hedging), as issued by the Financial Accounting Standards Board, as amended.

“ ASC 825 ” means the Accounting Standards Codification No. 825 (Financial Instruments), as issued by the Financial Accounting Standards Board, as amended.

“ Assignment and Assumption ” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 12.8 ), and accepted by Administrative Agent, in substantially the form of Exhibit A or any other form approved by Administrative Agent.

“ Bank Product Agreements ” means those certain agreements entered into from time to time between any Obligated Party and a Bank Product Provider in connection with any Bank Products, including without limitation, Hedging Agreements.

“ Bank Product Obligations ” means all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by any Obligated Party to any Bank Product Provider pursuant to or evidenced by any Bank Product Agreement and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that an Obligated Party is obligated to reimburse to any Bank Product Provider as a result of such Bank Product Provider purchasing participations or executing indemnities or reimbursement obligations with respect to the Bank Products provided to any Obligated Party pursuant to a Bank Product Agreement. For the avoidance of doubt, the Bank Product Obligations arising under any Hedging Transaction shall be determined by the Hedge Termination Value thereof.

CREDIT AGREEMENT - Page 4

“ Bank Product Provider ” means any Person that, at the time it enters into a Bank Product Agreement is a Lender or an Affiliate of a Lender, in its capacity as a party to such Bank Product Agreement.

“ Bank Products ” means any service provided to, facility extended to, or transaction entered into with any Obligated Party by any Bank Product Provider consisting of (a) deposit accounts, (b) cash management services, including treasury, depository, return items, overdraft, controlled disbursement, merchant store value cards, e-payables services, electronic funds transfer, interstate depository network, automatic clearing house transfer (including the Automated Clearing House processing of electronic funds transfers through the direct Federal Reserve Fedline system) and other cash management arrangements maintained with any Bank Product Provider, (c) debit cards, stored value cards, and credit cards (including commercial credit cards (including so-called “procurement cards” or “P-cards”)) and debit card and credit card processing services or (d) Hedging Agreements.

“ Base Rate ” means, for any day, a per annum interest rate equal to the highest of (a) the Prime Rate for such day; (b) the sum of the Federal Funds Rate for such day plus 0.50%; and (c) Adjusted LIBOR for such day plus 1.00%.

“ Base Rate Portion ” means each Portion bearing interest based on the Base Rate.

“ Board of Governors ” means the Board of Governors of the Federal Reserve System of the United States.

“ Borrower ” means the Person identified as such in the introductory paragraph hereto, and its successors and assigns to the extent permitted by Section 12.8 .

“ Borrowing ” means a borrowing consisting of simultaneous Loans made by each of the Lenders pursuant to Section 2.1 .

“ Borrowing Base ” means, as of any date, the loan amount that may be supported by the Oil and Gas Properties of Borrower and its Subsidiaries, as determined by Administrative Agent and approved by the Required Lenders, or all of the Lenders, as applicable, as set forth in Section 2.9 .

“ Borrowing Base Adjustment Letter ” means a borrowing base adjustment letter substantially in the form of Exhibit F attached hereto .

“ Borrowing Base Deficiency ” means the amount by which the Aggregate Revolving Credit Exposure exceeds the amount of the Borrowing Base.

“ Borrowing Base Deficiency Notice ” means a notice from Administrative Agent to Borrower that a Borrowing Base Deficiency exists because of a periodic or special redetermination made pursuant to Section 2.9(b) or Section 2.9(c)(i) .

“ Borrowing Request ” means a writing, substantially in the form of Exhibit C , properly completed and signed by a Responsible Officer of Borrower, requesting a Borrowing.

“ Brushy Gap ” means Brushy Gap Coal & Gas, Inc., a Kentucky corporation.

“ BTU ” means a British thermal unit.

CREDIT AGREEMENT - Page 5

“ Business Day ” means (a) for all purposes, a weekday, Monday through Friday, except a legal holiday or a day on which banking institutions in Dallas, Texas are authorized or required by Law to be closed, and (b) for purposes of any LIBOR Portion, a day that satisfies the requirements of clause (a) and that is a day on which commercial banks in the City of London, England are open for business and dealing in offshore Dollars. Unless otherwise provided, the term “days” when used herein means calendar days.

“ Capitalized Lease Obligation ” means, with respect to any Person, the amount of Debt under a lease of Property by such Person that would be shown as a liability on a balance sheet of such Person prepared for financial reporting purposes in accordance with GAAP.

“ Cash Collateralize ” means to pledge and deposit with or deliver to Administrative Agent, for the benefit of one or more of L/C Issuer or Lenders, as collateral for L/C Obligations or obligations of Lenders to fund participations in respect of L/C Obligations, cash or deposit account balances or, if Administrative Agent and L/C Issuer shall agree in their sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to Administrative Agent and L/C Issuer. “ Cash Collateral ” shall have a meaning correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.

“ Change in Law ” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any Law, rule, regulation or treaty, (b) any change in any Law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (i) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (ii) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “ Change in Law ”, regardless of the date enacted, implemented, adopted or issued.

“ Change of Control ” means an event or series of events by which:

(a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities Exchange Commission thereunder as in effect on the date hereof) of Equity Interests representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of Borrower;

(b) a majority of the seats (other than vacant seats) on the board of directors of Borrower are occupied by Persons who were neither (i) nominated by the board of directors of Borrower nor (ii) appointed by directors so nominated; or

(c) Patrick McDonald ceases for any reason to be active in the day to day management of Borrower and shall not be replaced within 180 days by another Person acceptable to Administrative Agent in its sole discretion.

“ Closing Date ” means the first date all the conditions precedent in Section 5.1 are satisfied or waived in accordance with Section 12.10 .

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“ Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder.

“ Collateral ” means substantially all of the Property of Borrower and its Subsidiaries as described in the Security Documents, together with any other Property and collateral described in the Security Documents, including, among other things, the Mortgaged Properties and any other Property which may now or hereafter secure the Obligations or any part thereof.

“ Commitment ” means, as to each Lender, its obligation to (a) make Loans to Borrower pursuant to Section 2.1(a) , and (b) purchase participations in L/C Obligations pursuant to Section 2.2 , in an aggregate principal amount at any one time outstanding not to exceed the lesser of (i) the amount set forth opposite such Lender’s name on Schedule 2.1 under the caption “Commitment” or opposite such caption in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement and (ii) such Lender’s Applicable Percentage of the Borrowing Base in effect from time to time.

“ Commodity Exchange Act ” means the Commodity Exchange Act (7 U.S.C. § 1 et seq .), as amended from time to time, and any successor statute.

“ Commodity Hedging Transaction ” means any swap transaction, cap, floor, collar, exchange transaction, forward transaction or other exchange or protection transaction relating to Hydrocarbons or any option with respect to any such transaction, including derivative financial instruments.

“ Communications ” means, collectively, any notice, demand, communication, information, document or other material provided by or on behalf of Borrower pursuant to any Loan Document or the transactions contemplated therein which is distributed to Administrative Agent, any Lender, or L/C Issuer by means of electronic communications pursuant to Section 12.11(d) , including through the Platform.

“ Compliance Certificate ” means a certificate, substantially in the form of Exhibit B , or in any other form agreed to by Borrower and Administrative Agent, prepared by and certified by a Responsible Officer of Borrower.

“ Connection Income Taxes ” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.

“ Constituent Documents ” means (a) in the case of a corporation, its articles or certificate of incorporation or certificate of formation, as applicable, and bylaws; (b) in the case of a general partnership, its partnership agreement; (c) in the case of a limited partnership, its certificate of limited partnership or certificate of formation, as applicable, and partnership agreement; (d) in the case of a trust, its trust agreement; (e) in the case of a joint venture, its joint venture agreement; (f) in the case of a limited liability company, its articles of organization or certificate of formation, as applicable, operating agreement, regulations and/or other organizational and governance documents and agreements; and (g) in the case of any other entity, its organizational and governance documents and agreements.

“ Control ” means the possession, directly or indirectly, of the power to direct or cause direction of the management or policies of a Person, whether through the ownership of voting securities, by contract, or otherwise, and the terms “ Controlling ” and “ Controlled ” have meanings correlative thereto.

“ Crawford Company ” means Crawford Gas Gathering Company, LLC, an Indiana limited liability company.

CREDIT AGREEMENT - Page 7

“ Credit Extension ” means each of (a) a Borrowing and (b) an L/C Credit Extension.

“ Current Ratio ” means, with respect to Borrower and its Subsidiaries on a consolidated basis as of any date of determination thereof, the ratio of (a) the sum of current assets (but excluding the amount of any non-cash items as a result of the application of ASC 410 and ASC 815) plus the Revolving Credit Availability on such date to (b) current liabilities (but excluding the amount of any liabilities respecting any non-cash items as a result of the application of ASC 410 and ASC 815) excluding (i) the current portion of the Obligations on such date and (ii) during the period from the Closing Date until December 31, 2017, to the extent such liabilities are non-cash items, firm transportation contract obligations resulting from a purchase accounting allocation in connection with a previous Acquisition by Nytis, in each case for purposes of this definition, determined in accordance with GAAP.

“ Debt ” means, with respect to any Person as of any date of determination thereof, without duplication, (a) all obligations of such Person for borrowed money; (b) all obligations of such Person evidenced by bonds, notes, debentures, or other similar instruments; (c) all obligations of such Person to pay the deferred purchase price of Property or services, except trade accounts payable of such Person arising in the ordinary course of business that are not past due by more than 90 days, unless such payables are being contested in good faith by appropriate proceedings and adequate reserves for such items have been made in accordance with GAAP; (d) all Capitalized Lease Obligations of such Person; (e) all Debt or other obligations of others Guaranteed by such Person; (f) all obligations secured by a Lien existing on Property owned by such Person, whether or not the obligations secured thereby have been assumed by such Person or are non-recourse to the credit of such Person; (g) any other obligation for borrowed money or other financial accommodations which in accordance with GAAP would be shown as a liability on the balance sheet of such Person; (h) any repurchase obligation or liability of a Person with respect to Accounts, chattel paper or notes receivable sold by such Person; (i) any liability under a sale and leaseback transaction that is not a Capitalized Lease Obligation; (j) any obligation under any so called “synthetic leases”; (k) any obligation arising with respect to any other transaction that is the functional equivalent of borrowing but which does not constitute a liability on the balance sheets of a Person; (l) all payment and reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers’ acceptances, surety or other bonds and similar instruments; (m) all liabilities of such Person in respect of unfunded vested benefits under any Plan; (n) all net Hedge Obligations of such Person, valued at the Hedge Termination Value thereof; (o) the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment ; and (p) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interests in such Person or any other Person prior to the date that is 90 days after the Maturity Date, valued, in the case of redeemable preferred stock interests, at the greater of its voluntary or involuntary liquidation preference plus all accrued and unpaid dividends.

For all purposes, the Debt of any Person shall include the Debt of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Debt is expressly made non-recourse to such Person.

“ Debtor Relief Laws ” means Title 11 of the United States Code, as now or hereafter in effect, or any other applicable Law, domestic or foreign, as now or hereafter in effect, relating to bankruptcy, insolvency, liquidation, receivership, reorganization, assignment for the benefit of creditors, moratorium, arrangement or composition, extension or adjustment of debts, or similar Laws affecting the rights of creditors.

“ Default ” means an Event of Default or the occurrence of an event or condition which with notice or lapse of time or both would become an Event of Default.

CREDIT AGREEMENT - Page 8

“ Default Interest Rate ” means (a) when used with respect to Obligations (other than Obligations described in the following clauses (b) and (c) ), an interest rate equal to (i) the Base Rate plus (ii) the Applicable Margin, if any, applicable to a Base Rate Portion plus (iii) 2.00% per annum; (b) when used with respect to a LIBOR Portion, an interest rate equal to the interest rate (including any Applicable Margin) otherwise applicable to such LIBOR Portion plus 2.00% per annum; and (c) when used with respect to Letter of Credit Fees, a rate equal to the Applicable Margin plus 2.00% per annum; provided , however , in no event shall the Default Interest Rate exceed the Maximum Rate.

“ Defaulting Lender ” means, subject to Section 12.22(b) , any Lender that (a) has failed to (i) fund all or any portion of its Loans within two Business Days of the date such Loans were required to be funded hereunder unless such Lender notifies Administrative Agent and Borrower in writing that such failure is the result of such Lender’s determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to Administrative Agent or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit) within two Business Days of the date when due, (b) has notified Borrower, Administrative Agent, or L/C Issuer in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement relates to such Lender’s obligation to fund a Loan hereunder and states that such position is based on such Lender’s determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three Business Days after written request by Administrative Agent or Borrower to confirm in writing to Administrative Agent and Borrower that it will comply with its prospective funding obligations hereunder ( provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by Administrative Agent and Borrower), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, or (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any Equity Interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 12.22(b) ) upon delivery of written notice of such determination to Borrower and each Lender which notice shall be promptly provided by the Administrative Agent.

“ Disposition ” means any sale, lease, sub-lease, transfer, assignment, conveyance, release, loss or other disposition, or the entry into any contract, including any Farmout, the performance of which would result in any of the foregoing, of any interest in Property (including any Oil and Gas Property), or of any Equity Interest in a Subsidiary that owns Property (including, but not limited to, any Oil and Gas Property), in any transaction or event or series of transactions or events, and “ Dispose ” has the correlative meaning thereto.

CREDIT AGREEMENT - Page 9

“ Dollars ” and “ $ ” mean lawful money of the United States of America.

“ EBITDA ” means, with respect to Borrower and its Subsidiaries on a consolidated basis as of any applicable date of determination thereof and for any Test Period, an amount equal to (a) Net Income (excluding any non-cash revenue or expense associated with Hedging Agreements resulting from ASC 815 and any non-cash charges attributable to the application of ASC 410), plus without duplication (b) the sum of the following to the extent deducted in the calculation of Net Income: (i) interest expense; (ii) income taxes; (iii) depreciation; (iv) depletion; (v) amortization; (vi) extraordinary losses determined in accordance with GAAP; (vii) other non-recurring expenses reducing such Net Income which do not represent a cash item in such Test Period or any future period; (viii) all other non-cash charges and credits to income including ceiling test impairments under full cost accounting; (ix) fees paid to the Lenders, L/C Issuer, and Administrative Agent under this Agreement; (x) transaction-related costs and expenses with respect to this Agreement, the Intercreditor Agreement and the Acquisition Agreement; and (xi) losses on the sale of assets, minus without duplication (c) the sum of the following to the extent included in the calculation of Net Income: (i) income tax credits; (ii) extraordinary gains determined in accordance with GAAP; (iii) gains on the sale of assets; and (iv) all non-recurring, non-cash items increasing Net Income.

“ Eligible Assignee ” means any Person that meets the requirements to be an assignee under Sections 12.8(b)(iii) , 12.8(b)(v) and 12.8(b)(vi) (subject to such consents, if any, as may be required under Section 12.8(b)(iii) ).

“ Environmental Laws ” means any and all federal, state, and local Laws, regulations, judicial decisions, orders, decrees, plans, rules, permits, licenses, and other governmental restrictions and requirements pertaining to health, safety, or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. § 6901 et seq., the Occupational Safety and Health Act, 29 U.S.C. § 651 et seq., the Clean Air Act, 42 U.S.C. § 7401 et seq., the Clean Water Act, 33 U.S.C. § 1251 et seq., and the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq.

“ Environmental Liabilities ” means, as to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs, and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including any Environmental Law, permit, order or agreement with any Governmental Authority or other Person, arising from environmental, health or safety conditions or the Release or threatened Release of a Hazardous Material into the environment, resulting from the past, present, or future operations of such Person or its Affiliates.

“ Equity Interests ” means any and all shares, interests, participations or other equivalents (however designated) of capital stock or other equivalent ownership (or profit) interests in a Person, securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person, and any and all warrants, rights or options to purchase any of the foregoing, whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination.

“ ERISA ” means the Employee Retirement Income Security Act of 1974.

“ ERISA Affiliate ” means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as an Obligated Party or is under common control (within the meaning of Section 414(c) of the Code and Sections 414(m) and (o) of the Code for purposes of the provisions relating to Section 412 of the Code) with an Obligated Party.

CREDIT AGREEMENT - Page 10

“ ERISA Event ” means (a) a Reportable Event with respect to a Plan, (b) a withdrawal by any Obligated Party or any ERISA Affiliate from a Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA, (c) a complete or partial withdrawal by any Obligated Party or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization, (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Plan or Multiemployer Plan, (e) the occurrence of an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan, (f) the imposition of any liability to the PBGC under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon any Obligated Party or any ERISA Affiliate, (g) the failure of any Obligated Party or ERISA Affiliate to meet any funding obligations with respect to any Plan or Multiemployer Plan, (h) a Plan becomes subject to the at-risk requirements in Section 303 of ERISA and Section 430 of the Code or (i) a Multiemployer Plan becomes subject to the requirements for plans in endangered or critical status under Section 432 of the Code or Section 305 of ERISA.

“ Event of Default ” has the meaning set forth in Section 10.1 .

“ Excluded Subsidiaries ” means each of the entities listed in Schedule 6.13(b) , including without limitation, Brushy Gap.

“ Excluded Swap Obligation ” means, with respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the Guarantee of such Guarantor of, or the grant by such Guarantor of a Lien to secure, such Swap Obligation (or any Guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act (determined after giving effect to any “keepwell, support or other agreement” for the benefit of such Guarantor and any and all Guarantees of such Guarantor’s Swap Obligations by Borrower or any other Guarantor) at the time the Guarantee of such Guarantor, or a grant by such Guarantor of a Lien, becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Guarantee or Lien is or becomes excluded in accordance with the first sentence of this definition.

“ Excluded Taxes ” means any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the Laws of, or having its principal office or, in the case of any Lender, its applicable Lending Office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a Law in effect on the date on which (i) such Lender acquires such interest in such Loan or Commitment (other than pursuant to an assignment request by Borrower under Section 3.6(b) ) or (ii) such Lender changes its Lending Office, except in each case to the extent that, pursuant to Section 3.4 , amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its Lending Office, (c) Taxes attributable to such Recipient’s failure to comply with Section 3.4(g) and (d) any U.S. federal withholding Taxes imposed under FATCA.

CREDIT AGREEMENT - Page 11

“ Existing Credit Agreement ” means the Credit Agreement dated May 31, 2010, between Nytis, as borrower, and Bank of Oklahoma, N.A., as lender, as amended from time to time.

“ Facility ” means, at any time, the Aggregate Commitments at such time.

“ Farmout ” means an arrangement pursuant to any agreement whereby the owner(s) of one or more oil, gas and/or mineral leases or other oil and natural gas working interests with respect to any property from which production of Hydrocarbons is sought agrees to transfer or assign an interest in such property to one or more Persons in exchange for (a) drilling or participating in (or agreeing to drill or participate in) the cost of the drilling of one or more wells, or undertaking other exploration or development activities or participating in the cost of such activities (or agreeing to do so), in an attempt to obtain production of Hydrocarbons from such property, or (b) obtaining production of Hydrocarbons from such property or participating in the costs of obtaining such production.

“ FATCA ” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Code.

“ Federal Funds Rate ” means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York, on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to Administrative Agent on such day on such transactions as determined by Administrative Agent.

“ Flood Insurance Regulations ” means (a) the National Flood Insurance Act of 1968, (b) the Flood Disaster Protection Act of 1973, (c) the National Flood Insurance Reform Act of 1994 (amending 42 USC 4001 et seq.), and (d) the Flood Insurance Reform Act of 2004, in each case as now or hereafter in effect or any successor statute thereto and including any regulations promulgated thereunder.

“ Foreign Lender ” means a Lender that is not a U.S. Person.

“ Fronting Exposure ” means, at any time there is a Defaulting Lender, with respect to L/C Issuer, such Defaulting Lender’s Applicable Percentage of the Outstanding Amount of the L/C Obligations other than L/C Obligations as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof.

“ Fund ” means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its activities.

“ GAAP ” means generally accepted accounting principles, applied on a consistent basis, as set forth in opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a “consistent basis” when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period.

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“ Gas Balancing Agreement ” means any agreement or arrangement whereby Borrower or any of its Subsidiaries, or any other party owning an interest in any Hydrocarbons to be produced from Oil and Gas Properties in which Borrower or any of its Subsidiaries owns an interest, has a right to take more than its proportionate share of production therefrom.

“ Governmental Authority ” means the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank, tribal body or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank), and any group or body charged with setting financial accounting or regulatory capital rules or standards (including, without limitation, the Financial Accounting Standards Board, the Bank for International Settlements or the Basel Committee on Banking Supervision or any successor or similar authority to any of the foregoing).

“ Guarantee ” by any Person means any obligation or liability, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person as well as any obligation or liability, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation or liability (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to operate Property, to take-or-pay, or to maintain net worth or working capital or other financial statement conditions or otherwise) or (b) entered into for the purpose of indemnifying or assuring in any other manner the obligee of such Debt or other obligation or liability of the payment thereof or to protect the obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term “ Guarantee ” used as a verb has a corresponding meaning.

“ Guaranteed Parties ” means the collective reference to Administrative Agent, each Lender, L/C Issuer, each Bank Product Provider, and any other Person the Obligations owing to which are, or are purported to be, Guaranteed under the terms of a Guaranty.

“ Guarantors ” means each Person who from time to time Guarantees all or any part of the Obligations under the Loan Documents, and “ Guarantor ” means any one of the Guarantors.

“ Guaranty ” means each written guaranty of a Guarantor in favor of Administrative Agent, for the benefit of the Guaranteed Parties, in form and substance satisfactory to Administrative Agent.

“ Hazardous Material ” means any substance, product, waste, pollutant, material, chemical, contaminant, constituent, or other material which is or becomes listed, regulated, or addressed under any Environmental Law, including, without limitation, asbestos, petroleum, and polychlorinated biphenyls.

“ Hedge Obligations ” means, at any time with respect to any Person, all indebtedness, liabilities, and obligations of such Person under or in connection with any Hedging Agreement or Hedging Transaction, whether actual or contingent, due or to become due and existing or arising from time to time.

“ Hedge Termination Value ” means, in respect of any one or more Hedging Transactions, after taking into account the effect of any legally enforceable netting agreement relating to such Hedging Transactions, (a) for any date on or after the date such Hedging Transactions have been closed out and settlement amounts, early termination amounts or termination value(s) determined in accordance therewith, such settlement amounts, early termination amounts or termination value(s), and (b) for any date prior to the date referenced in clause (a) , the amount(s) determined as the mark-to-market value(s) for such Hedging Transactions, as determined based upon one or more commercially reasonable mid-market or other readily available quotations provided by any dealer which is a party to such Hedging Transactions or any other recognized dealer in such Hedging Transactions (which may include a Lender or any Affiliate of a Lender).

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“ Hedging Agreement ” means any International Swap Dealers Association, Inc. Master Agreement, International Swaps and Derivatives Association, Inc. Master Agreement or other agreement and all schedules and exhibits attached thereto and incorporated therein that set forth the general terms upon which a Person may enter into one or more Hedging Transactions.

“ Hedging Transaction ” means a Commodity Hedging Transaction, a Rate Management Transaction or any other transaction with respect to any swap, forward, future or derivative transaction or option or similar transaction, whether exchange traded, “over-the-counter” or otherwise, involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions.

“ Honor Date ” has the meaning set forth in Section 2.2(c)(i) .

“ Hydrocarbons ” means oil, gas, coal seam gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate and all other liquid or gaseous hydrocarbons produced or to be produced in conjunction therewith from a well bore and all products, by-products and other substances derived therefrom or the processing thereof, including natural gas liquids, and all other minerals and substances produced in conjunction with such substances, including, sulfur, geothermal steam, water, carbon dioxide, helium and any and all minerals, ores or substances of value and the products and proceeds therefrom.

“ Immaterial Title Deficiencies ” means, with respect to Oil and Gas Properties, defects or clouds on title, discrepancies in reported net revenue or working interest ownership interests and other defects, discrepancies, Liens and similar matters which do not, individually or in the aggregate, affect Oil and Gas Properties with a Recognized Value greater than five percent (5.00%) of the Recognized Value of all such properties included in the Borrowing Base.

“ Indemnified Taxes ” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of Borrower under any Loan Document and (b) to the extent not otherwise described in clause (a) , Other Taxes.

“ Independent Engineer ” means Cawley, Gillespie & Associates, Inc. or any other third-party engineering firm acceptable to Administrative Agent in its sole discretion.

“ Information ” has the meaning set forth in Section 12.25 .

“ Initial Reserve Report ” means the Reserve Report prepared by an Independent Engineer and updated by Borrower’s own engineer, dated as of June 30, 2016, covering all of the Oil and Gas Properties of Borrower and its Subsidiaries or to be acquired pursuant to the Acquisition Agreement as of March 1, 2017.

“ Intellectual Property ” means all copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses and other types of intellectual property, in whatever form, now owned or hereafter acquired.

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“ Intercreditor Agreement ” means and certain intercreditor agreement among Borrower, one or more Approved Commodity Swap Counterparties that are not Bank Product Providers, and Administrative Agent, as contractual collateral representative for itself, the Lenders, the Bank Product Providers and such Approved Commodity Swap Counterparties, as amended and in effect from time to time.

“ Interest Period ” means, with respect to any LIBOR Portion, the period commencing on the date such Portion becomes a LIBOR Portion (whether by the making of a Loan or its continuation or conversion) and ending on the numerically corresponding day in the calendar month that is one, two, or three months thereafter, as Borrower may elect; provided , that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (b) any Interest Period pertaining to a LIBOR Portion that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period.

“ Interest Rate ” means the rate equal to the lesser of (a) the Maximum Rate and (b) the Applicable Rate.

“ IRS ” means the Internal Revenue Service or any entity succeeding to all or any of its functions.

“ ISP ” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice, Inc. (or such later version thereof as may be in effect at the time of issuance).

“ Issuer Documents ” means, with respect to any Letter of Credit, the Letter of Credit Application and any other document, agreement and instrument entered into by L/C Issuer and Borrower (or any Subsidiary) or in favor of L/C Issuer and relating to such Letter of Credit.

“ Jaguar Triangle Partnership ” means Jaguar Triangle Partners, a Kentucky general partnership.

“ L/C Advance ” means, with respect to each Lender, such Lender’s funding of its participation in any L/C Borrowing in accordance with its Applicable Percentage.

“ L/C Borrowing ” means an extension of credit resulting from a drawing under any Letter of Credit which has not been reimbursed by Borrower on the date when made or refinanced as a Borrowing.

“ L/C Credit Extension ” means, with respect to any Letter of Credit, the issuance thereof, the extension of the expiry date thereof, or the increase of the amount thereof.

“ L/C Issuer ” means LegacyTexas Bank in its capacity as issuer of Letters of Credit hereunder, or any successor issuer of Letters of Credit hereunder.

“ L/C Obligations ” means, as at any date of determination thereof, an amount equal to the aggregate amount available to be drawn under all outstanding Letters of Credit, plus the aggregate amount of all Unreimbursed Amounts, including all L/C Borrowings. For purposes of computing the amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.4 . For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn.

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“ Laws ” means, collectively, all international, foreign, federal, state, provincial and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

“ Lease Operating Statement ” means a report, in form and substance reasonably satisfactory to Administrative Agent, prepared by Borrower covering each of the Proved Oil and Gas Properties of Borrower and its Subsidiaries included in the most recent redetermination of the Borrowing Base and detailing on a monthly basis the Hydrocarbon production volumes, revenues, associated lease operating expenses, taxes and other expenses for such Proved Oil and Gas Properties.

“ LegacyTexas Bank ” means LegacyTexas Bank, a Texas state bank, and its successors and assigns.

“ Lender ” and “ Lenders ” have the meanings set forth in the introductory paragraph hereto and shall include L/C Issuer, as the context may require.

“ Lending Office ” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify Borrower and Administrative Agent.

“ Letter of Credit ” means any standby letter of credit issued hereunder providing for the payment of cash upon the honoring of a presentation thereunder.

“ Letter of Credit Application ” means an application and agreement for the issuance or amendment of a Letter of Credit in the form from time to time in use by L/C Issuer.

“ Letter of Credit Expiration Date ” means the date that is seven days prior to the Maturity Date (or, if such day is not a Business Day, the next preceding Business Day).

“ Letter of Credit Fee ” has the meaning set forth in Section 2.3(a) .

“ Letter of Credit Sublimit ” means an amount equal to $500,000. The Letter of Credit Sublimit is part of, and not in addition to, the Aggregate Commitments.

“ Leverage Ratio ” means, as of any date of determination thereof, the ratio of (a) all Debt of Borrower and its Subsidiaries, on a consolidated basis in accordance with GAAP, as of such date to (b) EBITDA of Borrower and its Subsidiaries, on a consolidated basis, for the Test Period most recently ended.

“ Liberty Energy Advances ” means the funds advanced to Nytis by Liberty Energy LLC in connection with the participation agreements by and between Nytis and Liberty Energy LLC covering Oil and Gas Properties located in portions of Boyd, Carter, Greenup and Lawrence Counties, Kentucky. As of June 30, 2016, the outstanding balance of the Liberty Advances was approximately $1,633,000 and is being repaid by Nytis by means of crediting to Liberty Energy LLC its portion of monthly joint interest billings.

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“ LIBOR ” means:

(a) for any interest calculation with respect to a LIBOR Portion, for any Interest Period:

(i) the rate per annum for deposits for the same term in Dollars that appears on Thomson Reuters ICE Benchmark Administration LIBOR Rates Page (or the successor thereto if the ICE Benchmark Administration is no longer making a LIBOR rate available) at approximately 11:00 a.m., London, England time, on the related LIBOR Determination Date; provided , however , if such rate appearing on such page is less than zero, such rate shall be deemed to be zero for purposes of this Agreement; or

(ii) if such rate does not appear on such screen or service, or such screen or service shall cease to be available, then LIBOR shall be determined by Administrative Agent to be the offered rate on such other screen or service that displays an average interest settlement rate for deposits in Dollars (for delivery on the first day of such Interest Period) for a term equivalent to such Interest Period as of 11:00 a.m. on the relevant LIBOR Determination Date; provided , however , if such rate appearing on such screen or service is less than zero, such rate shall be deemed to be zero for purposes of this Agreement; or

(ii) if the rates referenced in the foregoing clauses (a)(i) and (a)(ii) are not available, then LIBOR for the relevant Interest Period will be determined by such alternate method as is reasonably selected by Administrative Agent; and

(b) for any interest calculation with respect to a Base Rate Portion:

(i) the rate per annum for deposits in Dollars that appears on Thomson Reuters ICE Benchmark Administration LIBOR Rates Page (or the successor thereto if the ICE Benchmark Administration is no longer making a LIBOR rate available) at approximately 11:00 a.m., London, England time, on the related LIBOR Determination Date for a term of on e month commencing on the date of calculation ; provided , however , if such rate appearing on such page is less than zero, such rate shall be deemed to be zero for purposes of this Agreement; or

(ii) if such rate does not appear on such screen or service, or such screen or service shall cease to be available, then LIBOR shall be determined by Administrative Agent to be the offered rate on such other screen or service that displays an average interest settlement rate for deposits in Dollars (for delivery on such date of calculation) for a term of one month as of 11:00 a.m. on the relevant LIBOR Determination Date ; provided , however , if such rate appearing on such screen or service is less than zero, such rate shall be deemed to be zero for purposes of this Agreement; or

(iii) if the rates referenced in the foregoing clauses (b)(i) and (b)(ii) are not available, then LIBOR for a term of one month will be determined by such alternate method as is reasonably selected by Administrative Agent.

“ LIBOR Determination Date ” means a day that is two Business Days prior to the beginning of the relevant Interest Period or prior to the applicable date of determination, as applicable.

“ LIBOR Portion ” means each Portion bearing interest based on Adjusted LIBOR (other than any Portion bearing interest at the Base Rate which is determined by reference to Adjusted LIBOR).

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“ Lien ” means, as to any Property of any Person, (a) any lien, mortgage, security interest, tax lien, pledge, charge, hypothecation, collateral assignment, or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise, affecting such Property, (b) production payments and the like payable out of such Property, and (c) the signing or filing of a financing statement which names the Person as debtor or the signing of any security agreement, or the signing of any document authorizing a secured party to file any financing statement which names such Person as debtor.

“ Loan ” has the meaning set forth in Section 2.1(a) .

“ Loan Documents ” means this Agreement, each Guaranty, the Security Documents, the Notes, the Issuer Documents, and all other promissory notes, security agreements, deeds of trust, assignments, letters of credit, guaranties, and other instruments, documents, or agreements executed and delivered pursuant to or in connection with this Agreement or the Security Documents; provided that the term “ Loan Documents ” shall not include any Bank Product Agreement or the Intercreditor Agreement.

“ Loss ” has the meaning set forth in Section 7.5(c) .

“ Material Adverse Event ” means any act, event, condition, or circumstance which could materially and adversely affect (a) the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of Borrower and its Subsidiaries, taken as a whole; (b) the ability of any Obligated Party to perform its obligations under any Loan Document to which it is a party or the Intercreditor Agreement to the extent party thereto; or (c) the legality, validity, binding effect or enforceability against any Obligated Party of any Loan Document to which it is a party or the Intercreditor Agreement to the extent party thereto.

“ Material Gas Imbalance ” means, with respect to all Gas Balancing Agreements to which Borrower or any of its Subsidiaries is a party or by which any Oil and Gas Property of Borrower or any of its Subsidiaries is bound, net gas imbalance liabilities of Borrower or any of its Subsidiaries, considered individually or in the aggregate, in excess of $250,000. Gas imbalances will be determined based on Gas Balancing Agreements, with respect to wellhead imbalances, or gas purchase or transportation agreements, with respect to downstream imbalances, if any, specifying the method of calculation thereof, or, alternatively, if no such Gas Balancing Agreements or gas purchase or transportation agreements, as the case may be, are in existence, gas imbalances will be calculated by multiplying (x) the volume of gas imbalance as of the date of calculation (expressed in thousand cubic feet) by (y) the heating value in BTUs per thousand cubic feet, times the Henry Hub average daily spot price for the month immediately preceding the date of calculation adjusted for location differential and transportation costs based upon the location where the Oil and Gas Property giving rise to the imbalances are located.

“ Maturity Date ” means October 3, 2020, or such earlier date on which the Commitment of each Lender terminates as provided in this Agreement; provided , however , that if such date is not a Business Day, the Maturity Date shall be the next succeeding Business Day.

“ Maximum Rate ” means, at all times, the maximum rate of interest which may be charged, contracted for, taken, received or reserved by Lenders in accordance with applicable Texas Law (or applicable United States federal Law to the extent that such Law permits Lenders to charge, contract for, receive or reserve a greater amount of interest than under Texas Law). The Maximum Rate shall be calculated in a manner that takes into account any and all fees, payments, and other charges in respect of the Loan Documents that constitute interest under applicable Law. Each change in any interest rate provided for herein based upon the Maximum Rate resulting from a change in the Maximum Rate shall take effect without notice to Borrower at the time of such change in the Maximum Rate.

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“ Minimum Collateral Amount ” means, at any time, (a) with respect to Cash Collateral consisting of cash or deposit account balances provided to reduce or eliminate Fronting Exposure during the time that a Defaulting Lender exists, an amount equal to 105% of the Fronting Exposure of L/C Issuer with respect to Letters of Credit issued and outstanding at such time, (b) with respect to Cash Collateral consisting of cash or deposit account balances provided in accordance with the provisions of Section 2.6(a)(i) , (a)(ii) or (a)(iii) , an amount equal to 105% of the Outstanding Amount of all L/C Obligations, and (c) otherwise, an amount determined by Administrative Agent and L/C Issuer in their sole discretion.

“ Mortgaged Properties ” means all present and future Oil and Gas Properties of one or more of Borrower and its Subsidiaries in which one or more of Borrower and its Subsidiaries has granted or does hereafter grant a mortgage or Lien to or for the benefit of Administrative Agent for the benefit of the Secured Parties.

“ Mortgages ” means, collectively, the mortgages or deeds of trust now or hereafter encumbering Borrower’s or any of its Subsidiaries’ fee or leasehold estates in the property described therein in favor of Administrative Agent, in form and substance satisfactory to Administrative Agent.

“ Multiemployer Plan ” means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions are being made or have been made by, or for which there is an obligation to make by or there is any liability, contingent or otherwise, with respect to an Obligated Party or any ERISA Affiliate and which is covered by Title IV of ERISA.

“ Net Income ” means, for any Person for any Test Period, the net income (or loss) of such Person and its Subsidiaries on a consolidated basis as determined in accordance with GAAP; provided that Net Income shall exclude (a) the net income of any Subsidiary of such Person during such Test Period to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such income is not permitted by operation of the terms of its Constituent Documents or any agreement, instrument or Law applicable to such Subsidiary during such Test Period except that such Person’s equity in any net loss of any such Subsidiary for such Test Period shall be included in determining Net Income, and (b) any income (or loss) for such Test Period of any other Person if such other Person is not a Subsidiary, except that Borrower’s equity in the net income of any such Person for such Test Period shall be included in Net Income up to the aggregate amount of cash actually distributed by such Person during such Test Period to Borrower or a Subsidiary as a dividend or other distribution (and in the case of a dividend or other distribution to a Subsidiary, such Subsidiary is not precluded from further distributing such amount to Borrower as described in clause (a) of this proviso).

“ Non-Consenting Lender ” means any Lender that does not approve any consent, waiver or amendment that (a) requires the approval of all or all affected Lenders in accordance with the terms of Section 12.10 and (b) has been approved by the Required Lenders.

“ Non-Defaulting Lender ” means, at any time, each Lender that is not a Defaulting Lender at such time.

“ Note ” means a promissory note made by Borrower in favor of a Lender evidencing Loans made by such Lender, substantially in the form of Exhibit D .

“ Nytis ” means Nytis Exploration Company LLC, a Delaware limited liability company.

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“ Obligated Party ” means each of the Borrower, the Guarantors and each other Person who is or becomes party to any agreement that obligates such Person to pay or perform, or that Guarantees or secures payment or performance of, the Obligations under the Loan Documents or any part thereof.

“ Obligations ” means all obligations, indebtedness, and liabilities of Borrower, each Guarantor and each other Obligated Party to Administrative Agent, each Lender, any Affiliates of Administrative Agent or any Lender and any Bank Product Provider now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, arising under or pursuant to this Agreement, any Bank Product Agreements (but in the case of Bank Product Agreements that are Hedging Agreements, limited to obligations and liabilities of Borrower and its Subsidiaries to Bank Product Providers in respect of Hedging Transactions that are permitted by Section 8.17 and the Hedging Agreements under which they arise, to the extent related thereto, including any related early termination or settlement amounts) or the other Loan Documents, and all interest accruing thereon (whether a claim for post-filing or post-petition interest is allowed in any bankruptcy, insolvency, reorganization or similar proceeding) and all attorneys’ fees and other expenses incurred in the enforcement or collection thereof; provided that, as to any Guarantor, the “Obligations” shall exclude any Excluded Swap Obligations of such Guarantor.

“ Oil and Gas Properties ” means (a) all present and future interests and estates existing under any oil, gas and/or mineral leases including, without limitation, working interests, royalty interests, overriding royalty interests, production payments, net profits interests and carried interests, (b) all present and future rights in mineral fee interests, including without limitation, any reversionary interests relating thereto, (c) all rights, titles and interests created by or arising under the terms of all present and future unitization, communitization or pooling arrangements (and all properties covered and units created thereby) whether arising by contract or operation of law which now or hereafter include all or any part of the foregoing, (d) all rights, titles and interest created by or arising under the terms of all present and future Farmouts including, without limitation, any back-in interests related thereto, (e) all unsevered and unextracted Hydrocarbons in, under or attributable with respect to any of the foregoing, and (f) all rights, remedies, powers and privileges with respect to any of the foregoing, in each case, including, without limitation, all of the foregoing which are classified as proved developed producing, proved developed non-producing, proved developed behind pipe, proved developed shut-in, proved undeveloped, probable and possible reserves and any other reserve category recognized by the Society of Petroleum Evaluation Engineers or any successor thereto.

“ Other Connection Taxes ” means, with respect to any Recipient, Taxes imposed as a result of a present or former connection between such Recipient and the jurisdiction imposing such Tax (other than connections arising from such Recipient having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).

“ Other Taxes ” means all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 3.6 ).

“ Outstanding Amount ” means (a) with respect to the Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of Loans occurring on such date, and (b) with respect to any L/C Obligations on any date, the amount of such L/C Obligations on such date after giving effect to any L/C Credit Extension occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements by Borrower of Unreimbursed Amounts.

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“ Participant ” means any Person (other than a natural Person, or a holding company, investment vehicle or trust for, or owned and operated for the primary benefit of, a natural Person, a Defaulting Lender, or Borrower or any of Borrower’s Affiliates or Subsidiaries or any other Obligated Party) to which a participation is sold by any Lender in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it).

“ Participant Register ” means a register in the United States on which each Lender that sells a participation enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans or other obligations under the Loan Documents.

“ Patriot Act ” means the Uniting and Strengthening America by Providing Appropriate Tools to Intercept and Obstruct Terrorism Act of 2001 (Title III of Pub. L. 107-56, signed into law October 26, 2001).

“ Payment Date ” means (a) in respect of each Base Rate Portion, the first day of each and every calendar quarter during the term of this Agreement and the Maturity Date, and (b) in respect of each LIBOR Portion, the last day of each Interest Period applicable to such LIBOR Portion (or the day that is three months after the first day of such Interest Period if such Interest Period has a length of more than three months) and the Maturity Date.

“ PBGC ” means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA.

“ Permitted Liens ” means those Liens permitted by Section 8.2 .

“ Permitted Refinancing ” means Debt constituting a refinancing or extension of Debt permitted under Sections 8.1(b) and 8.1(d) that (a) has an aggregate outstanding principal amount not greater than the aggregate principal amount of the Debt being refinanced or extended plus an amount equal to the fees and expenses reasonably incurred in connection with such refinancing or extension, (b) is not entered into as part of a sale leaseback transaction, (c) is not secured by a Lien on any assets other than the collateral securing the Debt being refinanced or extended, (d) the obligors of which are the same as the obligors of the Debt being refinanced or extended and (e) is otherwise on terms no less favorable to the Obligated Parties, taken as a whole, than those of the Debt being refinanced or extended.

“ Permitted Tax Distributions ” means, with respect to any Person, any dividend or distribution to any holder of such Person’s Equity Interests to permit such holders to pay federal income taxes and all relevant state and local income taxes at a rate equal to the highest marginal applicable tax rate for the applicable tax year, however denominated (together with any interest, penalties, additions to tax, or additional amounts with respect thereto) imposed as a result of taxable income attributed to such holder as a partner, member or stockholder of such Person under federal, state, and local income tax Laws, determined on a basis that combines those liabilities arising out of the net effect of the income, gains, deductions, losses, and credits of such Person and attributable to it in proportion and to the extent in which such holders hold Equity Interests of such Person, provided , however , the computation of tax distributions under this definition shall take into account the carryovers of items of loss, deduction and expense previously allocated by Borrower to holders of its Equity Interests, such that the excess, if any, of the aggregate items of losses from the prior taxable year over aggregate items of income from the prior taxable year will be deducted from the current taxable year’s income before applying the appropriate tax rate.

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“ Person ” means any individual, corporation, limited liability company, business trust, association, company, partnership, joint venture, Governmental Authority, or other entity, and shall include such Person’s heirs, administrators, personal representatives, executors, successors and assigns.

“ Plan ” means any employee benefit or other plan, other than a Multiemployer Plan, established or maintained by, or for which there is an obligation to make contributions by or there is any liability, contingent or otherwise with respect to Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA or subject to Section 412 of the Code.

“ Platform ” means Debt Domain, Intralinks, Syndtrak or a substantially similar electronic transmission system.

“ Portion ” means any principal amount of any Loan bearing interest based upon the Base Rate or Adjusted LIBOR.

“ Prime Rate ” means the rate of interest per annum publicly announced from time to time by LegacyTexas Bank as its prime rate in effect at its Principal Office; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. Such rate is set by LegacyTexas Bank as a general reference rate of interest, taking into account such factors as LegacyTexas Bank may deem appropriate; it being understood that many of LegacyTexas Bank’s commercial or other loans are priced in relation to such rate, that it is not necessarily the lowest or best rate actually charged to any customer and that LegacyTexas Bank may make various commercial or other loans at rates of interest having no relationship to such rate.

“ Principal Office ” means the principal office of Administrative Agent, presently located at the address set forth on Schedule 12.11 .

“ Production Report ” means a report, in form and substance reasonably satisfactory to Administrative Agent, prepared by Borrower covering each of the Proved Oil and Gas Properties of Borrower and its Subsidiaries included in the most recent redetermination of the Borrowing Base and detailing Hydrocarbon production volumes on a well-by-well basis for the most recently-completed month, which report shall provide whether such Hydrocarbons were produced during such month or, as a result of accounting practices, were produced in a previous month, in which case the report shall specify the month during which such Hydrocarbons were produced.

“ Prohibited Transaction ” means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code.

“ Projected Production ” as of any time means the projected production of oil, natural gas, condensate or natural gas liquids including gas processing plant products (measured by volume unit or BTU equivalent, not sales price), as applicable, for the term of the contracts or a particular month, as applicable, from properties and interests owned by Borrower or any of its Subsidiaries which are located in or offshore of the United States and which have attributable to them proved developed producing oil and gas reserves, as such production has been most recently projected by Administrative Agent in its sole discretion based upon Administrative Agent’s reasonable internal reserve analysis, after deducting projected production from any properties or interests sold or under contract for sale that had been included in such analysis.

“ Property ” of a Person means any and all property, whether real, personal, tangible, intangible or mixed, of such Person, or any other assets owned, operated or leased by such Person, and, with respect to Borrower and its Subsidiaries, shall include the Mortgaged Properties.

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“ Proved Oil and Gas Properties ” means, collectively, (a) all Oil and Gas Properties which constitute proved developed producing reserves as determined by Administrative Agent, (b) all Oil and Gas Properties which constitute proved developed non-producing reserves, proved developed behind pipe reserves or proved developed shut-in reserves as determined by Administrative Agent, (c) all Oil and Gas Properties which constitute proved undeveloped reserves as determined by Administrative Agent and (d) all Oil and Gas Properties which constitute other categories of proved reserves recognized by the Society of Petroleum Evaluation Engineers or any successor thereto as determined by Administrative Agent.

“ Rate Management Transaction ” means any transaction (including an agreement with respect thereto) now existing or hereafter entered into by any Obligated Party which is a rate swap, basis swap, forward rate transaction, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures, but excluding Commodity Hedging Transactions.

“ Recipient ” means Administrative Agent, L/C Issuer, or any Lender, as applicable.

“ Recognized Value ” means the value, as determined by the Lenders, attributed to the Oil and Gas Properties of Borrower and its Subsidiaries from the most recent determination of the Borrowing Base, based upon the discounted present value of the estimated net cash flow to be realized from the production of Hydrocarbons from such Oil and Gas Properties and the other standards specified in Section 2.9(a) .

“ Register ” means a register for the recordation of the names and addresses of Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time.

“ Related Indebtedness ” means any and all Debt paid or payable by Borrower to Administrative Agent or any Lender pursuant to any Loan Document other than any Note.

“ Related Parties ” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors and representatives of such Person and of such Person’s Affiliates.

“ Release ” means, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, disbursement, leaching, or migration of Hazardous Materials into the indoor or outdoor environment or into or out of property owned by such Person, including, without limitation, the movement of Hazardous Materials through or in the air, soil, surface water, ground water, or Property.

“ Remedial Action ” means all actions required to (a) clean up, remove, treat, or otherwise address Hazardous Materials in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release of Hazardous Materials so that they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, or (c) perform pre-remedial studies and investigations and post-remedial monitoring and care.

“ Removal Effective Date ” has the meaning set forth in Section 11.6(b) .

“ Reportable Event ” means any of the events set forth in Section 4043 of ERISA.

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“ Required Lenders ” means, as of any date of determination, Lenders holding more than 66- ² / ₃ % of the Total Credit Exposure at such time (with the aggregate amount of each Lender’s risk participation and funded participation in L/C Obligations being deemed “held” by such Lender for purposes of this definition); provided that, if one Lender holds more than 66- ² / ₃ % but less than 100% of the Total Credit Exposure at such time, subject to the last sentence of Section 12.10 , Required Lenders shall be at least two Lenders. The unused Commitment of, and the Revolving Credit Exposure held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders.

“ Required Reserve Value ” means Proved Oil and Gas Properties that have a Recognized Value of not less than 90% of the Recognized Value of all Proved Oil and Gas Properties evaluated in the most recent Reserve Report.

“ Reserve Report ” means a report, in form and substance satisfactory to Administrative Agent, evaluating the oil and gas reserves attributable to all of the Oil and Gas Properties of Borrower and its Subsidiaries which shall, among other things, (a) identify the wells covered thereby, (b) specify the applicable engineer’s opinions with respect to the total volume of reserves (the “available reserves”) of Hydrocarbons (using, as applicable, the terms or categories “proved developed producing reserves”, “proved developed non-producing reserves”, “proved developed behind pipe reserves”, “proved developed shut-in reserves”, “proved undeveloped reserves”, “probable reserves” and “possible reserves” and any other reserve category recognized by the Society of Petroleum Evaluation Engineers or any successor thereto) which Borrower has advised such engineer that Borrower and its Subsidiaries have the right to produce for their own account, (c) set forth such engineer’s opinions with respect to the projected future cash proceeds from the available reserves, discounted for present value at a rate acceptable to Administrative Agent, for each calendar year or portion thereof after the date of such findings and data, (d) set forth such engineer’s opinions with respect to the projected future rate of production of the available reserves, (e) contain such other information as requested by Administrative Agent with respect to the projected rate of production, gross revenues, operating expenses, taxes, capital costs, net revenues and present value of future net revenues attributable to such reserves and production therefrom, (f) contain a statement of the price and escalation parameters, procedures and assumptions upon which such determinations were based, (g) contain a statement of price differentials between the wellhead market price for the commodity sold and the quoted market price used in such report during the previous 12-month period, and (h) contain summary lease operating statements for such Oil and Gas Properties for the previous 12-month period.

“ Resignation Effective Date ” has the meaning set forth in Section 11.6(a) .

“ Responsible Officer ” means the chief executive officer, president, chief financial officer, or treasurer of an Obligated Party or any Person designated by a Responsible Officer to act on behalf of a Responsible Officer; provided that such designated Person may not designate any other Person to be a Responsible Officer. Any document delivered hereunder that is signed by a Responsible Officer of an Obligated Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Person and such Responsible Officer shall be conclusively presumed to have acted on behalf of Obligated Party.

“ Revolving Credit Availability ” means, as of any date of determination thereof, the difference between (a) the Aggregate Commitments on such date minus (b) the Aggregate Revolving Credit Exposure on such date.

“ Revolving Credit Exposure ” means, as to any Lender at any time, the aggregate principal amount of its outstanding Loans at such time and such Lender’s participation in L/C Obligations at such time.

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“ RICO ” means the Racketeer Influenced and Corrupt Organization Act of 1970.

“ Sanctions ” means all economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State.

“ Sanctioned Country ” means, at any time, a country, region or territory which is itself the subject or target of any Sanctions (at the time of this Agreement, Crimea, Cuba, Iran, North Korea, Sudan, and Syria).

“ Sanctioned Person ” means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State, (b) any Person operating, organized, or resident in a Sanctioned Country, or (c) any Person controlled by any such Person.

“ Secured Parties ” means, collectively, Administrative Agent, each Lender, L/C Issuer, each Bank Product Provider, each other Approved Commodity Swap Counterparty (with respect to the Mortgages) and any other Person the Obligations owing to which are, or are purported to be, secured by the Collateral under the terms of the Security Documents.

“ Security Agreement ” means that certain security agreement dated as of even date herewith, among the Obligated Parties and Administrative Agent, in favor of the Secured Parties.

“ Security Documents ” means each and every Mortgage, security agreement, pledge agreement, mortgage, deed of trust, control agreement or other collateral security agreement required by or delivered to Administrative Agent from time to time that purport to create a Lien in favor of any of the Secured Parties to secure payment or performance of the Obligations or any portion thereof.

“ Sellers ” means, collectively, EXCO Production Company (WV), LLC, a Delaware limited liability company, BG Production Company (WV), LLC, a Delaware limited liability company, and EXCO Resources (PA) LLC, a Delaware limited liability company.

“ Solvent ” means, with respect to any Person as of any date of determination thereof, that the fair value of the assets of such Person (at fair valuation) is, on the date of determination, greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person as of such date; that the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the probable liability of such Person on its debts as such debts become absolute and matured; and that, as of such date, such Person will be able to pay all liabilities of such Person as such liabilities mature, and such Person does not have unreasonably small capital with which to carry on its business. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability discounted to present value at rates believed to be reasonable by such Person acting in good faith.

