UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): May 29, 2020 (May 25, 2020)
| CARBON ENERGY CORPORATION |
| (Exact name of registrant as specified in charter) |
| Delaware | 000-02040 | 26-0818050 | ||
|
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
| 1700 Broadway, Suite 1170, Denver, Colorado | 80290 | |
| (Address of principal executive offices) | (Zip code) |
| (720) 407-7043 | ||
| (Registrant’s telephone number including area code) |
| (Former Name or former address, if changed since last report) |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13a of the Exchange Act. ☐
Introductory Note.
On May 26, 2020 (the “Closing Date”), Carbon Energy Corporation (the “Company” or “Carbon”) completed its previously announced transaction with Diversified Gas & Oil Corporation (the “Purchaser” or “DGO”), pursuant to that certain Membership Interest Purchase Agreement, dated as of April 7, 2020 (the “Purchase Agreement”), by and among Carbon, Nytis Exploration (USA) Inc., a direct wholly owned subsidiary of the Company (“Nytis USA” and, together with Carbon, the “Sellers”), DGO and certain of Carbon’s other direct and indirect wholly owned subsidiaries. Pursuant to the Purchase Agreement, Carbon agreed to sell to DGO all of the issued and outstanding membership interests of Carbon Appalachia Company, LLC, a direct wholly owned subsidiary of the Company, and Nytis Exploration Company LLC, an indirect wholly owned subsidiary of the Company (the “Transactions”).
| Item 1.01 | Entry into a Material Definitive Agreement. |
On May 25, 2020, Carbon entered into an Agreement Regarding Payoff and Release or Amendment of Notes (the “Payoff Agreement”) with Old Ironside Fund II-A Portfolio Holding Company, LLC and Old Ironside Fund II-B Portfolio Holding Company, LLC (collectively, “Old Ironsides”) as holders of Carbon’s unsecured promissory notes dated as of December 31, 2018 in aggregate principal amount of $25.1 million (the “Old Ironsides Notes”).
Pursuant to the terms of the Payoff Agreement, Carbon is required to apply certain net proceeds of the Transactions in repayment of the Old Ironsides notes on specified repayment dates tied to milestones under the Purchase Agreement. The initial payment is due within three business days of the Closing Date and must equal or exceed $10.5 million. The second payment is due within three business days of the settlement and payment of the Final Base Purchase Price (as defined in the Purchase Agreement). If the sum of the initial payment and the second payment is at least $20.0 million, the Old Ironsides notes will be deemed paid in full. If the sum of the initial payment and the second payment is at least $18.0 million but less than $20.0 million, the Old Ironsides Notes will be amended such that the outstanding principal balance plus all accrued and unpaid interest is equal to $21.5 million (less the amount of the initial and second payments) and the Old Ironsides Notes will remain outstanding with no other change to the existing terms. If the sum of the initial payment and the second payment is less than $18 million, then Carbon will have the opportunity to make a third payment.
The third payment would be due within three business days of the first Contingent Payment (as defined in the Purchase Agreement). If the sum of the initial payment, the second payment and the third payment is at least $18.0 million, the Old Ironsides Notes will be amended such that the outstanding principal balance plus all accrued and unpaid interest is equal to $23.0 million (less the amount of the initial, second and third payments) and the Old Ironsides Notes will remain outstanding with no other change to the existing terms. If the sum of the initial payment, the second payment and the third payment is less than $18 million, the payments made by Carbon as of such date will be considered mandatory prepayments and the Old Ironsides Notes will remain outstanding with no change to the existing terms.
The foregoing description of the Payoff Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Payoff Agreement, which is attached hereto as Exhibit 10.1 and is incorporated herein by reference.
| Item 1.02 | Termination of a Material Definitive Agreement. |
In connection with the closing of the Transactions, on the Closing Date, Carbon terminated all outstanding commitments under that certain Amended and Restated Credit Agreement by and among Nytis USA and Carbon Appalachia Enterprises, LLC, as Borrowers, and Prosperity Bank, as Administrative Agent, and the Lenders from time to time party thereto, dated December 31, 2018, as amended (as amended, the “Credit Agreement”). In connection with the termination of the Credit Agreement, on the Closing Date, all outstanding obligations under the Credit Agreement were paid off in full, and all liens securing such obligations and guarantees of such obligations were released.