“ Statutory Reserve Rate ” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board of Governors to which Administrative Agent is subject with respect to the LIBOR, for eurocurrency funding (currently referred to as “Eurocurrency liabilities” in Regulation D of the Board of Governors). Such reserve percentages shall include those imposed pursuant to such Regulation D. LIBOR Portions shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

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“ Subordinated Debt ” means any unsecured Debt of Borrower (other than the Obligations) that has been subordinated to the Obligations under the Loan Documents by written agreement, in form and content, including without limitation, amount, interest rates, payments, covenants, and other terms and conditions, satisfactory to Administrative Agent, and which has been approved in writing by Administrative Agent as constituting Subordinated Debt for purposes of this Agreement.

“ Subsidiary ” means (a) any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or Controlled by Borrower, one or more of Borrower’s other Subsidiaries or by Borrower and one or more of such Subsidiaries, and (b) any other entity (i) of which at least a majority of the ownership, equity or voting interest is at the time directly or indirectly owned or Controlled by one or more of Borrower and other Subsidiaries and (ii) which is treated as a subsidiary in accordance with GAAP. Unless otherwise specified herein, any reference to a “Subsidiary” or “Subsidiaries” shall be deemed to be references to a Subsidiary or Subsidiaries of Borrower. Notwithstanding anything to the contrary contained herein, each of the Excluded Subsidiaries shall not be a Subsidiary for purposes of this Agreement or any other Loan Document.

“ Swap Obligations ” means, with respect to any Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act.

“ Taxes ” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

“ Test Period ” means, as of any date of determination thereof, the four consecutive fiscal quarters of Borrower most recently ended (in each case taken as one accounting period) for which financial statements have been or are required to be delivered pursuant to this Agreement; provided , however , for purposes of the calculation of EBITDAX (including Net Income and each other amount included in the determination of EBITDAX) for Test Period ending March 31, 2017, such amounts shall be annualized by taking the results of the fiscal quarter ending March 31, 2017, and multiplying them by 4; for the Test Period ending June 30, 2017, such amounts shall be annualized by taking the results of the two fiscal quarters ending June 30, 2017, and multiplying them by 2; for the Test Period ending September 30, 2017, such amounts shall be annualized by taking the results of the three fiscal quarters ending September 30, 2017, and multiplying them by 4/3; and for the Test Period ending December 31, 2017 and for each Test Period thereafter, such amount shall be the sum of the results of the four consecutive fiscal quarters of Borrower most recently ended.

“ Total Credit Exposure ” means, as of any date of determination thereof, the sum of the unused Aggregate Commitments at such time plus the Aggregate Revolving Credit Exposure at such time.

“ Type ” means, with respect to a Portion, its character as a LIBOR Portion or a Base Rate Portion.

“ UCC ” means Chapters 1 through 11 of the Texas Business and Commerce Code.

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“ Unfunded Pension Liability ” means the excess, if any, of (a) the funding target as defined under Section 430(d) of the Code without regard to the special at-risk rules of Section 430(i) of the Code, over (b) the value of plan assets as defined under Section 430(g)(3)(A) of the Code determined as of the last day of each calendar year, without regard to the averaging which may be allowed under Section 430(g)(3)(B) of the Code and reduced for any prefunding balance or funding standard carryover balance as defined and provided for in Section 430(f) of the Code.

“ Unreimbursed Amount ” has the meaning set forth in Section 2.2(c)(i) .

“ U.S. Person ” means any Person that is a “United States person” as defined in Section 7701(a)(30) of the Code.

“ U.S. Tax Compliance Certificate ” has the meaning specified in Section 3.4(g)(ii)(B)(3) .

“ Utilization ” means, as of any date of determination thereof, the percentage obtained by dividing the Aggregate Revolving Credit Exposure as of such date by the Aggregate Commitments as of such date.

“ WI/NRI Schedule ” means a schedule comparing the working and net revenue interests of each well, lease or unit mortgaged to Administrative Agent as reflected on each applicable Mortgage, to the working and net revenue interests for such properties reflected in the Reserve Report, along with an explanation as to any material discrepancies between the two disclosures.

“ Withholding Agent ” means each of Borrower and Administrative Agent.

Section 1.2 Accounting Matters .

(a) Generally . All accounting terms not specifically or completely defined herein shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the audited financial statements described in Section 6.2 , except as otherwise specifically prescribed herein. Notwithstanding the foregoing, for purposes of determining compliance with any covenant (including the computation of any financial covenant) contained herein, Debt of Borrower and its Subsidiaries shall be deemed to be carried at 100% of the outstanding principal amount thereof, and the effects of ASC 825 on financial liabilities shall be disregarded.

(b) Changes in GAAP . If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth herein, and either Borrower or the Required Lenders shall so request, Administrative Agent, Lenders and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Required Lenders); provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (ii) Borrower shall provide to Administrative Agent and Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP.

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Section 1.3 ERISA Matters . If, after the date hereof, there shall occur, with respect to ERISA, the adoption of any applicable Law, rule, or regulation, or any change therein, or any change in the interpretation, implementation or administration thereof by the PBGC or any other Governmental Authority, then either Borrower or Required Lenders may request a modification to this Agreement solely to preserve the original intent of this Agreement with respect to the provisions hereof applicable to ERISA, and the parties to this Agreement shall negotiate in good faith to complete such modification.

Section 1.4 Letter of Credit Amounts . Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in effect at such time; provided , however , that with respect to any Letter of Credit that, by its terms or the terms of any Issuer Document related thereto, provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time.

Section 1.5 Other Definitional Provisions . All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words “ hereof ”, “ herein ”, and “ hereunder ” and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all references in a Loan Document to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, the Loan Document in which such references appear. Terms used herein that are defined in the UCC, unless otherwise defined herein, shall have the meanings specified in the UCC. Any definition of or reference to any agreement, instrument or other document shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or in any other Loan Document). Any reference to any Law shall include all statutory and regulatory provisions consolidating, amending or replacing such Law and any reference to any Law or regulation shall, unless otherwise specified, refer to such Law or regulation as amended, modified or supplemented from time to time. Words denoting gender shall be construed to include the masculine, feminine and neuter, when such construction is appropriate; and specific enumeration shall not exclude the general but shall be construed as cumulative; the word “or” is not exclusive; the word “including” (in its various forms) means “including, without limitation”; in the computation of periods of time, the word “from” means “from and including” and the words “to” and “until” mean “to but excluding”; and all references to money refer to the legal currency of the United States of America.

Section 1.6 Interpretative Provision . For purposes of Section 10.1 , a breach of a financial covenant contained in Article 9 shall be deemed to have occurred as of any date of determination thereof by Borrower, the Required Lenders or as of the last date of any specified measurement period, regardless of when the financial statements or the Compliance Certificate reflecting such breach are delivered to Administrative Agent.

Section 1.7 Times of Day . Unless otherwise specified, all references herein to times of day shall be references to central time (daylight or standard, as applicable).

Section 1.8 Other Loan Documents . The other Loan Documents, including the Security Documents, and the Intercreditor Agreement contain representations, warranties, covenants, defaults and other provisions that are in addition to and not limited by, or a limitation of, similar provisions of this Agreement. Such provisions in such other Loan Documents and the Intercreditor Agreement may be different or more expansive than similar provisions of this Agreement and neither such differences nor such more expansive provisions shall be construed as a conflict.

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ARTICLE 2

THE COMMITMENTS AND CREDIT EXTENSIONS

Section 2.1 The Loans .

(a) Borrowings . Subject to the terms and conditions of this Agreement, each Lender severally agrees to make one or more revolving credit loans (each such loan, a “ Loan ”) to Borrower from time to time from the Closing Date until the Maturity Date in an aggregate principal amount for such Lender at any time outstanding up to but not exceeding the amount of such Lender’s Commitment, provided that the Aggregate Revolving Credit Exposure shall not exceed the Aggregate Commitments. Subject to the foregoing limitations, and the other terms and provisions of this Agreement, Borrower may borrow, repay, and reborrow Loans hereunder.

(b) Borrowing Procedure . Each Borrowing, each conversion of a Portion from one Type to the other, and each continuation of a LIBOR Portion shall be made upon Borrower’s irrevocable notice to Administrative Agent, which may be given by telephone. Each such notice must be received by Administrative Agent not later than 11:00 a.m. (i) three Business Days prior to the requested date of any Borrowing of, conversion to, or continuation of a LIBOR Portion or of any conversion of a LIBOR Portion to a Base Rate Portion, and (ii) on the requested date of any Borrowing of a Base Rate Portion. Each telephonic notice by Borrower pursuant to this Section 2.1(b) must be confirmed promptly by delivery to Administrative Agent of a written Borrowing Request, appropriately completed and signed by a Responsible Officer of Borrower. Each Borrowing of, conversion to, or continuation of a LIBOR Portion shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof. Except as provided in Section 2.2(c) , each Borrowing of or conversion to a Base Rate Portion shall be in a principal amount of $250,000 or a whole multiple of $50,000 in excess thereof; provided that a Base Rate Portion may be in an amount equal to the Revolving Credit Availability. Each Borrowing Request (whether telephonic or written) shall specify (A) whether Borrower is requesting a Borrowing, a conversion of Portions from one Type to the other, or a continuation of LIBOR Portions, (B) the requested date of the Borrowing, conversion or continuation, as the case may be (which shall be a Business Day), (C) the principal amount of Portions to be borrowed, converted or continued, (D) the Type of Portions to be borrowed or to which existing Portions are to be converted, and (E) if applicable, the duration of the Interest Period with respect thereto. If Borrower fails to specify a Type of Portion in a Borrowing Request or if Borrower fails to give a timely notice requesting a conversion or continuation, then the applicable Portions shall be made as, or converted to, Base Rate Portions. Any such automatic conversion to Base Rate Portions shall be effective as of the last day of the Interest Period then in effect with respect to the applicable LIBOR Portions. If Borrower requests a Borrowing of, conversion to, or continuation of a LIBOR Portion in any such Borrowing Request but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month.

(c) Funding . Following receipt of a Borrowing Request, Administrative Agent shall promptly notify each Lender of the amount of its Applicable Percentage of the applicable Portions, and if no timely notice of a conversion or continuation is provided by Borrower, Administrative Agent shall notify each Lender of the details of any automatic conversion to Base Rate Portions as described in Section 2.1(b) . In the case of a Borrowing, each Lender shall make the amount of its Loan available to Administrative Agent in immediately available funds at Administrative Agent’s Principal Office not later than 1:00 p.m. on the Business Day specified in the applicable Borrowing Request. Upon satisfaction of the applicable conditions set forth in Section 5.2 (and, if such Borrowing is the initial Credit Extension, Section 5.1 ), Administrative Agent shall make all funds so received available to Borrower in like funds as received by Administrative Agent either by (i) crediting the account of Borrower on the books of LegacyTexas Bank with the amount of such funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) Administrative Agent by Borrower; provided , however , if, on the date the Borrowing Request with respect to such Borrowing is given by Borrower, there are L/C Borrowings outstanding, then the proceeds of such Borrowing, first , shall be applied to the payment in full of any such L/C Borrowings, and second , shall be made available to Borrower as provided above.

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(d) Continuations and Conversions . Except as otherwise provided herein, a LIBOR Portion may be continued or converted only on the last day of the Interest Period for such LIBOR Portion. During the existence of a Default, (i) no Loans may be requested as, converted to, or continued as LIBOR Portions without the consent of the Required Lenders and (ii) unless repaid, each LIBOR Portion shall be converted to a Base Rate Portion at the end of the Interest Period applicable thereto.

(e) Notifications . Administrative Agent shall promptly notify Borrower and Lenders of the interest rate applicable to any Interest Period for LIBOR Portions upon determination of such interest rate.

(f) Interest Periods . After giving effect to all Borrowings, all conversions of Portions from one Type to the other, and all continuations of Portions as the same Type, there shall not be more than five Interest Periods in effect with respect to LIBOR Portions.

Section 2.2 Letters of Credit .

(a) The Letter of Credit Commitment .

(i) Subject to the terms and conditions set forth herein, (A) L/C Issuer agrees, in reliance upon the agreements of Lenders set forth in this Section 2.2 , (1) from time to time on any Business Day during the period from the Closing Date until the Letter of Credit Expiration Date, to issue Letters of Credit for the account of Borrower or its Subsidiaries, and to amend or extend Letters of Credit previously issued by it, in accordance with subsection (b) below, and (2) to honor drawings under the Letters of Credit; and (B) Lenders severally agree to participate in Letters of Credit issued for the account of Borrower or its Subsidiaries and any drawings thereunder; provided that after giving effect to any L/C Credit Extension with respect to any Letter of Credit, (x) the Aggregate Revolving Credit Exposure shall not exceed the Aggregate Commitments, (y) the Revolving Credit Exposure of any Lender shall not exceed such Lender’s Commitment, and (z) the Outstanding Amount of the L/C Obligations shall not exceed the Letter of Credit Sublimit. Each request by Borrower for the issuance or amendment of a Letter of Credit shall be deemed to be a representation by Borrower that the L/C Credit Extension so requested complies with the conditions set forth in the proviso to the preceding sentence. Within the foregoing limits, and subject to the terms and conditions hereof, Borrower’s ability to obtain Letters of Credit shall be fully revolving, and accordingly Borrower may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit that have expired or that have been drawn upon and reimbursed.

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(ii) L/C Issuer shall not issue any Letter of Credit, if:

(A) the expiry date of the requested Letter of Credit would occur more than 12 months after the date of issuance, unless Required Lenders have approved such expiry date; or

(B) the expiry date of the requested Letter of Credit would occur after the Letter of Credit Expiration Date, unless all Lenders have approved such expiry date.

(iii) L/C Issuer shall not be under any obligation to issue any Letter of Credit if:

(A) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain L/C Issuer from issuing the Letter of Credit, or any Law applicable to L/C Issuer or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over L/C Issuer shall prohibit, or request that L/C Issuer refrain from, the issuance of letters of credit generally or the Letter of Credit in particular or shall impose upon L/C Issuer with respect to the Letter of Credit any restriction, reserve or capital requirement (for which L/C Issuer is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon L/C Issuer any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which L/C Issuer in good faith deems material to it;

(B) the issuance of the Letter of Credit would violate one or more policies of L/C Issuer applicable to letters of credit generally;

(C) except as otherwise agreed by Administrative Agent and L/C Issuer, the Letter of Credit is in an initial stated amount less than $25,000;

(D) the Letter of Credit is to be denominated in a currency other than Dollars;

(E) any Lender is at that time a Defaulting Lender, unless L/C Issuer has entered into arrangements, including the delivery of Cash Collateral, satisfactory to L/C Issuer (in its sole discretion) with Borrower or such Lender to eliminate L/C Issuer’s actual or potential Fronting Exposure (after giving effect to Section 12.22(a)(iv) ) with respect to such Defaulting Lender arising from either the Letter of Credit then proposed to be issued or that Letter of Credit and all other L/C Obligations as to which L/C Issuer has actual or potential Fronting Exposure, as it may elect in its sole discretion; or

(F) the Letter of Credit contains any provisions for automatic reinstatement of the stated amount after any drawing thereunder.

(iv) L/C Issuer shall not amend any Letter of Credit if L/C Issuer would not be permitted at such time to issue the Letter of Credit in its amended form under the terms hereof.

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(v) L/C Issuer shall be under no obligation to amend any Letter of Credit if (A) L/C Issuer would have no obligation at such time to issue the Letter of Credit in its amended form under the terms hereof, or (B) the beneficiary of the Letter of Credit does not accept the proposed amendment to the Letter of Credit.

(vi) L/C Issuer shall act on behalf of Lenders with respect to any Letters of Credit issued by it and the documents associated therewith, and L/C Issuer shall have all of the benefits and immunities (A) provided to Administrative Agent in Article 11 with respect to any acts taken or omissions suffered by L/C Issuer in connection with Letters of Credit issued by it or proposed to be issued by it and Issuer Documents pertaining to such Letters of Credit as fully as if the term “Administrative Agent” as used in Article 11 included L/C Issuer with respect to such acts or omissions, and (B) as additionally provided herein with respect to L/C Issuer.

(b) Procedures for Issuance and Amendment of Letters of Credit .

(i) Each Letter of Credit shall be issued or amended, as the case may be, upon the request of Borrower delivered to L/C Issuer (with a copy to Administrative Agent) in the form of a Letter of Credit Application, appropriately completed and signed by a Responsible Officer of Borrower. Such Letter of Credit Application may be sent by facsimile, by United States mail, by overnight courier, by electronic transmission using the system provided by L/C Issuer, by personal delivery, or by any other means acceptable to L/C Issuer. Such Letter of Credit Application must be received by L/C Issuer and Administrative Agent not later than 11:00 a.m. at least two Business Days (or such later date and time as Administrative Agent and L/C Issuer may agree in a particular instance in their sole discretion) prior to the proposed issuance date or date of amendment, as the case may be. In the case of a request for an initial issuance of a Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to L/C Issuer: (A) the proposed issuance date of the requested Letter of Credit (which shall be a Business Day); (B) the amount thereof; (C) the expiry date thereof; (D) the name and address of the beneficiary thereof; (E) the documents to be presented by such beneficiary in case of any drawing thereunder; (F) the full text of any certificate to be presented by such beneficiary in case of any drawing thereunder; (G) the purpose and nature of the requested Letter of Credit; and (H) such other matters as L/C Issuer may require. In the case of a request for an amendment of any outstanding Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to L/C Issuer (1) the Letter of Credit to be amended; (2) the proposed date of amendment thereof (which shall be a Business Day); (3) the nature of the proposed amendment; and (4) such other matters as L/C Issuer may require. Additionally, Borrower shall furnish to L/C Issuer and Administrative Agent such other documents and information pertaining to such requested Letter of Credit issuance or amendment, including any Issuer Documents, as L/C Issuer or Administrative Agent may require.

(ii) Promptly after receipt of any Letter of Credit Application, L/C Issuer will confirm with Administrative Agent (by telephone or in writing) that Administrative Agent has received a copy of such Letter of Credit Application from Borrower and, if not, L/C Issuer will provide Administrative Agent with a copy thereof. Unless L/C Issuer has received written notice from any Lender, Administrative Agent or any Obligated Party, at least one Business Day prior to the requested date of issuance or amendment of the applicable Letter of Credit that one or more applicable conditions contained in Article 5 shall not then be satisfied, then, subject to the terms and conditions hereof, L/C Issuer shall, on the requested date, issue a Letter of Credit for the account of Borrower (or the applicable Subsidiary) or enter into the applicable amendment, as the case may be, in each case in accordance with L/C Issuer’s usual and customary business practices. Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from L/C Issuer a risk participation in such Letter of Credit in an amount equal to the product of such Lender’s Applicable Percentage times the amount of such Letter of Credit.

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(iii) Promptly after its delivery of any Letter of Credit or any amendment to a Letter of Credit to an advising bank with respect thereto or to the beneficiary thereof, L/C Issuer will also deliver to Borrower and Administrative Agent a true and complete copy of such Letter of Credit or amendment.

(i) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, L/C Issuer shall notify Borrower and Administrative Agent thereof. Not later than 11:00 a.m. on the date of any payment by L/C Issuer under a Letter of Credit (each such date, an “ Honor Date ”), Borrower shall reimburse L/C Issuer through Administrative Agent in an amount equal to the amount of such drawing. If Borrower fails to so reimburse L/C Issuer by such time, Administrative Agent shall promptly notify each Lender of the Honor Date, the amount of the unreimbursed drawing (the “ Unreimbursed Amount ”), and the amount of such Lender’s Applicable Percentage thereof. In such event, Borrower shall be deemed to have requested a Borrowing to be disbursed on the Honor Date in an amount equal to the Unreimbursed Amount, subject to the amount of the unutilized portion of Revolving Credit Availability and the conditions set forth in Section 5.2 (other than the delivery of a Borrowing Request). Any notice given by L/C Issuer or Administrative Agent pursuant to this Section 2.2(c)(i) may be given by telephone if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice.

(ii) Each Lender shall upon any notice pursuant to Section 2.2(c)(i) make funds available (and Administrative Agent may apply Cash Collateral provided for this purpose) for the account of L/C Issuer at Administrative Agent’s Principal Office in an amount equal to its Applicable Percentage of the Unreimbursed Amount not later than 1:00 p.m. on the Business Day specified in such notice by Administrative Agent, whereupon, subject to the provisions of Section 2.2(c)(iii) , each Lender that so makes funds available shall be deemed to have made a Loan (or, if the conditions set forth in Section 5.2 are not satisfied, an L/C Borrowing as further described in clause (iii) below) to Borrower in such amount. Administrative Agent shall remit the funds so received to L/C Issuer.

(iii) With respect to any Unreimbursed Amount that is not fully refinanced by a Borrowing because the conditions set forth in Section 5.2 cannot be satisfied or for any other reason, Borrower shall be deemed to have incurred from L/C Issuer an L/C Borrowing in the amount of the Unreimbursed Amount that is not so refinanced, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the Default Interest Rate. In such event, each Lender’s payment to Administrative Agent for the account of L/C Issuer pursuant to Section 2.2(c)(ii) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Lender in satisfaction of its participation obligation under this Section 2.2 .

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(iv) Until each Lender funds its Loan or L/C Advance pursuant to this Section 2.2(c) to reimburse L/C Issuer for any amount drawn under any Letter of Credit, interest in respect of such Lender’s Applicable Percentage of such amount shall be solely for the account of L/C Issuer.

(v) Each Lender’s obligation to make Loans or L/C Advances to reimburse L/C Issuer for amounts drawn under Letters of Credit, as contemplated by this Section 2.2(c) , shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against L/C Issuer, Borrower or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing; provided , however , that each Lender’s obligation to make Loans (but not its obligation to fund its pro rata share of L/C Advances) pursuant to this Section 2.2(c) is subject to the conditions set forth in Section 5.2 (other than delivery by Borrower of a Borrowing Request). No such making of an L/C Advance shall relieve or otherwise impair the obligation of Borrower to reimburse L/C Issuer for the amount of any payment made by L/C Issuer under any Letter of Credit, together with interest as provided herein.

(vi) If any Lender fails to make available to Administrative Agent for the account of L/C Issuer any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.2(c) by the time specified in Section 2.2(c)(ii) , then, without limiting the other provisions of this Agreement, L/C Issuer shall be entitled to recover from such Lender (acting through Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to L/C Issuer at a rate per annum equal to the greater of the Federal Funds Rate and a rate determined by L/C Issuer in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by L/C Issuer in connection with the foregoing. If such Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute such Lender’s Loan included in the relevant Borrowing or L/C Advance in respect of the relevant L/C Borrowing, as the case may be. A certificate of L/C Issuer submitted to any Lender (through Administrative Agent) with respect to any amounts owing under this clause (vi) shall be conclusive absent manifest error.

(d) Repayment of Participations .

(i) At any time after L/C Issuer has made a payment under any Letter of Credit and has received from any Lender such Lender’s L/C Advance in respect of such payment in accordance with Section 2.2(c) , if Administrative Agent receives for the account of L/C Issuer any payment in respect of the related Unreimbursed Amount or interest thereon (whether directly from Borrower or otherwise, including proceeds of Cash Collateral applied thereto by Administrative Agent), Administrative Agent will distribute to such Lender its Applicable Percentage thereof in the same funds as those received by Administrative Agent.

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(ii) If any payment received by Administrative Agent for the account of L/C Issuer pursuant to Section 2.2(c)(i) is required to be returned under any of the circumstances described in Section 12.24 (including pursuant to any settlement entered into by L/C Issuer in its discretion), each Lender shall pay to Administrative Agent for the account of L/C Issuer its Applicable Percentage thereof on demand of Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned by such Lender, at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of Lenders under this clause shall survive the payment in full of the Obligations and the termination of this Agreement.

(e) Obligations Absolute . The obligation of Borrower to reimburse L/C Issuer for each drawing under each Letter of Credit and to repay each L/C Borrowing shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including the following:

(i) any lack of validity or enforceability of such Letter of Credit, this Agreement, or any other Loan Document;

(ii) the existence of any claim, counterclaim, setoff, defense or other right that Borrower or any Subsidiary may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), L/C Issuer or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction;

(iii) any draft, demand, certificate or other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under such Letter of Credit;

(iv) waiver by L/C Issuer of any requirement that exists for L/C Issuer’s protection and not the protection of Borrower or any waiver by L/C Issuer which does not in fact materially prejudice Borrower;

(v) honor of a demand for payment presented electronically even if such Letter of Credit requires that demand be in the form of a draft;

(vi) any payment made by L/C Issuer in respect of an otherwise complying item presented after the date specified as the expiration date of, or the date by which documents must be received under such Letter of Credit if presentation after such date is authorized by the UCC or the ISP, as applicable;

(vii) any payment by L/C Issuer under such Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; or any payment made by L/C Issuer under such Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Law; or

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(viii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, Borrower or any Subsidiary.

Borrower shall promptly examine a copy of each Letter of Credit and each amendment thereto that is delivered to it and, in the event of any claim of noncompliance with Borrower’s instructions or other irregularity, Borrower will promptly notify L/C Issuer. Borrower shall be conclusively deemed to have waived any such claim against L/C Issuer and its correspondents unless such notice is given as aforesaid.

(f) Role of L/C Issuer . Each Lender and Borrower agree that, in paying any drawing under a Letter of Credit, L/C Issuer shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. None of L/C Issuer, Administrative Agent, any of their respective Related Parties nor any correspondent, participant or assignee of L/C Issuer shall be liable to any Lender for (i) any action taken or omitted in connection herewith at the request or with the approval of Required Lenders; (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit or Issuer Document. Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided , however , that this assumption is not intended to, and shall not, preclude Borrower’s pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. None of L/C Issuer, Administrative Agent, any of their respective Related Parties nor any correspondent, participant or assignee of L/C Issuer shall be liable or responsible for any of the matters described in clauses (i) through (viii) of Section 2.2(e) ; provided , however , that anything in such clauses to the contrary notwithstanding, Borrower may have a claim against L/C Issuer, and L/C Issuer may be liable to Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by Borrower which Borrower proves were caused by L/C Issuer’s willful misconduct or gross negligence or L/C Issuer’s willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing, L/C Issuer may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary, and L/C Issuer shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. L/C Issuer may send a Letter of Credit or conduct any communication to or from the beneficiary via the Society for Worldwide Interbank Financial Telecommunication message or overnight courier, or any other commercially reasonable means of communicating with a beneficiary.

(g) Applicability of ISP; Limitation of Liability . Unless otherwise expressly agreed by L/C Issuer and Borrower when a Letter of Credit is issued, the rules of the ISP shall apply to such Letter of Credit. Notwithstanding the foregoing, L/C Issuer shall not be responsible to Borrower for, and L/C Issuer’s rights and remedies against Borrower shall not be impaired by, any action or inaction of L/C Issuer required or permitted under any Law, order, or practice that is required or permitted to be applied to any Letter of Credit or this Agreement, including the Law or any order of a jurisdiction where L/C Issuer or the beneficiary is located, the practice stated in the ISP or in the decisions, opinions, practice statements, or official commentary of the ICC Banking Commission, the Bankers Association for Finance and Trade – International Financial Services Association (BAFT-IFSA), or the Institute of International Banking Law & Practice, whether or not any Letter of Credit or other Issuer Document chooses such Law or practice.

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(h) Fronting Fee and Documentary and Processing Charges Payable to L/C Issuer . At any time there is more than one Lender, Borrower shall pay directly to L/C Issuer for its own account a fronting fee with respect to each Letter of Credit, at the rate per annum separately agreed between Borrower and L/C Issuer, computed on the daily amount available to be drawn under such Letter of Credit and payable on a quarterly basis in advance. Such fronting fee shall be due and payable upon the issuance or renewal of such Letter of Credit for the period from the date of issuance or renewal through the end of the first calendar quarter ending after such date and on the first Business Day of each April, July, October and January thereafter. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.4 . In addition, Borrower shall pay directly to L/C Issuer for its own account the customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, of L/C Issuer relating to letters of credit as from time to time in effect. Such customary fees and standard costs and charges are due and payable on demand and are nonrefundable.

(i) Conflict with Issuer Documents . In the event of any conflict between the terms hereof and the terms of any Issuer Document, the terms hereof shall control.

(j) Letters of Credit Issued for Subsidiaries . Notwithstanding that a Letter of Credit issued or outstanding hereunder is in support of any obligations of, or is for the account of, a Subsidiary, Borrower shall be obligated to reimburse L/C Issuer hereunder for any and all drawings under such Letter of Credit. Borrower hereby acknowledges that the issuance of Letters of Credit for the account of Subsidiaries inures to the benefit of Borrower, and that Borrower’s business derives substantial benefits from the businesses of such Subsidiaries.

Section 2.3 Fees .

(a) Letter of Credit Fees . Borrower shall pay to Administrative Agent for the account of each Lender in accordance, subject to Section 12.22 , with its Applicable Percentage a Letter of Credit fee (the “ Letter of Credit Fee ”) for each Letter of Credit equal to the Applicable Margin for LIBOR Portions times the daily amount available to be drawn under such Letter of Credit; provided , however , each such Letter of Credit Fee shall be no less than $1,000. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.4 . Letter of Credit Fees for each Letter of Credit shall be (i) due and payable in advance on the date of issuance of such Letter of Credit and on the first Business Day of each April, July, October and January thereafter so long as such Letter of Credit remains outstanding and (ii) computed on a quarterly basis in advance. If there is any change in the Applicable Margin for LIBOR Portions during any quarter, the daily amount available to be drawn under each Letter of Credit shall be computed and multiplied by the Applicable Margin for LIBOR Portions separately for each period during such quarter that such Applicable Margin for LIBOR Portions was in effect. Notwithstanding anything to the contrary contained herein while any Event of Default exists, all Letter of Credit Fees shall accrue at the Default Interest Rate.

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(b) Commitment Fees . Borrower agrees to pay to Administrative Agent for the account of each Lender in accordance, subject to Section 12.22 , with its Applicable Percentage a commitment fee on the daily average unused amount of the Commitment of such Lender for the period from and including the date of this Agreement to and including the Maturity Date (including at any time during which one or more of the conditions in Article 5 is not met), at a rate equal to the Applicable Margin. For the purpose of calculating the commitment fee hereunder, the Commitment of each Revolving Credit Lender shall be deemed utilized by the amount of all outstanding Revolving Credit Loans and L/C Obligations, owing to such Revolving Credit Lender whether directly or by participation. Accrued commitment fees shall be payable quarterly in arrears on the first day of each April, July, October, and January during the term of this Agreement and on the Maturity Date.

Section 2.4 Payments Generally; Administrative Agent’s Clawback .

(a) Generally . All payments of principal, interest, and other amounts to be made by Borrower under this Agreement and the other Loan Documents shall be made to Administrative Agent for the account of Administrative Agent or L/C Issuer or the pro rata accounts of the applicable Lenders, as applicable, at the Principal Office in Dollars and immediately available funds, without setoff, deduction, or counterclaim, and free and clear of all Taxes at the time and in the manner provided herein. Payments by check or draft shall not constitute payment in immediately available funds until the required amount is actually received by Administrative Agent in full. Payments in immediately available funds received by Administrative Agent in the place designated for payment on a Business Day prior to 11:00 a.m. at such place of payment shall be credited prior to the close of business on the Business Day received, while payments received by Administrative Agent on a day other than a Business Day or after 11:00 a.m. on a Business Day shall not be credited until the next succeeding Business Day. If any payment of principal or interest on the Notes shall become due and payable on a day other than a Business Day, then such payment shall be made on the next succeeding Business Day. Any such extension of time for payment shall be included in computing interest which has accrued and shall be payable in connection with such payment. Administrative Agent is hereby authorized upon notice to Borrower to charge the account of Borrower maintained with Administrative Agent for each payment of principal, interest and fees as it becomes due hereunder.

(b) Funding by Lenders; Presumption by Administrative Agent . Unless Administrative Agent shall have received notice from a Lender, that such Lender will not make available to Administrative Agent such Lender’s share of a Borrowing, Administrative Agent may assume that such Lender has made such share available on such date in accordance with this Agreement and may, in reliance upon such assumption, make available to Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to Administrative Agent, then the applicable Lender and Borrower severally agree to pay to Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to Borrower to but excluding the date of payment to Administrative Agent, at (i) in the case of a payment to be made by such Lender, the greater of the Federal Funds Rate and a rate determined by Administrative Agent in accordance with banking industry rules on interbank compensation, and (ii) in the case of a payment to be made by Borrower, the interest rate applicable to the applicable Borrowing. If Borrower and such Lender shall pay such interest to Administrative Agent for the same or an overlapping period, Administrative Agent shall promptly remit to Borrower the amount of such interest paid by Borrower for such period. If such Lender pays its share of the applicable Borrowing to Administrative Agent, then the amount so paid shall constitute such Lender’s Loan. Any payment by Borrower shall be without prejudice to any claim Borrower may have against a Lender that shall have failed to make such payment to Administrative Agent.

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(c) Payments by Borrower; Presumption by Administrative Agent . Unless Administrative Agent shall have received notice from Borrower prior to the date on which any payment is due to Administrative Agent for the account of L/C Issuer or the applicable Lenders hereunder that Borrower will not make such payment, Administrative Agent may assume that Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to L/C Issuer or the applicable Lenders the amount due. In such event, if Borrower has not in fact made such payment, then L/C Issuer or each applicable Lender, as applicable, severally agrees to repay to Administrative Agent forthwith on demand the amount so distributed to L/C Issuer or such Lender, with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by Administrative Agent in accordance with banking industry rules on interbank compensation.

Section 2.5 Evidence of Debt .

(a) The Loans made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by Administrative Agent in the ordinary course of business; provided that such Lender or Administrative Agent may, in addition, request that such Loans be evidenced by the Notes. The Credit Extensions made by L/C Issuer shall be evidenced by one or more accounts or records maintained by L/C Issuer and by Administrative Agent in the ordinary course of business. The accounts or records maintained by Administrative Agent, L/C Issuer, and each Lender shall be conclusive absent manifest error of the amount of the Credit Extensions made to Borrower and, with respect to Letters of Credit issued for the account of a Subsidiary, such Subsidiary and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of Borrower hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by L/C Issuer or any Lender and the accounts and records of Administrative Agent in respect of such matters, the accounts and records of Administrative Agent shall control in the absence of manifest error.

(b) In addition to the accounts and records referred to in Section 2.5(a) above, each Lender and Administrative Agent shall maintain in accordance with its usual practice accounts or records evidencing the purchases and sales by such Lender of participations in Letters of Credit. In the event of any conflict between the accounts and records maintained by Administrative Agent and the accounts and records of any Lender in respect of such matters, the accounts and records of Administrative Agent shall control in the absence of manifest error.

Section 2.6 Cash Collateral .

(a) Certain Credit Support Events . If (i) L/C Issuer has honored any full or partial drawing request under any Letter of Credit and such drawing has resulted in an L/C Borrowing, (ii) as of the Letter of Credit Expiration Date, any L/C Obligation for any reason remains outstanding, (iii) Borrower shall be required to provide Cash Collateral pursuant to Section 10.2 , or (iv) there shall exist a Defaulting Lender, Borrower shall immediately (in the case of clause (iii) above) or within one Business Day (in all other cases) following any request by Administrative Agent or L/C Issuer, provide Cash Collateral in an amount not less than the applicable Minimum Collateral Amount (determined, in the case of Cash Collateral provided pursuant to clause (iv) above, after giving effect to Section 12.22(a)(iv) and any Cash Collateral provided by the Defaulting Lender).

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(b) Grant of Security Interest . Borrower, and to the extent provided by any Defaulting Lender, such Defaulting Lender, hereby grants to (and subjects to the control of) Administrative Agent, for the benefit of Administrative Agent, L/C Issuer and Lenders, and agrees to maintain, a first priority security interest in all such Cash Collateral and all other Property so provided as Collateral pursuant hereto, and in all proceeds of the foregoing, all as security for the obligations to which such Cash Collateral may be applied pursuant to Section 2.6(c) . If at any time Administrative Agent determines that Cash Collateral is subject to any right or claim of any Person other than Administrative Agent or L/C Issuer as herein provided, or that the total amount of such Cash Collateral is less than the Minimum Collateral Amount, Borrower will, promptly upon demand by Administrative Agent, pay or provide to Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency. All Cash Collateral (other than credit support not constituting funds subject to deposit) shall be maintained in one or more blocked, non-interest bearing deposit accounts at LegacyTexas Bank. Borrower shall pay on demand therefor from time to time all customary account opening, activity and other administrative fees and charges in connection with the maintenance and disbursement of Cash Collateral.

(c) Application . Notwithstanding anything to the contrary contained in this Agreement, Cash Collateral provided under any of this Section 2.6 or Sections 2.2 , 10.2 or 12.22 in respect of Letters of Credit shall be held and applied to the satisfaction of the specific L/C Obligations, obligations to fund participations therein (including, as to Cash Collateral provided by a Defaulting Lender, any interest accrued on such obligation) and other obligations for which the Cash Collateral was so provided, prior to any other application of such Property as may otherwise be provided for herein.

(d) Release . Cash Collateral (or the appropriate portion thereof) provided to reduce Fronting Exposure or to secure other obligations shall be released promptly following (i) the elimination of the applicable Fronting Exposure or other obligations giving rise thereto, including by the termination of Defaulting Lender status of the applicable Lender (or, as appropriate, its assignee following compliance with Section 12.8(b)(vii) ) or (ii) the determination by Administrative Agent and L/C Issuer that there exists excess Cash Collateral; provided , however , (x) any such release shall be without prejudice to, and any disbursement or other transfer of Cash Collateral shall be and remain subject to, any other Lien conferred under the Loan Documents and the other applicable provisions of the Loan Documents, and (y) the Person providing Cash Collateral and L/C Issuer may agree that Cash Collateral shall not be released but instead held to support future anticipated Fronting Exposure or other obligations.

Section 2.7 Interest; Payment Terms .

(a) Loans – Payment of Principal and Interest; Revolving Nature . The unpaid principal amount of each Portion of the Loans shall, subject to the following sentence and Section 2.7(f) , bear interest at the applicable Interest Rate. If at any time such rate of interest would exceed the Maximum Rate but for the provisions thereof limiting interest to the Maximum Rate, then any subsequent reduction shall not reduce the rate of interest on the Loans below the Maximum Rate until the aggregate amount of interest accrued on the Loans equals the aggregate amount of interest which would have accrued on the Loans if the interest rate had not been limited by the Maximum Rate. All accrued but unpaid interest on the principal balance of the Loans shall be payable on each Payment Date and on the Maturity Date, provided that interest accruing at the Default Interest Rate pursuant to Section 2.7(f) shall be payable on demand. The then Outstanding Amount of the Loans and all accrued but unpaid interest thereon shall be due and payable on the Maturity Date. The unpaid principal balance of the Loans at any time shall be the total amount advanced hereunder by Lenders less the amount of principal payments made thereon by or for Borrower, which balance may be endorsed on the Notes from time to time by Lenders or otherwise noted in Lenders’ and/or Administrative Agent’s records, which notations shall be, absent manifest error, conclusive evidence of the amounts owing hereunder from time to time.

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(b) Application . Except as expressly provided herein or in the Intercreditor Agreement to the contrary, all payments on the Obligations under the Loan Documents shall be applied in the following order of priority: (i) the payment or reimbursement of any expenses, costs or obligations (other than the outstanding principal amount thereof and interest thereon) for which Borrower shall be obligated or Administrative Agent, L/C Issuer, or any Lender shall be entitled pursuant to the provisions of this Agreement, the Notes or the other Loan Documents; (ii) the payment of accrued but unpaid interest thereon; and (iii) the payment of all or any portion of the principal balance thereof then outstanding hereunder as directed by Borrower. If an Event of Default exists under this Agreement, the Notes or under any of the other Loan Documents, any such payment shall be applied as provided in Section 10.3 below.

(c) Computation Period . Interest on the Loans and all other amounts payable by Borrower hereunder on a per annum basis shall be computed on the basis of a 360-day year and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a 365-day year or 366-day year, as the case may be. In computing the number of days during which interest accrues, the day on which funds are initially advanced shall be included regardless of the time of day such advance is made, and the day on which funds are repaid shall be included unless repayment is credited prior to the close of business on the Business Day received. Each determination by Administrative Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error.

(d) Unconditional Payment . Borrower is and shall be obligated to pay all principal, interest and any and all other amounts which become payable under any of the Loan Documents absolutely and unconditionally and without any abatement, postponement, diminution or deduction whatsoever and without any reduction for counterclaim or setoff whatsoever. If at any time any payment received by Administrative Agent hereunder shall be deemed by a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under any Debtor Relief Law, then the obligation to make such payment shall survive any cancellation or satisfaction of the Obligations under the Loan Documents and shall not be discharged or satisfied with any prior payment thereof or cancellation of such Obligations, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof, and such payment shall be immediately due and payable upon demand.

(e) Partial or Incomplete Payments . Remittances in payment of any part of the Obligations under the Loan Documents other than in the required amount in immediately available funds at the place where such Obligations are payable shall not, regardless of any receipt or credit issued therefor, constitute payment until the required amount is actually received by Administrative Agent in full in accordance herewith and shall be made and accepted subject to the condition that any check or draft may be handled for collection in accordance with the practice of the collecting bank or banks. Acceptance by Administrative Agent of any payment in an amount less than the full amount then due shall be deemed an acceptance on account only, and the failure to pay the entire amount then due shall be and continue to be an Event of Default.

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(f) Default Interest Rate . For so long as any Event of Default exists, regardless of whether or not there has been an acceleration of the Loans, and at all times after the maturity of the Loans (whether by acceleration or otherwise), and in addition to all other rights and remedies of Administrative Agent or Lenders hereunder, (i) interest shall accrue on the Outstanding Amount of the Loans at the Default Interest Rate, (ii) interest shall accrue on any past due amount (other than the Outstanding Amount of the Loans) at the Default Interest Rate and (iii) upon the request of the Required Lenders, interest shall accrue on the principal amount of all other outstanding Obligations at the Default Interest Rate, and such accrued interest shall be immediately due and payable. Borrower acknowledges that it would be extremely difficult or impracticable to determine Administrative Agent’s or Lenders’ actual damages resulting from any late payment or Event of Default, and such accrued interest are reasonable estimates of those damages and do not constitute a penalty.

Section 2.8 Voluntary Termination or Reduction of Commitments; Prepayments .

(a) Voluntary Termination or Reduction of Commitments . Borrower may, upon written notice to Administrative Agent, terminate the Aggregate Commitments, or from time to time permanently reduce the Aggregate Commitments; provided that (i) any such notice shall be received by Administrative Agent not later than 11:00 a.m. three Business Days prior to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of $1,000,000 or any whole multiple of $500,000 in excess thereof, and (iii) Borrower shall not terminate or reduce the Aggregate Commitments if, after giving effect thereto and to any concurrent prepayments hereunder, the Aggregate Revolving Credit Exposure would exceed the Aggregate Commitments. Administrative Agent will promptly notify Lenders of any such notice of termination or reduction of the Aggregate Commitments. Any reduction of the Aggregate Commitments shall be applied to the Commitment of each Lender according to its Applicable Percentage. All fees accrued until the effective date of any termination or reduction of the Aggregate Commitments shall be paid on the effective date of such termination or reduction and all Commitment Fees shall thereafter be computed on the basis of the Commitments, as so reduced.

(b) Voluntary Prepayments . Subject to the conditions set forth below, Borrower shall have the right, at any time and from time to time upon at least three Business Days’ prior written notice to Administrative Agent, to prepay the principal of the Loans in full or in part. If there is a prepayment of all or any portion of the principal of the Loans on or before the Maturity Date for such Loans, whether voluntary or because of acceleration or otherwise, such prepayment shall also include any and all accrued but unpaid interest on the amount of principal being so prepaid through and including the date of prepayment, plus any other sums which have become due to Lenders under the other Loan Documents on or before the date of prepayment, but which have not been fully paid.

(c) Mandatory Prepayments . Except as provided in Section 2.9(e) hereof, if at any time the Aggregate Revolving Credit Exposure exceeds the Borrowing Base then in effect, then Borrower shall immediately prepay the entire amount of such excess to Administrative Agent, for the ratable account of the Lenders, and/or Cash Collateralize the L/C Obligations in an aggregate amount equal to such excess; provided , however , that Borrower shall not be required to Cash Collateralize the L/C Obligations pursuant to this Section 2.8(c) unless after the prepayment in full of the Loans the Aggregate Revolving Credit Exposure exceeds the Borrowing Base then in effect. Each prepayment required by this Section 2.8(c) shall be applied, first, to any Base Rate Portions then outstanding, and, second, to any LIBOR Portions then outstanding, and if more than one LIBOR Portion is then outstanding, to such LIBOR Portions in such order as Borrower may direct or, if Borrower fails to so direct, as Administrative Agent shall elect.

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Section 2.9 Borrowing Base .

(a) Borrowing Base Standards . The Borrowing Base shall represent the approval in their sole discretion of the Required Lenders or all Lenders, as applicable, of Administrative Agent’s determination of the loan amount that may be supported by the Required Lenders’ or all Lenders’, as applicable, evaluation of the Proved Oil and Gas Properties of Borrower and its Subsidiaries. The determination of the Borrowing Base will be made in accordance with then-current practices, economic and pricing parameters, methodology, assumptions, and customary procedures and standards established by each Lender from time to time for its petroleum industry customers including without limitation (i) an analysis of such reserve and production data with respect to all of the Proved Oil and Gas Properties of Borrower and its Subsidiaries, including the Mortgaged Properties, as is provided to the Lenders in accordance herewith, (ii) an analysis of the assets, liabilities, cash flow, business, properties, prospects, management and ownership of Borrower and its Subsidiaries, (iii) Borrower’s and its Subsidiaries’ Hedging Transactions and the status (or lack thereof) of any provider of Hedging Transactions as an “Approved Commodity Swap Counterparty,” and (iv) such other credit factors consistently applied as each Lender customarily considers in evaluating similar oil and gas credit facilities. Borrower and the Lenders acknowledge that due to the uncertainties of the oil and gas extraction process, the Oil and Gas Properties of Borrower and its Subsidiaries are not subject to evaluation with a high degree of accuracy and are subject to potential rapid deterioration in value, the determination of the loan amount will be less than the total present value of the Proved Oil and Gas Properties of Borrower and its Subsidiaries, which Borrower acknowledges to be essential for the adequate protection of the Lenders. Without limiting the foregoing, the Lenders may exclude from the Borrowing Base any oil and gas reserves or portion of production therefrom or any income from any other property, at any time, because title information is not satisfactory, such oil and gas reserves are not Mortgaged Properties in violation of this Agreement or such oil and gas reserves are not in “pay” status. The Borrowing Base shall initially be $17,000,000 on the Closing Date.

(b) Periodic Determinations of Borrowing Base .

(i) The Borrowing Base shall be redetermined as of March 1 and September 1 of each year, commencing March 1, 2017. On or before February 1 of each year, Borrower shall furnish Administrative Agent a Reserve Report as of the preceding January 1 prepared by an Independent Engineer covering all of the Proved Oil and Gas Properties of Borrower and its Subsidiaries, including the Mortgaged Properties. On or before August 1 of each year, Borrower shall furnish Administrative Agent a Reserve Report as of the preceding July 1 prepared by Borrower’s own engineer and certified by a Responsible Officer of Borrower covering all of the Proved Oil and Gas Properties of Borrower and its Subsidiaries, including the Mortgaged Properties. Upon receipt of each such Reserve Report, Administrative Agent shall make a determination of the Borrowing Base which shall become effective upon approval by the Required Lenders or all Lenders in accordance with the procedures set forth in Section 2.9(d) and subsequent written notification from Administrative Agent to Borrower, and which, subject to the other provisions of this Agreement, shall be the Borrowing Base until the effective date of the next redetermination as provided in this Section 2.9 .

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(ii) In the event that Borrower does not furnish to Administrative Agent a Reserve Report by the dates specified in Section 2.9(b)(i) , then Administrative Agent and the Required Lenders or all Lenders, as applicable, may nonetheless redetermine the Borrowing Base and redesignate the Borrowing Base from time to time thereafter in their sole discretion until Administrative Agent receives the relevant Reserve Report, whereupon Administrative Agent and the Required Lenders or all Lenders, as applicable, shall redetermine the Borrowing Base as otherwise specified in this Section 2.9 .

(i) Special determinations of the Borrowing Base may be requested (A) by Borrower not more than two times per calendar year, or (B) by Administrative Agent at any time during the term hereof. If any special determination is requested by Borrower, Borrower shall provide, if requested by Administrative Agent, an updated Reserve Report prepared by Borrower’s own engineer brought forward from the most recent Reserve Report furnished by Borrower to Administrative Agent. If any special determination is requested by Administrative Agent, Borrower will provide Administrative Agent with engineering data for the oil and gas reserves updated from the most recent Reserve Report furnished to Administrative Agent, as soon as is reasonably possible following the request. The determination whether to increase or decrease the Borrowing Base shall be made in accordance with the standards set forth in Section 2.9(a) and the procedures set forth in Section 2.9(d) . In the event of any special determination of the Borrowing Base pursuant to this Section 2.9(c) , Administrative Agent in the exercise of its discretion may suspend the next regularly scheduled determination of the Borrowing Base.

(ii) In addition to the special determinations described in Section 2.9(c)(i) , Administrative Agent may, by notifying Borrower thereof, elect to cause an interim redetermination of the Borrowing Base any time (i) Borrower or any of its Subsidiaries Disposes of, whether in one Disposition or a series of Dispositions, Oil and Gas Properties the Borrowing Base value of which exceeds 5% of the Borrowing Base then in effect, (ii) any Commodity Hedging Transaction which has been taken into account in connection with the then current Borrowing Base is terminated and the Hedge Termination Value thereof determined in accordance therewith exceeds 5% of such Borrowing Base or (iii) a Person loses its status as an Approved Commodity Swap Counterparty if the then current Borrowing Base includes credit for Hedging Transactions with such Person. Any redetermination of the Borrowing Base pursuant to this Section 2.9(c)(ii) shall be made in accordance with the standards set forth in Section 2.9(a) and the procedures set forth in Section 2.9(d) and shall not be considered a special determination requested by Administrative Agent within the meaning of Section 2.9(c)(i) . Borrower shall, if requested by Administrative Agent, deliver an updated Reserve Report prepared by Borrower’s own engineer brought forward from the most recent Reserve Report furnished by Borrower to Administrative Agent. If a Borrowing Base Deficiency exists solely because of the reduction of the Borrowing Base pursuant to this Section 2.9(c)(ii) , Borrower shall, on the date of such occurrence, make a single lump sum payment in an amount sufficient to reduce the Aggregate Revolving Credit Exposure to or below the Borrowing Base.

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(d) General Procedures With Respect to Determination of Borrowing Base . Administrative Agent shall propose a redetermined Borrowing Base within 30 days following receipt by Administrative Agent and the Lenders of a Reserve Report and other applicable information. After having received notice of such proposal from Administrative Agent, the Required Lenders (or all Lenders in the event of a proposed increase of the Borrowing Base) shall have 15 days to agree or disagree with such proposal. If at the end of such 15-day period, the Required Lenders (or all Lenders, in the event of a proposed increase of the Borrowing Base) shall not have communicated their approval or disapproval, such silence shall be deemed an approval, and Administrative Agent’s proposal shall be the new Borrowing Base. If the Required Lenders (or all Lenders, in the event of a proposed increase of the Borrowing Base) cannot agree on the amount of the Borrowing Base within 7 days after Administrative Agent has been notified of their disapproval, then Administrative Agent shall propose a new redetermined Borrowing Base within 15 days after the end of such 7-day period and the foregoing process shall be repeated. This process shall be repeated until the Required Lenders (or all Lenders, in the event of a proposed increase of the Borrowing Base) agree on a new Borrowing Base. Upon the final redetermination of the Borrowing Base, Administrative Agent, the Lenders approving same and Borrower shall execute a Borrowing Base Adjustment Letter.

(e) Borrowing Base Deficiency .

(i) If a Borrowing Base Deficiency exists because of a periodic or special determination made pursuant to Section 2.9(b) or Section 2.9(c)(i) , then Administrative Agent shall send a Borrowing Base Deficiency Notice to Borrower, and Borrower shall within 30 days following receipt of such Borrowing Base Deficiency Notice elect whether to (A) prepay an amount which would, if prepaid immediately, reduce the Aggregate Revolving Credit Exposure to the amount of the Borrowing Base, (B) execute one or more Mortgages (or cause a Subsidiary to execute one or more Mortgages) covering such other Oil and Gas Properties not previously taken into account in the determination of the Borrowing Base as are acceptable to Administrative Agent and the Required Lenders having present values which, in the opinion of Administrative Agent and the Required Lenders, based upon Administrative Agent’s and the Required Lenders’ evaluation of the engineering data provided them, taken in the aggregate are sufficient to increase the Borrowing Base to an amount at least equal to the Aggregate Revolving Credit Exposure, or (C) do any combination of the foregoing as is acceptable to Administrative Agent. If Borrower fails to make an election within 30 days after Borrower’s receipt of the Borrowing Base Deficiency Notice, then Borrower shall be deemed to have selected the prepayment option specified in clause (A) above.