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| Item 2.01 | Completion of Acquisition or Disposition of Assets. |
As discussed in the Introductory Note, on the Closing Date, the Company completed the previously announced Transactions pursuant to the terms and conditions set forth in the Purchase Agreement. The aggregate consideration paid to the Sellers by the Purchaser in connection with the Transactions on the Closing Date was a base cash amount of $99.2 million. In certain circumstances, the Purchaser may be obligated to pay to the Sellers a contingent payment of up to $15.0 million, as more fully described in the Purchase Agreement. Following the consummation of the Transactions, Carbon’s operations are limited to those in the Ventura Basin through Carbon California Company, LLC, its majority-owned subsidiary.
The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Purchase Agreement, which is filed as Exhibit 2.1 hereto and is incorporated herein by reference.
| Item 5.02 | Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. |
In connection with the consummation of the Transactions, Mark D. Pierce, President of the Company, and Kevin Struzeski, Chief Financial Officer, Treasurer and Secretary of the Company, ceased serving in such capacities, effective as of the Closing Date. On the Closing Date, each of Mr. Pierce and Mr. Struzeski entered into consulting agreements with the Company (the “Consulting Agreements”). Under the Consulting Agreements, each of Mr. Pierce and Mr. Struzeski have agreed to provide transitional and consulting services to the Company through August 25, 2020 and will each receive monthly payments of $25,000 in exchange for such services. Following August 25, 2020, the term of the Consulting Agreements may be extended on a monthly basis by mutual agreement of the applicable parties thereto; however, the term of the Consulting Agreements may not be extended beyond November 25, 2020.
The foregoing description of the Consulting Agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the Consulting Agreements, which the Company expects to file as exhibits to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.
Cautionary Statement Regarding Forward-Looking Statements
This report may contain certain forward-looking statements, including certain plans, expectations, goals, projections, and statements about the benefits of the Transactions, the Company’s plans, objectives, expectations and intentions, and other statements that are not historical facts. All statements, other than historical facts included in this report, are forward-looking statements. The forward-looking statements contained herein include statements related to the Transactions as described above. Such forward-looking statements are subject to numerous assumptions, risks and uncertainties, many of which are beyond the control of the Company. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.
While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the Transactions; and competitive responses to the Transactions.
All forward-looking statements speak only as of the date of this report. Although the Company believes that the plans, intentions and expectations reflected in or suggested by the forward-looking statements are reasonable, there is no assurance that these plans, intentions or expectations will be achieved. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in such statements.
The Company’s business may be influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond the control of the Company. These factors include, but are not limited to, changes to business plans and fulfillment of conditions to receive the contingent payment, as circumstances warrant. For a full discussion of these risks and uncertainties and other factors, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC, as updated and supplemented by subsequent filings with the SEC. All forward-looking statements included in this report are expressly qualified in their entirety by such cautionary statements. The Company expressly disclaims any obligation to update, amend or clarify any forward-looking statement to reflect events, new information or circumstances occurring after the date of this report except as required by applicable law.
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| Item 9.01 | Financial Statements and Exhibits. |
(b) Pro forma financial information.
The unaudited pro forma consolidated financial statements of Carbon for the quarter ended March 31, 2020 and the years ended December 31, 2019 and 2018 and the notes related thereto filed as Exhibit 99.1 hereto are incorporated by reference herein.
(d) Exhibits.
| * | Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Carbon Energy Corporation agrees to furnish supplementally a copy of any such omitted schedule to the SEC upon request. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: May 29, 2020
| CARBON ENERGY CORPORATION | ||
| By: |
/s/ Patrick R. McDonald |
|
| Patrick R. McDonald | ||
| Chief Executive Officer | ||
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Exhibit 10.1
AGREEMENT REGARDING PAYOFF AND RELEASE OR AMENDMENT OF NOTES
This AGREEMENT REGARDING PAYOFF AND RELEASE OR AMENDMENT OF NOTES (this “Agreement”) is entered into this 25th day of May, 2020, by and among Carbon Energy Corporation, a Delaware corporation (“Issuer”), Old Ironsides Fund II-A Portfolio Holding Company, LLC, a Delaware limited liability company (“Holder Fund II-A”) and Old Ironsides Fund II-B Portfolio Holding Company, LLC, a Delaware limited liability company (“Holder Fund II-B” and together with Holder Fund II-A, the “Holders”). Holders and Issuer are referred herein as the “Parties” and individually, a “Party.” Any capitalized term used herein but not otherwise defined shall have the meaning given to such term in the Purchase Agreement (as defined below) or the Notes (as defined below), as applicable.
Recitals:
| A. | On December 31, 2018, Issuer issued to Holder Fund II-A that certain Promissory Note (the “Fund II-A Note”) in the original principal amount of Twenty Million Eight Hundred Forty-Two Thousand Six Hundred Sixty-Five and 51/100s Dollars ($20,842,665.51), as adjusted in accordance with the terms and conditions of the Fund II-A Note. As of March 31, 2020, the outstanding principal amount of the Fund II-A Note was $19,287,310.00 and the accrued but unpaid interest under the Fund II-A Note was $2,612,849.73, which interest is accruing at the rate of $6,228.54 per day. |
| B. | On December 31, 2018, Issuer issued to Holder Fund II-B that certain Promissory Note (the “Fund II-B Note”) in the original principal amount of Four Million Two Hundred Twenty-Two Thousand Five Hundred Eighteen and 49/100s Dollars ($4,222,518.49), as adjusted in accordance with the terms and conditions of the Fund II-B Note. As of March 31, 2020, the outstanding principal amount of the Fund II-B Note was $3,907,010.00 and the accrued but unpaid interest under the Fund II-B Note was $529,282.57, which interest is accruing at the rate of $1,261.71 per day. |
| C. | The terms of the Fund II-A Note and the Fund II-B Note (each, a “Note” and collectively, the “Notes”) require that, among other things, Issuer make mandatory prepayments of the Notes in an amount equal to the lesser of (i) the then-outstanding Obligations (as such term is defined in each Note) and (ii) the Net Cash Proceeds (as such term is defined in each Note) received by Issuer from the sale of its assets. |
| D. | Issuer is party to that certain Membership Interest Purchase and Sale Agreement dated April 7, 2020, by and among Issuer, Nytis Exploration (USA) Inc. and Diversified Gas & Oil Corporation (the “Purchase Agreement”) pursuant to which Issuer will sell substantially all of its assets and, at the closing thereof and at later dates, will receive Net Cash Proceeds. |
| E. | Holders and Issuer genuinely disagree on the amount of Net Cash Proceeds and the proper application thereof to the repayment of the Notes pursuant to the terms of the Notes, but the Parties all agree that the expected Net Cash Proceeds at the Closing of the Purchase Agreement are less than the amount of the then-outstanding Obligations under the Notes. |
| F. | Issuer has requested that Holders (i) terminate the Notes in exchange for the payment to Holders of an aggregate amount of $20,000,000 (the “Payoff Discount”), which is an amount less than the amount of the outstanding Obligations under the Notes or (ii) if the Net Cash Proceeds paid to Holders exceed $18,000,000 (the “Minimum Payoff Amount”) but are less than the full amount of the Payoff Discount, write down the current outstanding balance (principal and accrued interest) due under the Notes in accordance with this Agreement (the “Notes Amendment”). |
| G. | Holders are willing to agree to (i) the Payoff Discount or (ii) the Notes Amendment, in each case subject to the terms of this Agreement. |
| H. | The Parties agree that any payment made to Holders pursuant to this Agreement shall be made in cash and in proportion to the principal outstanding amount of each respective Note (i.e., 83.15% to the Fund II-A Note and 16.85% to the Fund II-B Note) (the “Notes Allocation Ratio”). |
| I. | The Parties wish to resolve the entire controversy and dispute between them, and enter into this Agreement solely due to the vagaries of litigation, neither admitting the facts relied on by the other nor conceding the legal positions respectively asserted by them. Neither the execution of this Agreement nor any specific provision hereof will be construed as any admission by either Party that the other would have prevailed, in whole or in part, in a judicial proceeding on the matters set forth herein. |