(ii) Borrower shall deliver or shall cause to be delivered such prepayments or Mortgages of additional Oil and Gas Properties in accordance with its election (or deemed election) pursuant to Section 2.9(e)(i) as follows:

(A) Prepayment Elections . If Borrower elects (or is deemed to have elected) to prepay an amount in accordance with Section 2.9(e)(i)(A) above, then Borrower may make such prepayment in one installment within 90 days after Borrower’s receipt of the Borrowing Base Deficiency Notice or, provided no Default has occurred and is continuing, in 6 equal consecutive monthly installments beginning within 30 days after Borrower’s receipt of the Borrowing Base Deficiency Notice and continuing on the same day of each month thereafter.

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(B) Elections to Mortgage Additional Oil and Gas Properties . If Borrower elects to mortgage additional Oil and Gas Properties in accordance with Section 2.9(e)(i)(B) above, then (1) such properties shall be acceptable to Administrative Agent and the Required Lenders with values determined by Administrative Agent and the Required Lenders in accordance with this Section 2.9 and (2) Borrower or such Subsidiary shall execute, acknowledge and deliver to Administrative Agent one or more Mortgages within 30 days after Borrower’s receipt of the Borrowing Base Deficiency Notice (or such longer time as Administrative Agent may agree in its sole discretion); provided , however (x) if none of the additional Oil and Gas Properties offered by Borrower are acceptable to Administrative Agent and the Required Lenders, Borrower shall be deemed to have elected the prepayment option specified in Section 2.9(e)(i)(A) (and Borrower shall make such prepayment in accordance with Section 2.9(e)(ii)(A) ); and (y) if the aggregate present values of additional Oil and Gas Properties which are acceptable to Administrative Agent and the Required Lenders are insufficient to eliminate the Borrowing Base Deficiency, then Borrower shall be deemed to have selected the option specified in Section 2.9(e)(i)(C) (and Borrower shall make prepayment and deliver one or more Mortgages as provided in Section 2.9(e)(ii)(C) ). Together with such Mortgages, Borrower shall deliver or cause to be delivered to Administrative Agent title opinions and/or other title information and data acceptable to Administrative Agent such that Administrative Agent shall have received, together with the title information previously delivered to Administrative Agent, acceptable title information regarding the Oil and Gas Properties of Borrower and its Subsidiaries that in the aggregate represent not less than 85% (or such lesser percentage as acceptable to Administrative Agent in its sole discretion) of the Recognized Value of Oil and Gas Properties evaluated in the most recent Reserve Report.

(C) Combination Elections . If Borrower elects (or is deemed to have elected) to eliminate the Borrowing Base Deficiency by a combination of prepayment and mortgaging of additional Oil and Gas Properties in accordance with Section 2.9(e)(i)(C) , then (1) within 30 days after Borrower’s receipt of the Borrowing Base Deficiency Notice (or such longer time as Administrative Agent may agree in its sole discretion), Borrower shall (or shall cause a Subsidiary to) execute, acknowledge and deliver to Administrative Agent one or more Mortgages covering such additional Oil and Gas Properties and (2) Borrower shall pay Administrative Agent the amount by which the Borrowing Base deficiency exceeds the present values of such additional Oil and Gas Properties in one installment within 30 days after Borrower’s receipt of the Borrowing Base Deficiency Notice or, provided no Default has occurred and is continuing, in six (6) equal consecutive monthly installments beginning within thirty (30) days after Borrower's receipt of the Borrowing Base Deficiency Notice and continuing on the same day of each month thereafter until paid.

(iii) Applicable Margin Increase . During any time in which a Borrowing Base Deficiency exists, each of the Applicable Margins will be automatically increased by a rate equal to 2.00% per annum.

(f) Borrowing Base Increase Fee . A fee shall be paid to Administrative Agent for the account of the Lenders for each incremental increase in the new Borrowing Base over the previously existing Borrowing Base; provided that, such fee shall not be subject to "double-counting" should a future Borrowing Base be reduced, then subsequently increased to an amount at or below the highest previously determined or redetermined Borrowing Base. The amount of each such fee shall be a percentage of such increase as determined by Administrative Agent in accordance with then current market conditions. There shall be no obligation imposed upon Borrower to accept an increase of the Borrowing Base proposed by the Lenders. However, if Borrower accepts the increase in the Borrowing Base, the fee determined by Administrative Agent shall be due and payable immediately and without regard as to whether Borrower ever borrows the increased amount available under such new Borrowing Base.

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(g) Mortgage of Additional Properties . Borrower may from time to time upon written notice to Administrative Agent propose to add Oil and Gas Properties of Borrower or any Subsidiary as Mortgaged Properties to be included in the Borrowing Base. Any such proposal shall be accompanied by a Reserve Report, which may be prepared by Borrower’s own engineer, applicable to such properties that conforms with the requirements of this Agreement and evidence sufficient to establish that Borrower or such Subsidiary, as applicable, has title to such Oil and Gas Properties. Any such addition shall become effective at such time as (i) Administrative Agent, with the approval of all of the Lenders, has made a determination of the amount by which the Borrowing Base would be increased as the result of such addition, (ii) the conditions set out in this Section 2.9 , to the extent they are applicable to such additional Oil and Gas Properties, have been satisfied, (iii) Mortgages duly executed and acknowledged by Borrower or such Subsidiary, as applicable, have been delivered to Administrative Agent, and (iv) arrangements satisfactory to Administrative Agent have been made with respect to payment of recording fees and taxes, as applicable. In determining the increase in the Borrowing Base pursuant to this Section, Administrative Agent and the Lenders shall apply the parameters and other credit factors set forth in this Section 2.9 . A proposal by Borrower pursuant to this Section 2.9(g) shall constitute a request for a special determination of the Borrowing Base for purposes of Section 2.9(c) .

ARTICLE 3

TAXES, YIELD PROTECTION AND INDEMNITY

Section 3.1 Increased Costs .

(a) Increased Costs Generally . If any Change in Law shall:

(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except any reserve requirement reflected in Adjusted LIBOR);

(ii) subject any Recipient to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (C) Connection Income Taxes) on its Loans, Loan principal, Letters of Credit, Commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto; or

(iii) impose on any Lender or the London interbank market any other condition, cost or expense (other than Taxes) affecting this Agreement or Loans made by such Lender;

and the result of any of the foregoing shall be to increase the cost to such Lender or such other Recipient of making, converting to, continuing or maintaining any Loan or of maintaining its obligation to make any such Loan, or to increase the cost to such Lender or such other Recipient of participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit) or to reduce the amount of any sum received or receivable by such Lender or other Recipient hereunder (whether of principal, interest or any other amount) then, upon request of such Lender or other Recipient, Borrower will pay to such Lender or other Recipient, as the case may be, such additional amount or amounts as will compensate such Lender or other Recipient, as the case may be, for such additional costs incurred or reduction suffered.

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(b) Capital or Liquidity Requirements . If any Lender determines that any Change in Law affecting such Lender or any Lending Office of such Lender or such Lender’s holding company, if any, regarding capital or liquidity requirements, has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement, the Commitment of such Lender or the Loans made by, or participations in Letters of Credit held by such Lender or the Letters of Credit issued by L/C Issuer, to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy and liquidity), then from time to time Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.

(c) Certificates for Reimbursement . A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in Sections 3.1(a) or 3.1(b) and delivered to Borrower, shall be conclusive absent manifest error. Borrower shall pay such Lender the amount shown as due on any such certificate within 30 days after receipt thereof.

(d) Delay in Requests . Failure or delay on the part of any Lender to demand compensation pursuant to this Section 3.1 shall not constitute a waiver of such Lender’s right to demand such compensation; provided that Borrower shall not be required to compensate a Lender pursuant to this Section 3.1 for any increased costs incurred or reductions suffered more than 9 months prior to the date that such Lender notifies Borrower of the Change in Law giving rise to such increased costs or reductions, and of such Lender’s intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 9-month period referred to above shall be extended to include the period of retroactive effect thereof).

Section 3.2 Illegality . If any Lender determines that any Law or regulation has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its Lending Office to make, maintain or fund Loans whose interest is determined by reference to LIBOR, or to determine or charge interest rates based upon LIBOR, or any Governmental Authority has imposed material restrictions on the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the London interbank market, then, on notice thereof by such Lender to Borrower through Administrative Agent, (a) any obligation of such Lender to make or continue LIBOR Portions or to convert Base Rate Portions to LIBOR Portions shall be suspended, and (b) if such notice asserts the illegality of such Lender making or maintaining Base Rate Portions the interest rate on which is determined by reference to the LIBOR component of the Base Rate, the interest rate on which Base Rate Portions of such Lender shall, if necessary to avoid such illegality, be determined by Administrative Agent without reference to the LIBOR component of the Base Rate, in each case until such Lender notifies Administrative Agent and Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, (i) Borrower shall, upon demand from such Lender (with a copy to Administrative Agent), prepay or, if applicable, convert all LIBOR Portions of such Lender to Base Rate Portions (the interest rate on which Base Rate Loans of such Lender shall, if necessary to avoid such illegality, be determined by Administrative Agent without reference to the LIBOR component of the Base Rate), either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain such LIBOR Portions to such day, or immediately, if such Lender may not lawfully continue to maintain such LIBOR Portions and (ii) if such notice asserts the illegality of such Lender determining or charging interest rates based upon LIBOR, Administrative Agent shall during the period of such suspension compute the Base Rate applicable to such Lender without reference to the LIBOR component thereof until Administrative Agent is advised in writing by such Lender that it is no longer illegal for such Lender to determine or charge interest rates based upon the LIBOR. Upon any such prepayment or conversion, Borrower shall also pay accrued interest on the amount so prepaid or converted.

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Section 3.3 Inability to Determine Rates . If (a) Administrative Agent or the Required Lenders determine that for any reason in connection with any request for a LIBOR Portion or a conversion to or continuation thereof that (i) Dollar deposits are not being offered to banks in the London interbank eurodollar market for the applicable amount and Interest Period of such LIBOR Portion, (ii) adequate and reasonable means do not exist for determining LIBOR for any requested Interest Period with respect to a proposed LIBOR Portion or in connection with an existing or proposed Base Rate Portion, or (iii) LIBOR for any requested Interest Period with respect to a proposed LIBOR Portion does not adequately and fairly reflect the cost to such Lenders of funding such LIBOR Portion, or (b) by reason of any Change in Law any Lender would become subject to restrictions on the amount of a category of liabilities or assets which it may hold and notifies Administrative Agent of same, Administrative Agent will promptly so notify Borrower and each Lender. Thereafter, (x) the obligation of Lenders to make or maintain LIBOR Portions shall be suspended, and (y) in the event of a determination described in the preceding sentence with respect to the LIBOR component of the Base Rate, the utilization of the LIBOR component in determining the Base Rate shall be suspended, in each case until Administrative Agent (upon the instruction of the Required Lenders) revokes such notice. Upon receipt of such notice, Borrower may revoke any pending request for a Borrowing of, conversion to or continuation of LIBOR Portions or, failing that, will be deemed to have converted such request into a request for a Borrowing of Base Rate Portions in the amount specified therein.

Section 3.4 Taxes .

(a) Defined Terms . For purposes of this Section, the term “applicable Law” includes FATCA.

(b) Payment Free of Taxes . Any and all payments by or on account of any obligation of Borrower under any Loan Document shall be made without deduction or withholding for any Taxes, except as required by applicable Law. If any applicable Law (as determined in the good faith discretion of an applicable Withholding Agent) requires the deduction or withholding of any Tax from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable Law and, if such Tax is an Indemnified Tax, then the sum payable by Borrower shall be increased as necessary so that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section 3.4 ) the applicable Recipient receives an amount equal to the sum it would have received had no such deduction or withholding been made.

(c) Payment of Other Taxes by Borrower . Borrower shall timely pay to the relevant Governmental Authority in accordance with applicable Law, or at the option of Administrative Agent timely reimburse it for the payment of, any Other Taxes.

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(d) Indemnification by Borrower . Borrower shall indemnify each Recipient, within 30 days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section 3.4 ) payable or paid by such Recipient or required to be withheld or deducted from a payment to such Recipient and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate setting forth in reasonable detail the amount and derivation of such payment or liability delivered to Borrower by a Lender (with a copy to Administrative Agent), or by Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.

(e) Indemnification by Lenders . Each Lender shall severally indemnify Administrative Agent, within 10 days after demand therefor, for (i) any Indemnified Taxes attributable to such Lender (but only to the extent that Borrower has not already indemnified Administrative Agent for such Indemnified Taxes and without limiting the obligation of Borrower to do so), (ii) any Taxes attributable to such Lender’s failure to comply with the provisions of Section 12.8 relating to the maintenance of a Participant Register and (iii) any Excluded Taxes attributable to such Lender, in each case, that are payable or paid by Administrative Agent in connection with any Loan Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender by Administrative Agent shall be conclusive absent manifest error. Each Lender hereby authorizes Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under any Loan Document or otherwise payable by Administrative Agent to such Lender from any other source against any amount due to Administrative Agent under this Section 3.4(e) .

(f) Evidence of Payments . As soon as practicable after any payment of Taxes by Borrower to a Governmental Authority pursuant to this Section 3.4 , Borrower shall deliver to Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to Administrative Agent.

(g) Status of Lenders .

(i) Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Loan Document shall deliver to Borrower and Administrative Agent, at the time or times reasonably requested by Borrower or Administrative Agent, such properly completed and executed documentation reasonably requested by Borrower or Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by Borrower or Administrative Agent, shall deliver such other documentation prescribed by applicable Law or reasonably requested by Borrower or Administrative Agent as will enable Borrower or Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in Section 3.4(g)(ii)(A) , (ii)(B) and (ii)(D) below) shall not be required if in such Lender’s reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.

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(ii) Without limiting the generality of the foregoing, in the event that Borrower is a U.S. Person,

(A) any Lender that is a U.S. Person shall deliver to Borrower and Administrative Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower or Administrative Agent), executed copies of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;

(B) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower and Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower or Administrative Agent), whichever of the following is applicable:

(1) in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest under any Loan Document, executed copies of IRS Form W-8BEN-E (or IRS Form W-8BEN, as applicable) establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS Form W-8BEN-E (or IRS Form W-8BEN, as applicable) establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;

(2) executed copies of IRS Form W-8ECI;

(3) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit E-1 to the effect that such Foreign Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of Borrower within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “ U.S. Tax Compliance Certificate ”) and (y) executed copies of IRS Form W-8BEN-E (or IRS Form W-8BEN, as applicable); or

(4) to the extent a Foreign Lender is not the beneficial owner, executed copies of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN, a U.S. Tax Compliance Certificate substantially in the form of Exhibit E-2 or Exhibit E-3 , IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate substantially in the form of Exhibit E-4 on behalf of each such direct and indirect partner;

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(C) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower and Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower or Administrative Agent), executed copies of any other form prescribed by applicable Law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable Law to permit Borrower or Administrative Agent to determine the withholding or deduction required to be made; and

(D) if a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to Borrower and Administrative Agent at the time or times prescribed by Law and at such time or times reasonably requested by Borrower or Administrative Agent such documentation prescribed by applicable Law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by Borrower or Administrative Agent as may be necessary for Borrower and Administrative Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D) , “FATCA” shall include any amendments made to FATCA after the date of this Agreement.

Each Lender agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify Borrower and Administrative Agent in writing of its legal inability to do so.

(h) Treatment of Certain Refunds . If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 3.4 (including by the payment of additional amounts pursuant to this Section 3.4 ), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section 3.4 with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this Section 3.4(h) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this Section 3.4(h) , in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this Section 3.4(h) the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This Section 3.4(h) shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.

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(i) Survival . Each party’s obligations under this Section 3.4 shall survive the resignation or replacement of Administrative Agent or any assignment of rights by, or the replacement of, a Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all obligations under any Loan Document.

Section 3.5 Compensation for Losses . Upon demand of any Lender (with a copy to Administrative Agent) from time to time, Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:

(a) any continuation, conversion, payment or prepayment of any LIBOR Portion on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise);

(b) any failure by Borrower (for a reason other than the failure of such Lender to lend a LIBOR Portion) to prepay, borrow, continue or convert any LIBOR Portion on the date or in the amount notified by Borrower; or

(c) any assignment of a LIBOR Portion on a day other than the last day of the Interest Period therefor as a result of a request by Borrower pursuant to Section 3.6(b) ;

including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained as a result of any of the actions described in Section 3.5 hereunder. Borrower shall also pay any customary administrative fees charged by such Lender in connection with the foregoing.

For purposes of calculating amounts payable by Borrower to the Lenders under this Section 3.5 , each Lender shall be deemed to have funded each LIBOR Portion made by it at Adjusted LIBOR for such Loan by a matching deposit or other borrowing in the London interbank eurodollar market for a comparable amount and for a comparable period, whether or not such LIBOR Portion was in fact so funded.

Section 3.6 Mitigation of Obligations; Replacement of Lenders .

(a) Designation of a Different Lending Office . If any Lender requests compensation under Section 3.1 , or requires Borrower to pay any Indemnified Taxes or additional amounts to such Lender or any Governmental Authority for the account of such Lender pursuant to Section 3.4 , then such Lender shall (at the request of Borrower) use reasonable efforts to designate a different Lending Office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or Affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 3.1 or Section 3.4 , as the case may be, in the future, and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.

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(b) Replacement of Lenders . If any Lender requests compensation under Section 3.1 , or if Borrower is required to pay any Indemnified Taxes or additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.4 and, in each case, such Lender has declined or is unable to designate a different Lending Office in accordance with Section 3.6(a) , or if any Lender is a Defaulting Lender or a Non-Consenting Lender, then Borrower may, at its sole expense and effort, upon notice to such Lender and Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 12.8 ), all of its interests, rights (other than its existing rights to payments pursuant to Section 3.1 or Section 3.4 ) and obligations under this Agreement and the related Loan Documents to an Eligible Assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that:

(i) Borrower shall have paid to Administrative Agent the assignment fee (if any) specified in Section 12.8 ;

(ii) such Lender shall have received payment of an amount equal to the Outstanding Amount of its Loans, and L/C Advances, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 3.5 ) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or Borrower (in the case of all other amounts);

(iii) in the case of any such assignment resulting from a claim for compensation under Section 3.1 or payments required to be made pursuant to Section 3.4 , such assignment will result in a reduction in such compensation or payments thereafter;

(iv) such assignment does not conflict with applicable Law; and

(v) in the case of any assignment resulting from a Lender becoming a Non-Consenting Lender, the applicable assignee shall have consented to the applicable amendment, waiver or consent.

A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling Borrower to require such assignment and delegation cease to apply.

Section 3.7 Survival . All of Borrower’s obligations under this Article 3 shall survive termination of the Aggregate Commitments, repayment of all other Obligations hereunder, and resignation of Administrative Agent.

ARTICLE 4

SECURITY

Section 4.1 Mortgaged Properties . To secure full and complete payment and performance of the Obligations, Borrower shall, and shall cause each of its Subsidiaries to, grant a first priority Lien (subject to Permitted Liens) against the Oil and Gas Properties of Borrower and its Subsidiaries to the extent set forth below pursuant to terms of one or more Mortgages. Borrower covenants that the Recognized Value of all Oil and Gas Properties subject to Mortgages shall at all times be not less than the Required Reserve Value. Within 30 days (or such longer time as Administrative Agent may agree in its sole discretion) after Administrative Agent advises Borrower of the failure to so achieve the Required Reserve Value and the percentage shortfall thereof, Borrower shall cause the Recognized Value of all Mortgaged Properties to be not less than the Required Reserve Value by executing, or causing its Subsidiaries to execute, Mortgages covering additional Proved Oil and Gas Properties sufficient to cover such shortfall.

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Section 4.2 Collateral . To secure full and complete payment and performance of the Obligations, Borrower shall, and shall cause its Subsidiaries to, execute and deliver or cause to be executed and delivered all of the Security Documents required by Administrative Agent covering the Collateral, subject, with respect to Oil and Gas Properties, to the limitations set forth in Section 4.1 . Borrower shall execute and cause to be executed such further documents and instruments, including without limitation, UCC financing statements, as Administrative Agent, in its reasonable discretion, deems necessary or desirable to create, evidence, preserve, and perfect its Liens in the Collateral and maintain the priority thereof as required by the Loan Documents.

Section 4.3 Setoff . If an Event of Default exists and subject to the Intercreditor Agreement, Administrative Agent and each Lender shall have the right to set off against the Obligations under the Loan Documents, at any time, any and all deposits (general or special, time or demand, provisional or final) or other sums at any time credited by or owing from Administrative Agent or such Lender to Borrower whether or not the Obligations under the Loan Documents are then due; provided that in the event that any Defaulting Lender shall exercise any such right of setoff: (a) all amounts so set off shall be paid over immediately to Administrative Agent for further application in accordance with the provisions of Section 12.22 and, pending such payment, shall be segregated by such Defaulting Lender from its other funds and deemed held in trust for the benefit of Administrative Agent and Lenders; and (b) such Defaulting Lender shall provide promptly to Administrative Agent a statement describing in reasonable detail the Obligations under the Loan Documents owing to such Defaulting Lender as to which it exercised such right of setoff. To the extent that Borrower has accounts, which in the style thereof as reflected in Administrative Agent’s records are designated as royalty, joint interest owner or operator accounts, the foregoing right of setoff shall only extend to funds in such accounts which do not belong to, or otherwise arise from payments to Borrower for the account of, third-party royalty, joint interest owners, or operators, and any funds in such accounts improperly setoff shall be returned to Borrower upon presentation by Borrower of reasonable proof that such funds were being held for the account of such other Persons. Each Lender or Administrative Agent making such an offset and application shall give Borrower and other Lenders written notice of such offset and application promptly after effecting it. Subject to the Intercreditor Agreement, each amount set off shall be paid to Administrative Agent for application to the Obligations under the Loan Documents in the order set forth in Section 10.3 . Subject to the limitations set forth in this Section 4.3 , as further security for the Obligations, Borrower hereby grants to Administrative Agent and each Lender a security interest in all money, instruments, and other Property of Borrower now or hereafter held by Administrative Agent or such Lender, including, without limitation, Property held in safekeeping. In addition to Administrative Agent’s and each Lender’s right of setoff and as further security for the Obligations, subject to the limitations set forth in this Section 4.3 , Borrower hereby grants to Administrative Agent and each Lender a security interest in all deposits (general or special, time or demand, provisional or final) and other accounts of Borrower now or hereafter on deposit with or held by Administrative Agent or such Lender and all other sums at any time credited by or owing from Administrative Agent or such Lender to Borrower. The rights and remedies of Administrative Agent and each Lender hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which Administrative Agent or such Lender may have. Each Lender agrees to notify Borrower and the Administrative Agent within ten (10) days after such setoff and application, provided that the failure to give such notice shall not affect the validity of such set-off and application or any other rights and remedies of Administrative Agent and each Lender hereunder.

Section 4.4 Authorization to File Financing Statements . Borrower and each other Obligated Party that has granted a security interest in connection herewith authorizes Administrative Agent to complete and file, from time to time, financing statements naming Borrower or such other Obligated Party, as applicable, as debtor.

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ARTICLE 5

CONDITIONS PRECEDENT

Section 5.1 Initial Extension of Credit . The obligation of Lenders to make the initial Credit Extension hereunder is subject to the condition precedent that Administrative Agent shall have received all of the following, each dated (unless otherwise indicated or otherwise specified by Administrative Agent) the Closing Date, in form and substance satisfactory to Administrative Agent:

(a) Credit Agreement . Executed counterparts of this Agreement, sufficient in number for distribution to Administrative Agent, each Lender and Borrower;

(b) Resolutions . Resolutions of the governing body of Borrower and each other Obligated Party certified by the secretary or an assistant secretary (or a Responsible Officer or other custodian of records) of such Person which authorize the execution, delivery, and performance by such Person of this Agreement, the other Loan Documents to which such Person is or is to be a party and the Intercreditor Agreement to the extent party thereto;

(c) Incumbency Certificate . A certificate of incumbency certified by a Responsible Officer of each Obligated Party certifying the names of the individuals or other Persons authorized on behalf of such Person to sign this Agreement, each of the other Loan Documents to which such Person is or is to be a party (including the certificates contemplated herein), and the Intercreditor Agreement to the extent party thereto, together with specimen signatures of such individual Persons;

(d) Certificate Regarding Consents and Approvals . A certificate of a Responsible Officer of each Obligated Party either (i) attaching copies of all consents, licenses and approvals required in connection with the execution, delivery and performance by such Obligated Party and the validity against such Obligated Party of the Loan Documents to which it is a party and the Intercreditor Agreement to the extent party thereto, and such consents, licenses and approvals shall be in full force and effect, or (ii) stating that no such consents, licenses or approvals are so required;

(e) Closing Certificate . A certificate signed by a Responsible Officer of Borrower certifying that the conditions specified in Sections 5.2(b) , 5.2(c) and 5.2(d) have been satisfied;

(f) Constituent Documents . The Constituent Documents and all amendments thereto for Borrower and each other Obligated Party that is not a natural Person, with the formation documents included in the Constituent Documents being certified as of a date acceptable to Administrative Agent by the appropriate government officials of the state of incorporation or organization of Borrower and each other Obligated Party, and all such Constituent Documents being accompanied by certificates that such copies are complete and correct, given by an authorized representative acceptable to Administrative Agent;

(g) Governmental Certificates . Certificates of the appropriate government officials of the state of incorporation or organization of Borrower and each other Obligated Party as to the existence and good standing of Borrower and each other Obligated Party. Any such certificate(s) due from the Texas Comptroller of Public Accounts may be satisfied with a printout of an electronic search of such office’s records which shows that the applicable Person’s status with respect to its right to transact business in Texas is “active”. Each certificate or other evidence required by this clause (g) shall be dated within 30 days prior to the date of the initial Credit Extension;

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(h) Notes . The Notes executed by Borrower in favor of each Lender requesting Notes;

(i) Security Documents . The Security Documents executed by Borrower and the other Obligated Parties;

(j) Financing Statements . UCC financing statements reflecting Borrower and the other Obligated Parties, as debtors, and Administrative Agent, as secured party, which are required to grant a Lien which secures the Obligations and covering such Collateral as Administrative Agent may request;

(k) Stock Certificates and Stock Powers . With respect to each Subsidiary or Excluded Subsidiary that is a corporation, all certificates evidencing the Equity Interests of such Subsidiary or Excluded Subsidiary, as applicable, accompanied by undated and duly executed stock powers or instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Administrative Agent;

(l) Guaranty . A Guaranty executed by each Guarantor;

(m) Insurance Matters . Copies of insurance certificates describing all insurance policies required by Section 7.5 , together with loss payable and lender endorsements in favor of Administrative Agent with respect to all insurance policies covering Collateral;

(n) Acquisition . (i) A true and correct copy of each Acquisition Document, (ii) evidence that all conditions precedent to the closing of the transactions described in the Acquisition Agreement, except the funding of the initial Credit Extension to enable Borrower to fund in part its obligations under the Acquisition Agreement, shall have been completed in a manner satisfactory to Administrative Agent for a total purchase price not to exceed $9,000,000, and (iii) evidence that any indebtedness owed by Sellers which is secured by a Lien on any property described in the Acquisition Agreement has been or concurrently with the Closing Date is being paid in full and such Liens have been or concurrently with the Closing Date are being released pursuant to lien releases satisfactory to Administrative Agent;

(o) Lien Searches . The results of UCC, tax Lien and judgment Lien searches showing all financing statements and other documents or instruments on file against Borrower and each other Obligated Party in the appropriate filing offices, such search to be as of a date no more than 30 days prior to the date of the initial Credit Extension, and reflecting no Liens against any of the intended Collateral other than Liens being released or assigned to Administrative Agent concurrently with the initial Credit Extension;

(p) Opinions of Counsel . A favorable opinion of Welborn Sullivan Meck & Tooley, P.C., legal counsel to Borrower and Guarantors, and a favorable opinion of local counsel to Borrower and Guarantors in each jurisdiction where the Mortgaged Properties are located on the Closing Date, in each case as to such matters as Administrative Agent may reasonably request;

(q) Attorneys’ Fees and Expenses . Evidence that the costs and expenses (including reasonable attorneys’ fees) referred to in Section 12.1 , to the extent invoiced, shall have been paid in full by Borrower;

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(r) Title Assurances . Title opinions and/or other title information and data acceptable to Administrative Agent covering Oil and Gas Properties that in the aggregate represent not less than 85% (or such lesser percentage as acceptable to Administrative Agent in its sole discretion) of the Recognized Value evaluated in the Initial Reserve Report, reflecting title to the Oil and Gas Properties of Borrower and its Subsidiaries in such Mortgaged Properties which is acceptable to Administrative Agent;

(s) Environmental Reports . Such environmental reports, if any, regarding the Oil and Gas Properties of Borrower and its Subsidiaries as Administrative Agent may reasonably request;

(t) Initial Reserve Report . A true and correct copy of the Initial Reserve Report;

(u) Material Agreements . True and correct copies of all material agreements described on Schedule 6.28 ;

(v) Payoff of Existing Indebtedness; Release of Liens . Evidence that all commitments under the Existing Credit Agreement have been or concurrently with the Closing Date are being terminated, and all outstanding amounts thereunder paid in full and all Liens securing obligations under the Existing Credit Agreement have been or concurrently with the Closing Date are being released pursuant to lien releases satisfactory to Administrative Agent; and

(w) Closing Fees . Evidence that (i) the upfront fee of $127,500 payable to LegacyTexas Bank and (ii) any other fees due on or before the Closing Date have, in each case, been paid.

For purposes of determining compliance with the conditions set forth in this Section 5.1 , each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or be satisfied with, each document or other matter required thereunder to be consented to or approved by or be acceptable or satisfactory to a Lender unless Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto.

Section 5.2 All Extensions of Credit . The obligation of Lenders to make any Credit Extension hereunder (including the initial Credit Extension) is subject to the following additional conditions precedent:

(a) Request for Credit Extension . Administrative Agent shall have received in accordance with this Agreement, as the case may be, a Borrowing Request or Letter of Credit Application, as applicable, pursuant to Administrative Agent’s requirements and executed by a Responsible Officer of Borrower;

(b) No Default . No Default shall have occurred and be continuing, or would result from or after giving effect to such Credit Extension;

(c) No Material Adverse Event . No Material Adverse Event shall have occurred and no circumstance shall exist that could reasonably be expected to result in a Material Adverse Event;

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(d) Representations and Warranties . All of the representations and warranties contained in Article 6 and in the other Loan Documents shall be true and correct in all material respects on and as of the date of such Borrowing with the same force and effect as if such representations and warranties had been made on and as of such date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date, and except that for purposes of this Section 5.2 , the representations and warranties contained in Section 6.2 shall be deemed to refer to the most recent statements furnished pursuant to Sections 7.1(a) and 7.1(b) , respectively;

(e) Additional Documentation . Administrative Agent shall have received such additional approvals, opinions, or documents as Administrative Agent or its legal counsel may reasonably request; and

(f) Revolving Credit Availability . After giving effect to the Credit Extension so requested, the Aggregate Revolving Credit Exposure shall not exceed the Aggregate Commitments in effect as of the date of such Credit Extension.

Each Credit Extension hereunder shall be deemed to be a representation and warranty by Borrower that the conditions specified in this Section 5.2 have been satisfied on and as of the date of the applicable Credit Extension.

ARTICLE 6

REPRESENTATIONS AND WARRANTIES

To induce Administrative Agent and Lenders to enter into this Agreement, and to make Credit Extensions hereunder, Borrower represents and warrants to Administrative Agent and Lenders that:

Section 6.1 Entity Existence . Each of Borrower and its Subsidiaries (a) is duly incorporated or organized, as the case may be, validly existing, and in good standing under the Laws of the jurisdiction of its incorporation or organization; (b) has all requisite power and authority to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify could reasonably be expected to result in a Material Adverse Event. Each of Borrower and the other Obligated Parties has the power and authority to execute, deliver, and perform its obligations under this Agreement, the other Loan Documents to which it is or may become a party and the Intercreditor Agreement to the extent party thereto.

Section 6.2 Financial Statements; Etc . Borrower has delivered to Administrative Agent audited financial statements of Borrower and its Subsidiaries as at and for the fiscal year ended December 31, 2015 and unaudited financial statements of Borrower and its Subsidiaries as at and for the 6-month period ended June 30, 2016. Such financial statements are accurate and complete in all material respects, have been prepared in accordance with GAAP, and fairly and accurately present in all material respects, on a consolidated basis, the financial condition of Borrower and its Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Neither Borrower nor any of its Subsidiaries has any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments, unrealized or anticipated losses from any unfavorable commitments except as referred to or reflected in such financial statements. No Material Adverse Event has occurred since the effective date of the financial statements referred to in this Section 6.2 . All projections delivered by Borrower to Administrative Agent and Lenders have been prepared in good faith, with care and diligence and using assumptions that are reasonable under the circumstances at the time such projections were prepared and delivered to Administrative Agent and Lenders and all cost, volume and pricing assumptions are disclosed in the projections. Other than the Debt listed on Schedule 8.1 and Debt otherwise permitted by Section 8.1 , Borrower and each Subsidiary have no Debt.

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Section 6.3 Action; No Breach . The execution, delivery, and performance by each of Borrower and each other Obligated Party of this Agreement, the other Loan Documents to which such Person is or may become a party and the Intercreditor Agreement to the extent party thereto and compliance with the terms and provisions hereof and thereof have been duly authorized by all requisite action on the part of such Person and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) the Constituent Documents of such Person, (ii) any applicable Law, rule, or regulation or any order, writ, injunction, or decree of any Governmental Authority or arbitrator, or (iii) any agreement or instrument to which such Person is a party or by which it or any of its Properties is bound or subject which could result in a Material Adverse Event, or (b) constitute a default under any such agreement or instrument which could result in a Material Adverse Event, or result in the creation or imposition of any Lien upon any of the revenues or assets of such Person.

Section 6.4 Operation of Business . Each of Borrower and its Subsidiaries possesses all licenses, permits, consents, authorizations, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, necessary to conduct its respective businesses substantially as now conducted and as presently proposed to be conducted, and neither Borrower nor any of its Subsidiaries is in violation of any valid rights of others with respect to any of the foregoing which could reasonably be expected to result in a Material Adverse Event.

Section 6.5 Litigation and Judgments . Except as specifically disclosed in Schedule 6.5 as of the date hereof, there is no action, suit, investigation, or proceeding before or by any Governmental Authority or arbitrator pending, or to the knowledge of Borrower, threatened against or affecting Borrower, any of its Subsidiaries, or any other Obligated Party that could, if adversely determined, result in a Material Adverse Event. There are no outstanding judgments against Borrower, any of its Subsidiaries, or any other Obligated Party that could result in an Event of Default.

Section 6.6 Rights in Properties; Liens .

(a) Each of Borrower and its Subsidiaries has good and indefeasible title to or valid leasehold interests in its respective Properties, including the Properties reflected in the financial statements described in Section 6.2 but excluding the Oil and Gas Properties owned by Borrower and its Subsidiaries, and none of such Properties is subject to any Lien, except Permitted Liens.

(b) Schedule 6.6(b) sets forth a complete and accurate list of all Oil and Gas Properties owned by Borrower and each of its Subsidiaries on the Closing Date and as of the date of each update thereof required hereunder, showing as of the date thereof the lessor, lessee, lease date, recording information and legal description for each oil, gas and/or mineral lease in which Borrower or any of its Subsidiaries has an interest, which leases shall be grouped by the applicable well or unit. Each of Borrower and its Subsidiaries has good and defensible title in and to such Oil and Gas Properties. Such Oil and Gas Properties are free and clear of all Liens, other than Liens created or permitted by the Loan Documents, Liens set forth on Schedule 8.2 , other permitted exceptions as reasonably approved by Administrative Agent and Liens otherwise permitted by Section 8.2 . Except in the ordinary course of business and consistent with historical practice, no Person other than such Person has any ownership interests, whether legal or beneficial, in such Person’s purported interests in such Oil and Gas Properties.

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(c) The Mortgaged Properties are described in and covered by the Reserve Reports which have previously been delivered to and relied upon by Administrative Agent and the Lenders in connection with this Agreement. Borrower has provided Administrative Agent with title information and title data acceptable to Administrative Agent reflecting title to the Oil and Gas Properties of Borrower and its Subsidiaries in those Oil and Gas Properties that in the aggregate represent not less than 85% (or such lesser percentage as acceptable to Administrative Agent in its sole discretion) of the Recognized Value of Oil and Gas Properties evaluated in the most recent Reserve Report. Borrower and each of its Subsidiaries owns (or, contemporaneously with the closing of any Acquisitions being financed through and closed substantially contemporaneously with the initial Credit Extension, will own) at least the net interest and production attributable to the wells and units evaluated in each Reserve Report delivered to Administrative Agent, except such as may result, after the delivery of such Reserve Report, from customary provisions of operating agreements requiring or allowing for the acquisition of the interests of any non-consenting parties so long as Borrower promptly notifies Administrative Agent thereof. The ownership of such Properties shall not in the aggregate obligate Borrower or any of its Subsidiaries to bear costs and expenses relating to the maintenance, development and operations of such Properties in an amount in excess of the working interests of such Properties as shown in each such Reserve Report, except such as may result, after the delivery of such Reserve Report, from customary provisions of operating agreements requiring or allowing the parties thereto to pay the share of costs of a non-consenting party so long as Borrower promptly notifies Administrative Agent of such changes. Neither Borrower nor any of its Subsidiaries has conveyed or transferred to any other Person a beneficial interest in the Oil and Gas Properties owned by it of record, whether pursuant to unrecorded assignments or transfers or accounting mechanisms, except to the extent disclosed or taken into account in the most recent Reserve Report. Borrower and each of its Subsidiaries has paid all royalties payable under the oil and gas leases concerning which it is an operator, except to those contested in accordance with the terms of the applicable joint operating agreement, held in suspense or otherwise contested in good faith and by appropriate proceedings and reserves for the payment of which are being maintained in accordance with GAAP.

Section 6.7 Enforceability . This Agreement constitutes, and the other Loan Documents to which Borrower or any other Obligated Party is a party and the Intercreditor Agreement to the extent Borrower or any other Obligated Party is party thereto, when delivered, shall constitute legal, valid, and binding obligations of such Person, enforceable against such Person in accordance with their respective terms, except as limited by Debtor Relief Laws and by general principles of equity, whether applied by a court of law or equity.

Section 6.8 Approvals . Except for the applicable authorization, approval, or consent contemplated by and obtained for this Agreement, the other Loan Documents or the Acquisition Agreement, no authorization, approval, or consent of, and no filing or registration with, any Governmental Authority or third party is or will be necessary for the execution, delivery, or performance by Borrower or any other Obligated Party of this Agreement, the other Loan Documents to which such Person is or may become a party or the Intercreditor Agreement to the extent such Person is party thereto or the validity or enforceability thereof.

Section 6.9 Taxes . Except to the extent that a failure to do so could not be reasonably expected to result in a Material Adverse Event, each of Borrower and its Subsidiaries has filed all tax returns (federal, state, and local) required to be filed, including all income, franchise, employment, Property, and sales tax returns, and has paid all of their respective liabilities for taxes, assessments, governmental charges, and other levies that are due and payable, other than taxes the payment of which is being contested in good faith and by appropriate proceedings and reserves for the payment of which are being maintained in accordance with GAAP. Borrower knows of no pending investigation of Borrower or any of its Subsidiaries by any taxing authority or of any pending but unassessed tax liability of Borrower or any of its Subsidiaries. Neither Borrower nor any Subsidiary thereof is party to any tax sharing agreement.

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Section 6.10 Use of Proceeds; Margin Securities . The proceeds of the Borrowings shall be used by Borrower for working capital in the ordinary course of business, for the acquisition, drilling and development of the Oil and Gas Properties of Borrower and its Subsidiaries, for the refinancing of the Existing Credit Agreement, and for other general company or corporate purposes, as applicable. Neither Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U, or X of the Board of Governors), and no part of the proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock.

Section 6.11 ERISA . Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the knowledge of Borrower, nothing has occurred which would prevent, or cause the loss of, such qualification. No application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. There are no pending or, to the knowledge of Borrower, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan. There has been no Prohibited Transaction or violation of the fiduciary responsibility rules with respect to any Plan. No ERISA Event has occurred or is reasonably expected to occur. No Plan has any Unfunded Pension Liability. No Obligated Party or ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Plan (other than premiums due and not delinquent under Section 4007 of ERISA). No Obligated Party or ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan. No Obligated Party or ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA.

Section 6.12 Disclosure . No statement, information, report, representation, or warranty made by Borrower or any other Obligated Party in this Agreement, in any other Loan Document or the Intercreditor Agreement or furnished to Administrative Agent or any Lender in connection with this Agreement or any of the transactions contemplated hereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to Borrower which is a Material Adverse Event, or which might in the future be reasonably expected to result in a Material Adverse Event that has not been disclosed in writing to Administrative Agent and each Lender.

Section 6.13 Subsidiaries . Borrower has no Subsidiaries other than those listed on Schedule 6.13 (and, if subsequent to the Closing Date, such additional Subsidiaries as have been formed or acquired in compliance with Section 7.13 ), and Schedule 6.13 sets forth the jurisdiction of incorporation or organization of each such Subsidiary and the percentage of Borrower’s ownership interest in such Subsidiary. All of the outstanding Equity Interests in each Subsidiary described on Schedule 6.13 have been validly issued, are fully paid, and are nonassessable. Other than (i) in connection with its equity incentive plans or (ii) as disclosed in its financial statements, there are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments of any nature relating to any Equity Interests of Borrower or any Subsidiary. All Excluded Subsidiaries are listed on Schedule 6.13(b) , and sets forth the jurisdiction of incorporation or organization of each such Excluded Subsidiary and the percentage of Borrower’s ownership interest in such Excluded Subsidiary.

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Section 6.14 Agreements . Neither Borrower nor any of its Subsidiaries is a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate or other organizational restriction, in each case which could reasonably be expected to result in a Material Adverse Event. Neither Borrower nor any of its Subsidiaries is in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party which could reasonably be expected to result in a Material Adverse Event.

Section 6.15 Compliance with Laws . Neither Borrower nor any of its Subsidiaries is in violation in any material respect of any Law, rule, regulation, order, or decree of any Governmental Authority or arbitrator.

Section 6.16 Inventory . All inventory (including Hydrocarbons) of Borrower and its Subsidiaries has been and will hereafter be produced in material compliance with all applicable Laws, rules, regulations, and governmental standards, including, without limitation, the minimum wage and overtime provisions of the Fair Labor Standards Act (29 U.S.C. §§ 201-219).

Section 6.17 Regulated Entities . Neither Borrower nor any of its Subsidiaries is (a) an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, (b) a “utility” under the Laws of the State of Texas or any other jurisdiction wherein such Person is required to qualify to do business or (c) subject to regulation under any other federal or state statute, rule or regulation limiting its ability to incur Debt, pledge its assets or perform its obligations under the Loan Documents or the Intercreditor Agreement.

Section 6.18 Environmental Matters . Except (i) as could not reasonably be expected to result in a Material Adverse Event or (ii) as set forth on Schedule 6.18 :

(a) Each of Borrower and its Subsidiaries, and all of its respective Properties, assets, and operations are in compliance with all Environmental Laws. Borrower is not aware of, nor has Borrower received notice of, any past, present, or future conditions, events, activities, practices, or incidents which may interfere with or prevent the compliance or continued compliance of Borrower and its Subsidiaries with all Environmental Laws;

(b) Each of Borrower and its Subsidiaries has obtained all permits, licenses, and authorizations that are required under applicable Environmental Laws, and all such permits are in good standing and Borrower and its Subsidiaries are in compliance with all of the terms and conditions of such permits;

(c) No Hazardous Materials exist on, about, or within or have been used, generated, stored, transported, disposed of on, or Released from any of the Properties or assets of Borrower or any of its Subsidiaries. The use which Borrower and its Subsidiaries make and intend to make of their respective Properties and assets will not result in the use, generation, storage, transportation, accumulation, disposal, or Release of any Hazardous Material on, in, or from any of their Properties or assets;

(d) Neither Borrower nor any of its Subsidiaries nor any of their respective currently or previously owned or leased Properties or operations is subject to any outstanding or threatened order from or agreement with any Governmental Authority or other Person or subject to any judicial or docketed administrative proceeding with respect to (i) failure to comply with Environmental Laws, (ii) Remedial Action, or (iii) any Environmental Liabilities arising from a Release or threatened Release;

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(e) There are no conditions or circumstances associated with the currently or previously owned or leased Properties or operations of Borrower or any of its Subsidiaries that could reasonably be expected to give rise to any Environmental Liabilities;

(f) Neither Borrower nor any of its Subsidiaries is a treatment, storage, or disposal facility requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., regulations thereunder or any comparable provision of state Law. Borrower and its Subsidiaries are in compliance with all applicable financial responsibility requirements of all Environmental Laws;

(g) Neither Borrower nor any of its Subsidiaries has filed or failed to file any notice required under applicable Environmental Law reporting a Release; and

(h) No Lien arising under any Environmental Law has attached to any Property or revenues of Borrower or any of its Subsidiaries.

Section 6.19 Intellectual Property . All material Intellectual Property owned or used by Borrower and its Subsidiaries as of the Closing Date is listed, together with application or registration numbers, where applicable, in Schedule 6.19 . Each Person identified on Schedule 6.19 owns, or is licensed to use, all Intellectual Property necessary to conduct its business as currently conducted except for such Intellectual Property the failure of which to own or license could not result in a Material Adverse Event. Each Person identified on Schedule 6.19 will maintain the patenting and registration of all Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office, or other appropriate Governmental Authority, and each Person identified on Schedule 6.19 will promptly, but in any event within 10 Business Days following its acquisition thereof, patent or register, as the case may be, all new Intellectual Property and notify Administrative Agent in writing 5 Business Days prior to filing any such new patent or registration.

Section 6.20 Anti-Corruption Laws and Sanctions . Borrower has implemented and maintains in effect policies and procedures designed to ensure compliance by Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions, and Borrower, its Subsidiaries and their respective officers and employees, and to the knowledge of Borrower its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects. None of (a) Borrower or any Subsidiary or (b) to the knowledge of Borrower, any of their respective directors, officers, employees, or agents, is a Sanctioned Person. No Credit Extension or use of proceeds of any Credit Extension will violate Anti-Corruption Laws or applicable Sanctions.

Section 6.21 Patriot Act . The Obligated Parties, each of their Subsidiaries, and each of their Affiliates are in compliance with (a) the Trading with the Enemy Act, and each of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B Chapter V, as amended), and all other enabling legislation or executive order relating thereto, (b) the Patriot Act, and (c) all other federal or state Laws relating to “know your customer” and anti-money laundering rules and regulations. No part of the proceeds of any Loan will be used directly or indirectly for any payments to any government official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977.

Section 6.22 Insurance . The Properties of Borrower and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of Borrower, in such amounts, with such deductibles and covering such risks as are customarily carried in conformity with prudent industry practice by companies in the oil and gas industry owning similar Properties in localities where Borrower or the applicable Subsidiary operates.

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Section 6.23 Solvency . Each of Borrower and the other Obligated Parties is Solvent and has not entered into any transaction with the intent to hinder, delay or defraud a creditor.

Section 6.24 Security Documents . The provisions of the Security Documents are effective to create in favor of Administrative Agent for the benefit of the Secured Parties a legal, valid and enforceable Lien (subject to Permitted Liens) on all right, title and interest of the respective Obligated Parties party thereto in the Collateral. Except for filings completed in connection with the Closing Date and as otherwise contemplated hereby and by the Security Documents, no filing or other action will be necessary to perfect such Liens in Collateral.

Section 6.25 Businesses . Borrower is presently engaged directly or through its Subsidiaries in the business of oil and gas acquisition, exploration, development, and production.

Section 6.26 Labor Matters . There are no labor controversies pending, or to the best knowledge of Borrower, threatened against Borrower or any of its Subsidiaries which could reasonably be expected to result in a Material Adverse Event.

Section 6.27 Gas Balancing Agreements and Advance Payment Contracts . As of the Closing Date, (a) there is no Material Gas Imbalance, and (b) the aggregate amount of all Advance Payments received by Borrower and its Subsidiaries under Advance Payment Contracts which have not been satisfied by delivery of production does not exceed $250,000.

Section 6.28 Material Agreements . Schedule 6.28 sets forth a complete and correct list of all agreements in effect or to be in effect on the Closing Date and on the date of each update thereof required hereunder, to the extent that a default, breach, termination or other impairment thereof could reasonably be expected to cause a Material Adverse Event.

Section 6.29 Hedging Agreements and Transactions . Schedule 6.29 sets forth a complete and correct list of all Hedging Agreements and Hedging Transactions entered into by Borrower or any of its Subsidiaries in effect or to be in effect on the Closing Date and on the date of each update thereof required hereunder, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the Hedge Termination Value thereof, and the counterparty thereto.

Section 6.30 Flood Matters . No “Building” (as defined in the applicable Flood Insurance Regulation) or “Manufactured (Mobile) Home” (as defined in the applicable Flood Insurance Regulation) is located on any Mortgaged Property within an area having special flood hazards and in which flood insurance is available under the Flood Insurance Regulations, and no “Building” or “Manufactured (Mobile) Home” is encumbered by the Mortgages.

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ARTICLE 7

AFFIRMATIVE COVENANTS

Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding (other than contingent indemnification obligations) or any Letter of Credit shall remain outstanding (unless arrangements satisfactory to the L/C Issuer have been made) or any Lender has any Commitment hereunder:

Section 7.1 Reporting Requirements . Borrower will furnish to Administrative Agent (with copies for each Lender):

(a) Borrower Annual Financial Statements . As soon as available, and in any event within 90 days after the last day of each fiscal year of Borrower, beginning with the fiscal year ending December 31, 2016, a copy of the annual audited report of Borrower and its Subsidiaries for such fiscal year containing, on a consolidated basis, balance sheets and statements of income, retained earnings, and cash flow as of the end of such fiscal year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and audited by and accompanied by a report of an independent certified public accountants of recognized standing reasonably acceptable to Administrative Agent, to the effect that such report has been prepared in accordance with GAAP and containing no material qualifications or limitations on scope;

(b) Borrower Quarterly Financial Statements . As soon as available, and in any event within 60 days after the last day of each fiscal quarter of each fiscal year of Borrower, commencing with the fiscal quarter ending September 30, 2016, a copy of an unaudited financial report of Borrower and its Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended, containing, on a consolidated basis, balance sheets and statements of income, retained earnings, and cash flow, in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail certified by a Responsible Officer of Borrower to have been prepared in accordance with GAAP and to fairly and accurately present in all material respects (subject to year-end audit adjustments) the financial condition and results of operations of Borrower and its Subsidiaries, on a consolidated basis, as of the dates and for the periods indicated therein;

(c) Compliance Certificate . Concurrently with the delivery of each of the financial statements referred to in Sections 7.1(a) and 7.1(b) , a Compliance Certificate executed by a Responsible Officer of Borrower (i) stating that to the best of the knowledge of such Responsible Officer executing the same, no Default has occurred and is continuing, or if a Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, (ii) showing in reasonable detail the calculations demonstrating compliance with the covenants set forth in Article 9 , (iii) containing an update to Schedule 6.29 and (iv) containing such other certifications set forth therein. For any financial statements delivered electronically by a Responsible Officer in satisfaction of the reporting requirements set forth in Sections 7.1(a) or 7.1(b) that are not accompanied by the required Compliance Certificate, that Responsible Officer shall nevertheless be deemed to have certified the factual matters described in this clause (c) with respect to such financial statements; provided , however , such deemed certification shall not excuse or be construed as a waiver of Borrower’s obligation to deliver the required Compliance Certificate;

(d) Management Letters . Promptly upon receipt thereof, a copy of any management letter or written report (except standard or customary correspondence) submitted to Borrower or any of its Subsidiaries by independent certified public accountants with respect to the business, financial condition, operations or Properties of Borrower or any of its Subsidiaries;

(e) Notice of Litigation . Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any Governmental Authority or arbitrator not previously disclosed in writing to the Administrative Agent affecting Borrower or any of its Subsidiaries which, if determined adversely to Borrower or such Subsidiary, could be a Material Adverse Event;

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(f) Notice of Default . As soon as possible and in any event within 5 Business Days after the occurrence of any Default, a written notice setting forth the details of such Default and the action that Borrower has taken and proposes to take with respect thereto;

(g) ERISA Reports . Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which any Borrower or ERISA Affiliate files with or receives from the PBGC, the IRS, or the U.S. Department of Labor under ERISA; as soon as possible and in any event within 5 Business Days after Borrower or any ERISA Affiliate knows or has reason to know that any ERISA Event or Prohibited Transaction has occurred with respect to any Plan, a certificate of the chief financial officer of Borrower setting forth the details as to such ERISA Event or Prohibited Transaction and the action that Borrower proposes to take with respect thereto; annually, copies of the notice described in Section 101(f) of ERISA that Borrower or ERISA Affiliate receives with respect to a Plan or Multiemployer Plan;

(h) Reports to Other Creditors . Promptly after the furnishing thereof, copies of any material statement or report furnished to any other party pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to Administrative Agent pursuant to any other clause of this Section 7.1 ;

(i) Acquisitions and Dispositions of Oil and Gas Properties . Concurrently with each Reserve Report delivered under Section 7.1(k) below, a list and description showing the lessor, lessee, lease date, recording information and legal description for each oil, gas and/or mineral lease (which leases shall be grouped by the applicable well or unit) and a sufficient description of any other Oil and Gas Property in which Borrower or any of its Subsidiaries acquired an interest or Disposed of since the delivery to Administrative Agent of the immediately previous Reserve Report;

(j) Notice of Material Adverse Event . As soon as possible and in any event within 5 Business Days after the occurrence thereof, written notice of any event or circumstance that could reasonably be expected to result in a Material Adverse Event;

(k) Reserve Reports . (i) On or before February 1 of each year, a Reserve Report prepared by an Independent Engineer, an update to Schedule 6.29 , and a WI/NRI Schedule, and (ii) on or before August 1 of each year, a Reserve Report prepared by Borrower’s own engineers and certified by a Responsible Officer of Borrower, an update to Schedule 6.29 , and a WI/NRI Schedule;

(l) Lease Operating Statements . Together with each Reserve Report delivered under Section 7.1(k) above, a Lease Operating Statement;

(m) Updated Schedules . Within 30 days after each request from Administrative Agent, updates to Schedules 6.6(b) , 6.28 and 6.29 of this Agreement and updates to the schedules to such other Loan Documents as may be requested by Administrative Agent, upon which delivery Borrower shall be deemed to have made all applicable representations and warranties with respect thereto contained in the applicable Loan Documents;

(n) Material Gas Imbalance; Advance Payments . Promptly upon the occurrence thereof, notice to Administrative Agent of any Material Gas Imbalance or Advance Payments in violation of Section 8.18 hereof;

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(o) Tax Returns . Within 30 days after each filing thereof by each Obligated Party with any Governmental Authority, if requested by Administrative Agent, complete copies of the federal and state income tax returns so filed;

(p) Accounts Receivable. Within 15 days following each request by Administrative Agent, a report setting forth all accounts receivable and accounts payable of Borrower as of the date specified in such request, such report to show the age of such accounts and such other information as Administrative Agent shall reasonably request;

(q) Change in Insurance . Within 10 Business Days after any material change in insurance coverage by Borrower or any Subsidiary from that previously disclosed to Administrative Agent, a report describing such change, and, within 30 days after each request by Administrative Agent, certificates of insurance from the insurance companies insuring Borrower and its Subsidiaries, describing such insurance coverage;

(r) Purchasers of Production . Within 10 Business Days after receipt of each request from Administrative Agent, a report setting forth the identities and addresses of all Persons remitting proceeds from the sale of Hydrocarbon production from or attributable to Collateral to any Person who has executed a Mortgage;

(s) Operating Budget . As soon as available, but in any event within 90 days after the last day of each fiscal year of Borrower, an annual Borrower-prepared operating budget for the fiscal year in which such budget is due, including at a minimum an income statement, balance sheet, cash flow statement and capital expenditure plan of Borrower;

(t) Production Reports . Within 15 days after request by Administrative Agent, a Production Report; and

(u) General Information . Promptly, such other information concerning Borrower, any of its Subsidiaries, or any other Obligated Party as Administrative Agent, or any Lender through Administrative Agent, may from time to time request.