NOW, THEREFORE, in consideration of the promises and covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
l. Payoff Discount. Except for as set forth expressly herein, Issuer hereby acknowledges and reiterates its obligation pursuant to Article 3.4(a)(i) of the Notes to pay any Net Cash Proceeds under the Purchase Agreement to the Holders no later than the third business day following the date of receipt by Issuer of any such Net Cash Proceeds. For the avoidance of doubt, the Net Cash Proceeds required to be paid to Holders include, but not limited to, any amount of the Deposit released to (or due and releasable to) Issuer or for Issuer’s account, any amounts in the Indemnity Escrow Fund returned to (or due and returnable to) Issuer or for Issuer’s account, any amounts paid to (or due and payable to) the Issuer or for Issuer’s account under Article 13.2 of the Purchase Agreement and any amounts paid to (or due and payable to) Issuer or for Issuer’s account with respect to the conveyance to Purchaser of any Purchase Agreement Assets which were initially excluded from the transaction for failure to obtain a Material Required Consent (each such term as defined in the Purchase Agreement).
Notwithstanding the above and in settlement of a dispute among the Parties regarding the appropriate calculation of Net Cash Proceeds with respect to the Purchase Agreement, Holders agree to terminate the Notes and release all outstanding Obligations of Issuer in consideration for the timely payment in cash of the Payoff Discount so long as the Payoff Discount shall be made with Net Cash Proceeds under the Notes and is to be paid to Holders in cash, in two tranches. The first tranche shall be in an amount of at least $10,500,000 (the “Closing Payoff Amount”) and shall be paid, solely with respect thereto, within three business days of the Closing, the second tranche shall be in an amount equal to any other Net Cash Proceeds payable to the Holders pursuant to the preceding paragraph (the “Final Settlement Statement Payoff Amount”) and shall be paid within three business days of the settlement and payment of the Final Base Purchase Price. Each of the Closing Payoff Amount, the Final Settlement Statement Payoff Amount and any other amounts paid to the Holders hereunder shall be allocated between the Holders in accordance with the Notes Allocation Ratio.
Issuer shall give notice to Holders in accordance with paragraph 8 hereof of the Closing and the Final Determination Date as soon as the same are known to Issuer.
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2. Release of Issuer. Upon Holders’ receipt of the Payoff Discount, solely in accordance with the timing set forth in the second paragraph of paragraph 1 above, the Notes shall be deemed paid in full and Holders will be deemed to have released and discharged Issuer from any liability it might have to repay the Notes and from any of the other Obligations under the Notes and the other Note Documents (as such term is defined in the Notes) and Holders shall redeliver to Issuer the original Notes within two business days of the Holders’ receipt of their respective portions of the Payoff Discount, which Issuer may mark “paid in full.”
3. Notes Amendment.
If and only if the Closing Payoff Amount plus the Final Settlement Statement Payoff Amount plus the other payment(s) received by the Holders pursuant to the second paragraph in paragraph 1 hereof by the date that the Final Settlement Statement Payoff Amount is due under paragraph 1 is more than the Minimum Payoff Amount but less than the full amount of the Payoff Discount, (i) Holder Fund II-A and Issuer shall amend the Fund II-A Note in writing to reflect that, immediately after the payments on the date that the Final Settlement Statement Payoff Amount is due, the outstanding principal balance plus all accrued but unpaid interest on the Fund II-A Note shall be written down to an amount equal to $17,878,077.75 minus the amount of the aggregate payments received by Holder Fund II-A from Issuer pursuant to paragraph 1 hereof, (ii) Holder Fund II-B and Issuer shall amend the Fund II-B Note in writing to reflect that, immediately after the payment on the date that the Final Settlement Statement Payoff Amount is due, the outstanding principal balance plus all accrued but unpaid interest on the Fund II-B Note shall be written down to an amount equal to $3,621,922.25 minus the amount of the aggregate payments received by Holder Fund II-B from Issuer pursuant to paragraph 1 hereof and (iii) the amended principal balance of each Note shall constitute the new Tranche A Adjusted Principal Balance.
If the Closing Payoff Amount plus the Final Settlement Statement Payoff Amount plus the other payment(s) received by the Holders pursuant to the second paragraph in paragraph 1 hereof by the date that the Final Settlement Statement Payoff Amount is due under paragraph 1 is less than the Minimum Payoff Amount, then if and only if the Closing Payoff Amount plus the Final Settlement Statement Payoff Amount plus any Net Cash Proceeds from the first Contingent Payment under the Purchase Agreement (which shall be paid to Holders within three business days of when such amount is due and payable to Issuer, such date “First Contingent Payment Date”) plus the other payment(s) received by the Holders pursuant to the second paragraph in paragraph 1 hereof by the First Contingent Payment Date is more than the Minimum Payoff Amount, (i) Holder Fund II-A and Issuer shall amend the Fund II-A Note in writing to reflect that, immediately after the payments on the First Contingent Payment Date, the outstanding principal balance plus all accrued but unpaid interest on the Fund II-A Note shall be written down to an amount equal to $19,124,500.00 minus the amount of the aggregate payments received by Holder Fund II-A from Issuer in accordance with this Agreement, (ii) Holder Fund II-B and Issuer shall amend the Fund II-B Note in writing to reflect that, immediately after the payment on the First Contingent Payment Date, the outstanding principal balance plus all accrued but unpaid interest on the Fund II-B Note shall be written down to an amount equal to $3,875,500.00 minus the amount of the aggregate payments received by Holder Fund II-B from Issuer in accordance with this Agreement and (iii) the amended principal balance of each Note shall constitute the new Tranche A Adjusted Principal Balance.
Each amendment described in this paragraph 3 above, as applicable, is hereinafter referred to as a “Note Amendment” and collectively, the “Notes Amendments”.
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4. Survival of the Notes.
(A) If the Closing Payoff Amount has not been delivered in full to Holders by Issuer on or prior to July 31, 2020 due to the closing of the Purchase Agreement fails to occur on or prior to July 30, 2020, this Agreement shall be deemed automatically terminated and of no further force or effect, and the Notes (as in effect on the date hereof) shall remain binding on the Parties.
(B) If the Closing Payoff Amount plus the Final Settlement Statement Payoff Amount plus any Net Cash Proceeds from the first Contingent Payment under the Purchase Agreement received by Holders plus the other payment(s) received by the Holders pursuant to the second paragraph in paragraph 1 hereof by the First Contingent Payment Date is less than the Minimum Payoff Amount, (i) the Closing Payoff Amount, the Final Settlement Statement Payoff Amount, any Net Cash Proceeds from the first Contingent Payment under the Purchase Agreement received by Holders, and the other payment(s) received by the Holders pursuant to paragraph 1 hereof by the date that the Final Payoff Amount is due shall be deemed to constitute a Mandatory Prepayment under Article 3.4(a)(i) of the Notes, (ii) the Notes (as in effect on the date hereof) shall remain binding on the Parties, and (iii) paragraph 3 hereof shall be deemed automatically deleted and of no further force or effect.
(C) Except as expressly amended in accordance with the terms of this Agreement upon fulfilling the conditions set forth herein, all other terms and conditions of the Notes remain in full force and effect and Holders are not waiving any of its rights under the Notes by entering into this Agreement. Issuer hereby adopts, ratifies and confirms the Notes as maybe expressly amended hereby.