No reporting requirement in this Section 7.1 shall be construed as waiving or eliminating any covenants or restrictions set forth elsewhere in this Agreement or in the other Loan Documents. All representations and warranties set forth in the Loan Documents with respect to any financial information concerning Borrower or any Guarantor shall apply to all financial information delivered to Administrative Agent by Borrower, such Guarantor, or any Person purporting to be a Responsible Officer of Borrower or such Guarantor or other representative of Borrower or such Guarantor regardless of the method of such transmission to Administrative Agent or whether or not signed by Borrower, such Guarantor, or such Responsible Officer or other representative, as applicable.

Section 7.2 Maintenance of Existence; Conduct of Business . Borrower shall, and shall cause each of its Subsidiaries to, preserve and maintain its existence and all of its leases, privileges, licenses, permits, franchises, qualifications, and rights that, in its reasonable business judgment, are necessary or desirable in the ordinary conduct of its business, except to the extent a failure to so preserve and maintain could not reasonably be expected to result in a Material Adverse Event. Borrower shall, and shall cause each of its Subsidiaries to, conduct its business in an orderly manner in accordance with prudent industry practice by companies in the oil and gas industry owning similar properties in localities where Borrower or the applicable Subsidiary operates.

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Section 7.3 Maintenance and Operation of Properties .

(a) Each Obligated Party shall at all times maintain, develop and operate its Oil and Gas Properties in a good and workmanlike manner in accordance with prudent industry practice by companies in the oil and gas industry owning similar properties in localities where Borrower or the applicable Subsidiary operates and will observe and comply in all material respects with all of the terms and provisions of all oil and gas leases relating to such Oil and Gas Properties so long as such oil and gas leases are capable of producing Hydrocarbons in commercial quantities, to the extent that the failure to so observe and comply could reasonably be expected to result in a Material Adverse Event.

(b) Each Obligated Party shall use commercially reasonable efforts to remain as the named operator for each oil or gas well in which it now or hereafter owns an interest if (i) any such party is the operator thereof on the date hereof or becomes the operator thereof subsequent hereto and (ii) such well is now or hereafter becomes Collateral.

(c) Each Obligated Party shall at all times maintain, preserve and keep all operating equipment used or useful with respect to its Oil and Gas Properties in proper repair, working order and condition, and make all necessary or appropriate repairs, renewals, replacements, additions and improvements thereto as would a reasonably prudent operator of similar properties in localities where Borrower or the applicable Subsidiary operates.

(d) Each Obligated Party shall comply in all material respects with all Laws and agreements applicable to or relating to its Oil and Gas Properties or the production and sale of Hydrocarbons therefrom and all applicable proration and conservation Laws of the jurisdictions in which such Properties are located, to the extent that the failure to so comply with such Laws or agreements could reasonably be expected to result in a Material Adverse Event.

(e) With respect to the Oil and Gas Properties referred to in this Section 7.3 that are operated by operators other than an Obligated Party or any Affiliate of an Obligated Party, no Obligated Party shall be obligated itself to perform any undertakings contemplated by the covenants and agreements contained in this Section 7.3 which are performable only by such operators and are beyond its control, but the Obligated Parties shall use commercially reasonable efforts to cause such operators to perform such undertakings.

(f) No Obligated Party will amend, alter or change in any respect which could reasonably be expected to be materially adverse to its interests or that of Lenders any agreements relating to the operations or business arrangements of such Obligated Party or the compression, gathering, sale or transportation of oil and gas from the Oil and Gas Properties included in the most recent determination of the Borrowing Base without the prior written consent of Administrative Agent, which consent shall not be unreasonably withheld.

Section 7.4 Taxes and Claims . Borrower shall, and shall cause each of its Subsidiaries to, pay or discharge at or before maturity or before becoming delinquent (a) all Taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its Property, and (b) all lawful claims for labor, material, and supplies, which, if unpaid, could become a Lien upon any of its Property; provided , however , that neither Borrower nor any of its Subsidiaries shall be required to pay or discharge any Tax, levy, assessment, or governmental charge which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves in accordance with GAAP have been established.

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Section 7.5 Insurance .

(a) Borrower shall, and shall cause each of its Subsidiaries and shall use its commercially reasonable efforts to cause each of the other operators of the Oil and Gas Properties of Borrower and its Subsidiaries to, maintain insurance with financially sound and reputable insurance companies in such amounts and covering such risks as is customarily carried in conformity with prudent industry practice by companies in the oil and gas industry owning similar Properties in the same general areas in which Borrower and its Subsidiaries operate, provided that in any event Borrower will maintain and cause each of its Subsidiaries to maintain workmen’s compensation insurance, property insurance, and comprehensive general liability insurance reasonably satisfactory to Administrative Agent. Each insurance policy of Borrower or its Subsidiaries covering Collateral shall name Administrative Agent as loss payee and each insurance policy covering liabilities shall name Administrative Agent as additional insured, and each such insurance policy shall provide that such policy will not be cancelled or reduced without 30 days prior written notice to Administrative Agent.

(b) Subject to the Intercreditor Agreement and subject to clause (c) below, all proceeds of insurance shall be paid over to Administrative Agent for application to the Obligations under the Loan Documents, unless Required Lenders otherwise agree in writing in their sole discretion.

(c) So long as no Default or Borrowing Base Deficiency is continuing, Borrower or a Subsidiary may apply the net proceeds of a casualty or condemnation (each a “ Loss ”) to the repair, restoration, or replacement of the assets suffering such Loss, so long as (i) such repair, restoration, or replacement is completed within 180 days after the date of such Loss (or such longer period of time agreed to in writing by Required Lenders), (ii) while such repair, restoration, or replacement is underway, all of such net proceeds are on deposit with Administrative Agent in a separate deposit account over which Administrative Agent has exclusive control, and (iii) such Loss did not cause an Event of Default. If (x) an Event of Default occurs pursuant to which the Obligations under the Loan Documents are accelerated in accordance with Section 10.2 or (y) such repair, restoration, or replacement is not completed within 180 days of the date of such Loss (or such longer period of time agreed to in writing by Required Lenders), then in each case Administrative Agent may immediately and without notice to any Person apply all of such net proceeds to such Obligations, regardless of any other prior agreement regarding the disposition of such net proceeds.

(d) If at any time the representations made in Section 6.30 are untrue and any Building or Manufactured (Mobile) Home (as defined in applicable Flood Insurance Regulations) is included in the Collateral and is or has become located in an area designated as a “flood hazard area” under applicable Flood Insurance Regulations, Borrower shall, and shall cause each of its Subsidiaries to, (i) provide Administrative Agent with a description of such Building or Manufactured (Mobile) Home, including the address and legal description thereof and such other information as may be requested by Administrative Agent to obtain a flood determination or otherwise satisfy its obligations under applicable Flood Insurance Regulations, (ii) obtain flood insurance in such amounts as required by applicable Flood Insurance Regulations and (iii) provide evidence in form and substance satisfactory to Administrative Agent of such flood insurance to Administrative Agent.

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Section 7.6 Inspection Rights . At any reasonable time and from time to time during normal business hours, Borrower shall, and shall, upon at least 1 Business Day’s advance written request from Administrative Agent or any Lender, cause each of its Subsidiaries to, permit representatives of Administrative Agent or any Lender (a) to examine, inspect, review, evaluate and make physical verifications and appraisals of the Mortgaged Properties and other Collateral in any manner and through any medium that Administrative Agent or such Lender considers advisable, (b) to examine, copy, and make extracts from its books and records, (c) to visit and inspect its Properties, and (d) to discuss its business, operations, and financial condition with its officers, employees, and independent certified public accountants, in each instance, at Borrower’s expense.

Section 7.7 Keeping Books and Records . Borrower shall, and shall cause each of its Subsidiaries to, maintain proper books of record and account in which full, true, and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities.

Section 7.8 Compliance with Laws . Borrower shall, and shall cause each of its Subsidiaries to, (a) comply in all material respects with all applicable Laws and decrees of any Governmental Authority or arbitrator, (b) maintain at all times all consents or approvals required from the United States or any state of the United States (or other applicable Governmental Authorities) necessary to grant to Administrative Agent a Lien on the Oil and Gas Properties of Borrower and its Subsidiaries, and (c) maintain in effect and enforce policies and procedures designed to ensure compliance by Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions .

Section 7.9 Compliance with Agreements . Borrower shall, and shall cause each of its Subsidiaries to, comply in all material respects with all agreements, contracts, and instruments binding on it or affecting its Properties or business, except to the extent a failure to so comply could not reasonably be expected to result in a Material Adverse Event.

Section 7.10 Further Assurances . Borrower shall, and shall cause each of its Subsidiaries and each other Obligated Party to, execute and deliver such further agreements and instruments and take such further action as may be reasonably requested by Administrative Agent or any Lender to carry out the provisions and purposes of this Agreement, the other Loan Documents and the Intercreditor Agreement and to create, preserve, and perfect the Liens of Administrative Agent in the Collateral.

Section 7.11 ERISA . Borrower shall, and shall cause each of its Subsidiaries to, comply with all minimum funding requirements, and all other material requirements, of ERISA, if applicable, so as not to give rise to any liability thereunder.

Section 7.12 Depository Relationship . Within 30 days after the Closing Date (or such other longer period as acceptable to the Administrative Agent in its sole discretion), Borrower shall, and shall cause each of its Subsidiaries to, use LegacyTexas Bank as its principal depository bank, and Borrower shall, and shall cause each of its Subsidiaries to, maintain LegacyTexas Bank as its principal depository bank, including for the maintenance of business, cash management, operating and administrative deposit accounts.

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Section 7.13 Additional Guarantors . Borrower shall notify Administrative Agent at the time that any Person becomes a Subsidiary, and promptly thereafter (and in any event within 30 days) Borrower shall (a) execute and deliver, or cause to be executed and delivered, to Administrative Agent all Security Documents, stock certificates, stock powers and other agreements and instruments as may be reasonably requested by Administrative Agent to ensure that Administrative Agent has a perfected security interest in all Equity Interests held by any Obligated Party in such Subsidiary, and (b) cause such Person to (i) become a Guarantor by executing and delivering to Administrative Agent a Guaranty (or a joinder to any existing Guaranty), (ii) execute and deliver all Security Documents requested by Administrative Agent pledging to Administrative Agent for the benefit of the Secured Parties all of its Property (subject to (A) Permitted Liens and (B) such exceptions as are provided in the Security Documents then in effect and (C) as Administrative Agent may permit), and subject, with respect to Oil and Gas Properties, to the limitations set forth in clause (iii) below and take all actions required by Administrative Agent to grant to the Administrative Agent for the benefit of Secured Parties a perfected first priority Lien on such property, including the filing of UCC financing statements in such jurisdictions as may be requested by Administrative Agent, (iii) with respect to each Oil and Gas Property owned by such Subsidiary, execute, acknowledge and deliver a Mortgage or Mortgages and evidence of the proper recordation of each such Mortgage in the appropriate filing office, in each case, sufficient to cause the Recognized Value of the Mortgaged Properties to be not less than the Required Reserve Value, (iv) deliver to Administrative Agent title opinions and/or other title information and data acceptable to Administrative Agent such that Administrative Agent shall have received, together with the title information previously delivered to Administrative Agent, acceptable title information regarding those Oil and Gas Properties that in the aggregate represent not less than 85% (or such lesser percentage as acceptable to Administrative Agent in its sole discretion) of the Recognized Value of Oil and Gas Properties evaluated in the most recent Reserve Report; and (v) deliver to Administrative Agent such other documents and instruments as Administrative Agent may require, including appropriate favorable opinions of counsel to such Person in form, content and scope reasonably satisfactory to Administrative Agent.

Section 7.14 Title Assurances . Without limitation of any other requirements contained in this Agreement and the other Loan Documents, Borrower shall, (a) upon request by Administrative Agent, deliver to Administrative Agent title opinions and/or other title information and data acceptable to Administrative Agent regarding the Oil and Gas Properties of Borrower and its Subsidiaries that in the aggregate represent not less than 85% (or such lesser percentage as acceptable to Administrative Agent in its sole discretion) of the Recognized Value of Oil and Gas Properties evaluated in the most recent Reserve Report; and (b) promptly, but in any event within 30 days after notice by Administrative Agent of any defect, material in the opinion of Administrative Agent, in the title of the mortgagor under any Mortgage to any Oil and Gas Property covered thereby, clear such title defect, and in the event any such title defects are not cured in a timely manner, pay all related costs and fees incurred by Administrative Agent and Lenders in attempting to do so. A failure of Borrower to clear any such title defect shall not be an Event of Default, but instead Administrative Agent and the Required Lenders may elect to redetermine the Borrowing Base, and if such election is made, Borrower may not make any special determinations of the Borrowing Base under Section 2.9(c)(i) until after the next scheduled redetermination.

Section 7.15 Commodity Hedging Transactions .

(a) Borrower shall, within 30 days following the Closing Date, enter into Acceptable Commodity Hedging Transactions for quantities of gaseous and liquid Hydrocarbons equal to (i) for the period through December 31, 2018, at least 75%, and (ii) for the 2019 calendar year, at least 60%, in each case, of the monthly Projected Production from the proved, developed producing Oil and Gas Properties of Borrower and its Subsidiaries used in determining the Borrowing Base using the most recently delivered Reserve Report (or, with Administrative Agent’s written approval, Acceptable Commodity Hedging Transactions having substantially equal value).

(b) Borrower and its Subsidiaries shall maintain a commodity price risk management policy, which policy shall be reasonably acceptable to Administrative Agent.

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Section 7.16 Concerning Operator’s Liens . Upon request of Administrative Agent, Borrower shall cause each Affiliated operator of its Oil and Gas Properties to fully subordinate to the Liens securing the Obligations any and all Liens granted to or held by such operator under any present or future joint operating agreement covering any of the Oil and Gas Properties of Borrower or any of its Subsidiaries, in a manner satisfactory to Administrative Agent and pursuant to documentation in form and substance satisfactory to Administrative Agent.

Section 7.17 Post-Closing Obligation .

(a) On or before the date Borrower enters into Acceptable Commodity Hedging Transactions in accordance with Section 7.15 , Administrative Agent shall have received the Intercreditor Agreement, duly executed by the parties thereto.

(b) Within 30 days following the Closing Date, Brushy Gap shall (i) transfer the entirety of its ownership interests in its Oil and Gas Properties and its Equity Interests in the Jaguar Triangle Partnership to Nytis, and (ii) promptly dissolve its corporate existence.

(c) Within 30 days after the Closing Date (or such other longer period as acceptable to the Administrative Agent in its sole discretion), Borrower shall, and shall cause each of its Subsidiaries to, (i) use LegacyTexas Bank as its principal depository bank pursuant to Section 7.12 hereof, and (ii) transfer funds from each of the deposit accounts set forth on Schedule 5 of the Security Agreement so that, collectively, the balance in all such accounts does not exceed $100,000 at any time.

ARTICLE 8

NEGATIVE COVENANTS

Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding (other than contingent indemnification obligations) or any Letter of Credit outstanding (unless arrangements satisfactory to the L/C Issuer have been made) or any Lender has any Commitment hereunder:

Section 8.1 Debt . Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, incur, create, assume, or permit to exist any Debt, except:

(a) the Obligations under the Loan Documents and Obligations existing or arising under Bank Product Agreements other than Hedging Agreements and Hedging Transactions;

(b) existing Debt described on Schedule 8.1 and Permitted Refinancings thereof;

(d) purchase money Debt and Capitalized Lease Obligations not to exceed $250,000 in the aggregate at any time outstanding and Permitted Refinancings thereof;

(e) Hedge Obligations existing or arising under Hedging Agreements and Hedging Transactions permitted by Section 8.17 ;

(f) Debt associated with bonds or other surety obligations required by Governmental Authorities in connection with the operation of the businesses of Borrower and its Subsidiaries;

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(g) Debt arising in the ordinary course of business with respect to customary indemnification and reimbursement obligations under asset purchase and sale agreements, division and transfer orders, joint operating agreements (including funds held in suspense), pooling, unitization or communitization agreements, gathering agreements, processing agreements, Farmout agreements and other agreements customary in the industry pertaining to the exploration for, development, disposition or operation of, or the production or sale of Hydrocarbons produced from, Oil and Gas Properties;

(h) Endorsements for collection or deposit in the ordinary course of business;

(i) Debt related to the financing of insurance policy premiums not to exceed $150,000 in the aggregate at any time outstanding;

(j) Debt related to the Liberty Energy Advances; and

(k) other Debt not to exceed $250,000 in the aggregate at any time outstanding.

Section 8.2 Limitation on Liens . Borrower shall not, and shall not permit any of its Subsidiaries to, incur, create, assume, or permit to exist any Lien upon any of its Property, assets, or revenues, whether now owned or hereafter acquired, except:

(a) existing Liens disclosed on Schedule 8.2 and Permitted Refinancings thereof;

(b) Liens in favor of Administrative Agent for the benefit of the Secured Parties, so long as, with respect to Liens for the benefit of Approved Commodity Swap Counterparties other than Bank Product Providers, such Liens are permitted by and subject to the Intercreditor Agreement;

(c) encumbrances consisting of minor easements, zoning restrictions, or other restrictions on the use of real property that are customary in the oil and gas industry and do not (individually or in the aggregate) materially affect the value of the assets encumbered thereby or materially impair the ability of Borrower or its Subsidiaries to use or operate such assets in their respective businesses, and none of which is violated in any material respect by existing or proposed structures or land use or operation;

(d) Immaterial Title Deficiencies;

(e) Liens for Taxes, assessments, or other governmental charges which are not delinquent or which are being contested in good faith and for which adequate reserves in accordance with GAAP have been established;

(f) Any interest or title of, or Liens created by, a lessor under any leases or subleases or occupancy agreement, other than oil and gas leases or other such instruments pertaining to Oil and Gas Properties, entered into in each case by Borrower or any Subsidiary, as tenant, in the ordinary course of business;

(g) Liens of mechanics, materialmen, warehousemen, carriers, or other similar statutory Liens securing obligations that are not yet due or are being contested in good faith and for which adequate reserves in accordance with GAAP have been established and are incurred in the ordinary course of business;

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(h) Liens resulting from good faith deposits to secure payments of workmen’s compensation or other social security programs (other than Liens imposed by ERISA) or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, contracts (other than for payment of Debt), or leases made in the ordinary course of business;

(i) purchase money Liens on specific Property to secure Debt used to acquire such Property and Liens securing Capitalized Lease Obligations with respect to specific leased Property, in each case to the extent permitted in Section 8.1(d) ;

(j) so long as no default has occurred by any Obligated Party in the payment or performance of such agreements, contracts, agreements, lease provisions, defects and irregularities which (i) were in effect when such Property, assets or revenues were acquired, (ii) were not created in contemplation of such acquisition, (iii) were not such as to materially interfere with the operation, value or use of the Properties covered by such Lien, (iv) are ordinary and customary to the oil, gas and other mineral exploration, development, processing or extraction business, (v) do not otherwise cause any other express representation or warranty of any Obligated Party in any of the Loan Documents to be untrue in any material respect, and (vi) do not operate to reduce any Obligated Party’s net revenue interest in production for the affected Oil and Gas Properties (if any) below such interests reflected in the most recent Reserve Report, or increase the working interest for the affected Oil and Gas Properties (if any) as reflected or warranted in the most recent Reserve Report without a corresponding increase in the corresponding net revenue interest;

(k) contractual Liens for the benefit of operators of the Oil and Gas Properties of Borrower and its Subsidiaries, but only to the extent that such operators are not Obligated Parties or Affiliates of Obligated Parties, and are not asserting a claim or right to exercise their rights under such contractual Liens, except for such claims and rights of operators which Borrower or the applicable Subsidiary is contesting in good faith and for which adequate reserves are maintained in accordance with GAAP;

(l) to the extent applicable, the statutory Lien to secure payment of proceeds of production established by § 9.343 of the UCC and similar Laws of other jurisdictions;

(m) royalties, overriding royalties, reversionary interests, production payments, net profits interests, calls on production, preferential purchase rights and similar lease burdens which (i) are customarily granted in the ordinary course of business in the oil and gas industry, (ii) are deducted in the calculation of discounted present value in the most recent Reserve Reports delivered to Administrative Agent hereunder, (iii) with respect to each Oil and Gas Property, do not operate to reduce any Obligated Party's net revenue interest in production for such Oil and Gas Property (if any) below such interests reflected in the most recent Reserve Report or increase the working interest for such Oil and Gas Property (if any) as reflected or warranted in the most recent Reserve Report without a corresponding increase in the corresponding net revenue interest, and (iv) do not materially impair the use or value of such Oil and Gas Property subject to such Lien;

(n) contractual Liens under sale contracts, farm-in agreements, Farmout agreements, area of mutual interest, joint operating agreements, or other arrangements for the exploration, development, production, transportation, gathering, processing or sale of Hydrocarbons, and other agreements which are usual and customary in the oil and gas business which (i) would not (when considered cumulatively with the matters discussed in Section 8.2(m) ) materially impair the use or value of such Oil and Gas Property subject to such Lien, (ii) are ordinary and customary to the oil, gas and other mineral exploration, development, processing or extraction business, (iii) do not otherwise cause any other express representation or warranty of any Obligated Party in any of the Loan Documents to be untrue in any material respect, and (iv) do not operate to reduce any Obligated Party's net revenue interest in production for the affected Oil and Gas Properties (if any) below such interests reflected in the most recent Reserve Report, or increase the working interest for the affected Oil and Gas Properties (if any) as reflected or warranted in the most recent Reserve Report without a corresponding increase in the corresponding net revenue interest;

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(o) Gas Balancing Agreements; provided that the amount of all gas imbalances and the amount of all production which has been paid for but not delivered shall have been disclosed or otherwise taken into account in the Reserve Reports delivered to Administrative Agent hereunder; and

(p) Liens to secure plugging and abandonment obligations;

(q) Liens granted by any Obligated Party on its rights under any insurance policy, but only to the extent that such Lien is granted to the insurers under such insurance policies or any insurance premium finance company to secure payment of the premiums and other amounts owed to the insurers or such premium finance company with respect to such insurance policy; and

(r) Other Liens securing Debt not to exceed $150,000 in the aggregate at any time outstanding;

provided , however , that Liens described in clauses (a) , (e) , (g) , (h) , (j) and (o) above shall continue to be permitted only for so long as (A) the appropriate Obligated Party shall cause any proceeding instituted contesting such Lien to stay the sale or forfeiture of any portion of Property on account of such Lien and (B) a proper reserve, if applicable, continues to be maintained in accordance with GAAP; and provided further , that no intention to subordinate the first priority Liens granted in favor of Administrative Agent to secure the Obligations is hereby implied or expressed or is to be inferred by the permitted existence of such Liens.

Section 8.3 Mergers, Etc . Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, become a party to a merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets of any Person or any Equity Interests or other evidence of beneficial ownership of any Person, or wind-up, dissolve, or liquidate, except that (a) any Subsidiary may merge or consolidate with Borrower so long as Borrower is the surviving entity; (b) any Subsidiary may merge or consolidate with another Subsidiary so long as the Subsidiary surviving the merger or consolidation (i) is a Guarantor, or (ii) within 10 Business Days of such merger or consolidation, becomes a Guarantor pursuant to Section 7.13 ; and (c) as otherwise permitted under Section 8.5 .

Section 8.4 Restricted Payments . Borrower shall not, directly or indirectly, declare or pay any dividends or make any other payment or distribution (in cash, Property, or obligations) on account of its Equity Interests, or redeem, purchase, retire, call, or otherwise acquire any of its Equity Interests, or permit any of its Subsidiaries to purchase or otherwise acquire any Equity Interest of Borrower or another Subsidiary of Borrower, or set apart any money for a sinking or other analogous fund for any dividend or other distribution on its Equity Interests or for any redemption, purchase, retirement, or other acquisition of any of its Equity Interests, or incur any obligation (contingent or otherwise) to do any of the foregoing, except that (a) Subsidiaries shall be permitted to make payments and distributions to Borrower or any Guarantor, and (b) annually, but only so long as Nytis is treated as a pass-through entity for federal income tax purposes, Nytis may make Permitted Tax Distributions, provided that no Default or Borrowing Base Deficiency exists or will exist after giving effect to such distribution.

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Section 8.5 Loans and Investments . Borrower shall not make, and shall not permit any of its Subsidiaries, directly or indirectly, to make, hold or maintain, any advance, loan, extension of credit, or capital contribution to or investment in, or purchase any stock, bonds, notes, debentures, or other securities of, any Person, except:

(a) existing investments described on Schedule 8.5 ;

(b) readily marketable direct obligations of the United States of America or any agency thereof with maturities of one year or less from the date of acquisition;

(c) fully insured certificates of deposit with maturities of one year or less from the date of acquisition issued by either (i) any commercial bank operating in the United States of America having capital and surplus in excess of $50,000,000.00 or (ii) any Lender;

(d) commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest rating categories of Standard and Poor’s Corporation or Moody’s Investors Service;

(e) investments resulting in an Acquisition where:

(i) the business, division or assets acquired are for use, or the Person acquired is engaged in, one of the businesses described in Section 6.25 ;

(ii) immediately before and after giving effect to such Acquisition, no Default shall exist;

(iii) the business, division or Person acquired shall not have a negative EBITDA after giving effect to reasonable pro forma adjustments which are approved by Administrative Agent;

(iv) no less than 10 Business Days prior to such Acquisition, Administrative Agent shall have received (A) drafts of each material document, instrument and agreement to be executed in connection with such Acquisition, (B) an acquisition summary with respect to the Person and/or business or division to be acquired, such summary to include a reasonably detailed description thereof (including financial information) and operating results (including financial statements for the most recent 12-month period for which they are available and as otherwise applicable), the terms and conditions, including economic terms, of the proposed Acquisition and Borrower’s calculation of pro forma EBITDA relating thereto, (C) a certificate of Borrower executed on its behalf by a Responsible Officer of Borrower, certifying that both before and after giving effect to such Acquisition, Borrower is in pro forma compliance with all financial covenants set forth in Article 9 ; and (D) Administrative Agent shall have approved Borrower’s computation of pro forma EBITDA;

(v) to the extent applicable, the provisions of Section 7.13 have been satisfied, thereby causing Administrative Agent to have a perfected first priority Lien (subject to Permitted Liens) on all assets, including Equity Interests, that are acquired in the Acquisition; and

(vi) after giving effect to such Acquisition, there shall be at least $250,000 in unrestricted cash of Borrower plus Revolving Credit Availability;

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(f) investments in Subsidiaries that are Guarantors;

(g) investments consisting of direct ownership interests in Oil and Gas Properties or wells, gas gathering systems or other field facilities, seismic data and surveys, in each case related to such Oil and Gas Properties , or related to Farmouts or farm-ins, participation agreements, joint operating agreements, joint venture or area of mutual interest agreements or other similar arrangements which are usual and customary in the oil and gas industry located within the geographic boundaries of the United States of America; provided that (i) no such investment includes an investment in any Equity Interest in a Person, (ii) any Debt incurred or assumed or Lien granted or permitted to exist pursuant to such investments is otherwise permitted under Section 8.1 and Section 8.2 , respectively, and (iii) such investments are taken into account in computing the working interests and net revenue interests set forth in the most recent WI/NRI Schedule;

(h) investments consisting of Hedging Transactions permitted under Section 8.17 ;

(i) advances or extensions of credit in the form of accounts receivable incurred in the ordinary course of business and upon terms common in the industry for such accounts receivable which are not more than 90 days past due;

(j) advances to employees for the payment of expenses in the ordinary course of business

(k) Investments received in satisfaction or partial satisfaction of Investments described in clause (i) above from financially troubled account debtors to the extent reasonably necessary in order to prevent or limit loss, provided that all such Investments under this clause (k) shall not exceed $100,000 in the aggregate outstanding at any one time; and

(l) other Investments not otherwise permitted by the foregoing clauses in an amount not to exceed $100,000 in the aggregate outstanding at any one time.

Section 8.6 Limitation on Issuance of Equity . Subsidiaries of the Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, issue or Dispose of any of its Equity Interests other than to Borrower or another Subsidiary and only if such Equity Interests are pledged to the Administrative Agent consistent with the Security Documents.

Section 8.7 Transactions With Affiliates . Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into any transaction, including, without limitation, the purchase, sale, or exchange of Property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate of Borrower or such Subsidiary, except in the ordinary course of and pursuant to the reasonable requirements of Borrower’s or such Subsidiary’s business, pursuant to a transaction which is otherwise expressly permitted under this Agreement, and upon fair and reasonable terms no less favorable to Borrower or such Subsidiary than would be obtained in a comparable arm’s-length transaction with a Person not an Affiliate of Borrower or such Subsidiary.

Section 8.8 Disposition of Assets . Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make any Disposition, except:

(a) Dispositions of inventory (including Hydrocarbons) in the ordinary course of business;

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(b) Dispositions, for fair value, of worn-out and obsolete equipment not necessary or useful to the conduct of business;

(c) Dispositions consisting of any compulsory pooling or unitization ordered by a Governmental Authority with jurisdiction over Borrower’s or any of its Subsidiaries’ Oil and Gas Properties;

(d) subject to Section 2.9(c)(ii) and provided that no Default has occurred and is continuing or would result therefrom, Dispositions of Oil and Gas Properties; provided that the aggregate fair market value of all such Oil and Gas Properties Disposed of between periodic redeterminations of the Borrowing Base under Section 2.9(b) shall not exceed $1,000,000 (when aggregated with Dispositions permitted under Section 8.8(e) during the same period);

(e) subject to Section 2.9(c)(ii) and provided no Default has occurred and is continuing or would result therefrom, Dispositions of proved developed Oil and Gas Properties; provided that (i) all of the consideration received in respect of any such Disposition shall be cash, (ii) the consideration received shall be equal to or greater than the fair market value thereof (as reasonably determined by a Responsible Officer of Borrower, and if requested by Administrative Agent, Borrower shall deliver a certificate of a Responsible Officer of Borrower certifying to that effect), and (iii) the aggregate Borrowing Base value of all such proved developed Oil and Gas Properties Disposed of between periodic redeterminations of the Borrowing Base under Section 2.9(b) shall not exceed 5% of the Borrowing Base in effect as of the then most recent periodic redetermination of the Borrowing Base under Section 2.9(b) ; and

(f) other Dispositions not to exceed $500,000 in the aggregate in any fiscal year.

Section 8.9 Sale and Leaseback . Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into any arrangement with any Person pursuant to which it leases from such Person real or personal Property that has been or is to be sold or transferred, directly or indirectly, by it to such Person.

Section 8.10 Prepayment of Debt . Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make any optional or voluntary payment, prepayment, repurchase or redemption of any Debt, except (a) the Obligations under the Loan Documents, (b) Debt secured by a Permitted Lien if the asset securing such Debt has been sold or otherwise disposed of in a transaction permitted hereunder, (c) a Permitted Refinancing of Debt permitted under Sections 8.1(b) , and 8.1(d) , (d) prepayments of other Debt so long as the amounts prepaid do not exceed $250,000 in the aggregate during any period between determinations of the Borrowing Base, and (e) prepayment of intercompany Debt to Obligated Parties.

Section 8.11 Nature of Business . Borrower shall not, and shall not permit any of its Subsidiaries to, engage in any business other than their businesses as oil and gas exploration and production companies. Borrower shall not, and shall not permit any of its Subsidiaries to, make any material change in its credit collection policies if such change would materially impair the collectability of any Account, nor will it rescind, cancel or modify any Account except in the ordinary course of business.

Section 8.12 Environmental Protection . Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly (a) use (or permit any tenant to use) any of their respective Properties or assets for the handling, processing, storage, transportation, or disposal of any Hazardous Material in material violation of Environmental Laws, (b) generate any Hazardous Material in material violation of Environmental Laws, (c) conduct any activity that is likely to cause a Release or threatened Release of any Hazardous Material, or (d) otherwise conduct any activity or use any of their respective Properties or assets in any manner that is likely to violate in any material respect any Environmental Law or create any material Environmental Liabilities for which Borrower or any of its Subsidiaries would be responsible.

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Section 8.13 Accounting . Borrower shall not, and shall not permit any of its Subsidiaries to, change its fiscal year or make any change (a) in accounting treatment or reporting practices, except as required by GAAP and disclosed to Administrative Agent and Lenders, or (b) in tax reporting treatment, except as required by Law and disclosed to Administrative Agent and Lenders.

Section 8.14 Burdensome Agreements . Borrower shall not, and shall not permit any of its Subsidiaries or any other Obligated Party to, enter into or permit to exist any arrangement or agreement, other than pursuant to this Agreement or any Loan Document, which (a) directly or indirectly prohibits Borrower, any of its Subsidiaries, or any other Obligated Party from creating or incurring a Lien on any of its Property, revenues, or assets, whether now owned or hereafter acquired, (b) directly or indirectly prohibits any of its Subsidiaries, or any other Obligated Party to make any payments, directly or indirectly, to Borrower by way of dividends, distributions, advances, repayments of loans, repayments of expenses, accruals, or otherwise or (c) in any way would be contravened by such Person’s performance of its obligations hereunder or under the other Loan Documents; provided, that the foregoing shall not prohibit any (i) provisions restricting subletting or assignment of any lease, (ii) provisions in any assignment, lease, easement, permit, license, deed or other agreement or instrument restricting or prohibiting assignment of such agreement or instrument or rights created, or property conveyed or assigned, thereunder, including, without limitation, preferential purchase rights and consent requirements, and (iii) customary restrictions and conditions contained in any agreement relating to the sale of any property permitted under this Agreement pending the consummation of such sale.

Section 8.15 Subsidiaries . Borrower shall not, directly or indirectly, form or acquire any Subsidiary unless Borrower complies with the requirements of Section 7.13 .

Section 8.16 Amendments of Constituent Documents . Borrower shall not, and shall not permit any of its Subsidiaries to, amend or restate any of their respective Constituent Documents without prior consent of the Administrative Agent, except as would not be reasonably expected to be materially adverse to the Lenders.

Section 8.17 Hedging Agreements and Transactions .

(a) Borrower shall not, and shall not permit any of its Subsidiaries to, enter into, or permit to exist, any Hedging Transaction unless (i) such Hedging Transaction is an Acceptable Commodity Hedging Transaction or a Rate Management Transaction that is with a counterparty reasonably satisfactory to Administrative Agent and that has terms and conditions reasonably satisfactory to Administrative Agent, and (ii) the Hedging Agreement governing such Hedging Transaction does not contain any anti-assignment provisions restricting such Person or, if such agreement contains anti-assignment provisions which cannot be removed, such provisions shall be modified to read substantially as follows: “The interest and obligations arising from this agreement are non-transferable and non-assignable, except that [insert Obligated Party’s name] may assign and grant a security interest in its rights and interests hereunder to LegacyTexas Bank, as a lender or as contractual representative of itself and other creditors, and its assigns (the “ Lender ”) as security for [insert Obligated Party’s name] ’s present and future obligations to such parties. Until [hedge provider] is notified in writing by the Lender to pay to the Lender amounts due [insert Obligated Party’s name] hereunder, [hedge provider] may continue to make such payments to [insert Obligated Party’s name] .”

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(b) No Obligated Party shall cause or permit any Hedging Transaction now existing or hereafter entered into by such Person to be amended, modified, terminated, negated through such Person’s entry into one or more new Hedging Transactions with the opposing effect, or liquidated without the prior written consent of Administrative Agent. Any consent by Administrative Agent granted pursuant to this Section might include a requirement (to be treated for the purposes of Section 2.9 as a Borrower requested determination) that a new Borrowing Base be determined.

(c) No Obligated Party shall enter into any new Hedging Agreement, or cause or permit any Hedging Agreement now existing or hereafter entered into by such Person to be amended, modified or terminated, without the prior written consent of Administrative Agent except as specifically permitted herein or as permitted in any then-effective Intercreditor Agreement and except for entering into usual and customary confirmations under such Hedging Agreements setting forth volume, pricing, duration and other such standard terms.

Section 8.18 Gas Balancing Agreements and Advance Payment Contracts . Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, incur, become or remain liable for, or permit any of its Subsidiaries to incur, become or remain liable for, at any time (a) any Material Gas Imbalance, or (b) Advance Payments under Advance Payment Contracts which are to be satisfied by delivery of production in excess of $250,000 in the aggregate.

Section 8.19 Certain Accounts Payable . For each well whose reserves or projected cash flow are from time to time included in any Reserve Report, there shall be no accounts payable outstanding more than 90 days after the due date under or in connection with an authorization for expenditure that are associated with such well, other than those that are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been established.

Section 8.20 Use of Proceeds . Borrower will not request any Credit Extension, and Borrower shall not use, and shall ensure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Credit Extension, (a) directly or indirectly, to purchase or carry margin stock (within the meaning of Regulations T, U, or X of the Board of Governors), (b) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (c) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, or (d) in any manner that would result in the violation of any Sanctions applicable to any party hereto.

Section 8.21 Joint Operating Agreements . Borrower shall not, and shall not permit any of its Subsidiaries to, amend, restate, supplement or otherwise modify, or elect a new operator under, any joint operating agreement covering any of the Oil and Gas Properties of Borrower or any of its Subsidiaries in a manner materially adverse to Borrower or such Subsidiary without the prior written consent of Administrative Agent.

Section 8.22 Excluded Subsidiaries . Borrower shall not permit any of its Excluded Subsidiaries (other than Crawford Company) to directly or indirectly, incur, create, assume, or permit to exist (i) any Debt, or (ii) any Lien upon any of its Property, assets, or revenues, whether now owned or hereafter acquired, except for those permitted by the Administrative Agent in its sole discretion.

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ARTICLE 9

FINANCIAL COVENANTS

Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or any Letter of Credit shall remain outstanding or any Lender has any Commitment hereunder:

Section 9.1 Leverage Ratio . Borrower shall not permit, as of the last day of any Test Period, commencing with the Test Period ending March 31, 2017, the Leverage Ratio for Borrower and its Subsidiaries, on a consolidated basis, to be greater than 3.50 to 1.00.

Section 9.2 Current Ratio . Borrower shall not permit, as of the last day of any fiscal quarter of Borrower, commencing with the fiscal quarter ending March 31, 2017, the Current Ratio for Borrower and its Subsidiaries, on a consolidated basis, to be less than 1.00 to 1.00.

ARTICLE 10

DEFAULT

Section 10.1 Events of Default . Each of the following shall be deemed an “ Event of Default ”:

(a) Borrower shall fail to pay the Obligations under the Loan Documents or any part thereof shall not be paid when due or declared due and, other than with respect to payments of principal, such failure shall continue unremedied for three (3) Business Days after such payment became due;

(b) Borrower shall breach any provision of Sections 7.1 , 7.2 , 7.5 , 7.6 , 7.13 , or 7.15 or Article 8 or Article 9 of this Agreement and in the case of a breach of Section 7.1(i) , (k) , or (l) , such breach shall continue unremedied for three (3) Business Days;

(c) any representation or warranty made or deemed made by Borrower or any other Obligated Party (or any of their respective officers) in any Loan Document or the Intercreditor Agreement or in any certificate, report, notice, or financial statement furnished at any time in connection with this Agreement shall be false, misleading, or erroneous in any material respect (without duplication of any materiality qualifier contained therein) when made or deemed to have been made;

(d) Borrower, any of its Subsidiaries, or any other Obligated Party shall fail to perform, observe, or comply with any covenant, agreement, or term contained in this Agreement or any other Loan Document (other than as covered by Sections 10.1(a) and 10.1(b) ) or the Intercreditor Agreement, and such failure continues for more than 30 consecutive days following the earlier of (i) the date of Borrower's receipt of written notice thereof or (ii) the date Borrower knew or should have known of such failure;

(e) Borrower, any of its Subsidiaries, or any other Obligated Party shall commence a voluntary proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or a substantial part of its Property or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any corporate action to authorize any of the foregoing;

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(f) an involuntary proceeding shall be commenced against Borrower, any of its Subsidiaries, or any other Obligated Party seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official for it or a substantial part of its Property, and such involuntary proceeding shall remain undismissed and unstayed for a period of 60 days;

(g) Borrower, any of its Subsidiaries, or any other Obligated Party shall fail to pay when due any principal of or interest on any Debt (other than the Obligations under the Loan Documents and Hedging Agreements with Bank Product Providers) in the amount of $250,000 or more beyond any applicable grace or cure period, or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid, repurchased, defeased or redeemed prior to the stated maturity thereof or any cash collateral in respect thereof to be demanded, or any event shall have occurred that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment, repurchase, defeasance or redemption or any cash collateral in respect thereof to be demanded;

(h) there shall occur an Early Termination Date (as defined in a Hedging Agreement) under any Hedging Agreement to which any Obligated Party is a party, and the Hedge Termination Value, if any, owed by Borrower or another Obligated Party as a result thereof exceeds $250,000;

(i) this Agreement, any other Loan Document or the Intercreditor Agreement shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by Borrower, any of its Subsidiaries, any other Obligated Party or any of their respective equity holders, or Borrower or any other Obligated Party shall deny that it has any further liability or obligation under any of the Loan Documents or the Intercreditor Agreement, or any Lien created by the Loan Documents shall for any reason cease to be a valid, first priority perfected Lien (subject to Permitted Liens) upon any of the Collateral purported to be covered thereby;

(j) any of the following events shall occur or exist with respect to Borrower or any ERISA Affiliate: (i) any ERISA Event occurs with respect to a Plan or Multiemployer Plan, or (ii) any Prohibited Transaction involving any Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of Administrative Agent subject Borrower or any ERISA Affiliate to any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, the IRS, the U. S. Department of Labor, or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to result in a Material Adverse Event;

(k) a Change of Control shall occur;

(l) Borrower, any of its Subsidiaries, or any other Obligated Party, or any of their Properties, revenues, or assets, shall become subject to an order of forfeiture, seizure, or divestiture (whether under RICO or otherwise) and the same shall not have been discharged within 30 days from the date of entry thereof;

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(m) Borrower, any of its Subsidiaries, or any other Obligated Party shall fail to discharge within a period of 60 days after the commencement thereof any attachment, sequestration, or similar proceeding or proceedings involving an aggregate amount in excess of $250,000 against any of its assets or Properties;

(n) a final judgment or judgments for the payment of money in excess of $250,000 in the aggregate shall be rendered by a court or courts against Borrower, any of its Subsidiaries, or any other Obligated Party and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof and Borrower, such Subsidiary, or such Obligated Party shall not, within such period of 60 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal;

(o) the subordination provisions related to any Subordinated Debt or any other agreement, document or instrument governing any Subordinated Debt shall for any reason be revoked or invalidated, or otherwise cease to be in full force and effect, or any Person shall contest in any manner the validity or enforceability thereof or deny that it has any further liability or obligation thereunder, or the Obligations under the Loan Documents, for any reason shall not have the priority contemplated by this Agreement or any such subordination provisions;

(p) any failure to cure a Borrowing Base Deficiency in accordance with Section 2.9(e) shall have occurred; or

(q) any Security Document shall cease to create valid perfected first priority Liens (subject to Permitted Liens) on the Collateral purported to be covered thereby.

Section 10.2 Remedies Upon Default . If any Event of Default shall occur and be continuing, then Administrative Agent may, with the consent of Required Lenders, or shall, at the direction of Required Lenders, without notice do any or all of the following: (a) terminate the Aggregate Commitments (except with respect to funding obligations for outstanding Letters of Credit), (b) terminate the obligations of L/C Issuer to make L/C Credit Extensions, (c) require that Borrower Cash Collateralize the L/C Obligations (in an amount equal to the Minimum Collateral Amount with respect thereto), or (d) declare the Obligations under the Loan Documents or any part thereof to be immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrower; provided , however , that upon the occurrence of an Event of Default under Section 10.1(e) or (f) , the Aggregate Commitments shall automatically terminate (except for funding obligations with respect to outstanding Letters of Credit), the obligations of L/C Issuer to make L/C Credit Extensions shall automatically terminate, the obligation of Borrower to Cash Collateralize the L/C Obligations as aforesaid shall automatically become effective, and the Obligations under the Loan Documents shall become immediately due and payable, in each case without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by Borrower. In addition to the foregoing, if any Event of Default shall occur and be continuing, Administrative Agent may, with the consent of Required Lenders, or shall, at the direction of Required Lenders, exercise all rights and remedies available to it, Lenders and L/C Issuer in law or in equity, under the Loan Documents, or otherwise.

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Section 10.3 Application of Funds . After the exercise of remedies provided for in Section 10.2 (or after the Loans have automatically become immediately due and payable), any amounts received on account of the Obligations shall be applied by Administrative Agent in the following order, subject to the Intercreditor Agreement:

First , to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to Administrative Agent) payable to Administrative Agent in its capacity as such;

Second , to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal, interest, and Letter of Credit Fees) payable to Lenders and L/C Issuer (including fees, charges and disbursements of counsel to the respective Lenders and L/C Issuer) arising under the Loan Documents, ratably among them in proportion to the respective amounts described in this clause Second payable to them;

Third , to payment of that portion of the Obligations constituting accrued and unpaid Letter of Credit Fees and interest on the Loans, L/C Borrowings and other Obligations arising under the Loan Documents, ratably among Lenders and L/C Issuer in proportion to the respective amounts described in this clause Third payable to them;

Fourth , to payment of that portion of the Obligations constituting unpaid principal of the Loans and L/C Borrowings and constituting unpaid Bank Product Obligations, ratably among Lenders and Bank Product Providers in proportion to the respective amounts described in this clause Fourth held by them;

Fifth , to Administrative Agent for the account of the L/C Issuer, to Cash Collateralize that portion of L/C Obligations comprised of the aggregate undrawn amount of Letters of Credit to the extent not otherwise Cash Collateralized by Borrower pursuant to Sections 2.2 and 2.6 ;

Sixth , to payment of that remaining portion of the Obligations, ratably among the Lenders and Bank Product Providers in proportion to the respective amounts described in this clause Sixth held by them; and

Last , the balance, if any, after all of the Obligations have been indefeasibly paid in full, to Borrower or as otherwise required by Law.

Notwithstanding the foregoing, Bank Product Obligations shall be excluded from the application described above if Administrative Agent has not received written notice thereof, together with supporting documentation as Administrative Agent may request from the applicable Bank Product Provider, provided that no such notice shall be required for any Bank Product Agreement for which Administrative Agent or any Affiliate of Administrative Agent is the applicable Bank Product Provider. Each Bank Product Provider that is not a party to this Agreement that has given notice contemplated by the preceding sentence shall, by such notice, be deemed to have acknowledged and accepted the appointment of Administrative Agent pursuant to the terms of Article 11 hereof for itself and its Affiliates as if a “Lender” party hereto.

Section 10.4 Performance by Administrative Agent . If Borrower shall fail to perform any covenant or agreement contained in any of the Loan Documents or the Intercreditor Agreement, then Administrative Agent may perform or attempt to perform such covenant or agreement on behalf of Borrower. In such event, Borrower shall, at the request of Administrative Agent, promptly pay to Administrative Agent any amount expended by Administrative Agent in connection with such performance or attempted performance, together with interest thereon at the Default Interest Rate from and including the date of such expenditure to but excluding the date such expenditure is paid in full. Notwithstanding the foregoing, it is expressly agreed that Administrative Agent shall not have any liability or responsibility for the performance of any covenant, agreement, or other obligation of Borrower under this Agreement, any other Loan Document or the Intercreditor Agreement.

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ARTICLE 11

AGENCY

Section 11.1 Appointment and Authority .

(a) Each of the Lenders and L/C Issuer hereby irrevocably appoints LegacyTexas Bank to act on its behalf as Administrative Agent hereunder and under the other Loan Documents and the Intercreditor Agreement and authorizes Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto, and each of the Lenders and L/C Issuer hereby approves the terms and conditions of the Intercreditor Agreement and authorizes Administrative Agent to enter into the Intercreditor Agreement and amendments thereto from time to time. The provisions of this Article 11 are solely for the benefit of Administrative Agent, Lenders, and L/C Issuer, and neither Borrower nor any other Obligated Party shall have rights as a third-party beneficiary of any of such provisions. It is understood and agreed that the use of the term “agent” herein or in any other Loan Documents or in the Intercreditor Agreement (or any other similar term) with reference to Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law. Instead such term is used as a matter of market custom, and is intended to create or reflect only an administrative relationship between contracting parties.

(b) Administrative Agent shall also act as the “collateral agent” under the Loan Documents and the Intercreditor Agreement, and each of the Lenders (including, for itself and its Affiliates, in their capacities as potential Bank Product Providers) and L/C Issuer hereby irrevocably appoints and authorizes Administrative Agent to act as the agent of such Lender and L/C Issuer for purposes of acquiring, holding and enforcing any and all Liens on Collateral granted by any of the Obligated Parties to secure any of the Obligations, together with such powers and discretion as are reasonably incidental thereto. In this connection, Administrative Agent, as “collateral agent” and any co-agents, sub-agents and attorneys-in-fact appointed by Administrative Agent pursuant to Section 11.5 for purposes of holding or enforcing any Lien on the Collateral (or any portion thereof) granted under the Security Documents, or for exercising any rights and remedies thereunder at the direction of Administrative Agent, shall be entitled to the benefits of all provisions of this Article 11 and Article 12 (including Section 12.1(b) ), as though such co-agents, sub-agents and attorneys-in-fact were the “collateral agent” under the Loan Documents and the Intercreditor Agreement as if set forth in full herein with respect thereto.

Section 11.2 Rights as a Lender . The Person serving as Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not Administrative Agent, and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, own securities of, act as the financial advisor or in any other advisory capacity for, and generally engage in any kind of business with, Borrower or any Subsidiary or other Affiliate thereof as if such Person were not Administrative Agent hereunder and without any duty to account therefor to Lenders.

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Section 11.3 Exculpatory Provisions .

(a) Administrative Agent shall not have any duties or obligations except those expressly set forth herein, in the other Loan Documents and in the Intercreditor Agreement, and its duties hereunder shall be administrative in nature. Without limiting the generality of the foregoing, Administrative Agent:

(i) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

(ii) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents or the Intercreditor Agreement that Administrative Agent is required to exercise as directed in writing by Required Lenders (or such other number or percentage of Lenders as shall be expressly provided for herein or in the other Loan Documents) or is required to exercise as directed in writing by any other party to the Intercreditor Agreement, as applicable; provided that Administrative Agent shall not be required to take any action that, in its opinion or upon the advice of its counsel, may expose Administrative Agent to liability or that is contrary to any Loan Document, the Intercreditor Agreement or applicable Law, including for the avoidance of doubt any action that may be in violation of the automatic stay under any Debtor Relief Law or that may effect a forfeiture, modification or termination of property of a Defaulting Lender in violation of any Debtor Relief Law;

(iii) shall not, except as expressly set forth herein and in the other Loan Documents and the Intercreditor Agreement, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to Borrower or any of its Affiliates that is communicated to or obtained by the Person serving as Administrative Agent or any of its Affiliates in any capacity; and

(iv) shall be fully justified in failing or refusing to take any action hereunder or under any other Loan Document or the Intercreditor Agreement unless it shall first be indemnified to its satisfaction by Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action.

(b) Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of Required Lenders (or such other number or percentage of Lenders as shall be necessary, or as Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 10.2 and 11.9 ), or (ii) in the absence of its own gross negligence or willful misconduct as determined by a court of competent jurisdiction by final and nonappealable judgment. SUCH LIMITATION OF LIABILITY SHALL APPLY REGARDLESS OF WHETHER THE LIABILITY ARISES FROM THE SOLE, CONCURRENT, CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OF ADMINISTRATIVE AGENT. Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to Administrative Agent in writing by Borrower, a Lender or L/C Issuer.

(c) Neither Administrative Agent nor any Related Party thereof shall be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, any other Loan Document or the Intercreditor Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document, the Intercreditor Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article 5 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to Administrative Agent.

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Section 11.4 Reliance by Administrative Agent . Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Credit Extension that by its terms must be fulfilled to the satisfaction of a Lender or L/C Issuer, Administrative Agent may presume that such condition is satisfactory to such Lender or L/C Issuer unless Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan. Administrative Agent may consult with legal counsel (who may be counsel for Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

Section 11.5 Delegation of Duties . Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document or the Intercreditor Agreement by or through any one or more sub agents appointed by Administrative Agent. Administrative Agent and any such sub agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article 11 shall apply to any such sub agent and to the Related Parties of Administrative Agent and any such sub agent, and shall apply to their respective activities in connection with the syndication of this facility as well as activities as Administrative Agent. Administrative Agent shall not be responsible for the negligence or misconduct of any sub-agents except to the extent that a court of competent jurisdiction determines in a final and non-appealable judgment that Administrative Agent acted with gross negligence or willful misconduct in the selection of such sub agents.

Section 11.6 Resignation of Administrative Agent .

(a) Administrative Agent may at any time give notice of its resignation to Lenders, L/C Issuer, and Borrower. Upon receipt of any such notice of resignation, Required Lenders shall have the right, in consultation with Borrower (so long as no Event of Default has occurred and is continuing), to appoint a successor, which shall be a bank with an office in Dallas, Texas, or an Affiliate of any such bank with an office in Dallas, Texas. If no such successor shall have been so appointed by Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation (or such earlier day as shall be agreed by Required Lenders) (such date, the “ Resignation Effective Date ”), then the retiring Administrative Agent may (but shall not be obligated to), on behalf of Lenders and L/C Issuer, appoint a successor Administrative Agent meeting the qualifications set forth above. Whether or not a successor has been appointed, such resignation shall become effective in accordance with such notice on the Resignation Effective Date. After the Resignation Effective Date, the provisions of this Article 11 relating to or indemnifying or releasing Administrative Agent shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement, the other Loan Documents and the Intercreditor Agreement.

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(b) If the Person serving as Administrative Agent is a Defaulting Lender pursuant to clause (d) of the definition thereof, Required Lenders may, to the extent permitted by applicable Law, by notice in writing to Borrower and such Person remove such Person as Administrative Agent and, in consultation with Borrower, appoint a successor. If no such successor shall have been so appointed by Required Lenders and shall have accepted such appointment within 30 days (or such earlier day as shall be agreed by Required Lenders) (such date, the “ Removal Effective Date ”), then such removal shall nonetheless become effective in accordance with such notice on the Removal Effective Date.

(c) With effect from the Resignation Effective Date or the Removal Effective Date (as applicable) (i) the retiring or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents and the Intercreditor Agreement (except that in the case of any Collateral held by Administrative Agent on behalf of Secured Parties under any of the Loan Documents or the Intercreditor Agreement, the retiring or removed Administrative Agent shall continue to hold such Collateral until such time as a successor Administrative Agent is appointed or a different Person is appointed to serve as collateral agent pursuant to the terms of the Intercreditor Agreement) and (ii) except for any indemnity, fee or expense payments owed to the retiring or removed Administrative Agent, all payments, communications and determinations provided to be made by, to or through Administrative Agent shall instead be made by or to each Lender or L/C Issuer, as applicable, directly, until such time, if any, as Required Lenders appoint a successor Administrative Agent as provided for above. Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring or removed Administrative Agent (other than any rights to indemnity payments owed to the retiring or removed Administrative Agent), and the retiring or removed Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents or the Intercreditor Agreement. The fees payable by Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between Borrower and such successor. After the retiring or removed Administrative Agent’s resignation or removal hereunder and under the other Loan Documents and the Intercreditor Agreement, the provisions of this Article 11 , Section 12.1 , and Section 12.2 shall continue in effect for the benefit of such retiring or removed Administrative Agent, its sub agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring or removed Administrative Agent was acting as Administrative Agent.

(d) Any resignation by LegacyTexas Bank as Administrative Agent pursuant to this Section shall also constitute its resignation as L/C Issuer. If LegacyTexas Bank resigns as an L/C Issuer, it shall retain all the rights, powers, privileges and duties of L/C Issuer hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as L/C Issuer and all L/C Obligations with respect thereto, including the right to require Lenders to make Loans or fund risk participations in Unreimbursed Amounts pursuant to Section 2.2(c) . Upon the appointment by Borrower of a successor L/C Issuer hereunder (which successor shall in all cases be a Lender other than a Defaulting Lender), (i) such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring L/C Issuer, (ii) the retiring L/C Issuer shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents, and (iii) the successor L/C Issuer shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangements satisfactory to LegacyTexas Bank to effectively assume the obligations of LegacyTexas Bank with respect to such Letters of Credit.

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Section 11.7 Non-Reliance on Administrative Agent and Other Lenders . Each of the Lenders and L/C Issuer expressly acknowledges that neither Administrative Agent nor any other Lender nor any Related Party thereto has made any representation or warranty to such Person and that no act by Administrative Agent or any other Lender hereafter taken, including any review of the affairs of Borrower, shall be deemed to constitute any representation or warranty by Administrative Agent or any Lender to any other Lender. Each of the Lenders and L/C Issuer acknowledges that it has, independently and without reliance upon Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each of the Lenders and L/C Issuer also acknowledges that it will, independently and without reliance upon Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document, the Intercreditor Agreement or any related agreement or any document furnished hereunder or thereunder. Except for notices, reports and other documents expressly required to be furnished to the Lenders by Administrative Agent hereunder, Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), or creditworthiness of Borrower or the value of the Collateral or other Properties of Borrower or any other Person which may come into the possession of Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates.

Section 11.8 Administrative Agent May File Proofs of Claim . In case of the pendency of any proceeding under any Debtor Relief Law or any other judicial proceeding relating to any Obligated Party, Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether Administrative Agent shall have made any demand on Borrower) shall be entitled and empowered (but not obligated) by intervention in such proceeding or otherwise:

(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, L/C Obligations and all other Obligations under the Loan Documents that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of Lenders, L/C Issuer, and Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of Lenders, L/C Issuer, and Administrative Agent and their respective agents and counsel and all other amounts due Lenders, L/C Issuer, and Administrative Agent under Section 12.1 or Section 12 . 2 ) allowed in such judicial proceeding; and

(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender and L/C Issuer to make such payments to Administrative Agent and, in the event that Administrative Agent shall consent to the making of such payments directly to Lenders and L/C Issuer, as applicable, to pay to Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of Administrative Agent and its agents and counsel, and any other amounts due Administrative Agent under Section 12.1 or Section 12.2 .

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Section 11.9 Collateral and Guaranty Matters .

(a) The Secured Parties irrevocably authorize Administrative Agent, at its option and in its discretion:

(i) to release any Lien on any Property granted to or held by Administrative Agent under any Loan Document (x) upon termination of the Aggregate Commitments and payment in full of all Obligations (other than (A) contingent indemnification obligations and (B) obligations and liabilities under Bank Product Agreements as to which arrangements satisfactory to the applicable Bank Product Provider shall have been made) and the expiration or termination of all Letters of Credit (other than Letters of Credit as to which other arrangements satisfactory to Administrative Agent and L/C Issuer shall have been made), (y) that is Disposed of or to Disposed of as part of or in connection with any Disposition permitted under the Loan Documents, or (z) if approved, authorized or ratified in writing by Required Lenders or all Lenders, as applicable, under Section 12.10 ;

(ii) to subordinate any Lien on any Property granted to or held by Administrative Agent under any Loan Document to the holder of any Lien on such Property that is permitted by Section 8.2 ;

(iii) to release any Guarantor from its obligations under the applicable Guaranty if such Person ceases to be a Subsidiary as a result of a transaction permitted under the Loan Documents; and

(iv) to take any other action with respect to the Collateral that is permitted or required under the Intercreditor Agreement.

Upon request by Administrative Agent at any time, Required Lenders will confirm in writing Administrative Agent’s authority to release or subordinate its interest in particular types or items of property, or to release any Guarantor from its obligations under the Guaranty pursuant to this Section 11.9 .

(b) Administrative Agent shall not be responsible for or have a duty to ascertain or inquire into any representation or warranty regarding the existence, value or collectability of the Collateral, the existence, priority or perfection of Administrative Agent’s Lien thereon, or any certificate prepared by any Obligated Party in connection therewith, nor shall Administrative Agent be responsible or liable to Lenders for any failure to monitor or maintain any portion of the Collateral.

Section 11.10 Bank Product Agreements . No Bank Product Provider who obtains the benefits of Section 10.3 , any Guaranties or any Collateral by virtue of the provisions hereof or of any Guaranty or any Security Document shall have any right to notice of any action or to consent to, direct or object to any action hereunder, under any other Loan Document or the Intercreditor Agreement or otherwise in respect of the Collateral (including the release or impairment of any Collateral) (or to notice of or to consent to any amendment, wavier or modification of the provisions hereof or of the Guaranty or any Security Document) other than in its capacity as a Lender and, in such case, only to the extent expressly provided in the Loan Documents and the Intercreditor Agreement. Notwithstanding any other provision of this Article 11 to the contrary, Administrative Agent shall not be required to verify the payment of, or that other satisfactory arrangements have been made with respect to, Bank Product Obligations unless Administrative Agent has received written notice of such Bank Product Obligations, together with such supporting documentation as Administrative Agent may request, from the applicable Bank Product Provider. Administrative Agent shall not be required to verify the payment of, or that other satisfactory arrangements have been made with respect to, Bank Product Obligations arising under Bank Product Agreements upon termination of the Aggregate Commitments and payment in full of all Obligations under the Loan Documents (other than contingent indemnification obligations) and the expiration or termination of all Letters of Credit (other than Letters of Credit as to which other arrangements satisfactory to Administrative Agent and L/C Issuer shall have been made).

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ARTICLE 12

MISCELLANEOUS

Section 12.1 Expenses .

(a) Borrower hereby agrees to pay on demand: (i) all reasonable out-of-pocket and documented costs and expenses of Administrative Agent, L/C Issuer, and their Related Parties in connection with the preparation, negotiation, execution, and delivery of this Agreement, the other Loan Documents, the Intercreditor Agreement and any and all amendments, modifications, renewals, extensions, supplements, waivers, consents and ratifications thereof and thereto, including, without limitation, the reasonable fees and expenses of legal counsel, advisors, consultants, and auditors for Administrative Agent, L/C Issuer, and their Related Parties, and all title due diligence and review expenses, Oil and Gas Properties evaluation and engineering expenses, expenses associated with the investigation of any matters relating to the transactions contemplated hereby and the satisfaction of the conditions set forth herein, the giving of oral or written opinions or advice incident to this transaction, and the consummation of the transactions contemplated hereby; (ii) all documented out-of-pocket costs and expenses of Administrative Agent, L/C Issuer, and each Lender in connection with any Default and the enforcement of this Agreement, any other Loan Document or the Intercreditor Agreement, including, without limitation, court costs and the fees and expenses of legal counsel, advisors, consultants, engineers, experts and auditors for Administrative Agent, L/C Issuer, and each Lender; (iii) all costs and expenses incurred by L/C Issuer in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder; (iv) all transfer, stamp, documentary, or other similar taxes, assessments, or charges levied by any Governmental Authority in respect of this Agreement, any of the other Loan Documents or the Intercreditor Agreement; (v) all costs, expenses, assessments, and other charges incurred in connection with any filing, registration, recording, or perfection of any Lien contemplated by this Agreement, any other Loan Document or the Intercreditor Agreement; and (vi) all other documented out-of-pocket costs and expenses incurred by Administrative Agent, L/C Issuer, and any Lender in connection with this Agreement, any other Loan Document or the Intercreditor Agreement, any litigation, dispute, suit, proceeding or action, the enforcement of its rights and remedies, and the protection of its interests in bankruptcy, insolvency or other legal proceedings, including, without limitation, all documented out-of-pocket costs, expenses, and other charges incurred in connection with evaluating, observing, collecting, examining, auditing, appraising, selling, liquidating, or otherwise disposing of the Collateral or other assets of Borrower. Borrower shall be responsible for all expenses described in this clause (a) whether or not any Credit Extension is ever made. Any amount to be paid under this Section 12.1 shall be a demand obligation owing by Borrower and if not paid within 30 days of demand shall bear interest, to the extent not prohibited by and not in violation of applicable Law, from the date of expenditure until paid at a rate per annum equal to the Default Interest Rate. The obligations of Borrower under this Section 12.1 shall survive payment of the Notes and other Obligations hereunder and the assignment of any right hereunder.

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(b) To the extent that Borrower for any reason fails to indefeasibly pay any amount required under Section 12.1(a) or Section 12.2 to be paid by it to Administrative Agent or L/C Issuer (or any sub-agent thereof) or any Related Party of Administrative Agent or L/C Issuer (or any sub-agent thereof), each Lender severally agrees to pay to Administrative Agent or L/C Issuer (or any such sub-agent) or such Related Party, as the case may be, such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought based each Lender’s share of the Total Credit Exposure at such time) of such unpaid amount (including any such unpaid amount in respect of a claim asserted by such Lender); provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against Administrative Agent or L/C Issuer (or any such sub-agent) or against any Related Party of Administrative Agent or L/C Issuer (or any sub-agent thereof) acting for Administrative Agent or L/C Issuer (or any such sub-agent) in connection with such capacity. EACH LENDER ACKNOWLEDGES THAT SUCH PAYMENTS MAY BE IN RESPECT OF LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES ARISING OUT OF OR RESULTING FROM THE SOLE, CONTRIBUTORY, COMPARATIVE, CONCURRENT OR ORDINARY NEGLIGENCE OF THE PERSON (OR THE REPRESENTATIVES OF THE PERSON) TO WHOM SUCH PAYMENTS ARE TO BE MADE.

Section 12.2 INDEMNIFICATION . BORROWER SHALL INDEMNIFY ADMINISTRATIVE AGENT, L/C ISSUER, EACH LENDER AND EACH RELATED PARTY THEREOF (EACH, AN “ INDEMNIFIED PARTY ”) FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING THE DOCUMENTED OUT-OF-POCKET FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNIFIED PARTY) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS OR THE INTERCREDITOR AGREEMENT, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS OR THE INTERCREDITOR AGREEMENT, (C) ANY BREACH BY BORROWER OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS OR THE INTERCREDITOR AGREEMENT, (D) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE PROPERTIES OR ASSETS OF BORROWER OR ANY OF ITS SUBSIDIARIES OR ANY OTHER OBLIGATED PARTY, (E) ANY LOAN OR LETTER OF CREDIT UNDER THIS AGREEMENT OR USE OR PROPOSED USE OF THE PROCEEDS THEREFROM (INCLUDING ANY REFUSAL BY L/C ISSUER TO HONOR A DEMAND FOR PAYMENT UNDER A LETTER OF CREDIT IF THE DOCUMENTS PRESENTED IN CONNECTION WITH SUCH DEMAND DO NOT STRICTLY COMPLY WITH THE TERMS OF SUCH LETTER OF CREDIT) OR (F) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, RELATING TO ANY OF THE FOREGOING. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH INDEMNIFIED PARTY SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING THE DOCUMENTED OUT-OF-POCKET FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNIFIED PARTY) ARISING OUT OF OR RESULTING FROM THE SOLE, CONTRIBUTORY, COMPARATIVE, CONCURRENT OR ORDINARY NEGLIGENCE OF SUCH PERSON (OR THE REPRESENTATIVES OF SUCH PERSON), provided that such indemnity shall not, as to any Indemnified Party, be available to the extent that such losses, liabilities, claims, damages, penalties, judgments, disbursements, costs and expenses are determined by a court of competent jurisdiction by final and non-appealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnified Party. Any amount to be paid under this Section 12.2 shall be a demand obligation owing by Borrower and if not paid within 10 days of demand shall bear interest, to the extent not prohibited by and not in violation of applicable Law, from the date of expenditure until paid at a rate per annum equal to the Default Interest Rate. The obligations of Borrower under this Section 12.2 shall survive payment of the Notes and other Obligations hereunder and the assignment of any right hereunder.

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Section 12.3 Limitation of Liability . No party hereto or any Related Party of any party hereto, shall assert, and each such Person hereby waives, any claim against any other party hereto and their Related Parties for any special, indirect, consequential or punitive damages in connection with, arising out of, or in any way related to, this Agreement, any of the other Loan Documents or the Intercreditor Agreement, or any of the transactions contemplated by this Agreement, any of the other Loan Documents or the Intercreditor Agreement.

Section 12.4 No Duty . All attorneys, accountants, appraisers, and other professional Persons and consultants retained by Administrative Agent, any Lender or L/C Issuer shall have the right to act exclusively in the interest of Administrative Agent or such Lender or L/C Issuer and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to Borrower or any of Borrower’s equity holders, Affiliates, officers, employees, attorneys, agents, or any other Person.

Section 12.5 Lenders Not Fiduciary . The relationship between Borrower and Administrative Agent, Arranger, each Lender, and L/C Issuer is solely that of debtor and creditor, and none of Administrative Agent, Arranger, any Lender, or L/C Issuer has any fiduciary or other special relationship with Borrower, and no term or condition of any of the Loan Documents or the Intercreditor Agreement shall be construed so as to deem the relationship between Borrower and Administrative Agent, Arranger each Lender, and L/C Issuer to be other than that of debtor and creditor.

Section 12.6 Equitable Relief . Borrower recognizes that in the event Borrower fails to pay, perform, observe, or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to Administrative Agent or Lenders or L/C Issuer. Borrower therefore agrees that Administrative Agent, any Lender, or L/C Issuer, if Administrative Agent or such Lender, or L/C Issuer, so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

Section 12.7 No Waiver; Cumulative Remedies . No failure on the part of an Obligated Party, Administrative Agent, any Lender, or L/C Issuer to exercise, and no delay in exercising, and no course of dealing with respect to, any right, remedy, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege. The rights and remedies provided for in this Agreement, the other Loan Documents and the Intercreditor Agreement are cumulative and not exclusive of any rights and remedies provided by Law.

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Notwithstanding anything to the contrary contained herein, in any other Loan Document or the Intercreditor Agreement, the authority to enforce rights and remedies hereunder and under the other Loan Documents and the Intercreditor Agreement against the Obligated Parties or any of them shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, Administrative Agent in accordance with Section 10.2 for the benefit of all the Lenders; provided , however , that the foregoing shall not prohibit (a) Administrative Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Administrative Agent) hereunder and under the other Loan Documents and the Intercreditor Agreement, (b) any Lender from exercising setoff rights in accordance with Section 4.3 (subject to the terms of Section 12.23 ), or (c) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to any Obligated Party under any Debtor Relief Law; and provided , further , that if at any time there is no Person acting as Administrative Agent hereunder and under the other Loan Documents, then (i) the Required Lenders shall have the rights otherwise ascribed to Administrative Agent pursuant to Section 10.2 and (ii) in addition to the matters set forth in clauses (b) and (c) of the preceding proviso and subject to Section 12.23 , any Lender may, with the consent of the Required Lenders, enforce any rights and remedies available to it and as authorized by the Required Lenders.

Section 12.8 Successors and Assigns .

(a) Successors and Assigns Generally . The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that Borrower may not assign or transfer any of its rights, duties, or obligations under this Agreement, the other Loan Documents or the Intercreditor Agreement without the prior written consent of Administrative Agent and each Lender, and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of Section 12.8(b) , (ii) by way of participation in accordance with the provisions of Section 12.8(d) , or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 12.8(e) (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in Section 12.8(d) and, to the extent expressly contemplated hereby, the Related Parties of each of Administrative Agent and Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b) Assignments by Lenders . Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that any such assignment shall be subject to the following conditions:

(i) Minimum Amounts . (A) In the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and/or the Loans at the time owing to it or contemporaneous assignments to related Approved Funds (determined after giving effect to such assignments) that equal at least the amount specified in Section 12.8(b)(i)(B) in the aggregate or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and (B) in any case not described in Section 12.8(b)(i)(A) , the aggregate amount of the Commitment (which for this purpose includes Loans outstanding hereunder) or, if the Commitment is not then in effect, the Outstanding Amount of the Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date) shall not be less than $5,000,000, unless each of Administrative Agent and, so long as no Event of Default has occurred and is continuing, Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed).

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(ii) Proportionate Amounts . Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Loans or the Commitment assigned.

(iii) Required Consents . No consent shall be required for any assignment except to the extent required by Section 12.8(b)(i)(B) and, in addition: (A) the consent of Borrower (such consent not to be unreasonably withheld or delayed) shall be required unless (x) an Event of Default has occurred and is continuing at the time of such assignment, or (y) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund; provided that Borrower shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to Administrative Agent within 5 Business Days after having received notice thereof; (B) the consent of Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of any Commitment or Loans if such assignment is to a Person that is not a Lender with a Commitment, an Affiliate of such Lender or an Approved Fund with respect to such Lender, and (C) the consent of L/C Issuer (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of any Commitment or Loans if such assignment is to a Person that is not a Lender with a Commitment, an Affiliate of such Lender or an Approved Fund with respect to such Lender.

(iv) Assignment and Assumption . The parties to each assignment shall execute and deliver to Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; provided that Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment. The assignee, if it is not a Lender, shall deliver to Administrative Agent an Administrative Questionnaire.

(v) No Assignment to Certain Persons . No such assignment shall be made to (A) Borrower, any of Borrower’s Affiliates or Subsidiaries or any other Obligated Party or (B) any Defaulting Lender or any of its Affiliates, or any Person who, upon becoming a Lender hereunder, would constitute any of the foregoing persons described in this clause (B) .

(vi) No Assignment to Natural Persons . No such assignment shall be made to a natural Person (or a holding company, investment vehicle or trust for, or owned and operated for the primary benefit of, a natural Person).

(vii) Certain Additional Payments . In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the parties to such assignment shall make such additional payments to Administrative Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations or subparticipations, or other compensating actions, including funding, with the consent of Borrower and Administrative Agent, the applicable pro rata share of Loans previously requested but not funded by such Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to: (A) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to Administrative Agent or any Lender hereunder (and interest accrued thereon) and (B) acquire (and fund as appropriate) its full pro rata share of all Loans in accordance with its Applicable Percentage. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under applicable Law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.

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Subject to acceptance and recording thereof by Administrative Agent pursuant to Section 12.8(c) , from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Section 12.1 and Section 12.2 with respect to facts and circumstances occurring prior to the effective date of such assignment; provided that, except to the extent otherwise expressly agreed by the affected parties, no assignment by a Defaulting Lender will constitute a waiver or release of any party hereunder arising from that Lenders’ having been a Defaulting Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 12.8(d) . Upon the consummation of any assignment pursuant to this Section 12.8(b) , if requested by the transferor or transferee Lender, the transferor Lender, Administrative Agent and Borrower shall make appropriate arrangements so that replacement Notes are issued to such transferor Lender (if applicable) and new Notes or, as appropriate, replacement Notes, are issued to the assignee.

(c) Register . Administrative Agent, acting solely for this purpose as an agent of Borrower, shall maintain at one of its offices in Dallas, Texas a copy of each Assignment and Assumption delivered to it and a Register. The entries in the Register shall be conclusive absent manifest error, and Borrower, Administrative Agent and Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(d) Participations . Any Lender may at any time, without the consent of, or notice to, Borrower, but subject to the prior written consent of Administrative Agent, sell participations to a Participant in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, and (iii) Borrower, Administrative Agent, and Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. For the avoidance of doubt, each Lender shall be responsible for the indemnity under Section 12.1(b) without regard to the existence of any participation.

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Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in Section 12.10 which requires the consent of all Lenders and affects such Participant. Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.1 , 3.4 and 3.5 (subject to the requirements and limitations therein, including the requirements under Section 3.4(g) (it being understood that the documentation required under Section 3.4(g) shall be delivered to the participating Lender)) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section; provided that such Participant (A) agrees to be subject to the provisions of Section 3.6 as if it were an assignee under paragraph (b) of this Section; and (B) shall not be entitled to receive any greater payment under Sections 3.1 or 3.4 , with respect to any participation, than its participating Lender would have been entitled to receive, except to the extent such entitlement to receive a greater payment results from a Change in Law that occurs after the Participant acquired the applicable participation. Each Lender that sells a participation agrees, at Borrower’s request and expense, to use reasonable efforts to cooperate with Borrower to effectuate the provisions of Section 3.6 with respect to any Participant. To the extent permitted by Law, each Participant also shall be entitled to the benefits of Section 4.3 as though it were a Lender; provided that such Participant agrees to pay to Administrative Agent any amount set-off for application to the Obligations under the Loan Documents as required pursuant to Section 4.3 ; provided further that such Participant agrees to be subject to Section 12.23 as though it were a Lender. Each Lender that sells a participation shall, acting solely for this purpose as a non-fiduciary agent of Borrower, maintain a Participant Register; provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register to any Person (including the identity of any Participant or any information relating to a Participant’s interest in any commitments, loans, letters of credit or its other obligations under any Loan Document) except to the extent that such disclosure is necessary to establish that such commitment, loan, letter of credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, Administrative Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant Register.

(e) Certain Pledges . Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(f) Dissemination of Information . Borrower and each other Obligated Party authorizes Administrative Agent and each Lender to disclose to any actual or prospective purchaser, assignee or other recipient of a Lender’s Commitment, any and all information in Administrative Agent’s or such Lender’s possession concerning Borrower, the other Obligated Parties and their respective Affiliates.

Section 12.9 Survival . All representations and warranties made in this Agreement, any other Loan Document or the Intercreditor Agreement or in any document, statement, or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement, the other Loan Documents and the Intercreditor Agreement, and no investigation by Administrative Agent or any Lender or any closing shall affect the representations and warranties or the right of Administrative Agent or any Lender to rely upon them. Without prejudice to the survival of any other obligation of Borrower hereunder, the obligations of Borrower under Sections 12.1 and 12.2 shall survive repayment of the Obligations and termination of the Aggregate Commitments.

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Section 12.10 Amendment . The provisions of this Agreement and the other Loan Documents to which Borrower is a party (other than the Issuer Documents) may be amended or waived only by an instrument in writing signed by Required Lenders (or by Administrative Agent with the consent of Required Lenders) and Borrower and acknowledged by Administrative Agent; provided , however , that no such amendment or waiver shall:

(a) waive any condition set forth in Section 5.1 (other than Sections 5.1(q) and 5.1(w) ), without the written consent of each Lender;

(b) extend or increase any Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 10.2 ) without the written consent of such Lender;

(c) postpone any date fixed by this Agreement or any other Loan Document for any payment (excluding mandatory prepayment) of principal, interest, fees or other amounts due to Lenders (or any of them) hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby;

(d) reduce the principal of, or the rate of interest specified herein on, any Loan, or any fees or other amounts payable hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby; provided , however , that only the consent of Required Lenders shall be necessary to adjust the Default Interest Rate or to waive any obligation of Borrower to pay interest at such rate;

(e) change any provision of this Section 12.10 or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender;

(f) change Section 10.3 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender;

(g) release any material Guaranty or all or substantially all of the Collateral (in each case, except as provided herein) without the written consent of each Lender; or

(h) increase the Borrowing Base or modify the provisions of Section 2.9(d) without the written consent of each Lender;

and, provided further , that (i) no amendment, waiver or consent shall, unless in writing and signed by L/C Issuer in addition to the Lenders required above, affect the rights or duties of the L/C Issuer under this Agreement or any Issuer Document relating to any Letter of Credit issued or to be issued by it; and (ii) no amendment, waiver or consent shall, unless in writing and signed by Administrative Agent in addition to Lenders required above, affect the rights or duties of Administrative Agent under this Agreement or any other Loan Document.

Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder (and any amendment, waiver or consent which by its terms requires the consent of all Lenders or each affected Lender may be effected with the consent of the applicable Lenders other than Defaulting Lenders), except that (x) the Commitment of any Defaulting Lender may not be increased or extended without the consent of such Lender; and (y) any waiver, amendment or modification requiring the consent of all Lenders or each affected Lender that by its terms affects any Defaulting Lender disproportionately adversely relative to other affected Lenders shall require the consent of such Defaulting Lender. For the avoidance of doubt, a Defaulting Lender shall not have the right to approve or disapprove any decrease or reaffirmation of the Borrowing Base.

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Section 12.11 Notices .

(a) Notices Generally . Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in Section 12.11(b) ), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile as set forth on Schedule 12.11 . Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received. Notices sent by facsimile shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications, to the extent provided in Section 12.11(b) shall be effective as provided in Section 12.11(b) .

(b) Electronic Communications . Notices and other communications to Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and internet or intranet websites) pursuant to procedures approved by Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article 2 if such Lender has notified Administrative Agent that it is incapable of receiving notices under Article 2 by electronic communication. Administrative Agent or Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.

Unless Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), and (ii) notices or communications posted to an internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient, at its e-mail address as described in the foregoing clause (i) , of notification that such notice or communication is available and identifying the website address therefor; provided that, for both clauses (i) and (ii) above, if such facsimile, email or other electronic communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient.

(c) Change of Address, etc . Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto, Schedule 12.11 shall be deemed to be amended by each such change, and Administrative Agent is authorized, in its discretion, from time to time to reflect each such change in an amended Schedule 12.11 provided by Administrative Agent to each party hereto.

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(d) Platform .

(i) Borrower agrees that Administrative Agent may, but shall not be obligated to, make the Communications available to the Lenders or L/C Issuer by posting the Communications on the Platform.

(ii) The Platform is provided “as is” and “as available.” The Agent Parties (as defined below) do not warrant the adequacy of the Platform and expressly disclaim liability for errors or omissions in the Communications. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects, is made by any Agent Party in connection with the Communications or the Platform. In no event shall the Agent Parties have any liability to Borrower, any Lender or any other Person for damages of any kind, including, without limitation, direct or indirect, special, incidental or consequential damages, losses or expenses (whether in tort, contract or otherwise) arising out of Borrower’s or Administrative Agent’s transmission of communications through the Platform.

(iii) Borrower and each other Obligated Party (by its, his or her execution of a Loan Document) hereby authorizes Administrative Agent, each Lender, and their respective counsel and agents to communicate and transfer documents and other information (including confidential information) concerning this transaction or Borrower or any other Obligated Party and the business affairs of Borrower and such other Obligated Parties via the internet or other electronic communication without regard to the lack of security of such communications.

Section 12.12 Governing Law; Venue; Service of Process .

(a) Governing Law . This Agreement and the other Loan Documents and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement or any other Loan Document (except, as to any other Loan Document, as expressly set forth therein) and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the Law of the State of Texas (without reference to applicable rules of conflicts of Laws), except to the extent the Laws of any jurisdiction where Collateral is located require application of such Laws with respect to such Collateral.

(b) Jurisdiction . Borrower irrevocably and unconditionally agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or in tort or otherwise, against Administrative Agent, any Lender, L/C Issuer, or any Related Party of the foregoing in any way relating to this Agreement or any other Loan Document or the transactions relating hereto or thereto in any forum other than the courts of the State of Texas sitting in Dallas County, and of the United States District Court of the Northern District of Texas, and any appellate court from any thereof, and each of the parties hereto irrevocably and unconditionally submits to the jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such Texas State court or, to the fullest extent permitted by applicable Law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Nothing in this Agreement or in any other Loan Document shall affect any right that Administrative Agent, any Lender or L/C Issuer may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against Borrower or its Properties in the courts of any jurisdiction.

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(c) Waiver of Venue . Borrower irrevocably and unconditionally waives, to the fullest extent permitted by applicable Law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d) Service of Process . Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 12.11 . Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by applicable Law.

Section 12.13 Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Except as provided in Section 5.1 , this Agreement shall become effective when it shall have been executed by Administrative Agent and when Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or other electronic imaging means (e.g. “pdf” or “tif”) shall be effective as delivery of a manually executed counterpart of this Agreement.

Section 12.14 Severability . Any provision of this Agreement or any other Loan Document held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal. Furthermore, in lieu of such invalid or unenforceable provision, such court shall substitute as a part of this Agreement or the other Loan Documents a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.

Section 12.15 Headings . The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.

Section 12.16 Construction . Borrower, Administrative Agent and each Lender acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement, the other Loan Documents and the Intercreditor Agreement with its legal counsel and that this Agreement, the other Loan Documents and the Intercreditor Agreement shall be construed as if jointly drafted by Borrower, Administrative Agent, each Lender and each other Person party thereto.

Section 12.17 Independence of Covenants . All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or such condition exists.

Section 12.18 WAIVER OF JURY TRIAL . EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 12.18 .

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Section 12.19 Additional Interest Provision . It is expressly stipulated and agreed to be the intent of Borrower, Administrative Agent and each Lender at all times to comply strictly with the applicable Law governing the maximum rate or amount of interest payable on the indebtedness evidenced by any Note, any Loan Document, and the Related Indebtedness (or applicable United States federal Law to the extent that it permits any Lender to contract for, charge, take, reserve or receive a greater amount of interest than under applicable Law). If the applicable Law is ever judicially interpreted so as to render usurious any amount (a) contracted for, charged, taken, reserved or received pursuant to any Note, any of the other Loan Documents or any other communication or writing by or between Borrower and any Lender related to the transaction or transactions that are the subject matter of the Loan Documents, (b) contracted for, charged, taken, reserved or received by reason of Administrative Agent’s or any Lender’s exercise of the option to accelerate the maturity of any Note and/or the Related Indebtedness, or (c) Borrower will have paid or Administrative Agent or any Lender will have received by reason of any voluntary prepayment by Borrower of any Note and/or the Related Indebtedness, then it is Borrower’s, Administrative Agent’s and Lenders’ express intent that all amounts charged in excess of the Maximum Rate shall be automatically canceled, ab initio, and all amounts in excess of the Maximum Rate theretofore collected by Administrative Agent or any Lender shall be credited on the principal balance of any Note and/or the Related Indebtedness (or, if any Note and all Related Indebtedness have been or would thereby be paid in full, refunded to Borrower), and the provisions of any Note and the other Loan Documents shall immediately be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable Law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder; provided , however , if any Note or Related Indebtedness has been paid in full before the end of the stated term thereof, then Borrower, Administrative Agent and each Lender agree that Administrative Agent or any Lender, as applicable, shall, with reasonable promptness after Administrative Agent or such Lender discovers or is advised by Borrower that interest was received in an amount in excess of the Maximum Rate, either refund such excess interest to Borrower and/or credit such excess interest against such Note and/or any Related Indebtedness then owing by Borrower to Administrative Agent or such Lender. Borrower hereby agrees that as a condition precedent to any claim seeking usury penalties against Administrative Agent or any Lender, Borrower will provide written notice to Administrative Agent or such Lender, advising Administrative Agent or such Lender in reasonable detail of the nature and amount of the violation, and Administrative Agent or such Lender shall have 60 days after receipt of such notice in which to correct such usury violation, if any, by either refunding such excess interest to Borrower or crediting such excess interest against the Note to which the alleged violation relates and/or the Related Indebtedness then owing by Borrower to Administrative Agent or such Lender. All sums contracted for, charged, taken, reserved or received by Administrative Agent or any Lender for the use, forbearance or detention of any debt evidenced by any Note and/or the Related Indebtedness shall, to the extent permitted by applicable Law, be amortized or spread, using the actuarial method, throughout the stated term of such Note and/or the Related Indebtedness (including any and all renewal and extension periods) until payment in full so that the rate or amount of interest on account of any Note and/or the Related Indebtedness does not exceed the Maximum Rate from time to time in effect and applicable to such Note and/or the Related Indebtedness for so long as debt is outstanding. In no event shall the provisions of Chapter 346 of the Texas Finance Code (which regulates certain revolving credit loan accounts and revolving triparty accounts) apply to the Notes and/or any of the Related Indebtedness. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, it is not the intention of Administrative Agent or any Lender to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration.

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Section 12.20 Ceiling Election . To the extent that any Lender is relying on Chapter 303 of the Texas Finance Code to determine the Maximum Rate payable on any Note and/or any other portion of the Obligations under the Loan Documents, such Lender will utilize the weekly ceiling from time to time in effect as provided in such Chapter 303. To the extent United States federal Law permits any Lender to contract for, charge, take, receive or reserve a greater amount of interest than under Texas Law, such Lender will rely on United States federal Law instead of such Chapter 303 for the purpose of determining the Maximum Rate. Additionally, to the extent permitted by applicable Law now or hereafter in effect, any Lender may, at its option and from time to time, utilize any other method of establishing the Maximum Rate under such Chapter 303 or under other applicable Law by giving notice, if required, to Borrower as provided by applicable Law now or hereafter in effect.

Section 12.21 USA Patriot Act Notice . Administrative Agent and each Lender hereby notify Borrower that pursuant to the requirements of the Patriot Act, it is required to obtain, verify and record information that identifies Borrower and each other Obligated Party, which information includes the name and address of Borrower and each other Obligated Party and other information that will allow Administrative Agent and such Lender to identify Borrower and each other Obligated Party in accordance with the Patriot Act.

Section 12.22 Defaulting Lenders .

(a) Adjustments . Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as that Lender is no longer a Defaulting Lender, to the extent permitted by applicable Law:

(i) Waivers and Amendments . Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in the definitions of “ Required Lenders ” and in Section 12.10 .

(ii) Defaulting Lender Waterfall . Any payment of principal, interest, fees or other amounts received by Administrative Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Article 10 or otherwise) or received by Administrative Agent from a Defaulting Lender shall be applied at such time or times as may be determined by Administrative Agent as follows: first , to the payment of any amounts owing by such Defaulting Lender to Administrative Agent hereunder; second , to the payment on a pro rata basis of any amounts owing by such Defaulting Lender to L/C Issuer hereunder; third , to Cash Collateralize L/C Issuer’s Fronting Exposure, if any, with respect to such Defaulting Lender in accordance with Section 2.6 ; fourth , as Borrower may request (so long as no Default or Event of Default exists), to the funding of any Loan in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by Administrative Agent; fifth , if so determined by Administrative Agent and Borrower, to be held in a deposit account and released pro rata in order to (x) satisfy such Defaulting Lender’s potential future funding obligations with respect to Loans under this Agreement and (y) Cash Collateralize L/C Issuer’s future Fronting Exposure, if any, with respect to such Defaulting Lender with respect to future Letters of Credit issued under this Agreement, in accordance with Section 2.6 ; sixth , to the payment of any amounts owing to Lenders or L/C Issuer as a result of any judgment of a court of competent jurisdiction obtained by any Lender or L/C Issuer against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; seventh , so long as no Default or Event of Default exists, to the payment of any amounts owing to Borrower as a result of any judgment of a court of competent jurisdiction obtained by Borrower against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; and eighth , to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that, if (A) such payment is a payment of the principal amount of any Loans or L/C Borrowings in respect of which such Defaulting Lender has not fully funded its appropriate share, and (B) such Loans were made or the related Letters of Credit were issued at a time when the conditions set forth in Section 5.2 were satisfied or waived, such payment shall be applied solely to pay the Loans of, and L/C Obligations owed to, all Non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of, or L/C Obligations owed to, such Defaulting Lender until such time as all Loans and funded and unfunded participations in L/C Obligations are held by Lenders pro rata in accordance with the Aggregate Commitments under the Facility without giving effect to Section 12.22(a)(iv) . Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 12.22(a)(ii) shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.

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(iii) Certain Fees .

(A) No Defaulting Lender shall be entitled to receive any fee payable under Section 2.3(b) for any period during which that Lender is a Defaulting Lender (and Borrower shall not be required to pay any such fee that otherwise would have been required to have been paid to that Defaulting Lender).

(B) Each Defaulting Lender shall be entitled to receive Letter of Credit Fees for any period during which that Lender is a Defaulting Lender only to the extent allocable to its Applicable Percentage of the stated amount of Letters of Credit for which it has provided Cash Collateral pursuant to Section 2.6 .

(C) With respect to any fee payable under Section 2.3(b) or Letter of Credit Fee not required to be paid to any Defaulting Lender pursuant to clause (A) or (B) above, Borrower shall (x) pay to each Non-Defaulting Lender that portion of any such fee otherwise payable to such Defaulting Lender with respect to such Defaulting Lender’s participation in L/C Obligations that has been reallocated to such Non-Defaulting Lender pursuant to clause (a)(iv) below, (y) pay to L/C Issuer the amount of any such fee otherwise payable to such Defaulting Lender to the extent allocable to such L/C Issuer’s Fronting Exposure to such Defaulting Lender, and (z) not be required to pay the remaining amount of any such fee.

(iv) Reallocation of Applicable Percentages to Reduce Fronting Exposure . All or any part of such Defaulting Lender’s participation in L/C Obligations shall be reallocated among the Non-Defaulting Lenders in accordance with their respective Applicable Percentages (calculated without regard to such Defaulting Lender’s Commitment) but only to the extent that such reallocation does not cause the Revolving Credit Exposure of any Non-Defaulting Lender to exceed such Non-Defaulting Lender’s Commitment. No reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any claim of a Non-Defaulting Lender as a result of such Non-Defaulting Lender’s increased exposure following such reallocation.

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(v) Cash Collateral . If the reallocation described in clause (a)(iv) above cannot, or can only partially, be effected, Borrower shall, without prejudice to any right or remedy available to it hereunder or under applicable Law, Cash Collateralize L/C Issuer’s Fronting Exposure in accordance with the procedures set forth in Section 2.6 .

(b) Defaulting Lender Cure . If Borrower, Administrative Agent, and L/C Issuer agree in writing that a Lender is no longer a Defaulting Lender, Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any Cash Collateral), that Lender will, to the extent applicable, purchase at par that portion of outstanding Loans of the other Lenders or take such other actions as Administrative Agent may determine to be necessary to cause the Loans and funded and unfunded participations in Letters of Credit to be held on a pro rata basis by Lenders in accordance with their Applicable Percentages (without giving effect to Section 12.22(a)(iv) ), whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of Borrower while that Lender was a Defaulting Lender; and provided , further , that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender.

Section 12.23 Sharing of Payments by Lenders . If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of the Loans made by it or other obligations hereunder, resulting in such Lender’s receiving payment of a proportion of the aggregate amount of such Loans and accrued interest thereon greater than its pro rata share thereof as provided herein, then the Lender receiving such greater proportion shall:

(a) notify Administrative Agent of such fact; and

(b) purchase (for cash at face value) participations in the Loans and such other obligations of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them, provided that:

(i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and

(ii) the provisions of this Section 12.23 shall not be construed to apply to: (A) any payment made by or on behalf of Borrower pursuant to and in accordance with the express terms of this Agreement (including the application of funds arising from the existence of a Defaulting Lender); or (B) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or subparticipations in L/C Obligations to any assignee or participant, other than an assignment to Borrower or any Affiliate thereof (as to which the provisions of this Section 12.23 shall apply).

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Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable Law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against Borrower rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of Borrower in the amount of such participation.

Section 12.24 Payments Set Aside . To the extent that any payment by or on behalf of Borrower is made to Administrative Agent, L/C Issuer or any Lender, or Administrative Agent, L/C Issuer or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by Administrative Agent, L/C Issuer or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender and L/C Issuer severally agrees to pay to Administrative Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of Lenders and L/C Issuer under clause (b) of the preceding sentence shall survive the payment in full of the Obligations and the termination of this Agreement.

Section 12.25 Confidentiality . Each of Administrative Agent, L/C Issuer, and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its Related Parties (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent required or requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners) or any Governmental Authority, quasi-Governmental Authority or legislative committee, (c) to the extent required by applicable Laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, any other Loan Document or the Intercreditor Agreement, (e) in connection with the exercise of any remedies hereunder, under any other Loan Document or the Intercreditor Agreement or any suit, action or proceeding relating to this Agreement, any other Loan Document or the Intercreditor Agreement or the enforcement of rights hereunder or thereunder, (f) subject to its being under a duty of confidentiality no less restrictive than this Section 12.25 , to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (ii) any actual or prospective counterparty (or its Related Parties) to any Hedging Agreement relating to Borrower and its obligations, (iii) any actual or prospective purchaser of a Lender or its holding company, (iv) any rating agency or any similar organization in connection with the rating of Borrower or the Facility or (v) the CUSIP Service Bureau or any similar organization in connection with the issuance and monitoring of CUSIP numbers with respect to the Facility, (g) with the consent of Borrower, or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section 12.25 or (ii) becomes available to Administrative Agent, L/C Issuer, any Lender or any of their respective Affiliates on a nonconfidential basis from a source other than Borrower or a Subsidiary which is not actually known by Administrative Agent, L/C Issuer, any Lender or any of their respective Affiliates to be bound by a contractual, legal or fiduciary obligation of confidentiality to the Borrower or its Subsidiaries with respect to such information. In addition, Administrative Agent and the Lenders may disclose the existence of this Agreement and information about this Agreement to market data collectors, similar service providers to the lending industry and service providers to Administrative Agent and the Lenders in connection with the administration of this Agreement, the other Loan Documents, and the Aggregate Commitments. For purposes of this Section 12.25 , “ Information ” means all information received from Borrower or any Subsidiary relating to Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to Administrative Agent, L/C Issuer, or any Lender on a nonconfidential basis prior to disclosure by Borrower or a Subsidiary. Any Person required to maintain the confidentiality of Information as provided in this Section 12.25 shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

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Section 12.26 Electronic Execution of Assignments and Certain Other Documents . The words “execute,” “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption or in any amendment or other modification hereof (including waivers and consents) shall be deemed to include electronic signatures, the electronic matching of assignment terms and contract formations on electronic platforms approved by Administrative Agent, or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable Law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state Laws based on the Uniform Electronic Transactions Act.

Section 12.27 Intercreditor Agreement . In the event of a conflict between the provisions of any of the Loan Documents and the provisions of the Intercreditor Agreement, the provisions of the Intercreditor Agreement shall control.

Section 12.28 NOTICE OF FINAL AGREEMENT . THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE INTERCREDITOR AGREEMENT REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

[Remainder of Page Intentionally Left Blank; Signature Pages Follow]

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EXECUTED to be effective as of the date first written above.

	BORROWER:

	CARBON NATURAL GAS COMPANY

	By:
		Name:
		Title:

CREDIT AGREEMENT - Signature Page [Borrower]

	ADMINISTRATIVE AGENT:

	LEGACYTEXAS BANK

	By:
		Alison White
		Senior Vice President

	LENDERS:

	LEGACYTEXAS BANK

	By:
		Alison White
		Senior Vice President

CREDIT AGREEMENT - Signature Page [Administrative Agent and Lenders]

SCHEDULE 2.1

Commitments and Applicable Percentages

Lender	Commitment		Applicable Percentage
LegacyTexas Bank	$	100,000,000		100.000000000	%

Total:	$	100,000,000		100.000000000	%

SCHEDULE 2.1 – Page 1

SCHEDULE 6.5

Litigation and Judgments

None.

SCHEDULE 6.5 – Page 1

SCHEDULE 6.6(b)

Oil and Gas Properties

Subject to Confidential Treatment Status

SCHEDULE 6.6(b) – Page 1

SCHEDULE 6.13

Subsidiaries

Subsidiary	Jurisdiction of Incorporation or Organization	Borrower’s Ownership Interest
Nytis Exploration (USA) Inc.	Delaware		100	%
Nytis Exploration Company, LLC	Delaware		97.5	%

SCHEDULE 6.13 – Page 1

SCHEDULE 6.13(b)

Excluded Subsidiaries

Subject to Confidential Treatment Status

2. Other Excluded Subsidiaries :

	Jurisdiction of Incorporation or Organization	Nytis LLC’s Ownership Interest
Brushy Gap Coal & Gas, Inc.	Kentucky		100	%
Crawford County Gas Gathering Company, LLC	Indiana		50	%	Carbon Natural Gas Company has a 50% interest in Crawford County Gas Gathering Company, LLC (“CCGGC”), an Indiana limited liability company, which owns and operates pipelines and related gathering and treating facilities.

SCHEDULE 6.13(b) – Page 1

SCHEDULE 6.18

Environmental Matters

None.

SCHEDULE 6.18 – Page 1

SCHEDULE 6.19

Intellectual Property

None.

SCHEDULE 6.19 – Page 1

SCHEDULE 6.28

Material Agreements

1.	Participation Agreement dated September 17, 2012, by and among Nytis Exploration Company LLC, Carbon Natural Gas Company and Liberty Energy, LLC.

2.	Participation Agreement dated February 25, 2014, by and among Nytis Exploration Company LLC, Carbon Natural Gas Company and Liberty Energy, LLC.

3.	Addendum to Participation Agreement dated February 26, 2014, by and among Nytis Exploration Company LLC, Carbon Natural Gas Company and Liberty Energy, LLC.

4.	Amended and Restated Credit Agreement dated May 31, 2010, by and between Nytis Exploration Company LLC and BOKF, NA, as amended. This and associated agreements will be terminated at Closing.

5.	FTS Services Agreement by and between and Nytis Exploration Company LLC dated July 7, 2010.

6.	FTS Services Agreement by and between and Nytis Exploration Company LLC dated December 9, 2014 (Service Agreement 30091).

7.	FTS Services Agreement by and between and Nytis Exploration Company LLC dated December 9, 2014 (Service Agreement 30092).

8.	Transportation Service Agreement by and between and Nytis Exploration Company LLC dated August 31, 2011.

9.	Agreements associated with the acquisition of the EXCO assets:

	a.	Purchase and Sale Agreement [dated October 3, 2016] by and among EXCO Production Company (WV), LLC, BG Production Company (WV), LLC, EXCO Resources (PA) LLC and Nytis Exploration Company LLC

	b.	Mineral Farmout Agreement [dated October 3, 2016] by and among EXCO Production Company (WV), LLC, BG Production Company (WV), LLC, EXCO Resources (PA) LLC and Nytis Exploration Company LLC

10.	Post-EXCO Acquisition:

	a.	FTS Services Agreement by and between and dated August 1, 2009.

	b.	FTS Services Agreement by and between and . dated April 1, 2010.

11.	Denver Office Lease.

12.	Lexington Office Lease.

SCHEDULE 6.28 – Page 1

SCHEDULE 6.29

Hedging Agreements and Hedging Transactions

None.

SCHEDULE 6.29 – Page 1

SCHEDULE 8.1

Existing Debt

Subject to Confidential Treatment Status

SCHEDULE 8.1 – Page 1

SCHEDULE 8.2

Existing Liens

Subject to Confidential Treatment Status

SCHEDULE 8.2 – Page 1

SCHEDULE 8.5

Existing Investments

1.	Crawford County Gas Gathering Co., LLC

400 Main St., PO Box 237

Vincennes, IN 47591

FEIN: 27-3505894

Membership interest: 50.0%

Held by Nytis Exploration Company LLC

SCHEDULE 8.5 – Page 1

SCHEDULE 12.11

Notices

Notices under this Agreement shall be given:

(a) if to Borrower, to it at 1700 Broadway, Suite 1170, Denver, Colorado 80290, Attention of ;

(b) if to Administrative Agent, to it at LegacyTexas Bank at its Principal Office at 8411 Preston Road, Suite 600, Dallas, Texas 75225, Attention ;

(c) if to L/C Issuer, to it at LegacyTexas Bank at its Principal Office at 8411 Preston Road, Suite 600, Dallas, Texas 75225, Attention ; and

(d) if to a Lender, to it at its address (or facsimile number) set forth in its Administrative Questionnaire.