5. Holders’ Representations and Warranties.
(A) Holder Fund II-A hereby expressly represents and warrants to Issuer that it has not assigned, sold, transferred or otherwise conveyed or purported to assign, sell, transfer or otherwise convey all or any portion of the Fund II-A Note or any of the Obligations thereunder.
(B) Holder Fund II-B hereby expressly represents and warrants to Issuer that it has not assigned, sold, transferred or otherwise conveyed or purported to assign, sell, transfer or otherwise convey all or any portion of the Fund II-B Note or any of the Obligations thereunder.
6. Mutual Representations and Warranties. Each of the Parties acknowledges, agrees, represents and warrants that:
(A) It has duly executed and delivered this Agreement and is fully authorized to enter into and perform this Agreement and every term hereof;
(B) It has been represented by legal counsel in the negotiation and joint preparation of this Agreement, has received advice from legal counsel in connection with this Agreement and is fully aware of this Agreement’s provisions and legal effect; and
(C) It enters into this Agreement freely, without coercion, and based on its own judgment and not in reliance upon any representations or promises made by the other Parties, apart from those set forth in this Agreement.
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7. Severability. If any term, provision, covenant, agreement or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants, agreements and restrictions of this Agreement will continue in full force and effect and will in no way be affected, impaired or invalidated.
8. Notices. Unless otherwise provided herein, any notice, request, consent, instruction or other document to be given hereunder by any party hereto to the other party hereto shall be in writing and will be deemed given (a) when received if delivered personally or by courier; or (b) on the date receipt is acknowledged if delivered by certified mail, postage prepaid, return receipt requested; as follows:
If to a Holder, addressed to:
Old Ironsides Energy
Attention: Scott Carson
10 St. James Avenue, 19th Floor
Boston, Massachusetts 02116
scarson@oldironsidesenergy.com
With a copy to:
White & Case LLP
Attention: Mingda Zhao
609 Main Street
Suite 2900
Houston, Texas 77002
mingda.zhao@whitecase.com
If to Issuer, addressed to:
Carbon Energy Corporation
Attention: Patrick R. McDonald
1700 Broadway, Suite 1170
Denver, Colorado 80290
pmcdonald@carbonenergycorp.com
With a copy to:
Welborn Sullivan Meck & Tooley, P.C.
Attention: Jeffrey J. Peterson
1125 17th Street, Suite 2200
jpeterson@wsmtlaw.com
or to such other place and with such other copies as either party may designate as to itself by written notice to the others in accordance with this paragraph 8.
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9. Release and Indemnification of Holders. Issuer agrees to indemnify and hold Holders harmless from any and all claims, causes of action, and liabilities, of any kind or character, whether known or unknown, arising from and against any and all Indemnified Liabilities (as such term is defined in the Notes, provided that this Agreement shall be deemed to be a “Note Document” as defined therein) provided, the Issuer shall have no obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise from the gross negligence or willful misconduct of that Indemnitee as determined by a court of competent jurisdiction in a final, nonappealable order. Upon Holders’ receipt of the Payoff Discount, Issuer hereby forever releases, discharges and acquits Holders, and each of their successors, assigns, and Related Parties, from any and all obligations to Issuer (and its successors, assigns, and Related Parties) through the date hereof, and hereby further waives, releases and discharges, any and all claims (including, without limitation, crossclaims, counterclaims, rights of set-off and recoupment), demands, debts, accounts, contracts, liabilities, damages, actions and causes of actions, whether in law or in equity, of whatsoever nature and kind, whether known or unknown, whether now or hereafter existing, that Issuer at any time had or has, or that its successors, assigns, affiliates, shareholders and controlling persons hereafter can or may have against Holders, or any of their successors, assigns, or Related Parties through such date of payment, in each case, solely in connection with this Agreement, the Notes, all other documents executed in connection therewith, and the transactions contemplated thereby. As used herein, the term “Related Parties” means, with respect to any specified Person, such Person’s affiliates and the respective partners, directors, managers, officers, employees, agents, trustees, administrators, representatives and advisors (including attorneys, accountants and experts) of such Person and of such Person’s Affiliates.
10. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND INTERPRETED AND THE RIGHTS OF THE PARTIES GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK.
11. Jurisdiction, Consent to Service of Process, Waiver of Jury Trial.
(a) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT SHALL BE BROUGHT IN A DELAWARE STATE OR FEDERAL COURT LOCATED IN WILMINGTON, DELAWARE, AND NOT IN ANY OTHER STATE OR FEDERAL COURT IN THE UNITED STATES OF AMERICA OR ANY COURT IN ANY OTHER COUNTRY, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY HERETO HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVIENENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS.
(b) EACH PARTY HERETO IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT THE ADDRESS SPECIFIED IN PARAGRAPH 8 OR SUCH OTHER ADDRESS AS IS SPECIFIED PURSUANT TO PARAGRAPH 8 (OR ITS ASSIGNMENT AND ASSUMPTION), SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY HERETO IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY OTHER PARTY IN ANY OTHER JURISDICTION.
(c) EACH PARTY HERETO HEREBY (i) IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN; (ii) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER INANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES RELATING TO THIS AGREEMENT; (iii) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OF HOLDERS OR OF COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (iv) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS PARAGRAPH 11.
12. Entire Agreement. Subject to paragraph 4 hereof, this Agreement, together with its exhibits, contains all the agreements between the parties with respect to the matters described herein and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties, and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreement of the parties. There are no other warranties, representations or other agreements between the parties in connection with the subject matter and there are no unwritten oral agreements between the parties.
13. Counterpart Execution and Use of Photocopies. This Agreement may be executed in counterparts by signature of each of the Parties hereto, or their authorized representatives, on multiple copies of this Agreement, including copies transmitted by facsimile machine or electronically, and upon being so executed by all Parties hereto, shall be effective as if all signatures appeared on the original of this Agreement.
14. Recitals, Acknowledgement & Consent to Terms. The Parties acknowledge that the recitals contained hereinabove are true and correct to the best of their knowledge, and are made a part of this Agreement and incorporated by reference. The Parties acknowledge that they have read this Agreement, understand the promises, recitals, mutual covenants, terms and conditions contained herein, and voluntarily consent to the terms hereof.
15. Successors and Assigns. This Agreement, specifically including but not limited to the waiver and release provisions hereof, shall be binding upon and inure to the benefit of the Parties and their respective successors and assigns.
[Remainder of this page intentionally left blank]
6
IN WITNESS WHEREOF, the parties hereto have caused this Note to be duly executed by their respective authorized officers on the date and year first above written.
| ISSUER: | ||
| CARBON ENERGY CORPORATION | ||
| By: | /s/ Patrick R. McDonald | |
| Name: | Patrick R. McDonald | |
| Title: | Chief Executive Officer | |
Signature Page to Agreement Regarding Payoff and Release
7
| HOLDER FUND II-A: | ||
| OLD IRONSIDES FUND II-A PORTFOLIO HOLDING COMPANY, LLC | ||
| By: | /s/ Scott Carson | |
| Name: Scott Carson | ||
| Title: Managing Partner | ||
| HOLDER FUND II-B: | ||
| OLD IRONSIDES FUND II-B PORTFOLIO HOLDING COMPANY, LLC | ||
| By: | /s/ Scott Carson | |
| Name: Scott Carson | ||
| Title: Managing Partner | ||
Signature Page to Agreement Regarding Payoff and Release
8
Exhibit 99.1
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Introduction
The following unaudited pro forma consolidated financial statements present the historical consolidated financial statements of Carbon Energy Corporation, a Delaware corporation (“Carbon”), adjusted to give effect to the sale of all of the issued and outstanding membership interests of each of Carbon Appalachian Company, LLC, a Delaware limited liability company (“CAC”), and Nytis Exploration Company LLC, a Delaware limited liability company (“Nytis LLC” and together with CAC, the “Disposed Companies”) (the “Transactions”), during the periods presented. The unaudited pro forma consolidated statements of operations for the three months ended March 31, 2020 and for the years ended December 31, 2019 and 2018 give effect to the Transactions as if they were consummated on January 1, 2018, the beginning of the earliest period presented. The unaudited pro forma consolidated balance sheet as of March 31, 2020 gives effect to the Transactions as if they had been consummated on March 31, 2020.