SCHEDULE 12.11 – Page 1

EXHIBIT A

Assignment and Assumption

This Assignment and Assumption (the “ Assignment and Assumption ”) is dated as of the Effective Date set forth below and is entered into by and between [the][each] ¹ Assignor identified in item 1 below ([the][each, an] “ Assignor ”) and [the][each] ² Assignee identified in item 2 below ([the][each, an] “ Assignee ”). [It is understood and agreed that the rights and obligations of [the Assignors][the Assignees] ³ hereunder are several and not joint.] ⁴ Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the “ Credit Agreement ”), receipt of a copy of which is hereby acknowledged by [the][each] Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

For an agreed consideration, [the][each] Assignor hereby irrevocably sells and assigns to [the Assignee][the respective Assignees] , and [the][each] Assignee hereby irrevocably purchases and assumes from [the Assignor][the respective Assignors] , subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by Administrative Agent as contemplated below (i) all of [the Assignor’s][the respective Assignors’] rights and obligations in [its capacity as a Lender][their respective capacities as Lenders] under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of [the Assignor][the respective Assignors] under the respective facilities identified below (including without limitation any letters of credit and guarantees included in such facilities), and (ii) to the extent permitted to be assigned under applicable Law, all claims, suits, causes of action and any other right of [the Assignor (in its capacity as a Lender)][the respective Assignors (in their respective capacities as Lenders)] against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned by [the][any] Assignor to [the][any] Assignee pursuant to clauses (i) and (ii) above being referred to herein collectively as [the][an] “ Assigned Interest ”); provided, however, that for the avoidance of doubt, the Assigned Interest excludes any Hedging Agreements and Hedging Transactions that may exist between the Assignor(s) and Borrower or any other Obligated Party. Each such sale and assignment is without recourse to [the][any] Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by [the][any] Assignor.

1.	Assignor[s]:

¹	For bracketed language here and elsewhere in this form relating to the Assignor(s), if the assignment is from a single Assignor, choose the first bracketed language. If the assignment is from multiple Assignors, choose the second bracketed language.
²	For bracketed language here and elsewhere in this form relating to the Assignee(s), if the assignment is to a single Assignee, choose the first bracketed language. If the assignment is to multiple Assignees, choose the second bracketed language.
³	Select as appropriate.
⁴	Include bracketed language if there are either multiple Assignors or multiple Assignees.

EXHIBIT A – Assignment and Assumption – Page 1

[Assignor [is] [is not] a Defaulting Lender]

2.	Assignee[s]:

[Assignee is an [Affiliate][Approved Fund] of [identify Lender]]

3.	Borrower:	Carbon Natural Gas Company

4.	Administrative Agent:	LegacyTexas Bank, as the administrative agent under the Credit Agreement

5.	Credit Agreement:	$100,000,000 Credit Agreement dated as of October 3, 2016 among Borrower, the Lenders parties thereto, LegacyTexas Bank, as Administrative Agent, and the other agents parties thereto

6.	Assigned Interest[s]:

Assignor [s] ⁵

Assignee [s] ⁶

Aggregate Amount

of Commitment/Loans for all Lenders ²⁰

Amount of Commitment/Loans Assigned ⁷

Percentage Assigned of Commitment/Loans ⁸

CUSIP Number

[7.

Trade Date:

______________] ⁹

	⁵	List each Assignor, as appropriate.
	⁶	List each Assignor, as appropriate.
	⁷	Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.
	⁸	To be completed if the Assignor(s) and the Assignee(s) intend that the minimum assignment amount is to be determined as of the Trade Date.
	⁹	To be added only if the consent of Administrative Agent is required by the terms of the Credit Agreement.

EXHIBIT A – Assignment and Assumption – Page 2

Effective Date: _____________ ___, 20___ [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]

The terms set forth in this Assignment and Assumption are hereby agreed to:

	ASSIGNOR[S] ¹⁰

	[NAME OF ASSIGNOR]

	By:
		Name:
		Title:

	[NAME OF ASSIGNOR]

	By:
		Name:
		Title:

	ASSIGNEE[S] ¹¹

	[NAME OF ASSIGNEE]

	By:
		Name:
		Title:

	[NAME OF ASSIGNEE]

	By:
		Name:
		Title:

¹⁰	To be added only if the consent of Borrower and/or other parties (e.g. L/C Issuer) is required by the terms of the Credit Agreement.
¹¹	Add additional signature blocks as needed. Include both Fund/Pension Plan and manager making the trade (if applicable).

EXHIBIT A – Assignment and Assumption – Page 3

[Consented to and] ¹² Accepted:

LEGACYTEXAS BANK,

as Administrative Agent

By:
	Name:
	Title:

[Consented to] : ¹³

[NAME OF RELEVANT PARTY]

By:
	Name:
	Title:

¹²	To be added only if the consent of Administrative Agent is required by the terms of the Credit Agreement.
¹³	To be added only if the consent of Borrower and/or other parties (e.g. L/C Issuer) is required by the terms of the Credit Agreement.

EXHIBIT A – Assignment and Assumption – Page 4

ANNEX 1

Standard Terms and Conditions for Assignment and Assumption

1.	Representations and Warranties .

1.1 Assignor [s] . [The][Each] Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of [the][the relevant] Assigned Interest, (ii) [the][such] Assigned Interest is free and clear of any lien, encumbrance or other adverse claim, (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and (iv) it is [not] a Defaulting Lender; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document, or (iv) the performance or observance by Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

1.2. Assignee [s] . [The][Each] Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets all the requirements to be an assignee under Section 12.8(b)(iii) , (v) and (vi) of the Credit Agreement (subject to such consents, if any, as may be required under Section 12.8(b)(iii) of the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of [the][the relevant] Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it is sophisticated with respect to decisions to acquire assets of the type represented by the Assigned Interest and either it, or the Person exercising discretion in making its decision to acquire the Assigned Interest, is experienced in acquiring assets of such type, (v) it has received a copy of the Credit Agreement, and has received or has been accorded the opportunity to receive copies of the most recent financial statements delivered pursuant to Section 7.1 thereof, as applicable, and such other documents and information as it deems appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the][such] Assigned Interest, (vi) it has, independently and without reliance upon Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the][such] Assigned Interest, and (vii) if it is a Foreign Lender, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by [the][such] Assignee; and (b) agrees that (i) it will, independently and without reliance on Administrative Agent, [the][any] Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

2. Payments . From and after the Effective Date, Administrative Agent shall make all payments in respect of [the][each] Assigned Interest (including payments of principal, interest, fees and other amounts) to [the][the relevant] Assignor for amounts which have accrued to but excluding the Effective Date and to [the][the relevant] Assignee for amounts which have accrued from and after the Effective Date. Notwithstanding the foregoing, Administrative Agent shall make all payments of interest, fees or other amounts paid or payable in kind from and after the Effective Date to [the][the relevant] Assignee.

3. General Provisions . This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the Law of the State of Texas.

ANNEX 1 – Standard Terms and Conditions for Assignment and Assumption – Page 1

EXHIBIT B

Compliance Certificate

FOR QUARTER/YEAR ENDED	_______________________ (the “ Subject Period ”)

ADMINISTRATIVE AGENT:	LegacyTexas Bank

BORROWER:	Carbon Natural Gas Company

This Compliance Certificate (this “ Certificate ”) is delivered under the Credit Agreement (the “ Credit Agreement ”) dated as of October 3, 2016, by and among Borrower, the Lenders from time to time party thereto and Administrative Agent. Capitalized terms used in this Certificate shall, unless otherwise indicated, have the meanings set forth in the Credit Agreement. The undersigned hereby certifies to Administrative Agent and Lenders as of the date hereof that: (a) he/she is the ___________________ of Borrower, and that, as such, he/she is authorized to execute and deliver this Certificate to Administrative Agent on behalf of Borrower; (b) he/she has reviewed and is familiar with the terms of the Credit Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and condition (financial or otherwise) of Borrower during the Subject Period; (c) during the Subject Period, Borrower performed and observed each covenant and condition of the Loan Documents applicable to it and no Default or Event of Default currently exists or has occurred which has not been cured or waived by Required Lenders or all Lenders, as required by the Loan Documents; (d) the representations and warranties of Borrower contained in Article 6 of the Credit Agreement, and any representations and warranties of Borrower that are contained in any document furnished at any time under or in connection with the Loan Documents, are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and except that for purposes of this Certificate, the representations and warranties contained in Section 6.2 of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to Section 7.1 of the Credit Agreement, including the statements in connection with which this Certificate is delivered; (e) the financial statements of Borrower attached to this Certificate were prepared in accordance with GAAP, and present, on a consolidated basis, fairly and accurately the financial condition and results of operations of Borrower and its Subsidiaries as of the end of and for the Subject Period; (f) the update to Schedule 6.29 attached hereto sets forth a complete and correct list of all Hedging Agreements and Hedging Transactions in effect or to be in effect as of the date hereof, the material terms thereof (including the type, term, effective date, termination date and notional amounts or values), the Hedge Termination Value thereof, and the counterparty thereto; (g) the financial covenant analyses and information set forth below are true and accurate on and as of the date of this Certificate; and (h) the status of compliance by Borrower with certain covenants of the Credit Agreement at the end of the Subject Period is as set forth below:

		In Compliance as of End of Subject Period (Please Indicate)

1.	Financial Statements and Reports

	(a)	Provide annual audited FYE financial statements within 90 days after the last day of each fiscal year.	Yes	No

EXHIBIT B – Compliance Certificate – Page 1

	In Compliance as of End of Subject Period (Please Indicate)

	(b)	Provide quarterly financial statements within 60 days after the last day of each fiscal quarter.	Yes	No

	(c)	Provide other required reporting timely.	Yes	No

2.	Subsidiaries None, except as listed on Schedule 6.13 .		Yes	No

3.	Debt None, except Debt permitted by Section 8.1 of the Credit Agreement.		Yes	No

4.	Liens None, except Liens permitted by Section 8.2 of the Credit Agreement.		Yes	No

5.	Acquisitions and Mergers None, except those permitted by Section 8.3 of the Credit Agreement.		Yes	No

6.	Dividends and Stock Repurchase None, except as permitted by Section 8.4 of the Credit Agreement. (if applicable, Dollar amount during Subject Period: $_____)		Yes	No

7.	Loans and Investments None, except those permitted by Section 8.5 of the Credit Agreement.		Yes	No

8.	Issuance of Equity None, except issuances permitted by Section 8.6 of the Credit Agreement.		Yes	No

9.	Affiliate Transactions None, except transactions permitted by Section 8.7 of the Credit Agreement.		Yes	No

10.	Dispositions of Assets None, except Dispositions permitted by Section 8.8 of the Credit Agreement.		Yes	No

11.	Sale and Leaseback Transactions None, except transactions permitted by Section 8.9 of the Credit Agreement.		Yes	No

12.	Prepayment of Debt None, except prepayments permitted by Section 8.10 of the Credit Agreement.		Yes	No

13.	Changes in Nature of Business None, except changes permitted by Section 8.11 of the Credit Agreement.		Yes	No

14.	Environmental Protection No activity likely to cause violations of Environmental Laws or create any Environmental Liabilities.		Yes	No

15.	Changes in Fiscal Year; Accounting Practices None, except transactions permitted by Section 8.13 of the Credit Agreement.		Yes	No

EXHIBIT B – Compliance Certificate – Page 2

	In Compliance as of End of Subject Period (Please Indicate)

16.	No Negative Pledge None, except those permitted by Section 8.14 of the Credit Agreement.	Yes	No

17.	Hedging Agreements, Transactions and Terminations None, except those permitted by Section 8.17 of the Credit Agreement.	Yes	No

18.	Gas Balancing Agreements and Advance Payment Contracts None, except those permitted by Section 8.18 of the Credit Agreement.	Yes	No

19.	Amendments to JOAs None, except those permitted by Section 8.21 of the Credit Agreement.	Yes	No

20.	Leverage Ratio Maximum of 3.50 to 1.00 at end of Subject Period (defined as Debt divided by EBITDA; calculated for the Test Period then ended).

		÷		=
	Debt		EBITDAX				Yes	No

21.

Current Ratio
Minimum of 1.00 to 1.00 at end of Subject Period (defined as current assets divided by current liabilities).

Yes

		÷		=
	Current Assets		Current Liabilities

EXHIBIT B – Compliance Certificate – Page 3

IN WITNESS WHEREOF, the undersigned has executed this Certificate as of _____________________, _____.

	BORROWER:

	CARBON NATURAL GAS COMPANY

	By:
		Name:
		Title:

EXHIBIT B – Compliance Certificate – Page 4

EXHIBIT C

Borrowing Request

Date: ___________, _____

To:	LegacyTexas Bank, as Administrative Agent

Ladies and Gentlemen:

Reference is made to that certain Credit Agreement, dated as of October 3, 2016 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “ Credit Agreement ;” the terms defined therein being used herein as therein defined), among Carbon Natural Gas Company, a Texas corporation (“ Borrower ”), the Lenders from time to time party thereto, and LegacyTexas Bank, as Administrative Agent and L/C Issuer.

The undersigned hereby requests (select one):

☐	A Borrowing of Loans

☐	A conversion or continuation of Loans

	1.	On ________________________________________ (a Business Day).

	2.	In the amount of $______________________

	3.	Comprised of _______________________________________
		(Type of Portion requested)

	4.	For LIBOR Portion: with an Interest Period of ____ months.

Borrower hereby represents and warrants that the conditions specified in Section 5.2 of the Credit Agreement shall be satisfied on and as of the date of the requested Borrowing.

	BORROWER:

	CARBON NATURAL GAS COMPANY

	By:
		Name:
		Title:

EXHIBIT C – Borrowing Request – Page Solo

EXHIBIT D

Note

____________, 20___

FOR VALUE RECEIVED, Carbon Natural Gas Company, a Texas corporation (“ Borrower ”), hereby promises to pay to the order of _______________________________ (“ Lender ”), in accordance with the provisions of the Credit Agreement (as hereinafter defined), the principal amount of each Loan or so much thereof as may be advanced by Lender (in its capacity as Lender) from time to time to or for the benefit or account of Borrower under that certain Credit Agreement, dated as of October 3, 2016 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “ Credit Agreement ;” the terms defined therein being used herein as therein defined), among Borrower, the lenders from time to time party thereto, and LegacyTexas Bank, as Administrative Agent (in such capacity, “ Administrative Agent ”) and L/C Issuer.

Borrower promises to pay interest on the unpaid principal amount of this Note from the date hereof until the Loans made by Lender are paid in full, at such interest rates and at such times as provided in the Credit Agreement. All payments of principal and interest shall be made to Administrative Agent for the account of Lender in Dollars in immediately available funds at Administrative Agent’s Principal Office. If any amount is not paid in full when due hereunder, then such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Credit Agreement.

This Note is one of the Notes referred to in the Credit Agreement, is entitled to the benefits thereof and may be prepaid in whole or in part subject to the terms and conditions provided therein. This Note is also entitled to the benefits of the Guaranties. Upon the occurrence and continuation of one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable all as provided in the Credit Agreement. The Loans made by Lender shall be evidenced by an account maintained by Lender in the ordinary course of business. Lender may also attach schedules to this Note and endorse thereon the date, amount and maturity of its Loans and payments with respect thereto.

Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, dishonor and non-payment of this Note.

THIS NOTE, AND ANY CLAIM, CONTROVERSY, OR DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS NOTE, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.

[Remainder of Page Intentionally Left Blank

Signature Page Follows]

EXHIBIT D – Note – Page 1

IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has duly executed this Note as of the day and year first written above.

	BORROWER:

	CARBON NATURAL GAS COMPANY

	By:
		Name:
		Title:

EXHIBIT D – Note – Page 2

EXHIBIT E-1

U.S. Tax Compliance Certificate

(For Foreign Lenders That Are Not Partnerships for U.S. Federal Income Tax Purposes)

Reference is hereby made to the Credit Agreement dated as of October 3, 2016 (as amended, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), among Carbon Natural Gas Company, a Texas corporation (“ Borrower ”), LegacyTexas Bank, as Administrative Agent and L/C Issuer, and each Lender from time to time party thereto.

Pursuant to the provisions of Section 3.4 of the Credit Agreement, the undersigned hereby certifies that (i) it is the sole record and beneficial owner of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of which it is providing this certificate, (ii) it is not a bank within the meaning of Section 881(c)(3)(A) of the Code, (iii) it is not a ten percent shareholder of Borrower within the meaning of Section 871(h)(3)(B) of the Code and (iv) it is not a controlled foreign corporation related to Borrower as described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished Administrative Agent and Borrower with a certificate of its non-U.S. Person status on IRS Form W-8BEN. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform Borrower and Administrative Agent, and (2) the undersigned shall have at all times furnished Borrower and Administrative Agent with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

[NAME OF LENDER]

By:
	Name:
	Title:

Date:	______________ ____, 20 __

EXHIBIT E – U.S. Tax Compliance Certificate – Page 1

EXHIBIT E-2

U.S. Tax Compliance Certificate

(For Foreign Participants That Are Not Partnerships for U.S. Federal Income Tax Purposes)

Pursuant to the provisions of Section 3.4 of the Credit Agreement, the undersigned hereby certifies that (i) it is the sole record and beneficial owner of the participation in respect of which it is providing this certificate, (ii) it is not a bank within the meaning of Section 881(c)(3)(A) of the Code, (iii) it is not a ten percent shareholder of Borrower within the meaning of Section 871(h)(3)(B) of the Code and (iv) it is not a controlled foreign corporation related to Borrower as described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished its participating Lender with a certificate of its non-U.S. Person status on IRS Form W-8BEN. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform such Lender in writing, and (2) the undersigned shall have at all times furnished such Lender with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

[NAME OF PARTICIPANT]

By:
	Name:
	Title:

Date:	______________ ____, 20 __

EXHIBIT E – U.S. Tax Compliance Certificate – Page 2

EXHIBIT E-3

U.S. Tax Compliance Certificate

(For Foreign Participants That Are Partnerships for U.S. Federal Income Tax Purposes)

Pursuant to the provisions of Section 3.4 of the Credit Agreement, the undersigned hereby certifies that (i) it is the sole record owner of the participation in respect of which it is providing this certificate, (ii) its direct or indirect partners/members are the sole beneficial owners of such participation, (iii) with respect such participation, neither the undersigned nor any of its direct or indirect partners/members is a bank extending credit pursuant to a loan agreement entered into in the ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of the Code, (iv) none of its direct or indirect partners/members is a ten percent shareholder of Borrower within the meaning of Section 871(h)(3)(B) of the Code and (v) none of its direct or indirect partners/members is a controlled foreign corporation related to Borrower as described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished its participating Lender with IRS Form W-8IMY accompanied by one of the following forms from each of its partners/members that is claiming the portfolio interest exemption: (i) an IRS Form W-8BEN or (ii) an IRS Form W-8IMY accompanied by an interest exemption. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform such Lender and (2) the undersigned shall have at all times furnished such Lender with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

[NAME OF PARTICIPANT]

By:
	Name:
	Title:

Date:	______________ ____, 20 __

EXHIBIT E – U.S. Tax Compliance Certificate – Page 3

EXHIBIT E-4

U.S. Tax Compliance Certificate

(For Foreign Lenders That Are Partnerships for U.S. Federal Income Tax Purposes)

Pursuant to the provisions of Section 3.4 of the Credit Agreement, the undersigned hereby certifies that (i) it is the sole record owner of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of which it is providing this certificate, (ii) its direct or indirect partners/members are the sole beneficial owners of such Loan(s) (as well as any Note(s) evidencing such Loan(s)), (iii) with respect to the extension of credit pursuant to this Credit Agreement or any other Loan Document, neither the undersigned nor any of its direct or indirect partners/members is a bank extending credit pursuant to a loan agreement entered into in the ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of the Code, (iv) none of its direct or indirect partners/members is a ten percent shareholder of Borrower within the meaning of Section 871(h)(3)(B) of the Code and (v) none of its direct or indirect partners/members is a controlled foreign corporation related to Borrower as described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished Administrative Agent and Borrower with IRS Form W-8IMY accompanied by one of the following forms from each of its partners/members that is claiming the portfolio interest exemption: (i) an IRS Form W-8BEN or (ii) an IRS Form W-8IMY accompanied by an interest exemption. By executing this certificate, the undersigned agrees that (1) if the information provided on this certificate changes, the undersigned shall promptly so inform Borrower and Administrative Agent, and (2) the undersigned shall have at all times furnished Borrower and Administrative Agent with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

[NAME OF LENDER]

By:
	Name:
	Title:

Date:	______________ ____, 20 __

EXHIBIT E – U.S. Tax Compliance Certificate – Page 4

EXHIBIT F

Form of Borrowing Base Adjustment Letter

As of __________, 201__

Carbon Natural Gas Company

____________________

Re:	Adjustment of Borrowing Base

Ladies and Gentlemen:

We refer to that certain Credit Agreement, dated as of October 3, 2016 (as amended from time to time, the “ Credit Agreement ”) among Carbon Natural Gas Company, a Texas corporation (“ Borrower ”), the financial institutions from time to time party thereto (the “ Lenders ”), and LegacyTexas Bank, as administrative agent for the Lenders (“ Administrative Agent ”). The defined terms used in this letter have the same meanings as are provided therefor in the Credit Agreement.

This letter will confirm our agreements with respect to the Borrowing Base:

	(a)	[Increase][Decrease][Reaffirmation] of Borrowing Base . Effective as of the date hereof [and subject to the payment of the fee described below] , the Borrowing Base is hereby [[increased][decreased] from [$__________] to [$__________]][reaffirmed at $__________] . The foregoing adjustment of the Borrowing Base is a periodic redetermination of the Borrowing Base under Section 2.9(b) of the Credit Agreement.

	(b)	[ Borrowing Base Increase Fee . The incremental increase in the Borrowing Base is $__________. As a condition to the increase in the Borrowing Base set forth above, Borrower will pay the Lenders a fee of $__________ for such incremental increase (_____% of $__________), to be shared among the Lenders in accordance with their Applicable Percentages.]

	(c)	Determination Date . The Borrowing Base as adjusted will remain in effect until __________, 201__, which is the date of the next periodic redetermination of the Borrowing Base, unless otherwise adjusted pursuant to the provisions of Section 2.9 of the Credit Agreement.

The agreements set forth herein are limited precisely as written and shall not be deemed (a) to be a waiver of or a consent to the modification of or deviation from any other term or condition of the Loan Documents, or (b) to prejudice any right or rights which Administrative Agent or the Lenders may now have or may have in the future under or in connection with the Loan Documents. This letter constitutes a Loan Document under the Credit Agreement.

The failure by Administrative Agent and the Lenders to exercise available rights and remedies is not intended (a) to operate as a waiver of rights and remedies except as expressly herein provided, and (b) to indicate any agreement on the part of Administrative Agent and the Lenders to waive their rights and remedies in the future. Administrative Agent and the Lenders are not obligated in any way with respect to future dealings between them and Borrower, except as set forth in the presently existing Loan Documents.

[Remainder of page intentionally left blank. Signature pages follow.]

EXHIBIT F – Borrowing Base Adjustment Letter – Page 1

Kindly sign and return the enclosed counterpart of this letter.

	Very truly yours,

	LEGACYTEXAS BANK
	as Administrative Agent and as a Lender

	By:
	Name:
	Title:

EXHIBIT F – Form of Borrowing Base Adjustment Letter – Signature Page

AGREED AND ACCEPTED:

as of __________, 201__

CARBON NATURAL GAS COMPANY,

as Borrower

By:
Name:
Title:

EXHIBIT F – Form of Borrowing Base Adjustment Letter – Signature Page

Exhibit 10.1(a)

UNCONDITIONAL GUARANTY

THIS UNCONDITIONAL GUARANTY (this " Guaranty ") dated as of October 3, 2016, is made by NYTIS EXPLORATION COMPANY LLC, a Delaware limited liability company, NYTIS EXPLORATION (USA) INC., a Delaware corporation, each a Subsidiary of CARBON NATURAL GAS COMPANY, a Delaware corporation (" Borrower "), whether as an original signatory hereto or as an Additional Guarantor (together with each such Person's permitted successors and permitted assigns, collectively, " Guarantors " and each individually, a " Guarantor "), in favor of LEGACYTEXAS BANK, as administrative agent for the benefit of the Guaranteed Parties, as defined herein (in such capacity, " Administrative Agent "), and is executed and delivered pursuant to that certain Credit Agreement dated as of the date hereof (as the same may be amended, restated or modified from time to time, the " Credit Agreement ") among Administrative Agent, the financial institutions party thereto (the " Lenders ") and Borrower.

WHEREAS, Borrower has executed and delivered the Credit Agreement, and to induce the Guaranteed Parties to make the loans and other financial accommodations provided for in the Credit Agreement and any Bank Product Agreements, Guarantors have agreed to guarantee the payment and satisfaction of the Obligations and to execute and deliver this Guaranty; and

WHEREAS, each Guarantor is a Subsidiary of Borrower, and each Guarantor desires that the Guaranteed Parties extend credit and make financial accommodations to Borrower as contemplated by the Credit Agreement, and each Guarantor will directly or indirectly benefit from the extensions of credit and financial accommodations for the purposes for which the credit and financial accommodations are being extended pursuant to the Credit Agreement and the Bank Product Agreements; and

WHEREAS, each Guarantor, by and through the action of its governing body, has determined that it may reasonably be expected to benefit, directly or indirectly, from guarantying the Obligations, all as hereinafter provided;

NOW, THEREFORE, in consideration of the foregoing, and intending to be legally bound hereby, Guarantors guarantee to the Guaranteed Parties the prompt and full payment and performance of the Obligations upon the following terms and conditions:

1. Definitions . Capitalized t erms used herein which are defined in the Credit Agreement have the meanings provided therefor in the Credit Agreement unless the context hereof otherwise requires or provides. As used herein:

" Guaranteed Parties " means the collective reference to Administrative Agent, each Lender, the L/C Issuer, each Bank Product Provider and any other Person the Obligations owing to which are, or are purported to be, guaranteed under the terms hereof .

" Release Date " means the last to occur of the dates on which Liens securing the Obligations may be released pursuant to Section 11.9(a)(i) of the Credit Agreement.

UNCONDITIONAL GUARANTY – Page 1

2. Guaranty .

(a) In consideration of loans, advances or other credit heretofore or hereafter granted by the Guaranteed Parties to Borrower pursuant to the Credit Agreement and in further consideration of any Bank Product Agreements, Guarantors hereby, jointly and severally, unconditionally, absolutely and irrevocably, guarantee to the Guaranteed Parties the due and punctual payment at maturity, whether by acceleration or otherwise, and the due fulfillment and performance of the Obligations. Each Guarantor is jointly and severally liable for the full payment and performance of the Obligations as a primary obligor.

(b) In order to provide for just and equitable contribution among the Guarantors, subject to Section 6 hereof, the Guarantors agree that in the event a payment shall be made on any date under this Guaranty by any Guarantor (the " Funding Guarantor "), each other Guarantor (each a " Contributing Guarantor ") shall indemnify the Funding Guarantor in an amount equal to the amount of such payment, in each case multiplied by a fraction the numerator of which shall be the net worth of the Contributing Guarantor as of such date and the denominator of which shall be the aggregate net worth of all the Contributing Guarantors together with the net worth of the Funding Guarantor as of such date. Any Contributing Guarantor making any payment to a Funding Guarantor pursuant to this Section 2(b) shall be subrogated to the rights of such Funding Guarantor to the extent of such payment.

3. Payment . If any of the Obligations is not punctually paid when the same becomes due and payable, either by its terms or as a result of the exercise of any power to accelerate, Guarantors shall, immediately on demand and without presentment, protest, notice of protest, notice of nonpayment, notice of intent to accelerate, notice of acceleration or any other notice whatsoever (all of which are expressly waived in accordance with Section 4 hereof), pay to Administrative Agent the amount due and payable thereon at its office specified in the Credit Agreement. It is not necessary for Administrative Agent, in order to enforce such payment by Guarantors, first to institute suit or exhaust its remedies against Borrower or others liable on the Obligations, or to enforce its rights against any security given to secure the Obligations. Administrative Agent is not required to mitigate damages or take any other action to reduce, collect or enforce the Obligations. No setoff, counterclaim, reduction or diminution of any obligation, or any defense of any kind which any Guarantor has or may have against Borrower or any Guaranteed Party shall be available hereunder to Guarantors. No payment by any Guarantor shall discharge the liability of Guarantors hereunder until the Obligations have been fully satisfied and the Release Date shall have occurred. If Administrative Agent must rescind or restore any payment, or any part thereof, received by Administrative Agent on any part of the Obligations, any prior release or discharge from the terms of this Guaranty given Guarantors by Administrative Agent or any reduction of any Guarantor's liability hereunder shall be without effect, and this Guaranty shall remain in full force and effect. Each Guarantor shall make all payments hereunder without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless such Guarantor is compelled by law to make such deduction or withholding. If any such obligation (other than one arising with respect to taxes based on or measured by the income or profits of the Guaranteed Parties) is imposed upon any Guarantor with respect to any amount payable by it hereunder, such Guarantor will pay to the Administrative Agent, on behalf of the Guaranteed Parties, on the date on which such amount is due and payable hereunder, such additional amount in Dollars as shall be necessary to enable the Guaranteed Parties to receive the same net amount which the Guaranteed Parties would have received on such due date had no such obligation been imposed upon such Guarantor. Each Guarantor will deliver promptly to the Administrative Agent, on behalf of the Guaranteed Parties, certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by such Guarantor hereunder. The obligations of each Guarantor under this Section 3 shall survive the payment in full of the Obligations and termination of this Guaranty.

UNCONDITIONAL GUARANTY – Page 2

4. Agreements and Waivers . To the extent not prohibited by applicable Law, each Guarantor:

(a) agrees to all terms and agreements heretofore or hereafter made by Borrower with Administrative Agent and/or any other Guaranteed Party;

(b) agrees that Administrative Agent may without impairing its rights or the obligations of such Guarantor hereunder (i) waive or delay the exercise of any of its rights or remedies against or release Borrower or any other Person, including, without limitation, any other Person who is or whose Property is liable with respect to the Obligations or any part thereof (Guarantors and any such other Person or Persons are hereafter collectively called the " Sureties " and each individually called a " Surety " ); (ii) take or accept any other security, collateral or guaranty, or other assurance of the payment of all or any part of the Obligations; (iii) release, surrender, exchange, or subordinate any collateral, property or security, at any time existing in connection with, or assuring or securing payment of, all or any part of the Obligations or the liability of such Guarantor or any other Surety; (iv) increase, renew, extend, or modify the terms of any of the Obligations or any instrument or agreement evidencing the same; (v) apply payments by Borrower, any Surety, or any other Person to any of the Obligations; (vi) bring suit against any one or more Sureties without joining any other Surety or Borrower in such proceeding; (vii) compromise or settle with any one or more Sureties in whole or in part for such consideration or no consideration as Administrative Agent may deem appropriate; or (viii) partially or fully release any Guarantor or any other Surety from liability hereunder;

(c) agrees that the obligations of such Guarantor under this Guaranty shall not be released, diminished, or adversely affected by any of the following: (i) the insolvency, bankruptcy, rearrangement, adjustment, composition, liquidation, disability, dissolution or lack of power of Borrower or any Surety; (ii) the invalidity, illegality or unenforceability of all or any part of the Obligations or any document or agreement executed in connection with the Obligations, for any reason, or the fact that any debt included in the Obligations exceeds the amount permitted by law; (iii) the fact that any collateral, security, security interest or Lien contemplated or intended to be given, created or granted as security for the repayment of the Obligations is not properly perfected or created, or proves to be unenforceable or subordinate to any other security interest or Lien; (iv) the fact that Borrower has any defense to the payment of all or any part of the Obligations; (v) any payment by Borrower or any Surety to Administrative Agent and/or any other Guaranteed Party is a preference under applicable Debtor Relief Laws, or for any reason Administrative Agent and/or any other Guaranteed Party is required to refund such payment or pay such amounts to Borrower, any such Surety, or someone else; (vi) any defenses which Borrower could assert on the Obligations, including but not limited to failure of consideration, breach of warranty, fraud, accord and satisfaction, strict foreclosure, statute of frauds, bankruptcy, statute of limitations, lender liability and usury; or (vii) any other action taken or omitted to be taken with respect to the Credit Agreement, the Loan Documents, the Obligations, the security and the collateral therefor whether or not such action or omission prejudices such Guarantor or any Surety or increases the likelihood that such Guarantor will be required to pay the Obligations pursuant to the terms hereof;

(d) agrees that such Guarantor is obligated to pay the Obligations when due, notwithstanding any occurrence, circumstance, event, action or omission whatsoever whether or not particularly described herein, except for the full and final payment and satisfaction of the Obligations;

(e) waives all rights and remedies now or hereafter accorded by applicable Law to guarantors or sureties, including without limitation any defense, right of offset or other claim which such Guarantor may have against Borrower or which Borrower may have against Administrative Agent and/or the Guaranteed Parties;

(f) waives all notices whatsoever with respect to this Guaranty or with respect to the Obligations, including, but without limitation, notice of (i) Administrative Agent's and/or the Guaranteed Parties' acceptance hereof or its or their intention to act, or its or their action, in reliance hereon; (ii) the present existence, future incurring, or any amendment of the provisions of any of the Obligations or any terms or amounts thereof or any change therein in the rate of interest thereon; (iii) any default by Borrower or any Surety; or (iv) the obtaining, enforcing, or releasing of any guaranty or surety agreement (in addition hereto), pledge, assignment, or other security for any of the Obligations;

UNCONDITIONAL GUARANTY – Page 3

(g) waives notice of presentment for payment, notice of protest, protest, demand, notice of intent to accelerate, notice of acceleration and notice of nonpayment, protest in relation to any instrument evidencing any of the Obligations, and any demands and notices required by Law, except as such waiver may be expressly prohibited by Law, and diligence in bringing suits against any Surety; and

(h) waives each right to which it may be entitled by virtue of the laws of the State of Texas governing or relating to suretyship and guaranties, including, without limitation, any rights under Rule 31, Texas Rules of Civil Procedure, Chapter 51 of the Texas Property Code, Section 17.001 of the Texas Civil Practice and Remedies Code, Section 3.605 of the UCC, and Chapter 43 of the Texas Civil Practice and Remedies Code, as any or all of the same may be amended or construed from time to time, or the common law of the State of Texas at all relevant times.

5. Liability . The liability of each Guarantor under this Guaranty is irrevocable, absolute and unconditional, without regard to the liability of any other Person, and shall not in any manner be affected by reason of any action taken or not taken by Administrative Agent and/or any other Guaranteed Party, which action or inaction is herein consented and agreed to, nor by the partial or complete unenforceability or invalidity of any other guaranty or surety agreement, pledge, assignment or other security for any of the Obligations. No delay in making demand on Sureties or any of them for satisfaction of the liability hereunder shall prejudice Administrative Agent's right to enforce such satisfaction. All of Administrative Agent's rights and remedies shall be cumulative and any failure of Administrative Agent to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time, and from time to time, thereafter. This is a continuing guaranty of payment, not a guaranty of collection, and this Guaranty shall be binding upon Guarantors regardless of how long before or after the date hereof any of the Obligations were or are incurred.

6. Subordination . If Borrower or any other Obligated Party is now or hereafter becomes indebted to one or more Guarantors (such indebtedness and all interest thereon is referred to as the " Affiliated Debt "), such Affiliated Debt shall be subordinate in all respects to the full payment and performance of the Obligations, and no Guarantor shall be entitled to enforce or, during the existence of an Event of Default, receive payment with respect to any Affiliated Debt until the Release Date. Each Guarantor agrees that any Liens, mortgages, deeds of trust, security interests, judgment liens, charges or other encumbrances upon Borrower's or any other Obligated Party 's assets securing the payment of the Affiliated Debt shall be and remain subordinate and inferior to any Liens, security interests, judgment liens, charges or other encumbrances upon Borrower's or any other Obligated Party 's assets securing the payment of the Obligations, and without the prior written consent of Administrative Agent, no Guarantor shall exercise or enforce any creditor's rights of any nature against Borrower or any other Obligated Party to collect the Affiliated Debt (other than demand payment therefor). In the event of the receivership, bankruptcy, reorganization, arrangement, debtor's relief or other insolvency proceedings involving Borrower or any applicable Obligated Party as a debtor, Administrative Agent has the right and authority, either in its own name or as attorney-in-fact for any applicable Guarantor, to file such proof of debt, claim, petition or other documents and to take such other steps as are necessary to prove its rights hereunder and receive directly from the receiver, trustee or other court custodian, payments, distributions or other dividends which would otherwise be payable upon the Affiliated Debt. Each Guarantor hereby assigns such payments, distributions and dividends to Administrative Agent, and irrevocably appoints Administrative Agent as its true and lawful attorney-in-fact with authority to make and file in the name of such Guarantor any proof of debt, amendment of proof of debt, claim, petition or other document in such proceedings and to receive payment of any sums becoming distributable on account of the Affiliated Debt, and to execute such other documents and to give acquittances therefor and to do and perform all such other acts and things for and on behalf of such Guarantor as may be necessary in the opinion of Administrative Agent in order to have the Affiliated Debt allowed in any such proceeding and to receive payments, distributions or dividends of or on account of the Affiliated Debt.

UNCONDITIONAL GUARANTY – Page 4

7. Subrogation . No Guarantor waives or releases any rights of subrogation, reimbursement or contribution which such Guarantor may have, after full and final payment of the Obligations, against others liable on the Obligations. Each Guarantor's rights of subrogation and reimbursement are subordinate in all respects to the rights and claims of Administrative Agent and the other Guaranteed Parties, and no Guarantor may exercise any rights it may acquire by way of subrogation under this Guaranty, by payment made hereunder or otherwise, until the Release Date. If any amount is paid to any Guarantor on account of such subrogation rights prior to the Release Date, such amount shall be held in trust for the benefit of Administrative Agent and/or the other Guaranteed Parties to be credited and applied on the Obligations, whether matured or unmatured. If all Obligations have been paid in full and on the Release Date, there is no proceeding pending to recover any payments made on or transfers of property with respect to the Obligations from Lenders, such trust shall be released. If on the Release Date, any proceeding to recover payments made on or transfers of property with respect to the Obligations from Lenders is pending, such funds shall be held in trust until the final resolution of such proceeding.

8. Other Indebtedness or Obligations of Guarantors . If any Guarantor is or becomes liable for any indebtedness owed by Borrower or any other Obligated Party to the Guaranteed Parties by endorsement or otherwise than under this Guaranty, such liability shall not be affected by this Guaranty, and the rights of Administrative Agent and the Guaranteed Parties hereunder shall be cumulative of all other rights that Administrative Agent and the Guaranteed Parties may have against such Guarantor. The exercise by Administrative Agent of any right or remedy hereunder or under any other instrument or at law or in equity shall not preclude the concurrent or subsequent exercise of any other instrument or remedy at law or in equity and shall not preclude the concurrent or subsequent exercise of any other right or remedy. Further, without limiting the generality of the foregoing, this Guaranty is given by Guarantors as an additional guaranty to all guaranties heretofore or hereafter executed and delivered to Administrative Agent and/or the Guaranteed Parties by Guarantors in favor of Administrative Agent and/or the Guaranteed Parties relating to the indebtedness of Borrower and the other Obligated Parties to the Guaranteed Parties, and nothing herein shall be deemed to replace or be in lieu of any other of such previous or subsequent guarantees.

9. Representations . Each Guarantor represents as follows:

(a) such Guarantor has received, or will receive, direct or indirect benefit from the Obligations and from the making of this Guaranty;

(b) such Guarantor is familiar with, and has independently reviewed the books and records regarding, the financial condition of Borrower and is familiar with the value of any and all Collateral intended to be created as security for the payment of the Obligations, but such Guarantor is not relying on such financial condition, the collateral, or the agreement of any other party to become a Surety as an inducement to enter into this Guaranty;

(c) neither Administrative Agent, any Guaranteed Party, any Surety, nor any other Person has made any representation, warranty or statement to such Guarantor in order to induce such Guarantor to execute this Guaranty;

UNCONDITIONAL GUARANTY – Page 5

(d) as of the date hereof, and after giving effect to this Guaranty and the contingent obligation evidenced hereby, such Guarantor is, and will be, Solvent and has not entered into any transaction with the intent to hinder, delay or defraud a creditor;

(e) the execution, delivery, and performance by such Guarantor of this Guaranty and the other Loan Documents to which such Guarantor is or may become a party and compliance with the terms and provisions hereof and thereof have been duly authorized by all requisite action on the part of such Guarantor and do not and will not (i) violate or conflict with, or result in a breach of, or require any consent under (x) the Constituent Documents of such Person, (y) any applicable Law, rule, or regulation or any order, writ, injunction, or decree of any Governmental Authority or arbitrator, or (z) any agreement or instrument to which such Guarantor is a party or by which it or any of its Properties is bound or subject which could result in a Material Adverse Event, or (ii) constitute a default under any such agreement or instrument which could result in a Material Adverse Event, or result in the creation or imposition of any Lien upon any of the revenues or assets of such Guarantor;

(f) the governing body of such Guarantor, acting pursuant to a duly called and constituted meeting, after proper notice, or pursuant to a valid unanimous consent, has determined that (i) such Guarantor has received, or will receive, direct or indirect benefit from the Obligations and the making of this Guaranty, and (ii) this Guaranty is in the best interests of such Guarantor; and

(g) such Guarantor (i) is duly incorporated or organized, as the case may be, validly existing, and in good standing under the Laws of the jurisdiction of its incorporation or organization , (ii) h as all requisite power and authority to own its assets and carry on its business as now being or as proposed to be conducted, and (iii) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify could result in a Material Adverse Event, and (iv) has the power and authority to execute, deliver and perform its obligations under this Guaranty and the other Loan Documents to which it is or may become a party.

10. Covenants of Guarantors . So long as the Credit Agreement is in effect and until the Release Date, unless compliance has been waived in writing by Administrative Agent, each Guarantor will

(a) promptly give written notice to Administrative Agent of (i) any action, proceeding or claim of which such Guarantor may have notice, which may be commenced or asserted against such Guarantor or relate to this Guaranty and (ii) any dispute which may exist between such Guarantor and any Governmental Authority, which in either case may substantially affect the properties and assets of such Guarantor;

(b) pay or discharge at or before maturity or before becoming delinquent (i) all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its Property, and (ii) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its Property; provided, however , such Guarantor shall not be required to pay or discharge any tax, levy, assessment, or governmental charge which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves in accordance with GAAP have been established ;

(c) allow any representative of Administrative Agent or any Lender to visit and inspect any of its Properties and to examine its books and records in accordance with Section 7.6 of the Credit Agreement;

UNCONDITIONAL GUARANTY – Page 6

(d) not wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation unless permitted by Section 8.3 of the Credit Agreement; and

(e) not Dispose of any of its assets, except in accordance with Section 8.8 of the Credit Agreement.

11. Setoff . If an Event of Default exists, Administrative Agent and each Guaranteed Party shall have the right to set off against the Obligations, at any time and without prior notice to any Guarantor (but in any event in accordance with Section 4.3 of the Credit Agreement), any and all deposits (general or special, time or demand, provisional or final) or other sums at any time credited by or owing from Administrative Agent or such Guaranteed Party to such Guarantor whether or not the Obligations under the Loan Documents are then due and irrespective of whether or not such Guaranteed Party shall have made demand under this Guaranty or any other Loan Document and although such Obligations may be contingent or unmatured or denominated in a currency different from that of the applicable deposit or indebtedness. Each Guaranteed Party agrees promptly to notify the affected Guarantor and Administrative Agent after any such set-off and application made by such Guaranteed Party; provided , however , that the failure to give such notice shall not affect the validity of such set-off and application.

12. Costs and Expenses . Guarantors jointly and severally agree to pay to Administrative Agent and the Guaranteed Parties, upon demand, all documented out-of-pocket costs and expenses, including attorneys' fees, that may be incurred by Administrative Agent and the Guaranteed Parties in attempting to cause the Obligations to be satisfied or in attempting to cause satisfaction of Guarantors' liability under this Guaranty.

13. Exercising Rights, Etc . No notice to or demand upon any Guarantor in any case shall, of itself, entitle such Guarantor or any other Guarantor to any other or further notice or demand in similar or other circumstances. No delay or omission by Administrative Agent in exercising any power or right hereunder shall impair such right or power or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such power preclude other or further exercise thereof, or the exercise of any other right or power hereunder.

14. Reference to Credit Agreement; Incorporation of Certain Provisions by Reference. Reference is hereby made to the representations, warranties and covenants of the Borrower set forth in Articles 6, 7, and 8 of the Credit Agreement which are incorporated herein by reference for all purposes. Each Guarantor (a) reaffirms that each such representation and warranty is true and correct in every material respect with respect to such Guarantor to the extent that such representation and warranty refers to such Guarantor, and (b) agrees, with respect to the covenants, to take, or refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Default or Event of Default is caused by the failure to take such action or to refrain from taking such action by such Guarantor or any of its Subsidiaries. Further, the provisions of Section 12.12 of the Credit Agreement captioned "Governing Law; Venue; Service of Process" and Section 12.18 of the Credit Agreement captioned "WAIVER OF JURY TRIAL" are incorporated herein by reference for all purposes. If the Credit Agreement shall cease to remain in effect for any reason whatsoever during any period and any part of the Obligations remain unpaid, then the terms, covenants, and agreements set forth therein applicable to the Guarantors shall nevertheless continue in full force and effect as obligations of each Guarantor under this Guaranty.

15. Notices . All notices and other communications provided for herein shall be in writing and shall be delivered in accordance with Section 12.11 of the Credit Agreement as follows:

(a) if to Guarantors, at their addresses set forth on the signature pages hereof; and

(b) if to Administrative Agent, as provided in Schedule 12.11 of the Credit Agreement.

UNCONDITIONAL GUARANTY – Page 7

16. Benefit; Binding Effect . This Guaranty shall inure to the benefit of Administrative Agent and each other Guaranteed Party and their respective successors and assigns, and to any interest in any of the Obligations. All of the obligations of Guarantors arising hereunder shall be jointly and severally binding on each of the Persons signing this Guaranty, and their respective successors and assigns ( provided, however , that no Guarantor may, without the prior written consent of Administrative Agent, in each instance, assign or delegate any of its rights, powers, duties or obligations hereunder, and any attempted assignment or delegation made without Administrative Agent's prior written consent shall be void ab initio and of no force or effect).

17. Entirety and Amendments . This Guaranty embodies the entire agreement between the parties and supersedes all prior agreements, conditions, and understandings, if any, relating to the subject matter hereof and thereof, and this Guaranty may be amended only by an instrument in writing executed by Guarantors, Administrative Agent (with the requisite consent, if any, of the Required Lenders or all Lenders in accordance with the Credit Agreement).

18. Counterparts . This Guaranty may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Guaranty and all of which, when taken together, will be deemed to constitute one and the same Guaranty. Delivery of an executed counterpart of a signature page of this Guaranty by facsimile or other electronic imaging means (e.g. "pdf" or "tif") shall be effective as delivery of a manually executed counterpart of this Guaranty.

19. Multiple Guarantors . It is specifically agreed that Administrative Agent may enforce the provisions hereof with respect to one or more Guarantors without seeking to enforce the same as to all or any Guarantors. If one or more additional guaranty agreements (" Other Guaranties ") are executed by one or more additional guarantors (" Other Guarantors "), which guarantee, in whole or in part, any of the Obligations, it is specifically agreed that Administrative Agent may enforce the provisions of this Guaranty or of the Other Guaranties with respect to one or more of the Guarantors or any one or more of the Other Guarantors under the Other Guaranties without seeking to enforce the provisions of this Guaranty or the Other Guaranties as to all or any of the Guarantors or the Other Guarantors. Each Guarantor hereby waives any requirement of joinder of all or any other Guarantor or all or any of the Other Guarantors in any suit or proceeding to enforce the provisions of this Guaranty or of the Other Guaranties. The liability hereunder of all Guarantors hereunder shall be joint and several.

20. Additional Guarantors . From time to time subsequent to the date hereof, additional Persons may become parties hereto as additional Guarantors (each, an " Additional Guarantor "), by executing a joinder agreement in the form of Exhibit A hereto (each, a " Joinder Agreement "). Upon delivery of any such Joinder Agreement to Administrative Agent, notice of which is hereby waived by Guarantors, each Additional Guarantor shall be a Guarantor and shall be as fully a party hereto as if Additional Guarantor were an original signatory hereto. Each Guarantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Guarantor hereunder, nor by any election of Administrative Agent not to cause any Subsidiary of Borrower to become an Additional Guarantor hereunder. This Guaranty shall be fully effective as to any Guarantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Guarantor hereunder.

UNCONDITIONAL GUARANTY – Page 8

21. Maximum Liability. Anything in this Guaranty to the contrary notwithstanding, the obligations of each Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable Law (collectively, the " Fraudulent Transfer Laws "), in each case after giving effect to all other liabilities of such Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of such Guarantor in respect of intercompany indebtedness to other Obligated Parties or Affiliates of other Obligated Parties to the extent that such indebtedness would be discharged in an amount equal to the amount paid or property conveyed by such Guarantor under the Loan Documents) and after giving effect as assets, subject to Section 7, to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation or contribution of such Guarantor pursuant to (a) applicable Law or (b) any agreement providing for an equitable allocation among such Guarantor and other Obligated Parties of obligations arising under the Loan Documents and Bank Product Agreements.

22. ENTIRE AGREEMENT . THIS GUARANTY AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

[Remainder of Page Intentionally Left Blank; Signature Pages Follow]

UNCONDITIONAL GUARANTY – Page 9

IN WITNESS WHEREOF, Guarantors, intending to be jointly and severally legally bound hereby, have executed this Guaranty as of the date and year first above written.

	NYTIS EXPLORATION COMPANY LLC

	By:	Nytis Exploration (USA) Inc.,
		its sole Manager

	By:
		Patrick R. McDonald
		Chief Executive Officer

	Address:

	2480 Fortune Drive, Suite 300
	Lexington, Kentucky 40509

	NYTIS EXPLORATION (USA) INC.

	By:
		Patrick R. McDonald
		Chief Executive Officer

	Address:

	1700 Broadway, Suite 1170
	Denver, Colorado 80290

UNCONDITIONAL GUARANTY – Signature Page

EXHIBIT A

Form of Guaranty Joinder Agreement

JOINDER AGREEMENT

THIS JOINDER AGREEMENT (this " Joinder Agreement ") is entered into as of ______________, 20___, by the undersigned (" Additional Guarantor "), in favor of LEGACYTEXAS BANK, for the benefit of the Guaranteed Parties (in such capacity, " Administrative Agent ").

WHEREAS, CARBON NATURAL GAS COMPANY, a Delaware corporation (" Borrower "), Administrative Agent and the Lenders party thereto have entered into that certain Credit Agreement dated as of October 3, 2016 (as the same has been or may be amended, restated or modified from time to time, the " Credit Agreement "); and

WHEREAS, pursuant to the Credit Agreement, certain Subsidiaries of Borrower entered into that certain Unconditional Guaranty dated as of October 3, 2016 (as the same has been or may be amended, restated or modified from time to time, the " Guaranty ") in favor of Administrative Agent for the benefit of the Guaranteed Parties, in order to, among other things, induce the Guaranteed Parties to make the loans and other financial accommodations provided for in the Credit Agreement and Bank Product Agreements; and

WHEREAS, Additional Guarantor is a Subsidiary of Borrower, and Additional Guarantor desires that the Lenders extend credit to Borrower as contemplated by the Credit Agreement, and Additional Guarantor will directly or indirectly benefit from the use of the loan proceeds by Borrower for the purposes for which the credit is being extended pursuant to the Credit Agreement; and

WHEREAS, Additional Guarantor, by and through the action of its governing body, has determined that it may reasonably be expected to benefit, directly or indirectly, from guarantying the Obligations (as defined in the Credit Agreement), all as provided therein;

ACCORDINGLY, Additional Guarantor hereby agrees with Administrative Agent as follows:

1. Definitions . All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Guaranty.

2. Party to Guaranty . Additional Guarantor hereby acknowledges, agrees and confirms that, by its execution of this Joinder Agreement, Additional Guarantor will be deemed to be a party to the Guaranty and a "Guarantor" for all purposes of the Guaranty, and shall have all of the obligations of a Guarantor thereunder as if it had executed the Guaranty. Additional Guarantor hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to Guarantors contained in the Guaranty. Without limiting the generality of the foregoing terms of this Section 2 , Additional Guarantor hereby, jointly and severally with the other Guarantors, unconditionally, absolutely and irrevocably guarantees to the Guaranteed Parties, as provided in the Guaranty, the due and punctual payment at maturity, whether by acceleration or otherwise, and the due fulfillment and performance of the Obligations. Additional Guarantor is jointly and severally liable for the full payment and performance of the Obligations as a primary obligor.

3. Address for Notice Purposes . The address of Additional Guarantor for purposes of all notices and other communications is set forth on the signature page hereof.

EXHIBIT A – Form of Guaranty Joinder Agreement – Page 1

4. Waiver of Acceptance . Additional Guarantor hereby waives acceptance by Administrative Agent and the Guaranteed Parties of the guaranty by Additional Guarantor under the Guaranty upon the execution of this Joinder Agreement by Additional Guarantor.

5. Representations and Warranties . Additional Guarantor hereby represents and confirms that the representations and warranties set forth in the Guaranty and in the Credit Agreement which are applicable to Guarantors are true and correct with respect to Additional Guarantor on and as of the date hereof (and after giving effect hereto), as if set forth herein in their entirety.

6. Severability . Any provision of this Joinder Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Joinder Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal.

7. Counterparts . This Joinder Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Joinder Agreement shall become effective when it shall have been executed by Administrative Agent and when Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Joinder Agreement by facsimile or other electronic imaging means (e.g. "pdf" or "tif") shall be effective as delivery of a manually executed counterpart of this Joinder Agreement.

8. Governing Law . This Joinder Agreement and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Joinder Agreement and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the law of the State of Texas (without reference to applicable rules of conflicts of laws).

9. L oan Document . This Joinder Agreement is a Loan Document for all purposes and each reference in any Loan Document to the Guaranty shall mean the Guaranty as supplemented by this Joinder Agreement.

10. ENTIRE AGREEMENT . THIS JOINDER AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Remainder of Page Intentionally Left Blank; Signature Pages Follow]

EXHIBIT A – Form of Guaranty Joinder Agreement – Page 2

IN WITNESS WHEREOF, the undersigned Additional Guarantor and Administrative Agent have executed this Joinder Agreement as of the date first above written.

	ADDITIONAL GUARANTOR:

	By:
	Name:
	Title:

	Address:



	Facsimile:

EXHIBIT A – Form of Guaranty Joinder Agreement – Signature Page

	ACCEPTED BY: LEGACYTEXAS BANK, as Administrative Agent

	By:
	Name:
	Title:

EXHIBIT A – Form of Guaranty Joinder Agreement – Signature Page

Exhibit 10.1B

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (this agreement, together with all amendments and restatements and Joinders, this " Agreement "), dated as of October 3, 2016, is made by CARBON NATURAL GAS COMPANY, a Delaware corporation (" Borrower "), NYTIS EXPLORATION COMPANY LLC, a Delaware limited liability company, NYTIS EXPLORATION (USA) INC., a Delaware corporation, each of the other signatories party hereto and each other Person who becomes a party hereto pursuant to Section 6.15 (together with Borrower and including any permitted successors and assigns, collectively, the " Debtors " and each a " Debtor "), in favor of LEGACYTEXAS BANK, as administrative agent for the benefit of each of the Secured Parties (in such capacity, " Administrative Agent ").

BACKGROUND .

Borrower, the lenders from time to time party thereto (the " Lenders "), and LegacyTexas Bank, as Administrative Agent and L/C Issuer, have entered into the Credit Agreement dated as of the date hereof (such agreement, together with all amendments and restatements, the " Credit Agreement ").

Borrower and each other Debtor are members of the same affiliated group of companies and are engaged in operations which require financing on a basis in which credit can be made available from time to time to Borrower and the other Debtors, and Debtors will derive direct and indirect economic benefit from the Loans, Letters of Credit and other financial accommodations under the Credit Agreement and other Loan Documents and financial accommodations under Bank Product Agreements.

It is the intention of the parties hereto that this Agreement create a first priority security interest in the Collateral in favor of Administrative Agent for the benefit of the Secured Parties securing the payment and performance of the Obligations.

AGREEMENT .

NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce Secured Parties to (a) make Loans and issue Letters of Credit under the Credit Agreement and to extend other credit and financial accommodations under the Loan Documents, and (b) make financial accommodations under Bank Product Agreements, each Debtor hereby agrees with Administrative Agent, for the benefit of Secured Parties, as follows:

ARTICLE I
DEFINITIONS

1.01. Definitions . For purposes of this Agreement:

" Accession " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to an accession (as defined in the UCC), and (whether or not included in that definition), a good that is physically united with another good in such a manner that the identity of the original good is not lost.

" Account " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to an account (as defined in the UCC), and (whether or not included in such definition), a right to payment of a monetary obligation, whether or not earned by performance for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, and for service rendered or to be rendered, and all right, title, and interest in any returned property, together with all rights, titles, securities, and guarantees with respect thereto, including any rights to stoppage in transit, replevin, reclamation, and resales, and all related Liens whether voluntary or involuntary.

" Account Debtor " means any Person who is or who may become obligated to each Debtor under, with respect to or on account of an Account.

" Acquisition Rights " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to each warrant, option, instrument, subscription right, redemption right and other right (including any instrument or right convertible into an Equity Interest) to acquire or sell any Equity Interest in any Person.

" As-Extracted Collateral " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to as-extracted collateral (as defined in the UCC), and (whether or not included in that definition), (a) oil, gas, or other minerals that are subject to a security interest that (i) is created by such Debtor before extraction, and (ii) attaches to the minerals as extracted, or (b) Accounts arising out of the sale at the wellhead or minehead of oil, gas, or other minerals in which such Debtor had an interest before extraction.

" Chattel Paper " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to chattel paper (as defined in the UCC), and (whether or not included in such definition), a Record or Records that evidence both a monetary obligation and a security interest in specific Goods, a security interest in specific Goods and Software used in the Goods, or a lease of specific Goods. "Chattel Paper" includes Electronic Chattel Paper and Tangible Chattel Paper.

" Collateral " has the meaning specified in Section 2.01 .

" Collateral Records " means books, records, ledger cards, files, correspondence, customer lists, blueprints, technical specifications, manuals, computer software, computer printouts, tapes, disks and related data processing software and similar items that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon.

" Commercial Tort Claim " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a commercial tort claim (as defined in the UCC), and (whether or not included in such definition), all claims arising in tort with respect to which the claimant (a) is an organization, or (b) an individual and the claim (i) arose in the course of the claimant's business or profession, and (ii) does not include damages arising out of personal injury to or the death of an individual.

" Commodity Account " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a commodity account (as defined in the UCC), and (whether or not included in such definition), an account maintained by a Commodity Intermediary in which a Commodity Contract is carried for such Debtor.

" Commodity Contract " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a commodity futures contract, an option on a commodity futures contract, a commodity option, or any other contract if the contract or option is (a) traded on or subject to the rules of a board of trade that has been designated as a contract market for such a contract pursuant to the federal commodities Laws, or (b) traded on a foreign commodity board of trade, exchange, or market, and is carried on the books of a Commodity Intermediary for such Debtor.

Security agreement–Page 2

" Commodity Intermediary " means (a) a Person that is registered as a futures commission merchant under the federal commodities Laws or (b) a Person that in the ordinary course of its business provides clearance or settlement services for a board of trade that has been designated as a contract market pursuant to federal commodities Laws.

" Copyright License " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to any written agreement, now or hereafter in effect, granting any right to any third party under any Copyright now or hereafter owned by such Debtor or which such Debtor otherwise has the right to license, or granting any right to such Debtor under any Copyright now or hereafter owned by any third party, and all rights of such Debtor under any such agreement.

" Copyrights " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to (a) all copyright rights in any work subject to the copyright Laws of any Governmental Authority, whether as author, assignee, transferee, or otherwise, (b) all registrations and applications for registration of any such copyright in any Governmental Authority, including registrations, recordings, supplemental registrations, and pending applications for registration in any jurisdiction, and (c) all rights to use and/or sell any of the foregoing.

" Deposit Account " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a deposit account (as defined in the UCC), and (whether or not included in such definition), a demand, time, savings, passbook, or similar account maintained at a bank (as defined in the UCC).

" Document " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a document (as defined in the UCC), and (whether or not included in such definition), a document of title, bill of lading, dock warrant, dock receipt, warehouse receipt, or order for the delivery of Goods.

" Electronic Chattel Paper " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to electronic chattel paper (as defined in the UCC), and (whether or not included in such definition), chattel paper evidenced by a Record or Records consisting of information stored in electronic medium.

" Entitlement Holder " means a Person identified in the records of a Securities Intermediary as the Person having a Security Entitlement against the Securities Intermediary. If a Person acquires a Security Entitlement by virtue of § 8.501(b)(2) or (3) of the UCC, such Person is the Entitlement Holder.

" Equipment " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to equipment (as defined in the UCC), and (whether or not included in such definition), all Goods other than Inventory or consumer goods, and all improvements, accessions, or appurtenances thereto.

" Equity Interests " means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests, other than a net profits based bonus program solely for the benefit of employees, in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.

Security agreement–Page 3

" Event of Default " has the meaning provided in Section 5.03 .

" Farm Products " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to all farm products (as defined in the UCC), and (whether or not included in such definition), Goods (other than standing timber) with respect to which a Person is engaged in raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquiculture operation, and which are (a) crops grown, growing, or to be grown including (i) crops produced on trees, vines, and bushes, and (ii) aquatic goods produced in aquacultural operations; (b) livestock born or unborn, including aquatic goods produced in aquacultural operations; (c) supplies used or produced in a farming operation; or (d) products of crops or livestock in their unmanufactured states.

" Financial Asset " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a financial asset (as defined in the UCC), and (whether or not included in such definition), (a) a Security, (b) an obligation of a Person or a share, participation or other interest in a Person or in property or an enterprise of a Person, that is, or is of a type, dealt in or traded on financial markets or that is recognized in any area in which it is issued or dealt in as a medium for investment, or (c) any property that is held by a Securities Intermediary for another Person in a Securities Account if the Securities Intermediary has expressly agreed with the other Person that the property is to be treated as a financial asset under Chapter 8 of the UCC. As the context requires, "Financial Asset" means either the interest itself or the means by which a Person's claim to it is evidenced, including a certificated or uncertificated Security, a certificate representing a Security, or a Security Entitlement.

" Fixtures " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to fixtures (as defined in the UCC), and (whether or not included in such definition), all Goods that have become so related to particular real property that an interest in them arises under the real property Law of the state in which the real property is situated.

" Foreign Subsidiary " means any Subsidiary of any Person that is organized under the Laws of a jurisdiction other than the United States or a political subdivision of the United States.

" General Intangible " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a general intangible (as defined in the UCC), and (whether or not included in such definition), all personal property, including things in action, other than Accounts, Chattel Paper, Commercial Tort Claims, Deposit Accounts, Documents, Goods, Instruments, Investment Property, Letter-of-Credit Rights, Letters of Credit, money, and oil, gas or other minerals before extraction.

" Goods " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to goods (as defined in the UCC), and (whether or not included in such definition), all things that are movable when a security interest attaches.

" Instrument " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to an instrument (as defined in the UCC), and (whether or not included in such definition), a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment.

Security agreement–Page 4

" Insurance " means all insurance policies for which each Debtor is the owner, an insured, an additional insured, a beneficiary or loss payee, including any policy covering any or all of the Collateral (regardless of whether Administrative Agent is the loss payee or an additional insured thereof).

" Intellectual Property " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to all intellectual and similar property of every kind and nature, including inventions, designs, Patents, Copyrights, Licenses, Trademarks, Trade Secrets, confidential or proprietary technical and business information, know-how, show-how or other data or information, Software and databases and all embodiments or fixations thereof and related documentation, registrations and franchises, and all additions, improvements and accessions to, and books and records describing or used in connection with, any of the foregoing.

" Inventory " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to inventory (as defined in the UCC), and (whether or not included in such definition), Goods that (a) are leased by a Person as lessor, (b) are held by a Person for sale or lease or to be furnished under a contract of service, (c) are furnished by a Person under a contract of service, or (d) consist of raw materials, work in process, or materials used or consumed in a business, including packaging materials, scrap material, manufacturing supplies and spare parts, and all such Goods that have been returned to or repossessed by or on behalf of such Person.

" Investment Property " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to investment property (as defined in the UCC), and (whether or not included in such definition), a Security (whether certificated or uncertificated), a Commodity Contract, a Commodity Account, a Security Entitlement and Securities Account.

" Joinder " means a Security Agreement Joinder in substantially the form of Exhibit A .

" Letter of Credit " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a letter of credit (as defined in the UCC).

" Letter-of-Credit Right " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a letter-of-credit right (as defined in the UCC), and (whether or not included in such definition), (a) a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance, and (b) the right of a beneficiary to demand payment or performance under a letter of credit.

" License " means any Patent License, Trademark License, Copyright License, or other similar license or sublicense.

" Money " means "money" as defined in the UCC.

" Patent License " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to any written agreement, now or hereafter in effect, granting to any third party any right to make, use or sell any invention on which a Patent, now or hereafter owned by such Debtor or which such Debtor otherwise has the right to license, is in existence, or granting to such Debtor any right to make, use or sell any invention on which a Patent, now or hereafter owned by any third party, is in existence, and all rights of such Debtor under any such agreement.

Security agreement–Page 5

" Patents " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to (a) all letters patent of any Governmental Authority, all registrations and recordings thereof, and all applications for letters patent of any Governmental Authority, and (b) all reissues, continuations, divisions, continuations-in-part, renewals, or extensions thereof, and the inventions disclosed or claimed therein, including the right to make, use and/or sell the inventions disclosed or claimed therein.

" Payment Intangible " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a payment intangible (as defined in the UCC), and (whether or not included in such definition), a General Intangible under which the Account Debtor's principal obligation is a monetary obligation.

" Permit " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to any authorization, consent, approval, permit, license or exemption of, registration or filing with, or report or notice to, any Governmental Authority.

" Pledged Debt " means all indebtedness owed to each Debtor, the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness.

" Pledged Equity Interests " means all Acquisition Rights, Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests and Pledged Trust Interests; provided , however , notwithstanding anything herein to the contrary, the amount of pledged Equity Interests of any Foreign Subsidiary shall be limited to 65% of the issued and outstanding Equity Interests of such Foreign Subsidiary.

" Pledged LLC Interests " means, with respect to each Debtor, all interests of such Debtor in any limited liability company and the certificates, if any, representing such limited liability company interests and any limited liability company interest of such Debtor on the books and records of such limited liability company or on the books and records of any securities intermediary pertaining to each such limited liability company interest, and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such limited liability company interests; provided , however , notwithstanding anything herein to the contrary, the amount of pledged limited liability company interests of any Foreign Subsidiary shall be limited to 65% of the issued and outstanding limited liability company interests of such Foreign Subsidiary.

" Pledged Partnership Interests " means, with respect to each Debtor, all interests of such Debtor in any general partnership, limited partnership, limited liability partnership or other partnership and the certificates, if any, representing such partnership interests and any partnership interest of such Debtor on the books and records of each such partnership or on the books and records of any securities intermediary pertaining to such partnership interests and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such partnership interests; provided , however , notwithstanding anything herein to the contrary, the amount of pledged general partnership, limited partnership, limited liability partnership or other partnership interests of any Foreign Subsidiary shall be limited to 65% of the issued and outstanding general partnership, limited partnership, limited liability partnership or other partnership interests of such Foreign Subsidiary.

" Pledged Stock " means, with respect to each Debtor, all shares of capital stock of such Debtor in any corporation and the certificates, if any, representing such shares and any equity interest of such Debtor on the books of the issuer of such shares or on the books of any securities intermediary pertaining to such shares, and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; provided , however , notwithstanding anything herein to the contrary, the amount of pledged capital stock of any Foreign Subsidiary shall be limited to 65% of the issued and outstanding capital stock of such Foreign Subsidiary.

Security agreement–Page 6

" Pledged Trust Interests " means, with respect to each Debtor, all interests of such Debtor in a business trust or other trust and the certificates, if any, representing such trust interests and any interest of such Debtor on the books and records of such trust or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such trust interests.

" Proceeds " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to proceeds (as defined in the UCC), and (whether or not included in such definition), (a) whatever is acquired upon the sale, lease, license, exchange, or other disposition of the Collateral, (b) whatever is collected on, or distributed on account of, the Collateral, (c) rights arising out of the Collateral, (d) claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to the Collateral, (e) proceeds of insurance, including insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to the Collateral, and (f) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral.

" Record " means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

" Release Date " means the last to occur of the dates on which Liens securing the Obligations may be released pursuant to Section 11.9(a)(i) of the Credit Agreement.

" Schedule Effective Date " means, with respect to any Schedule to this Agreement, the effective date of such Schedule or any restatement of such Schedule, which effective date shall be stated on such Schedule or restatement and agreed to by Administrative Agent as provided in Section 4.16 .

" Secured Parties " means the collective reference to Administrative Agent, each Lender, L/C Issuer, each Bank Product Provider and any other Person the Obligations owing to which are, or are purported to be, secured by the Collateral under the terms hereof.

" Securities Account " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to an account to which a Financial Asset is or may be credited in accordance with an agreement under which the Person maintaining the account undertakes to treat the Person for whom the account is maintained as entitled to exercise rights that comprise the Financial Asset.

" Securities Act " has the meaning provided in Section 5.04(d) .

" Securities Intermediary " means (a) a clearing corporation, or (b) a Person, including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity.

" Security " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to any obligations of an issuer or any shares, participations or other interests in an issuer or in property or an enterprise of an issuer which (a) are represented by a certificate representing a security in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer, (b) are one of a class or series or by its terms is divisible into a class or series of shares, participations, interests or obligations, and (c)(i) are, or are of a type, dealt with or traded on securities exchanges or securities markets or (ii) are a medium for investment and by their terms expressly provide that they are a security governed by Chapter 8 of the UCC.

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" Security Entitlements " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to the rights and property interests as and of an Entitlement Holder with respect to a Financial Asset.

" Software " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to software (as defined in the UCC), and (whether or not included in such definition), a computer program (including both source and object code) and any supporting information provided in connection with a transaction relating to the program.

" Supporting Obligations " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to a supporting obligation (as defined in the UCC), and whether or not included in such definition, a Letter-of-Credit Right or secondary obligation that supports the payment or performance of an Account, Chattel Paper, a Document, a General Intangible, an Instrument, or Investment Property.

" Tangible Chattel Paper " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to tangible chattel paper (as defined in the UCC), and (whether or not included in such definition), chattel paper evidenced by a Record or Records consisting of information that is inscribed on a tangible medium.

" Trade Secrets " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to trade secrets, all know-how, inventions, processes, methods, information, data, plans, blueprints, specifications, designs, drawings, engineering reports, test reports, materials standards, processing standards and performance standards, and all Software directly related thereto, and all Licenses or other agreements to which such Debtor is a party with respect to any of the foregoing.

" Trademark License " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to any written agreement, now or hereafter in effect, granting to any third party any right to use any Trademark now or hereafter owned by such Debtor or which such Debtor otherwise has the right to license, or granting to such Debtor any right to use any Trademark now or hereafter owned by any third party, and all rights of such Debtor under any such agreement.

" Trademarks " means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to (a) all trademarks, service marks, trade names, corporate names, company names, business names, fictitious business names, trade styles, trade dress, logos, other source or business identifiers, designs and general intangibles of like nature, all registrations and recordings thereof, and all registration and recording applications filed with any Governmental Authority in connection therewith, and all extensions or renewals thereof, (b) all goodwill associated therewith or symbolized thereby, (c) all other assets, rights and interests that uniquely reflect or embody such goodwill, (d) all rights to use and/or sell any of the foregoing, and (e) the portion of the business to which each trademark pertains.

" UCC " means Chapters 1, 8 and 9 of the Uniform Commercial Code as in effect from time to time in the State of Texas or, where applicable as to specific items or types of Collateral, any other relevant state.

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1.02. Other Definitional Provisions . Capitalized terms not otherwise defined herein have the meaning specified in the Credit Agreement, and, to the extent of any conflict, terms as defined herein shall control ( provided , that a more expansive or explanatory definition shall not be deemed a conflict).

1.03. Construction . Unless otherwise expressly provided in this Agreement or the context requires otherwise, (a) the singular shall include the plural, and vice versa , (b) words of a gender include the other gender, (c) monetary references are to Dollars, (d) time references are to central time, (e) references to the "Agreement" and to "Articles," "Sections," "Exhibits," and "Schedules" are to this Agreement and to the Articles, Sections, Exhibits, and Schedules of and to this Agreement, together with all amendments and restatements thereto, (f) headings used in this Agreement are for convenience only and shall not be used in connection with the interpretation of any provision hereof, (g) references to any Person include that Person's heirs, personal representatives, successors, trustees, receivers, and permitted assigns, that Person as a debtor-in possession, and any receiver, trustee, liquidator, conservator, custodian, or similar party appointed for such Person or all or substantially all of its assets, (h) references to any Law include every amendment or restatement to it, rule and regulation adopted under it, and successor or replacement for it, (i) references to a particular Loan Document include each amendment or restatement to it made in accordance with the Credit Agreement and such Loan Document, (j) references to a particular Bank Product Agreement include each amendment or restatement to it made in accordance with such Bank Product Agreement, and (k) the inclusion of Proceeds in the definition of "Collateral" shall not be deemed a consent by Administrative Agent or any other Secured Party to any sale or other disposition of any Collateral not otherwise specifically permitted by the terms of the Credit Agreement or this Agreement. This Agreement is a Loan Document.

ARTICLE II
GRANT OF SECURITY INTEREST

2.01. Assignment and Grant of Security Interest . As security for the payment and performance, as the case may be, in full of the Obligations, each Debtor hereby assigns, pledges and grants to Administrative Agent, for it and the benefit of Secured Parties, a security interest in the entire right, title, and interest of such Debtor in and to all property of such Debtor, whether now or hereafter existing, owned, arising or acquired, including all of the following property of such Debtor, whether now or hereafter existing, owned, arising or acquired: (a) Accounts, (b) Accessions, (c) As-Extracted Collateral, (d) Chattel Paper, (e) Collateral Records, (f) Commercial Tort Claims, including but not limited to the specific Commercial Tort Claims described on Schedule 6 , (g) Commodity Accounts, (h) Commodity Contracts, (i) Deposit Accounts, (j) Documents, (k) Equipment, (l) Financial Assets, (m) Fixtures, (n) General Intangibles, (o) Goods, (p) Instruments, (q) Insurance, (r) Intellectual Property, (s) Inventory, (t) Investment Property, (u) Letters of Credit, (v) Letter-of-Credit Rights, (w) Licenses, (x) Money, (y) Payment Intangibles, (z) Permits, (aa) Pledged Debt, (bb) Pledged Equity Interests, (cc) Securities, (dd) Securities Accounts, (ee) Security Entitlements, (ff) Software, (gg) Supporting Obligations, and (hh) Proceeds of the foregoing (collectively, the " Collateral ").

2.02. Debtors Remain Liable . Anything herein to the contrary notwithstanding, (a) each Debtor shall remain liable with respect to and under all Collateral, (b) the exercise by Administrative Agent or any other Secured Party of any of the rights hereunder shall not release any Debtor from any of its duties or obligations with respect to or under any Collateral or under this Agreement, and (c) neither Administrative Agent nor any other Secured Party shall have any obligation or liability with respect to or under any Collateral by reason of this Agreement, nor shall Administrative Agent or any other Secured Party be obligated to perform any of the obligations or duties of any Debtor thereunder or to take any action to collect or enforce any claim for payment assigned or in which a security interest is granted hereunder.

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2.03. Rights Retained by Debtor . So long as no Event of Default shall have occurred and be continuing and the Borrower has not received notice from the Administrative Agent terminating such rights, the Debtors shall be entitled (a) to receive and retain all revenues and other moneys pledged hereby as Collateral and the proceeds of any Disposition of any of its Properties constituting Collateral provided that such Disposition is permitted under the Credit Agreement, and (b) protect, enforce and exercise its rights under any contracts; provided that the Debtors shall not exercise nor shall any Debtor refrain from exercising any such right if such action or inaction, as applicable, would have a materially adverse effect on the value of the applicable Collateral.

2.04. Delivery of Security and Instrument Collateral . All certificates, if any, or Instruments constituting or evidencing the Collateral shall be delivered to and held by or on behalf of Administrative Agent pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by undated and duly executed stock powers or instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Administrative Agent. If an Event of Default exists, Administrative Agent has the right without notice to any Debtor to transfer to or to register in the name of Administrative Agent or any of its nominees any or all of such Collateral. In addition, Administrative Agent has the right, if Administrative Agent reasonably determines that the exercise of such right is necessary to protect its rights, at any time to exchange certificates or Instruments representing or evidencing Collateral for certificates or Instruments of smaller or larger denominations.

2.05. Agreement With Respect to Collateral . Each Debtor and Administrative Agent agree that to the extent that any of the Collateral may be deemed to be a Fixture as opposed to Equipment, Inventory, or any other form of Collateral that may be perfected by the filing of a UCC financing statement, it is the intention of Debtors, Administrative Agent and Secured Parties that such Collateral be deemed to be Equipment, Inventory, or any other form of Collateral that, to the extent not prohibited by Law, may be perfected by the filing of a UCC financing statement and such Collateral not be deemed to be a Fixture.

2.06. Future Advances . Each Debtor acknowledges that the Loan Documents and each Bank Product Agreement provide for future advances and financial accommodations, and this Agreement secures performance of such future advances and financial accommodations.

2.07. Limited Exclusions . Notwithstanding anything herein to the contrary, in no event shall the security interest granted in Section 2.01 attach to any lease, license, contract, property rights or agreement to which a Debtor is a party or any of its rights or interests thereunder if and for so long as the grant of such security interest would constitute or result in the abandonment, termination pursuant to the terms of, or a breach or default under, any such lease, license, contract, property rights or agreement (other than to the extent that any such term would be rendered ineffective pursuant to Sections 9.406, 9.407, 9.408 or 9.409 of the UCC of any relevant jurisdiction or any other applicable Law (including any Debtor Relief Law) or principles of equity); provided , however , that such security interest shall attach immediately at such time as the condition causing such abandonment, invalidation or unenforceability shall be remedied and to the extent severable, shall attach immediately to any portion of such lease, license, contract, property rights or agreement that does not result in any of the consequences specified above. So long as any property of a Debtor is excluded from the security interest granted in Section 2.01 pursuant to the immediately preceding sentence, such property shall be excluded from the term "Collateral" for all purposes hereunder. If the grant of a security interest in any lease, license, contract, property right or agreement existing on the date of this Agreement to which a Debtor is a party, or in any of its rights or interests thereunder, would constitute or result in the abandonment, termination pursuant to the terms of, or a breach or default under, any such lease, license, contract, property right or agreement (other than to the extent that any such term is rendered ineffective pursuant to Sections 9.406, 9.407, 9.408 or 9.409 of the UCC of any relevant jurisdiction or any other applicable Law (including any Debtor Relief Law) or principles of equity), such Debtor shall use commercially reasonable efforts to remove such term from such lease, license, contract, property right or agreement at the time of the next amendment to, extension of or restatement of such lease, license, contract, property right or agreement. With respect to each lease, license, contract, property right or agreement entered into by a Debtor after the date of this Agreement, each Debtor shall use commercially reasonable efforts to assure that such Debtor can grant to Administrative Agent a security interest in such lease, license, contract, property right or agreement and that such security interest can be perfected and that such grant and perfection will not result in the abandonment, termination or breach of or default under, any such lease, license, contract, property right or agreement.

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2.08. Maximum Liability . Anything in this Agreement to the contrary notwithstanding, the obligations of each Debtor (other than Borrower) hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable Law (collectively, the " Fraudulent Transfer Laws "), in each case after giving effect to all other liabilities of such Debtor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of such Debtor in respect of intercompany indebtedness to other Obligated Parties or Affiliates of other Obligated Parties to the extent that such indebtedness would be discharged in an amount equal to the amount paid or property conveyed by such Debtor under the Loan Documents) and after giving effect as assets, subject to Section 6.01 , to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation or contribution of such Debtor pursuant to (a) applicable Law or (b) any agreement providing for an equitable allocation among such Debtor and other Obligated Parties of obligations arising under the Loan Documents and Bank Product Agreements.

ARTICLE III
REPRESENTATIONS AND WARRANTIES

3.01. Representations and Warranties – All Debtors . Each Debtor represents and warrants to Administrative Agent and each Secured Party with respect to itself and its Collateral that:

(a) This Agreement and the grant of the security interest in the Collateral pursuant to this Agreement create a valid security interest in the Collateral in favor of Administrative Agent for the benefit of Secured Parties, securing the payment and performance of the Obligations, and upon (i) the filing of UCC-1 financing statements for such Debtor, in the form delivered by such Debtor to Administrative Agent on or prior to the date of this Agreement and in the appropriate filing offices listed on Schedule 1 , Section (h) , (ii) the granting of control (as defined in the UCC) to Administrative Agent, (iii) the delivery to and continuing possession by Administrative Agent of all certificates evidencing the Pledged Equity Interests, and (iv) the filing of an appropriate notice with the United States Patent and Trademark office or the United States Copyright Office, as appropriate for the item and type of Collateral in question, shall constitute a valid, first priority, perfected security interest in such Collateral (subject (A) in the case of Collateral other than Pledged Equity Interests, to Permitted Liens, and (B) in the case of Pledged Equity Interests, to Liens arising under the Loan Documents and Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of such Debtor in accordance with GAAP) to the extent such security interests can be perfected by taking the actions described in clauses (i) - (iv) , and all filings and other actions necessary to perfect and protect such security interest and such priority have been duly taken (or will be taken upon such Debtor obtaining rights in Collateral after the date hereof).

(b) No authorization, approval, or consent of, and no filing or registration with, any Governmental Authority, issuer, manager, member, stockholder, director or any other third party (other than filings required by the UCC or such authorization, approval, or consent that has already been obtained) is or will be necessary (i) for the pledge by such Debtor of the Collateral, including without limitation, the Pledged Equity Interests set forth on Schedule 7 , pledged by it hereunder, for the grant by such Debtor of the security interest granted hereby, or for the execution, delivery, or performance of this Agreement by such Debtor, (ii) for the perfection or maintenance of the pledge, assignment, and security interest created hereby (including the first priority nature of such pledge, assignment, and security interest, subject to Permitted Liens) or (iii) for the enforcement of remedies by Administrative Agent or any other Secured Party.

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(c) This Agreement constitutes, and the other Loan Documents to which such Debtor is a party, when delivered, shall constitute, legal, valid and binding obligations of such Debtor, enforceable against such Debtor in accordance with their respective terms, except as limited by Debtor Relief Laws.

(d) Such Debtor has good and indefeasible title to, or valid leasehold interests in, all of the Collateral, and none of the Collateral is subject to any Lien, except for Permitted Liens. Such Debtor has not granted a security interest or other Lien in or made an assignment of any of the Collateral (except for the security interest and Lien granted by this Agreement and Permitted Liens). Such Debtor has neither entered into nor is it or any of its Property subject to any agreement limiting the ability of such Debtor to grant a Lien in any of the Collateral, or the ability of such Debtor to agree to grant or not grant a Lien in any of the Collateral. None of the Collateral is consigned goods, subject to any agreement of repurchase, or subject to any dispute, defense, or counterclaim. No effective financing statement or other similar effective document used to perfect and preserve a security interest or other Lien under the Laws of any jurisdiction covering all or any part of the Collateral is on file in any recording office, except such as may have been filed (i) pursuant to this Agreement or another Loan Document, or (ii) relating to Permitted Liens. Such Debtor has not sold any interest in any of its Accounts, Chattel Paper, promissory notes, Payment Intangibles, or consigned any of its Goods or been a party to any securitization of any of its property. No control agreement in favor of anyone other than Administrative Agent exists with respect to any Collateral.

(e) All of the Pledged Equity Interests have been duly and validly issued, and the Pledged Equity Interests (other than any general partner interest, if any), are fully paid and non-assessable. None of the Pledged Equity Interests were issued in violation of the preemptive rights of any Person or any agreement to which such Debtor or the issuer thereof is a party or the Pledged Equity Interest is subject. All capital contributions required to be made by the terms of the Constituent Documents of each issuer of Pledged Equity Interests have been made. All Pledged Equity Interests that are certificated have been delivered and pledged to Administrative Agent duly endorsed and accompanied by such duly executed instruments of transfer or assignment as are necessary for such pledge to be held as pledged collateral. Except with respect to partnership or limited liability company interests of issuers the Constituent Documents of which do not provide that any interest in such issuer is a security governed by Chapter 8 of the UCC, there are no Pledged Equity Interests other than those represented by certificated securities in the possession of Administrative Agent. The Pledged Equity Interests include (i) the percentage set forth on Schedule 7 of the issued and outstanding Equity Interests of each Person in which such Debtor owns a direct interest and which Person is not a Foreign Subsidiary, and (ii) 65% of the issued and outstanding Equity Interests of each first-tier Foreign Subsidiary, if any, of such Debtor. There are no restrictions (which have not been effectively waived by all necessary Persons) in any Constituent Document governing any Pledged Equity Interest or any other document related thereto which would limit or restrict (A) the grant of a Lien in the Pledged Equity Interests, (B) the perfection of such Lien, (C) the exercise of remedies in respect of such perfected Lien in the Pledged Equity Interests as contemplated by this Agreement or (D) the admission of any transferee of the Pledged Equity Interests as a shareholder, member, partner or equity holder of the issuer of such Pledged Equity Interests. Such Debtor has delivered to Administrative Agent complete and correct copies of all Constituent Documents for each issuer of Pledged Equity Interests. Except as set forth on Schedule 7 , the Constituent Documents of each issuer which is a partnership or limited liability company do not provide that any interest in such issuer is a security governed by Chapter 8 of the UCC, and no Equity Interest of such issuer is evidenced by a certificate or other instrument. Upon the exercise of remedies in respect of Pledged Equity Interests, a transferee or assignee of any Pledged Equity Interests shall become a shareholder, partner or member, as the case may be, of the issuer thereof, entitled to participate in the management thereof and, upon the transfer of the entire interest of such Debtor in such issuer, such Debtor shall cease to be a shareholder, partner or member, as the case may be, of such issuer.

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(f) As of each Schedule Effective Date:

(i) Schedule 1 , Section (a) states the exact name of such Debtor, as such name appears in its currently effective Constituent Documents as filed with the appropriate authority of the jurisdiction of such Debtor's organization.

(ii) Schedule 1 , Section (b) states the jurisdiction of organization of such Debtor, and such Debtor is not organized in more than one jurisdiction.

(iii) Schedule 1 , Section (c) sets forth the current type of entity of such Debtor.

(iv) Schedule 1 , Section (d) states each other entity type, jurisdiction of organization and name such Debtor has had in the five-year period preceding such Schedule Effective Date, together with the date of the relevant change. Except as set forth on Schedule 1 , Section (d) , such Debtor has not changed its identity or type of entity, jurisdiction of organization or name in any way within the five-year period preceding such Schedule Effective Date (changes in identity or type of entity include mergers, consolidations, acquisitions (including both equity and asset acquisitions), and any change in the form, nature or jurisdiction of organization).

(v) Schedule 1 , Section (e) states all other names (including trade, assumed and similar names) used by such Debtor or any of its divisions or other business units at any time during the five-year period preceding such Schedule Effective Date.

(vi) Schedule 1 , Section (f) states the Federal Taxpayer Identification Number of such Debtor.

(vii) Schedule 1 , Section (g) states the corporate or other organizational number of such Debtor issued by such Debtor's jurisdiction of organization (or "N/A" if such jurisdiction does not issue an organizational number for such Debtor's entity type).

(g) As of each Schedule Effective Date, Schedule 2 is a complete and correct list of such Debtor's chief executive office and each other location where such Debtor maintains any Collateral or any books and records relating to any Collateral or where such Debtor conducts any business, including for each such location, a description of the Collateral maintained at such location, the name of all Persons other than such Debtor who have possession of any of the Collateral or other property of such Debtor at such location, and whether such location is owned or leased by such Debtor.

(h) All Accounts have been originated by such Debtor and all Inventory has been acquired by such Debtor in the ordinary course of business.

(i) Such Debtor has exclusive possession and control of the Equipment and Inventory (other than Inventory leased by such Debtor to third parties in the ordinary course of business) pledged by it hereunder.

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(j) As of each Schedule Effective Date, Schedule 3 is a complete and correct list of all Pledged Debt, promissory notes and other instruments evidencing indebtedness held by such Debtor, including all intercompany notes and other instruments between such Debtor and each Subsidiary, and each Subsidiary and each other Subsidiary.

(k) As of each Schedule Effective Date, Schedule 4 is a complete and correct list of each Trademark registration, Patent, Patent application or Copyright in which such Debtor has any interest (whether as owner, licensee, or otherwise), including:

(i) for each Trademark registration or application in which such Debtor has any interest, the name of the registered owner or Person applying to be the registered owner and the nature of such Debtor's interest if not owned by such Debtor, the registered or to be registered Trademark, the Trademark application serial and/or registration number, the date of Trademark registration or application, and the country or state registering the Trademark or with which the Trademark application was filed;

(ii) for each Patent or Patent application in which such Debtor has any interest (whether as owner, licensee, or otherwise), the name of the registered owner or Person applying to be the registered owner and the nature of such Debtor's interest if not owned by such Debtor, the Patent number or application, the date of Patent issuance or application filing, and the country issuing the Patent or with which the Patent application was filed; and

(iii) for each Copyright (regardless of whether registered) in which such Debtor has any interest (whether as owner, licensee, or otherwise), if applicable, the name of the registered owner (or owner, if not registered) or the Person applying to be the registered owner and the nature of such Debtor's interest if such Debtor is not the owner, the title of the work which is the subject of the registered or applied for Copyright (or, if not registered or applied for, a description of the work subject to such unregistered Copyright), the date of Copyright issuance or application, the registration or application number (if applicable) and the country issuing the Copyright or with which the Copyright application was filed.

(l) As of each Schedule Effective Date, Schedule 5 is a complete and correct list of each Deposit Account, Securities Account or Commodity Account maintained by or in which such Debtor has any interest, including: (i) for each Deposit Account, the bank in which such account is maintained and ABA number of such bank, the account number, and account type; (ii) for each Securities Account, the complete name and identification number of the account, the jurisdiction the Law of which governs such account, and the name and street address of the Securities Intermediary maintaining such account; and (iii) for each Commodity Account, the complete name and identification number of the account, the jurisdiction the Law of which governs such account, and the name and street address of the Commodity Intermediary maintaining such account.

(m) As of each Schedule Effective Date, Schedule 6 is a complete and correct list of all Commercial Tort Claims in which such Debtor has any interest, including the complete case name or style, the case number, and the court or other Governmental Authority in which the case is pending.

(n) As of each Schedule Effective Date, (i) Schedule 7 is a complete and correct list of all Equity Interests in which such Debtor has a direct ownership interest, (ii) Schedule 7 contains a complete and correct description of each certificate or other instrument included in or evidencing Pledged Equity Interests, (iii) Schedule 7 is a complete and correct list of the exact name of each issuer of Pledged Equity Interests described on Schedule 7 , its jurisdiction of organization, and the authorized, issued and outstanding Equity Interests of such issuer, and (iv) such Debtor's interest in each such issuer is as stated on Schedule 7 .

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(o) Such Debtor has no interest in any Farm Products.

3.02. Representations and Warranties – Subsidiaries . Each Debtor (other than Borrower) represents and warrants to Administrative Agent and each Secured Party with respect to itself and its Collateral that this Agreement may reasonably be expected to benefit, directly or indirectly, such Debtor, and the board of directors of such Debtor, the requisite number of its partners, the requisite number of its members or the requisite number of the appropriate governance body or equity holders, as appropriate, have determined that this Agreement may reasonably be expected to benefit, directly or indirectly, such Debtor. Such Debtor is familiar with, and has independently reviewed the books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral intended to be security for the payment of all or any part of the Obligations; provided , however , such Debtor is not relying on such financial condition or collateral as an inducement to enter into this Agreement.

3.03. Survival . All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof and any update of any Schedule. Such representations and warranties have been or will be relied upon by Administrative Agent and each Secured Party, regardless of any investigation made by Administrative Agent or any Secured Party or on their behalf and notwithstanding that Administrative Agent or any Secured Party may have had notice or knowledge of any Default at the time of any credit extension, and shall continue in full force and survive the Release Date.

ARTICLE IV
COVENANTS

4.01. Further Assurances.

(a) Each Debtor will, from time to time and at such Debtor's expense, promptly execute and deliver all further instruments and documents (including the delivery of certificated securities, if any, and supplements to all schedules), authenticate, execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be reasonably necessary, or as Administrative Agent may reasonably request, in order to perfect and preserve the pledge, assignment, and security interest granted or purported to be granted hereby, and take all further action that Administrative Agent may reasonably request in order to perfect and protect any pledge, assignment, or security interest granted or purported to be granted hereby, and the priority thereof, or to enable Administrative Agent to exercise and enforce Administrative Agent's and other Secured Parties' rights and remedies hereunder with respect to any Collateral.

(b) In addition to such other information as shall be specifically provided for herein, each Debtor shall furnish to Administrative Agent such other information (including copies of documents) with respect to such Debtor and the Collateral as Administrative Agent may reasonably request.

(c) Each Debtor authorizes Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the authentication of any Debtor where permitted by Law and that (i) indicate the Collateral (A) as all assets of such Debtor (or words of similar effect), regardless of whether any particular asset included in the Collateral is within the scope of Article or Chapter 9 of the UCC of the applicable state or jurisdiction or whether such assets are included in the Collateral, or (B) as being of an equal or lesser scope or with greater detail, and (ii) contain any other information required by Article or Chapter 9 of the UCC of the applicable state or jurisdiction for the sufficiency or filing office acceptance of any financing statement, continuation or amendment, including (A) whether such Debtor is an organization, the type of organization, and any organization identification number issued to such Debtor and, (B) in the case of a financing statement indicating Collateral to be Fixtures, As-Extracted Collateral or timber to be cut, a sufficient description of real property to which such Collateral relates. Each Debtor agrees to furnish any such information to Administrative Agent promptly upon request. A photocopy or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by Law. Each Debtor ratifies its authentication, execution and delivery of, and the filing of, any financing statement or amendment thereto describing any of the Collateral which was filed prior to the date of this Agreement.

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(d) Each Debtor shall cooperate to determine what may or shall be required to satisfy the Laws or regulations throughout the world with respect to the recordation and validation of the license of and Lien in Intellectual Property as Administrative Agent may reasonably require, or otherwise to render this Agreement and the security interest in such Debtor's Intellectual Property effective, and shall execute all documents which may be necessary or desirable to implement this Section 4.01(e) , including registered user statements or other documents suitable for filing with the appropriate Governmental Authorities.

4.02. Place of Perfection; Records; Collection of Accounts, Chattel Paper and Instruments.

(a) No Debtor shall change the jurisdiction of its organization from the jurisdiction specified in Schedule 1 , Section (b) , its type of entity from the type of entity specified in Schedule 1 , Section (c) , its name from the name specified in Schedule 1 , Section (a) or its organizational identification number from the organizational identification number specified in Schedule 1 , Section (g) , unless such Debtor has delivered to Administrative Agent 30 days' prior written notice (unless Administrative Agent has agreed in writing to a shorter period) and taken such actions as Administrative Agent may reasonably require with respect to such change. With respect to each location on Schedule 2 , such Debtor shall keep its chief executive office at the address specified therein and the office where it keeps its Records concerning the Accounts, and the originals of all Chattel Paper and Instruments, at the address specified in Schedule 2 , unless such Debtor has delivered to Administrative Agent 30 days' prior written notice (unless Administrative Agent has agreed in writing to a shorter period) and taken such actions as Administrative Agent may reasonably require with respect to such change. Each Debtor will hold and preserve such Records and Chattel Paper and Instruments in a commercially reasonable manner and will permit representatives of Administrative Agent or any Lender to visit and inspect its Properties and make abstracts from and copies of such Records and Chattel Paper and Instruments in accordance with Section 7.6 of the Credit Agreement.

(b) Except as otherwise provided in this Section 4.02(b) , each Debtor shall continue to collect, in accordance with commercially reasonable procedures and at its own expense, all amounts due or to become due such Debtor under its Accounts, Chattel Paper, and Instruments. In connection with such collections, each Debtor may take (and, at Administrative Agent's direction, shall take) such action as such Debtor or Administrative Agent may deem necessary or advisable to enforce collection of such Debtor's Accounts, Chattel Paper, and Instruments; provided , however , that Administrative Agent shall have the right, if an Event of Default exists, to notify the Account Debtors or obligors under any Accounts, Chattel Paper, and Instruments of the assignment to Administrative Agent of such Accounts, Chattel Paper, and Instruments and to direct such Account Debtors or obligors to make payment of all amounts due or to become due to such Debtor thereunder directly to Administrative Agent and, at the expense of such Debtor, to enforce collection of any such Accounts, Chattel Paper, and Instruments, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Debtor might have done or as Administrative Agent reasonably deems appropriate. If any Event of Default exists, all amounts and proceeds (including Instruments) received by any Debtor in respect of the Accounts, Chattel Paper, and Instruments constituting Collateral shall be received in trust for the benefit of Administrative Agent hereunder, shall be segregated from other funds and property of such Debtor and shall be forthwith paid or delivered over to Administrative Agent in the same form as so received (with any necessary endorsement) to be held as Cash Collateral, thereafter to be applied as provided in the Credit Agreement and the other Loan Documents. No Debtor shall adjust, settle, or compromise the amount or payment of any Account, Chattel Paper, or Instrument, release wholly or partly any Account Debtor or obligor thereof, or allow any credit or discount thereon, except in the ordinary course of business. Notwithstanding the foregoing, any failure of Administrative Agent to notify Debtor of any actions taken hereunder shall not affect the validity of such actions or any other rights and remedies of Administrative Agent or each Lender hereunder.

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4.03. Equipment, Fixtures, and Inventory.

(a) Each Debtor shall keep its Equipment, Fixtures, and Inventory (other than Inventory sold in the ordinary course of business) at the addresses specified in Schedule 2 or, upon 30 days' prior written notice to Administrative Agent, at such other places in such jurisdiction where all action required by Section 4.01 shall have been taken with respect to the Equipment, Fixtures, and Inventory.

(b) Each Debtor shall cause its Equipment and Fixtures to be maintained, kept and preserved in good working order and condition and shall forthwith or, in the case of any loss or damage to any of the Equipment and Fixtures, as quickly as practicable after the occurrence thereof, make or cause to be made all repairs, replacements, and other improvements in connection therewith which are necessary or desirable to such end. Each Debtor shall promptly furnish to Administrative Agent a statement respecting any loss or damage to any of the Equipment and Fixtures which singly or in the aggregate equals or exceeds $100,000. Each Debtor shall promptly furnish to Administrative Agent a statement respecting any loss or damage to any Inventory which singly or in the aggregate equals or exceeds $100,000.

(c) Each Debtor shall comply with, and shall cause its licensees and subcontractors to comply with, all requirements of the Fair Labor Standards Act.

4.04. Chattel Paper and Instruments . a) Each Debtor will: (i) mark conspicuously each item of Tangible Chattel Paper and Instruments in the original amount of $100,000 or greater and all Tangible Chattel Paper if the aggregate original amount of all Tangible Chattel Paper and Instruments is $100,000 or greater and each of its Records pertaining to the Collateral with the following legend:

THIS *[INSTRUMENT]*[OTHER RECORD]* IS SUBJECT TO THE SECURITY INTEREST AND LIEN PURSUANT TO THE SECURITY AGREEMENT DATED OCTOBER 3, 2016 (AS THE SAME MAY BE AMENDED OR RESTATED) MADE BY *[DEBTOR NAME]*, IN FAVOR OF LEGACYTEXAS BANK, AS ADMINISTRATIVE AGENT.

or such other legend, in form and substance reasonably satisfactory to and as specified by Administrative Agent, indicating that such Tangible Chattel Paper or Collateral is subject to the pledge, assignment, and security interest granted hereby; and (ii) if any Collateral shall be or be evidenced by a promissory note or other Instrument or be Tangible Chattel Paper, and is, in each case, in the original amount of $100,000 or greater or the aggregate original amount of all promissory notes, other Instruments and Tangible Chattel Paper is $100,000 or greater, pledge to Administrative Agent hereunder and deliver to Administrative Agent such note, Instrument, or Chattel Paper duly indorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Administrative Agent; provided , however , during the existence of an Event of Default, such Debtor shall deliver to Administrative Agent all Tangible Chattel Paper and all Collateral evidenced by a promissory note or other Instrument accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Administrative Agent.

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(b) No Debtor shall have any rights in any Electronic Chattel Paper unless such Debtor has taken all actions reasonably necessary to establish in Administrative Agent control (as that term is defined in the UCC) of such Electronic Chattel Paper and Administrative Agent (and no other Person) has control of each item of Electronic Chattel Paper in the original amount of $100,000 or greater and all Electronic Chattel Paper if the aggregate original amount of all Electronic Chattel Paper is $100,000 or greater; provided , however , during the existence of an Event of Default, such Debtor shall take all actions reasonably necessary to establish in Administrative Agent control (as that term is defined in the UCC) of all Electronic Chattel Paper.

(c) Each Debtor shall pledge to Administrative Agent all Tangible Chattel Paper, promissory notes or other Instruments constituting or securing intercompany loans or intercompany leases and shall deliver to Administrative Agent such notes, Instruments, or Tangible Chattel Paper duly indorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Administrative Agent.

4.05. Deposit Accounts, Securities Accounts, Commodity Accounts and Letter-of-Credit Rights . Each Debtor shall use Administrative Agent as its principal depository bank in accordance with Section 7.12 of the Credit Agreement. No Debtor shall establish or maintain any Deposit Account, Securities Account or Commodity Account not listed on Schedule 5 (other than de minimis accounts, so long as the balance in all such accounts, collectively, does not exceed $100,000 at any time), unless prior to the establishment of such new Deposit Account, Securities Account, or Commodity Account such Debtor (i) delivers to Administrative Agent an updated Schedule as required by the first sentence of Section 4.16 and executes and delivers to Administrative Agent assignments of, and control agreements with respect to, such new Deposit Account, Securities Account, or Commodity Account, as applicable, in such form as Administrative Agent may reasonably request, (ii) causes the bank, Securities Intermediary or Commodity Intermediary, as appropriate, in which such account is or will be maintained, to deliver to Administrative Agent acknowledgments of the assignment of, and control agreements with respect to, such account, in form and substance satisfactory to Administrative Agent, and (iii) takes all actions necessary to establish in Administrative Agent control (as that term is defined in the UCC) with respect to such Deposit Account, Securities Account, or Commodity Account. Contemporaneously with the acquisition by any Debtor of any rights in a Letter of Credit (other than rights as an account party), such Debtor shall (x) execute and deliver to Administrative Agent assignments of, and control agreements with respect to, such Letter of Credit and Letter-of-Credit Right in such form as Administrative Agent may reasonably request, (y) cause the bank or other Person that is the issuer of such Letter of Credit to deliver to Administrative Agent acknowledgments of the assignment of, and control agreements with respect to, such Letter of Credit and Letter-of-Credit Right in form and substance satisfactory to Administrative Agent, and (z) take all actions necessary to establish control (as that term is defined in the UCC) by Administrative Agent with respect to such Letter of Credit and Letter-of-Credit Right. No Debtor shall obtain or maintain any interest in any Securities Entitlement other than Securities Entitlements held in and subject to a Securities Account described in Schedule 5 with respect to which such Debtor has complied with this Section 4.05 . No Debtor shall obtain or maintain any interest in any Commodity Contract other than Commodity Contracts held in and subject to a Commodity Account described in Schedule 5 with respect to which such Debtor has complied with this Section 4.05 .

4.06. Transferable Record . Each Debtor shall, upon acquisition by such Debtor of any transferable record, as that term is defined in the federal Electronic Signatures in Global and National Commerce Act or in the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, promptly notify Administrative Agent thereof and take such action as Administrative Agent may reasonably request to vest in Administrative Agent control (as that term is defined in the UCC) of such transferable record or control under the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record.

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4.07. Patents, Trademarks, and Copyrights.

(a) Each Debtor shall ensure that an acknowledgment (approved in form and substance by Administrative Agent) containing a description of all Collateral consisting of Intellectual Property has been received by and recorded with (i) the United States Patent and Trademark Office, with respect to United States Patents and Trademarks, and (ii) the United States Copyright Office, with respect to United States registered Copyrights pursuant to 35 U.S.C. § 261, 15 U.S.C. § 1060 or 17 U.S.C. § 205, and each Debtor shall take such other actions as may be required pursuant to the Laws of any other applicable jurisdiction to protect the validity of and to establish a legal, valid, and perfected security interest in favor of Administrative Agent in respect of all Collateral consisting of Patents, Trademarks, and Copyrights in which a security interest may be perfected by filing, recording, or registration in the United States and its territories and possessions, or in such other jurisdictions as may be required by Administrative Agent, such that no further or subsequent filing, refiling, recording, rerecording, registration, or reregistration is necessary (other than such actions as are necessary to perfect the security interest with respect to any Collateral consisting of Patents, Trademarks, and Copyrights (or registration or application for registration thereof) acquired or developed after the date hereof).

(b) Except as permitted pursuant to the Loan Documents and where an act or failure to act could not reasonably be expected to result in a Material Adverse Event, no Debtor (either itself or through licensees or sublicensees) will do any act, or omit to do any act, whereby any Patent may become invalidated or dedicated to the public, and shall continue to mark any products covered by a Patent with the relevant patent number as necessary and sufficient to establish and preserve its maximum rights under applicable Laws.

(c) Except where the failure to do so could not reasonably be expected to result in a Material Adverse Event, each Debtor (either itself or through licensees or sublicensees) will, for each Trademark, (i) maintain such Trademark in full force free from any claim of abandonment or invalidity for non-use, except as permitted pursuant to the Loan Documents, (ii) maintain the quality of products and services offered under such Trademark, except products and services offered under Trademarks disposed of as permitted pursuant to the Loan Documents, (iii) display such Trademark with notice of United States federal or foreign registration to the extent necessary and sufficient to establish and preserve its maximum rights under applicable Law, except as to Trademarks disposed of as permitted pursuant to the Loan Documents, and (iv) not use or permit the use of such Trademark in violation of any third party rights.

(d) Except where the failure to do so could not reasonably be expected to result in a Material Adverse Event, each Debtor (either itself or through licensees or sublicensees) will, for each work covered by a Copyright, continue to publish, reproduce, display, adopt, and distribute the work with appropriate copyright notice as necessary and sufficient to establish and preserve its maximum rights under applicable Laws.

(e) Each Debtor shall notify Administrative Agent immediately if it knows or has reason to know that any Intellectual Property may become abandoned, lost, or dedicated to the public, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, United States Copyright Office, or any Governmental Authority in any jurisdiction) regarding such Debtor's ownership of any Intellectual Property, its right to register the same, or its rights with respect to a License, or to keep and maintain the same, except to the extent that the abandonment, loss, or dedication to the public, or any adverse determination or development regarding such Debtor's ownership of any Intellectual Property, its right to register the same, or to keep and maintain the same, is permitted pursuant to the Loan Documents and could not reasonably be expected to result in a Material Adverse Event.

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(f) In no event shall any Debtor, either itself or through any agent, employee, licensee, or designee, file an application for any Patent, Trademark, or Copyright (or for the registration of any Trademark or Copyright) with the United States Patent and Trademark Office, the United States Copyright Office, or any Governmental Authority in any jurisdiction unless it complies with Section 4.16 within the time period specified therein, and, upon request of Administrative Agent, executes and delivers any and all agreements, instruments, documents, and papers as Administrative Agent may reasonably request to evidence Administrative Agent's and Secured Parties' security interest in such Patent, Trademark, or Copyright, and each Debtor hereby appoints Administrative Agent as its attorney-in-fact to execute and file such writings for the foregoing purposes.

(g) Except where the failure to do so could not reasonably be expected to result in a Material Adverse Event, each Debtor will take all necessary steps that are consistent with the practice in any proceeding before the United States Patent and Trademark Office, United States Copyright Office, or any Governmental Authority in any other jurisdiction as may be reasonably required by Administrative Agent, to maintain and pursue each application relating to the Patents, Trademarks, and/or Copyrights (and to obtain the relevant grant or registration), and to maintain each issued Patent and each registration of the Trademarks and Copyrights, including timely filings of applications for renewal, affidavits of use, affidavits of incontestability and payment of maintenance fees, and, if consistent with good business judgment, to initiate opposition, interference, and cancellation proceedings against third parties.

(h) If any Debtor has reason to believe that any Collateral consisting of a Patent, Trademark, or Copyright has been or is about to be infringed, misappropriated, or diluted by a third party, such Debtor promptly shall notify Administrative Agent and shall, if consistent with good business judgment, unless such Debtor shall reasonably determine that such Patent, Trademark or Copyright is not material to the conduct of its business or operations, promptly sue for infringement, misappropriation, or dilution and to recover any and all damages for such infringement, misappropriation, or dilution, and take such other actions as are appropriate under the circumstances to protect such Collateral.

(i) Upon the request of Administrative Agent, each Debtor shall use commercially reasonable efforts to obtain all requisite consents or approvals by the licensor of each Copyright License, Patent License, or Trademark License to effect the assignment of all of such Debtor's right, title, and interest thereunder to Administrative Agent or its designee.

(j) In no event shall any Debtor acquire or purchase any Patent, Trademark, or Copyright unless it complies with Section 4.16 within the time period specified therein, and, upon request of Administrative Agent, executes and delivers any and all agreements, instruments, documents, and papers as Administrative Agent may request to evidence Administrative Agent's and Secured Parties' security interest in such purchased or acquired Patent, Trademark, or Copyright. Each Debtor hereby appoints Administrative Agent as its attorney-in-fact to execute and file any application for any Patent, Trademark, or Copyright (or for the registration of any Trademark or Copyright) with the United States Patent and Trademark Office, United States Copyright Office, or any Governmental Authority in any other jurisdiction as may be required by Administrative Agent in connection with such purchase or acquisition of any Patent, Trademark, or Copyright.

(k) The parties acknowledge and agree that the Intellectual Property is the sole and exclusive property of each Debtor, subject to the terms and conditions stated in this Agreement. Other than in connection with any security interest in the Intellectual Property that a Debtor has granted to Administrative Agent, or any rights and remedies of Administrative Agent and Secured Parties under Laws, Administrative Agent shall not challenge such Debtor's ownership of the Intellectual Property. Each Debtor expressly retains all rights, at such times when no Event of Default exists, to license third parties to use the Intellectual Property for any purpose whatsoever not in violation of the Loan Documents and which are not exclusive as to prevent Administrative Agent from using any of the Intellectual Property.

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(l) The license granted to Administrative Agent hereunder shall include the right of Administrative Agent to grant sublicenses to others to use the Intellectual Property, and to enable such sublicensees to exercise any rights and remedies of Administrative Agent with respect to the Collateral, as Administrative Agent reasonably deems necessary or appropriate in the exercise of the rights and remedies of Administrative Agent. In any country where sublicenses are incapable of registration or where registration of a sublicense will not satisfactorily protect the rights of each Debtor and Administrative Agent, Administrative Agent shall also have the right to designate other parties as direct licensees of such Debtor to use the Intellectual Property if an Event of Default exists and to enable such direct licensees to exercise any rights and remedies of Administrative Agent as such licensees reasonably deem necessary or appropriate and each Debtor agrees to enter into direct written licenses with the parties as designated on the same terms as would be applicable to a sublicense, and any such direct license may, depending on the relevant local requirements, be either (i) in lieu of a sublicense or (ii) supplemental to a sublicense. In either case, the parties hereto shall cooperate to determine what shall be necessary or appropriate in the circumstances. For each sublicense to a sublicensee and direct license to a licensee, each Debtor appoints Administrative Agent its agent for the purpose of exercising quality control over the sublicensee. Each Debtor shall execute this Agreement and each other agreement necessary to effect the purposes of this Agreement in any form, content and language suitable for recordation, notice and/or registration in all available and appropriate agencies of foreign countries as Administrative Agent may reasonably require.

(m) In connection with the assignment or other transfer (in whole or in part) of its obligations to any other Person, Administrative Agent may assign the license granted herein without any Debtor's consent (other than any consent required by the Credit Agreement) and upon such assignment or transfer such other Person shall thereupon become vested with all rights and benefits in respect thereof granted to Administrative Agent under this Agreement (to the extent of such assignment or transfer).

(n) The parties hereto shall take reasonable action to preserve the confidentiality of the Intellectual Property; provided , that Administrative Agent shall not have any liability to any Person for any disclosure of the Intellectual Property in connection with Administrative Agent's enforcement of its rights under this Agreement or Laws.

4.08. Equity Interests; Dilution of Ownership . No Debtor will, or permit any Person to, revise, modify, amend or restate the Constituent Documents of any issuer of Pledged Equity Interests in a manner that adversely affects the security interest of Administrative Agent therein (except as permitted by the Loan Documents), or terminate, cancel, or dissolve any such Person (except as permitted by the Loan Documents). As to any Pledged Equity Interests, no Debtor will consent to or approve of the issuance of (a) any additional shares or units of any class of Equity Interests of such issuer (unless, promptly upon issuance, additional Equity Interests are pledged and delivered to Administrative Agent pursuant to the terms hereof to the extent necessary to give Administrative Agent a security interest after such issuance in at least the same percentage of such issuer's outstanding Equity Interests as Administrative Agent had before such issuance), (b) any instrument convertible voluntarily by the holder thereof or automatically upon the occurrence or non-occurrence of any event or condition into, or exchangeable for, any Equity Interests, or (c) any warrants, options, contracts or other commitments entitling any third party to purchase or otherwise acquire any Equity Interests.

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4.09. Waiver . To the extent not prohibited by applicable Laws or Permits, each Debtor agrees that any provision of any Constituent Document of any issuer of Collateral, any applicable Law, any certificate or instrument evidencing Collateral, or any other governance document that in any manner restricts, prohibits or provides conditions to (a) the grant of a Lien on any Equity Interest of such issuer or any other Collateral, (b) any transfer of any Equity Interest of such issuer or any other Collateral, (c) any change in management or control of such issuer or any other Collateral, (d) the admission of any transferee of any Collateral as a shareholder, member, partner or other equity holder of the issuer of such Collateral, or (e) any other exercise by Administrative Agent or any other Secured Party of any rights pursuant to this Agreement, any other Loan Document or Law, in each case shall not apply to (i) the grant of any Lien hereunder, (ii) the execution, delivery and performance of this Agreement by such Debtor, (iii) the foreclosure or other realization upon any interest in any Collateral, or (iv) the exercise of rights with respect to such Collateral, including the right to participate in the management of such issuer. Furthermore, to the extent not prohibited by applicable Laws or Permits, no Debtor will permit any amendment to or restatement of any Constituent Document or any other governance document or enter into or permit to exist any agreement that in any manner adversely affects Administrative Agent's ability to foreclose on any Collateral or which conflicts with the provisions of this Section 4.09 .

4.10. Restrictions on Securities. No issuer of any Pledged Equity Interests which is either a partnership or limited liability company shall amend or restate its Constituent Documents (if its Constituent Documents do not provide that any Equity Interest in such issuer is a security governed by Chapter 8 of the UCC or that any Equity Interest in such issuer is evidenced by a certificate or other instrument) to provide that any Equity Interest in such issuer is a security governed by Chapter 8 of the UCC or permit any Equity Interest in such issuer to be evidenced by a certificate or other instrument. No certificate or other instrument evidencing or constituting any Pledged Equity Interest shall contain any restriction on transfer or other legend not reasonably acceptable to Administrative Agent. With respect to each certificate that contains any such legend that is not reasonably acceptable to Administrative Agent, each Debtor shall cause the issuer of each such certificate to issue one or more certificates in a form reasonably acceptable to Administrative Agent.

4.11. Rights to Dividends and Distributions . With respect to any certificates, bonds, or other Instruments or Securities constituting a part of the Collateral, Administrative Agent shall have authority, if an Event of Default exists, either to have the same registered in Administrative Agent's name or in the name of a nominee, and, with or without such registration, to demand of the issuer thereof, and to receive and receipt for, any and all dividends and distributions (including any stock or similar dividend or distribution) payable in respect thereof, whether they be ordinary or extraordinary. If any Debtor shall become entitled to receive or shall receive any interest in or certificate (including, without limitation, any interest in or certificate representing a dividend or a distribution in connection with any reclassification, increase, or reduction of capital, or issued in connection with any reorganization), or any option or rights arising from or relating to any of the Collateral, whether as an addition to, in substitution of, as a conversion of, or in exchange for any of the Collateral, or otherwise, such Debtor agrees to accept the same as Administrative Agent's agent and to hold the same in trust on behalf of and for the benefit of Administrative Agent, and to deliver the same immediately to Administrative Agent in the exact form received, with appropriate undated stock or similar powers, duly executed in blank, to be held by Administrative Agent, subject to the terms hereof, as Collateral. Unless an Event of Default exists or will result therefrom and subject to the other Loan Documents, such Debtor shall be entitled to receive all cash dividends and distributions not representing a return of capital or liquidating dividend paid or distributed with respect to the Securities, other than dividends or distributions or interests payable in Securities of the issuer of such Securities (which, if evidenced by certificated securities, shall be delivered to Administrative Agent as set forth in the immediately preceding sentence, whether or not an Event of Default exists). Administrative Agent shall be entitled to all dividends and distributions, and to any sums paid upon or in respect of any Collateral, upon the liquidation, dissolution, or reorganization of the issuer thereof, which shall be paid to Administrative Agent to be held by it as additional collateral security for and application to the Obligations as provided in the Loan Documents. All dividends, distributions and Proceeds paid or distributed in respect of the Collateral which are received by any Debtor in violation of this Agreement shall, until paid or delivered to Administrative Agent, be held by such Debtor in trust as additional Collateral for the Obligations. Notwithstanding the foregoing, any failure of Administrative Agent to notify Debtor of any actions taken hereunder shall not affect the validity of such actions or any other rights and remedies of Administrative Agent or each Lender hereunder.

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4.12. Right of Administrative Agent to Notify Issuers . If an Event of Default exists and at such other times as Administrative Agent is entitled to receive dividends, distributions and other property in respect of or consisting of any Collateral which is or represents a Security or an Equity Interest, Administrative Agent may notify issuers of such Security or Equity Interest to make payments of all dividends and distributions directly to Administrative Agent and Administrative Agent may take control of all Proceeds of any Securities and Equity Interests. Until Administrative Agent elects to exercise such rights, each Debtor, as agent of Administrative Agent, shall collect, segregate and hold in trust all dividends and other amounts paid or distributed with respect to Securities and Equity Interests.

4.13. Insurance . Each Debtor shall, at its own expense, maintain insurance in accordance with the Credit Agreement.

4.14. Transfers and Other Liens . Except as permitted by the Loan Documents, no Debtor shall (a) sell, assign (by operation of Law or otherwise) or otherwise Dispose of, or grant any option with respect to, any of the Collateral, or (b) create or permit to exist any Lien, option, or other charge or encumbrance upon or with respect to any of the Collateral.

4.15. Administrative Agent Appointed Attorney-in-Fact . Each Debtor hereby irrevocably appoints Administrative Agent such Debtor's attorney-in-fact, with full authority in the place and stead of such Debtor and in the name of such Debtor or otherwise to take any action and to execute any instrument which Administrative Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation ( provided , Administrative Agent shall not have any duty to take any such action or execute any instrument):

(a) to obtain and adjust insurance required to be paid to Administrative Agent pursuant to Section 4.13 ;

(b) to ask, demand, collect, sue for, recover, compromise, receive, and give acquittance and receipts for moneys due and to become due under or in connection with the Collateral;

(c) to receive, indorse, and collect any drafts or other Instruments, Documents, and Chattel Paper in connection therewith; and

(d) to file any claims or take any action or institute any proceedings which Administrative Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce compliance with the terms and conditions of any Collateral or the rights of Administrative Agent with respect to any of the Collateral.

EACH DEBTOR HEREBY IRREVOCABLY GRANTS TO ADMINISTRATIVE AGENT SUCH DEBTOR'S PROXY (EXERCISABLE IF AN EVENT OF DEFAULT EXISTS) TO VOTE ANY SECURITIES INCLUDED IN COLLATERAL AND APPOINTS ADMINISTRATIVE AGENT SUCH DEBTOR'S ATTORNEY-IN-FACT (EXERCISABLE IF AN EVENT OF DEFAULT EXISTS) TO PERFORM ALL OBLIGATIONS OF SUCH DEBTOR UNDER THIS AGREEMENT AND TO EXERCISE ALL OF ADMINISTRATIVE AGENT'S AND EACH OTHER SECURED PARTY'S RIGHTS HEREUNDER. THE PROXY AND EACH POWER OF ATTORNEY HEREIN GRANTED, AND EACH STOCK POWER AND SIMILAR POWER NOW OR HEREAFTER GRANTED (INCLUDING ANY EVIDENCED BY A SEPARATE WRITING), ARE COUPLED WITH AN INTEREST AND ARE IRREVOCABLE BEFORE THE RELEASE DATE.

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4.16. Changes to Representations, Schedules . Not later than 30 days after the last day of each fiscal quarter of each Debtor during which any information disclosed on any Schedule to this Agreement changed and at such other times as required by this Agreement, each such Debtor shall deliver to Administrative Agent an updated Schedule (which updates shall restate (and not supplement) such Schedule in its entirety); provided , the delivery of any updated Schedule shall not be (a) deemed a waiver of any (i) obligation of any Debtor under any Loan Document, or (ii) representation or warranty of any Debtor with respect to a Schedule during the period such Schedule was effective, and (b) effective until Administrative Agent agrees in writing to (i) the substitution of such updated Schedule, and (ii) the Schedule Effective Date of such updated Schedule. Each Debtor shall promptly notify Administrative Agent of any change in any representation herein and any information on any Schedule hereto if such change could reasonably be expected to result in a Material Adverse Event. Each representation and warranty made as of a particular Schedule Effective Date shall be deemed made as of such Schedule Effective Date and at all times thereafter until the Schedule Effective Date of the next effective succeeding restated Schedule.

ARTICLE V
RIGHTS AND POWERS OF ADMINISTRATIVE AGENT.

5.01. Administrative Agent May Perform . If any Debtor fails to perform any agreement contained herein, Administrative Agent may itself perform, or cause performance of, such agreement, and the expenses of Administrative Agent incurred in connection therewith shall be payable by Debtors under Section 5.07 .

5.02. Administrative Agent's Duties . The powers conferred on Administrative Agent hereunder are solely to protect Administrative Agent's and Secured Parties' interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by Administrative Agent and Secured Parties hereunder, neither Administrative Agent nor any other Secured Party shall have any duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders, or other matters relative to any Collateral, whether or not Administrative Agent or any other Secured Party has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Administrative Agent accords its own property. Except as provided in this Section 5.02 , neither Administrative Agent nor any other Secured Party shall have any duty or liability to protect or preserve any Collateral or to preserve rights pertaining thereto. Nothing contained in this Agreement shall be construed as requiring or obligating Administrative Agent or any other Secured Party, and neither Administrative Agent nor any other Secured Party shall be required or obligated, to (a) present or file any claim or notice or take any action with respect to any Collateral or in connection therewith or (b) notify any Debtor of any decline in the value of any Collateral. This Section 5.02 shall survive the termination of this Agreement, and any satisfaction and discharge of each Debtor by virtue of any payment, court order, or Law.

5.03. Events of Default . The occurrence of an Event of Default under the Credit Agreement shall constitute an Event of Default under this Agreement (each, an " Event of Default ").

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5.04. Remedies . If an Event of Default exists:

(a) Administrative Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it or any other Secured Party pursuant to any applicable Laws, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Collateral) and also may require each Debtor to, and each Debtor will at its expense and upon request of Administrative Agent forthwith, assemble all or part of the Collateral as directed by Administrative Agent and make it available to Administrative Agent at a place to be designated by Administrative Agent which is reasonably convenient to both parties for public or private sale, at any of Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery and upon such other terms as Administrative Agent may deem commercially reasonable. Each Debtor agrees that, to the extent notice of sale shall be required by Law, 10 days' notice to such Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.

(b) All proceeds received by Administrative Agent upon any sale of, collection of, or other realization upon, all or any part of the Collateral shall be applied as set forth in the Credit Agreement and the other Loan Documents.

(c) All payments received by each Debtor under or in connection with any Collateral shall be received in trust for the benefit of Administrative Agent, shall be segregated from other funds of such Debtor, and shall be forthwith paid or delivered over to Administrative Agent in the same form as so received (with any necessary endorsement).

(d) Because of the Securities Act of 1933, as amended (the " Securities Act "), and other Laws, including without limitation state "blue sky" Laws, or contractual restrictions or agreements, there may be legal restrictions or limitations affecting Administrative Agent in any attempts to dispose of the Collateral and Administrative Agent's enforcement of its rights under this Agreement. For these reasons, Administrative Agent is authorized by each Debtor, but not obligated, if any Event of Default exists, to sell or otherwise dispose of any of the Collateral at private sale, subject to an investment letter, or in any other manner which will not require the Collateral, or any part thereof, to be registered in accordance with the Securities Act or any other Law. Administrative Agent is also hereby authorized by each Debtor, but not obligated, to take such actions, give such notices, obtain such consents, and do such other things as Administrative Agent may deem required or appropriate under the Securities Act or other securities Laws or other Laws or contractual restrictions or agreements in the event of a sale or disposition of any Collateral. Each Debtor understands that Administrative Agent may in its discretion approach a restricted number of potential purchasers and that a sale under such circumstances may yield a lower price for the Collateral than would otherwise be obtainable if the same were registered and/or sold in the open market. No sale so made in good faith by Administrative Agent shall be deemed to be not "commercially reasonable" because so made. Each Debtor agrees that if an Event of Default exists and Administrative Agent sells the Collateral or any portion thereof at any private sale or sales, Administrative Agent shall have the right to rely upon the advice and opinion of appraisers and other Persons, which appraisers and other Persons are acceptable to Administrative Agent, as to the best price reasonably obtainable upon such a private sale thereof. In the absence of fraud or gross negligence, such reliance shall be conclusive evidence that Administrative Agent and the other Secured Parties handled such matter in a commercially reasonable manner under applicable Law.

Security agreement–Page 25

(e) After notice to any Debtor, Administrative Agent and such Persons as Administrative Agent may reasonably designate shall have the right, at such Debtor's own cost and expense, to verify under reasonable procedures the validity, amount, quality, quantity, value, condition, and status of, or any other matter relating to, the Collateral, including, in the case of Accounts or Collateral in the possession of any third Person, by contacting Account Debtors or the third Person possessing such Collateral for the purpose of making such a verification. Administrative Agent shall have the absolute right to share any information it gains from such inspection or verification with any Secured Party.

(f) For purposes of enabling Administrative Agent to exercise rights and remedies under this Agreement, each Debtor grants to Administrative Agent an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to any Debtor or any other Person; provided , that if the license granted to Administrative Agent is a sublicense, each Debtor shall be solely responsible for, and indemnify Administrative Agent and each Secured Party against, any royalty or other compensation payable to such Debtor's licensor or other Person) to use all of such Debtor's Software, and including in such license reasonable access to all media in which any of the licensed items may be recorded and all related manuals. The use of such license by Administrative Agent shall be exercised, at the option of Administrative Agent, if an Event of Default exists; provided , that any license, sub-license, or other transaction entered into by Administrative Agent in accordance herewith shall be binding upon such Debtor notwithstanding any subsequent cure or waiver of an Event of Default.

(g) For the purpose of enabling Administrative Agent to exercise rights and remedies under this Agreement, each Debtor grants (to the extent not otherwise prohibited by a license with respect thereto) to Administrative Agent an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to any Debtor or any other Person; provided , that if the license granted to Administrative Agent is a sublicense, such Debtor shall be solely responsible for, and indemnify Administrative Agent and Secured Parties against, any royalty or other compensation payable to such Debtor's licensor or other Person) to use, license, or sub-license any of the Collateral consisting of Intellectual Property wherever the same may be located, and including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all Software used for the use, compilation, or printout thereof. In connection therewith, each Debtor shall execute and deliver a license agreement to Administrative Agent to evidence the grant of such license. The use of such license by Administrative Agent shall be exercised, at the option of Administrative Agent, if an Event of Default exists; provided , that any license, sub-license, or other transaction entered into by Administrative Agent in accordance herewith shall be binding upon each Debtor notwithstanding any subsequent cure or waiver of an Event of Default.

5.05. Appointment of Receiver or Trustee . In connection with the exercise of Administrative Agent's rights under this Agreement or any other Loan Document, Administrative Agent may, if an Event of Default exists, obtain the appointment of a receiver or trustee to assume, upon receipt of any necessary judicial or other Governmental Authority consents or approvals, control or ownership of any Collateral. Such receiver or trustee shall have all rights and powers provided to it by Law or by court order or provided to Administrative Agent under this Agreement or any other Loan Document. Upon the appointment of such trustee or receiver, each Debtor shall cooperate, to the extent necessary or appropriate, in the expeditious preparation, execution, and filing of an application to any Governmental Authority or for consent to the transfer, control or assignment of such Collateral to the receiver or trustee. To the extent required by applicable Law, Administrative Agent shall provide to each Debtor notice of the request for or appointment of such receiver or trustee.

Security agreement–Page 26

5.06. Further Approvals Required .

(a) In connection with the exercise by Administrative Agent of rights under this Agreement that affects the disposition of or use of any Collateral (including rights relating to the disposition of or operation under any Permit), it may be necessary to obtain the prior consent or approval of Governmental Authorities and other Persons to a transfer or assignment of Collateral. Each Debtor shall execute, deliver, and file, and hereby appoints (to the extent not prohibited by applicable Law) Administrative Agent as its attorney-in-fact (exercisable if an Event of Default exists), to execute, deliver, and file on such Debtor's behalf and in such Debtor's name all applications, certificates, filings, instruments, and other documents (including without limitation any application for an assignment or transfer of control or ownership) that may be necessary or appropriate, in Administrative Agent's reasonable opinion, to obtain such consents or approvals. Each Debtor shall use commercially reasonable efforts to obtain the foregoing consents, waivers, and approvals, including receipt of consents, waivers, and approvals under applicable agreements regardless of whether a Default or Event of Default exists.

(b) Each Debtor acknowledges that there is no adequate remedy at Law for failure by it to comply with the provisions of this Section 5.06 and that such failure would not be adequately compensable in damages, and therefore agrees that this Section 5.06 may be specifically enforced.

5.07. INDEMNITY AND EXPENSES .

(a) EACH DEBTOR SHALL INDEMNIFY ADMINISTRATIVE AGENT, L/C ISSUER, EACH LENDER AND EACH RELATED PARTY THEREOF FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, REASONABLE AND DOCUMENTED OUT-OF-POCKET COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (i) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF THIS AGREEMENT, (ii) ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, (iii) ANY BREACH BY SUCH DEBTOR OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED HEREIN, (iv) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE PROPERTIES OR ASSETS OF SUCH DEBTOR OR ANY OF ITS SUBSIDIARIES, OR (v) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, RELATING TO ANY OF THE FOREGOING. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, REASONABLE AND DOCUMENTED OUT-OF-POCKET COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) ARISING OUT OF OR RESULTING FROM THE SOLE CONTRIBUTORY OR ORDINARY NEGLIGENCE OF SUCH PERSON.

(b) Any amount to be paid under this Section 5.07 shall be a demand obligation owing by Debtors and if not paid within 10 days of demand shall bear interest, to the extent not prohibited by and not in violation of applicable Law, from the date of expenditure until paid at a rate per annum equal to the Default Interest Rate. The obligations of Debtors under this Section 5.07 shall survive payment of the Notes and other obligations hereunder and the assignment of any right hereunder.

Security agreement–Page 27

ARTICLE VI
MISCELLANEOUS

6.01. Waiver of Subrogation . Until the Release Date, no Debtor shall assert, enforce, or otherwise exercise (a) any right of subrogation to any of the rights or Liens of Administrative Agent, any other Secured Party or any Person acting for the benefit of Administrative Agent or any other Secured Party against any other Obligated Party or any Collateral or other security, or (b) any right of recourse, reimbursement, contribution, indemnification, or similar right against any other Obligated Party on all or any part of the Obligations or any other Obligated Party, and until the Release Date, each Debtor hereby waives any and all of the foregoing rights and the benefit of, and any right to participate in, and Collateral or other security given to Administrative Agent or any other Secured Party or any other Person acting for the benefit of Administrative Agent or any other Secured Party, to secure payment of the Obligations. This Section 6.01 shall survive the termination of this Agreement, and any satisfaction and discharge of each Debtor by virtue of any payment, court order, or Law.

6.02. Cumulative Rights . All rights of Administrative Agent and each other Secured Party under the Loan Documents and Bank Product Agreements are cumulative of each other and of every other right which Administrative Agent and each other Secured Party may otherwise have at Law or in equity or under any other agreement. The exercise of one or more rights shall not prejudice or impair the concurrent or subsequent exercise of other rights.

6.03. Amendments; Waivers . No amendment or waiver of any provision of this Agreement, and no consent to any departure by any Debtor, shall be effective unless in writing signed by Administrative Agent and each Debtor, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No election not to exercise, failure to exercise or delay in exercising any right, nor any course of dealing or performance, shall operate as a waiver of any right of Administrative Agent or any Secured Party under this Agreement or applicable Laws, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right of Administrative Agent or any Secured Party under this Agreement or applicable Laws.

6.04. Continuing Security Interest; Release . This Agreement creates a continuing security interest in the Collateral and shall (a) remain in full force and effect until the Release Date, (b) be binding upon each Debtor and its successors and assigns, and (c) inure to the benefit of, and be enforceable by, Administrative Agent and its successors, transferees and assigns. Upon the occurrence of the Release Date, this Agreement and all obligations (other than those expressly stated to survive such termination) of Administrative Agent and each Debtor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the granting parties and Administrative Agent will, at each Debtor's expense, execute and deliver to each Debtor such documents (including without limitation UCC termination statements) as such Debtor shall reasonably request to evidence such termination and shall deliver to such Debtor any Collateral held by Administrative Agent hereunder. Each Debtor agrees that to the extent that Administrative Agent or any other Secured Party receives any payment or benefit and such payment or benefit, or any part thereof, is subsequently invalidated, declared to be fraudulent or preferential, set aside or is required to be repaid to a trustee, receiver, or any other Person under any Debtor Relief Law, common law or equitable cause, then to the extent of such payment or benefit, the Obligations or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment or benefit had not been made and, further, any such repayment by Administrative Agent or any other Secured Party, to the extent that Administrative Agent or any other Secured Party did not directly receive a corresponding cash payment, shall be added to and be additional Obligations payable upon demand by Administrative Agent or any other Secured Party and secured hereby, and, if the Lien and security interest, any power of attorney, proxy or license hereof shall have been released, such Lien and security interest, power of attorney, proxy and license shall be reinstated with the same effect and priority as on the date of execution hereof all as if no release of such Lien or security interest, power of attorney, proxy or license had ever occurred. This Section 6.04 shall survive the termination of this Agreement, and any satisfaction and discharge of each Debtor by virtue of any payment, court order, or Law.

Security agreement–Page 28

6.05. Governing Law; Jurisdiction; Venue; Service of Process .

(a) Governing Law . This Agreement and the other Loan Documents and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement or any other Loan Document (except, as to any other Loan Document, as expressly set forth therein) and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the law of the State of Texas (without reference to applicable rules of conflicts of laws).

(b) Jurisdiction . Each Debtor irrevocably and unconditionally agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or in tort or otherwise, against Administrative Agent, any Lender, L/C Issuer or any Related Party of the foregoing in any way relating to this Agreement or any other Loan Document or the transactions relating hereto or thereto, in any forum other than the courts of the State of Texas sitting in Dallas County, and of the United States District Court of the Northern District of Texas, and any appellate court from any thereof, and each of the parties hereto irrevocably and unconditionally submits to the jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such Texas State court or, to the fullest extent permitted by applicable law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or in any other Loan Document shall affect any right that Administrative Agent, any Lender, or L/C Issuer may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against any Debtor or its properties in the courts of any jurisdiction.

(c) Waiver of Venue . Each Debtor irrevocably and unconditionally waives, to the fullest extent permitted by applicable Law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d) Service of Process . Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 6.11 . Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by applicable law.

6.06. Waiver of Right to Trial by Jury . EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 6.06 .

Security agreement–Page 29

6.07. Administrative Agent's Right to Use Agents . Administrative Agent may exercise its rights under this Agreement through an agent or other designee.

6.08. No Interference, Compensation or Expense . Administrative Agent may exercise its rights under this Agreement (a) without resistance or interference by any Debtor and (b) without payment of any rent, license fee, or compensation of any kind to any Debtor.

6.09. Waivers of Rights Inhibiting Enforcement . Each Debtor waives (a) any claim that, as to any part of the Collateral, a private sale, should Administrative Agent elect so to proceed, is, in and of itself, not a commercially reasonable method of sale for such Collateral, (b) except as otherwise provided in this Agreement, TO THE FULLEST EXTENT NOT PROHIBITED BY APPLICABLE LAW, NOTICE OR JUDICIAL HEARING IN CONNECTION WITH ADMINISTRATIVE AGENT'S DISPOSITION OF ANY OF THE COLLATERAL INCLUDING ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT SUCH DEBTOR WOULD OTHERWISE HAVE UNDER ANY LAW AND ALL OTHER REQUIREMENTS AS TO THE TIME, PLACE AND TERMS OF SALE OR OTHER REQUIREMENTS WITH RESPECT TO THE ENFORCEMENT OF ADMINISTRATIVE AGENT'S OR SECURED PARTIES' RIGHTS HEREUNDER and (c) all rights of redemption, appraisement or valuation.

6.10. Obligations Not Affected . To the fullest extent not prohibited by applicable Laws, the obligations of each Debtor under this Agreement shall remain in full force and effect without regard to, and shall not be impaired or affected by:

(a) any amendment, addition, or supplement to, or restatement of any Loan Document, Bank Product Agreement or any instrument delivered in connection therewith or any assignment or transfer thereof;

(b) any exercise, non-exercise, or waiver by Administrative Agent or any other Secured Party of any right, remedy, power, or privilege under or in respect of, or any release of any guaranty, any collateral, or the Collateral or any part thereof provided pursuant to, this Agreement, any Loan Document or any Bank Product Agreement;

(c) any waiver, consent, extension, indulgence, or other action or inaction in respect of this Agreement, any other Loan Document or any Bank Product Agreement or any assignment or transfer of any thereof;

(d) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation, or the like of any Obligated Party or any other Person, whether or not any Debtor shall have notice or knowledge of any of the foregoing; or

(e) any other event which may give any Debtor or any other Obligated Party a defense to, or a discharge of, any of its obligations under any Loan Document or any Bank Product Agreement.

6.11. Notices and Deliveries . All notices and other communications provided for herein to Administrative Agent or to any Debtor shall be effectuated in the manner provided for in the Credit Agreement. Each Debtor appoints Borrower such Debtor's agent, and Borrower shall act as agent for each other Debtor, for receipt of notices and other communications pursuant to the Loan Documents.

Security agreement–Page 30

6.12. Severability . Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal.

6.13. Successors and Assigns . The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns (including, as to each Debtor, all Persons who may become bound as a debtor or a new debtor to this Agreement); provided , no Debtor may assign any of its rights or obligations under this Agreement.

6.14. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall become effective when it shall have been executed by Administrative Agent and when Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or other electronic imaging means (e.g. "pdf" or "tif") shall be effective as delivery of a manually executed counterpart of this Agreement.

6.15. Additional Debtors . Any Person who was not a "Debtor" under this Agreement at the time of initial execution hereof shall become a "Debtor" hereunder if required pursuant to the terms of the Loan Documents by executing and delivering to Administrative Agent a Joinder. Such Person shall also deliver such items to Administrative Agent in connection with the execution of such Joinder as required by the terms of the Loan Documents and this Agreement. Any such Person shall thereafter be deemed a "Debtor" for all purposes under this Agreement.

6.16. ENTIRE AGREEMENT . THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Remainder of Page Intentionally Left Blank; Signature Pages Follow]

Security agreement–Page 31

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as of the date first above written.

	DEBTORS:

	CARBON NATURAL GAS COMPANY

	By:
		Patrick R. McDonald
		Chief Executive Officer

NYTIS EXPLORATION COMPANY LLC

By:	Nytis Exploration (USA) Inc.,
	its sole Manager

	By:
		Patrick R. McDonald
		Chief Executive Officer

	NYTIS EXPLORATION (USA) INC.

	By:
		Patrick R. McDonald
		Chief Executive Officer

	ADMINISTRATIVE AGENT:

	LEGACYTEXAS BANK

	By:
		Alison White
		Senior Vice President

Security Agreement – Signature Page

Schedule 1

Organization and Names

(Schedule Effective Date: October 3, 2016)

Carbon Natural Gas Company :

(a) Name:	Carbon Natural Gas Company
(b) Jurisdiction of Organization	Delaware
(c) Entity type:	Corporation
(d) Changes in jurisdiction of organization, name or entity type:
(e) Trade names:	None
(f) Federal Taxpayer Identification Number:	26-0818050
(g) Organizational number:	4411454
(h) UCC Filing Office	Delaware

Nytis Exploration Company LLC :

(a) Name:	Nytis Exploration Company LLC
(b) Jurisdiction of Organization	Delaware
(c) Entity type:	Limited Liability Company
(d) Changes in jurisdiction of organization, name or entity type:
(e) Trade names:	None
(f) Federal Taxpayer Identification Number:	20-2621412
(g) Organizational number:	3946676
(h) UCC Filing Office	Delaware

Nytis Exploration (USA) Inc. :

(a) Name:	Nytis Exploration (USA) Inc.
(b) Jurisdiction of Organization	Delaware
(c) Entity type:	Corporation
(d) Changes in jurisdiction of organization, name or entity type:
(e) Trade names:	None
(f) Federal Taxpayer Identification Number:	20-1941946
(g) Organizational number:	3878062
(h) UCC Filing Office	Delaware

[Remainder of Page Intentionally Left Blank]

Schedule 1 – Page 1

Schedule 2

Addresses

(Schedule Effective Date: October 3, 2016)

Carbon Natural Gas Company :

1700 Broadway, Suite 1170

Denver, Colorado 80290

Nytis Exploration Company LLC :

2480 Fortune Drive, Suite 300

Lexington, Kentucky 40509

Nytis Exploration (USA) Inc. :

1700 Broadway, Suite 1170

Denver, Colorado 80290

[Remainder of Page Intentionally Left Blank]

Schedule 2 – Page 1

Schedule 3

Pledged Debt; Indebtedness Evidenced by Instruments

(Schedule Effective Date: October 3, 2016)

Carbon Natural Gas Company :

None.

Nytis Exploration Company LLC :

None.

Nytis Exploration (USA) Inc. :

None.

[Remainder of Page Intentionally Left Blank]

Schedule 3 – Page 1

Schedule 4

Intellectual Property

(Schedule Effective Date: October 3, 2016)

Carbon Natural Gas Company :

None.

Nytis Exploration Company LLC :

None.

Nytis Exploration (USA) Inc. :

None.

[Remainder of Page Intentionally Left Blank]

Schedule 4 – Page 1

Schedule 5

Subject to Confidential Treatment Status

[Remainder of Page Intentionally Left Blank]

Schedule 5 – Page 1

Schedule 6

Commercial Tort Claims

(Schedule Effective Date: October 3, 2016)

Carbon Natural Gas Company :

None.

Nytis Exploration Company LLC :

None.

Nytis Exploration (USA) Inc. :

None.

[Remainder of Page Intentionally Left Blank]

Schedule 6 – Page 1

Schedule 7

Equity Interests

(Schedule Effective Date: October 3, 2016)

Carbon Natural Gas Company:

Issuer Name:		Nytis Exploration (USA) Inc.
Jurisdiction of Organization:		Delaware
Entity Type:		Corporation
Equity Interests of issuer owned by Debtor:		100 shares of common stock
Percentage of the issued and outstanding Equity Interests of issuer owned by Debtor:		100%
Authorized Capital Stock:		101,000 100,000 shares of common; 1,000 shares of preferred
Issued Capital Stock:		100 shares of common stock
Outstanding Capital Stock:		100 shares of common stock
Certificates representing Equity Interest of issuer:		No. 24
Constituent Documents of issuer provide that Equity Interest of issuer is a security:		N/A

Issuer Name:		Crawford County Gas Gathering Company, LLC
Jurisdiction of Organization:		Indiana
Entity Type:		Limited liability company
Equity Interests of issuer owned by Debtor:		Membership interest
Percentage of the issued and outstanding Equity Interests of issuer owned by Debtor:		50%
Authorized Capital Stock:		N/A
Issued Capital Stock:		N/A
Outstanding Capital Stock:		N/A
Certificates representing Equity Interest of issuer:		N/A
Constituent Documents of issuer provide that Equity Interest of issuer is a security:		N/A

Schedule 7 – Page 1


Subject to Confidential Treatment Status

Schedule 7 – Page 2

Nytis Exploration Company LLC:

Issuer Name:

Various Partnerships (see chart below)

Subject to Confidential Treatment Status

Issuer Name:		Brushy Gap Coal & Gas, Inc.
Jurisdiction of Organization:		Kentucky
Entity Type:		Corporation
Equity Interests of issuer owned by Debtor:		100 shares of common stock
Percentage of the issued and outstanding Equity Interests of issuer owned by Debtor:		100%
Authorized Capital Stock:		120 shares of common stock
Issued Capital Stock:		100 shares of common stock
Outstanding Capital Stock:		100 shares of common stock
Certificates representing Equity Interest of issuer:		Not prepared
Constituent Documents of issuer provide that Equity Interest of issuer is a security:		N/A

Schedule 7 – Page 3

Nytis Exploration (USA) Inc.:

Issuer Name:		Nytis Exploration Company LLC
Jurisdiction of Organization:		Delaware
Entity Type:		Limited liability company
Equity Interests of issuer owned by Debtor:		Membership Interests
Percentage of the issued and outstanding Equity Interests of issuer owned by Debtor:		97.5%
Authorized Capital Stock:		N/A
Issued Capital Stock:		N/A
Outstanding Capital Stock:		N/A
Certificates representing Equity Interest of issuer:		No
Constituent Documents of issuer provide that Equity Interest of issuer is a security:		No

[Remainder of Page Intentionally Left Blank]

Schedule 7 – Page 4

EXHIBIT A

Form of Security Agreement Joinder

SECURITY AGREEMENT JOINDER NO. ___

SECURITY AGREEMENT JOINDER NO. ___ (this " Joinder ") is dated as of _______________, to the Security Agreement dated as of October 3, 2016 (such agreement, together will all amendments and restatements and Joinders, the " Security Agreement "), among the initial signatories thereto and each other Person who from time to time thereafter became a party thereto pursuant to Section 6.15 thereof (each, individually, a " Debtor " and collectively, the " Debtors "), in favor of LEGACYTEXAS BANK, as Administrative Agent (in such capacity, " Administrative Agent "), for the benefit of each Secured Party.

BACKGROUND .

Capitalized terms not otherwise defined herein have the meaning specified in the Security Agreement. The Security Agreement provides that additional parties may become Debtors under the Security Agreement by execution and delivery of this form of Joinder. Pursuant to the provisions of Section 6.15 of the Security Agreement, the undersigned is becoming a Debtor under the Security Agreement. The undersigned desires to become a Debtor under the Security Agreement in order to induce Secured Parties to continue to make and maintain financial accommodations under the Loan Documents and Bank Product Agreements.

AGREEMENT .

NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce Secured Parties to continue to make and maintain financial accommodations under the Loan Documents and Bank Product Agreements, the undersigned hereby agrees with Administrative Agent, for the benefit of Secured Parties, as follows:

1. Joinder . In accordance with the Security Agreement, the undersigned hereby becomes a Debtor under the Security Agreement with the same force and effect as if it were an original signatory thereto as a Debtor and the undersigned hereby (a) agrees to all the terms and provisions of the Security Agreement applicable to it as a Debtor thereunder and (b) represents and warrants that the representations and warranties made by it as a Debtor thereunder are true and correct on and as of the date hereof. Each reference to a "Debtor" in the Security Agreement shall be deemed to include the undersigned.

2. Assignment and Grant of Security Interest . As security for the payment and performance, as the case may be, in full of the Obligations, the undersigned hereby assigns to, and pledges and grants to Administrative Agent, for it and the benefit of Secured Parties, a security interest in the entire right, title, and interest of the undersigned in and to all Collateral, whether now or hereafter existing, owned, arising or acquired.

3. Representations and Warranties . On and as of the date hereof or each Schedule Effective Date, as appropriate, the undersigned makes each representation and warranty set forth in Article III of the Security Agreement.

4. Notices . All communications and notices hereunder shall be in writing and given as provided in Section 6.11 of the Security Agreement.

EXHIBIT A – Form of Security Agreement Joinder – Page 1

5. Governing Law . This Joinder and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Joinder and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the law of the State of Texas (without reference to applicable rules of conflicts of laws).

6. Full Force of Security Agreement . Except as expressly supplemented hereby, the Security Agreement remains in full force and effect in accordance with its terms.

7. Schedules . Schedules 1 through 7 to the Security Agreement shall be supplemented by the addition of Schedules 1 through 7 attached hereto as to the undersigned.

8. Severability . Any provision of this Joinder held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Joinder and the effect thereof shall be confined to the provision held to be invalid or illegal.

9. Counterparts . This Joinder may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Joinder shall become effective when it shall have been executed by Administrative Agent and when Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Joinder by facsimile or other electronic imaging means (e.g. "pdf" or "tif") shall be effective as delivery of a manually executed counterpart of this Joinder.

10. Loan Document . This Joinder is a Loan Document for all purposes and each reference in any Loan Document to the Security Agreement shall mean the Security Agreement as supplemented by this Joinder.

11. ENTIRE AGREEMENT . THIS JOINDER AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Remainder of Page Intentionally Left Blank; Signature Pages Follow]

EXHIBIT A – Form of Security Agreement Joinder – Page 2

IN WITNESS WHEREOF , the undersigned has caused this Joinder to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written.



	By:
	Name:
	Title:

EXHIBIT A – Form of Security Agreement Joinder – Signature Page

	ACCEPTED BY:

	LEGACYTEXAS BANK,
	as Administrative Agent

	By:
	Name:
	Title:

EXHIBIT A – Form of Security Agreement Joinder – Signature Page

Exhibit 21.1

LIST OF SUBSIDIARIES

Name of Subsidiary	Jurisdiction of Organization		% Ownership
Brushy Gap Coal & Gas, Inc.		Kentucky	100% owned by our indirect subsidiary Nytis Exploration Company LLC

Carbon California Company, LLC		Delaware	17.8% represented by Class B Units

Carbon California Operating Company, LLC		Delaware	100%

Nytis Exploration Company LLC		Delaware	98.1% owned by our subsidiary Nytis Exploration (USA) Inc.

Nytis Exploration (USA) Inc.		Delaware	100%

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Carbon Natural Gas Company’s Registration Statement on Form S-8 (files No. 333-179184) of our report dated March 31, 2016 relating to the consolidated financial statements, which appears in this Annual Report on Form 10-K.

EKS&H LLLP

Denver, Colorado

March 31, 2017

Exhibit 23.2

CONSENT OF Cawley, Gillespie & Associates, Inc .

We acknowledge that the results of our independent reserve estimates for Carbon Natural Gas Company (the “Company”), with an effective date of December 31, 2016 and a preparation date of March 1, 2017, are reported in the Company’s annual report on Form 10-K for the year ended December 31, 2016. We hereby consent to the results of our independent reserve estimates for the Company from our report dated March 1, 2017 being included in the Form 10-K and each Company registration statement that may be filed hereafter. We further consent to the use of our name in the section of the Form 10-K entitled “Preparation of Reserves Estimates” and any reference to our firm or employees as “Experts”.

/s/ Cawley, Gillespie & Associates, Inc.

J. Zane Meekins, P. Eng.

Executive Vice President

Cawley, Gillespie & Associates, Inc.

March 30, 2017

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Patrick R. McDonald, certify that:

	1.	I have reviewed this annual report on Form 10-K of Carbon Natural Gas Company;

	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

March 31, 2017	/s/ Patrick R. McDonald
	Patrick R. McDonald
	Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Kevin D. Struzeski, certify that:

I have reviewed this annual report on Form 10-K of Carbon Natural Gas Company;

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;

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;

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:

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.

March 31, 2017	/s/ Kevin D. Struzeski
	Kevin D. Struzeski
	Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF CARBON NATURAL GAS COMPANY
PURSUANT TO 18 U.S.C. SECTION 1350

Pursuant to 18 U.S.C. Section 1350 and in connection with the accompanying report on Form 10-K for the year ended December 31, 2016 that is being filed concurrently with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officer of Carbon Natural Gas Company (the "Company") hereby certifies that:

	1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 31, 2017

/s/ Patrick R. McDonald

Patrick R. McDonald

Chief Executive Officer

Exhibit 32.2

CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF CARBON NATURAL GAS COMPANY
PURSUANT TO 18 U.S.C. SECTION 1350

	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.

March 31, 2017

/s/ Kevin D. Struzeski

Kevin D. Struzeski

Chief Financial Officer

Exhibit 99.1

March 1, 2017

Mr. Richard Finucane

Manager of Engineering

Nytis Exploration Company LLC

2480 Fortune Drive, Suite 300

Lexington, KY 40509

	Re:	Evaluation Summary
		Nytis Exploration Company LLC Interests
		Proved Reserves
		Various States
		As of December 31, 2016

Dear Mr. Finucane:

As requested, we are submitting our estimates of proved reserves and our forecasts of the resulting economics attributable to the captioned interests. It is our understanding that the proved reserves estimates in this report constitute 100 percent of all proved hydrocarbon reserves owned by Nytis Exploration Company LLC (“Nytis”). This report, completed on March 1, 2017, was prepared pursuant to the guidelines of the Securities and Exchange Commission for reporting corporate reserves and future net revenue.

Composite reserve estimates and economic forecasts for the proved reserves are summarized below:

		Proved		Proved
		Developed		Developed		Proved		Total
		Producing		Non-Producing		Undeveloped		Proved
Net Reserves
Oil/Condensate	- Mbbl		839.4		11.4		31.5		882.4
Gas	- MMcf		71,125.3		0.0		0.0		71,125.3
Revenue
Oil/Condensate	- M$		33,895.4		466.8		1,289.0		35,651.2
Gas	- M$		171,690.2		0.0		0.0		171,690.2
Severance and
Ad Valorem Taxes	- M$		16,301.2		33.0		91.2		16,425.5
Operating Expenses	- M$		74,894.5		42.1		109.5		75,046.2
Other Deductions	- M$		9,007.9		112.3		316.8		9,437.0
Investments	- M$		0.0		35.0		280.0		315.0
Operating Income (BFIT)	- M$		105,382.0		244.3		491.5		106,117.8
Discounted at 10.0%	- M$		47,158.3		202.1		298.7		47,659.0

The discounted value shown above should not be construed to represent an estimate of the fair market value by Cawley, Gillespie & Associates, Inc.

Nytis Exploration Company LLC Interests

March 1, 2017

Page 2 of 2

Annual average hydrocarbon prices for 2016 were utilized for the evaluation. The averages were calculated using the first-day-of-the-month prices for each month. The resulting hydrocarbon pricing of $2.481 per MMBtu of gas and $42.75 per barrel of oil/condensate was applied without escalation. Adjustments to these prices for basis differentials, hydrocarbon quality, and transportation/processing/gathering fees were supplied by Nytis and applied by producing area. Deductions were applied to the net gas volumes for fuel and shrinkage. The adjusted volume-weighted average product prices over the life of the properties are $2.41 per Mcf of gas and $40.40 per barrel of oil.

Operating expenses were supplied by Nytis and were accepted as furnished. The expenses were based on historical costs over the past six months to one year. Severance and ad valorem rates were specified by state/county. Neither expenses nor investments were escalated. The cost of plugging and the salvage value of equipment have not been considered.

The proved reserve classifications conform to criteria of the Securities and Exchange Commission. The estimates of reserves have been prepared in accordance with the definitions and disclosure guidelines set forth in the U.S. Securities and Exchange Commission Title 17, Code of Federal Regulations, Modernization of Oil and Gas Reporting, Final Rule released January 14, 2009 in the Federal Register. A combination of methods, including production performance analysis, analogy and volumetric analysis, were employed in estimating the reserves. The reserves and economics are predicated on the regulatory agency classifications, rules, policies, laws, taxes and royalties in effect on the effective date except as noted herein. The possible effects of changes in legislation or other Federal or State restrictive actions have not been considered. All reserve estimates represent our best judgment based on data available at the time of preparation and assumptions as to future economic and regulatory conditions. It should be realized that the reserves actually recovered, the revenue derived therefrom and the actual cost incurred could be more or less than the estimated amounts.

The reserve estimates were based on interpretations of factual data furnished by Nytis. We have used all methods and procedures as we considered necessary under the circumstances to prepare the report. We believe that all assumptions, data, methods and procedures were appropriate for the purpose served by this report. Ownership interests were supplied by Nytis and were accepted as furnished. To some extent, information from public records has been used to check and/or supplement these data. The basic engineering and geological data were utilized subject to third party reservations and qualifications. Nothing has come to our attention, however, that would cause us to believe that we are not justified in relying on such data. An on-site inspection of these properties has not been made nor have the wells been tested by Cawley, Gillespie & Associates, Inc.

Our work-papers and related data are available for inspection and review by authorized parties.

	Respectfully submitted,


	CAWLEY, GILLESPIE & ASSOCIATES, INC.
JZM:ptn	Texas Registered Engineering Firm F-693