The pro forma adjustments (as defined below) are preliminary and are subject to change as additional information becomes available and as additional analyses are performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma consolidated financial statements presented below. Upon completion of the Transactions, final valuations will be performed. Any increases or decreases in the fair value of relevant balance sheet amounts upon completion of the final valuations will result in adjustments to the pro forma balance sheet and/or statements of operations. Such differences may be material.
Assumptions and estimates underlying the unaudited adjustments to the pro forma consolidated financial statements (the “pro forma adjustments”) are described in the accompanying notes. The historical consolidated financial statements have been adjusted in the pro forma consolidated financial statements to give effect to pro forma events that are: (1) directly attributable to the Transactions; (2) factually supportable; and (3) with respect to the pro forma statements of operations, expected to have a continuing impact on the results of Carbon following the Transactions. The unaudited pro forma consolidated financial statements have been presented for illustrative purposes only and are not necessarily indicative of the operating results and financial position that would have been achieved had the Transactions occurred on the dates indicated. Further, the unaudited pro forma consolidated financial statements do not purport to project the future operating results or financial position of Carbon following the Transactions.
The unaudited pro forma consolidated financial statements have been developed from and should be read in conjunction with:
| ● | the accompanying notes to the unaudited pro forma consolidated financial statements; |
| ● | the historical audited consolidated financial statements of Carbon for the three months ended March 31, 2020 and for the fiscal years ended December 31, 2019 and 2018, included in Carbon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020; |
| ● | the unaudited combined and consolidated carve-out financial statements for the Disposed Companies as of and for the years ended December 31, 2019 and 2018, included in Carbon’s Definitive Information Statement filed with the Securities and Exchange Commission on May 4, 2020; and |
| ● | other information relating to Carbon contained in its Annual Report on Form 10-K for the year ended December 31, 2019 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. |
CARBON
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands)
| As of March 31, 2020 | ||||||||||||||||||
| Historical | Disposition of Business(2a) | Other Adjustments |
Pro
Forma |
|||||||||||||||
| ASSETS | ||||||||||||||||||
| Current assets: | ||||||||||||||||||
| Cash and cash equivalents | $ | 1,740 | $ | 1,999 | $ | 99,204 | 2c | $ | — | |||||||||
| (73,500 | ) | 2c | ||||||||||||||||
| (11,569 | ) | 2c | ||||||||||||||||
| (4,844 | ) | 2c | ||||||||||||||||
| (9,291 | ) | 2c | ||||||||||||||||
| 259 | 2g | |||||||||||||||||
| Restricted Cash | — | — | 4,844 | 2c | 4,844 | |||||||||||||
| Accounts receivable: | ||||||||||||||||||
| Revenue | 10,331 | 8,899 | — | 1,432 | ||||||||||||||
| Joint interest billings and other | 1,583 | 1,367 | — | 216 | ||||||||||||||
| Prepaid expenses, deposits and other current assets | 2,352 | 1,043 | — | 1,309 | ||||||||||||||
| Commodity derivative asset – current | 18,079 | 9,306 | — | 8,773 | ||||||||||||||
| Inventories | 1,943 | 1,510 | — | 433 | ||||||||||||||
| Total current assets | 36,028 | 24,124 | 5,103 | 17,007 | ||||||||||||||
| Due from related parties | — | 27,653 | 27,653 | 2f | — | |||||||||||||
| Property, plant and equipment, at cost: | ||||||||||||||||||
| Oil & gas properties | ||||||||||||||||||
| Proved, net | 239,842 | 97,258 | (30,199 | ) | 2e | 112,385 | ||||||||||||
| Unevaluated | 4,906 | 3,297 | — | 1,609 | ||||||||||||||
| Other property and equipment, net | 15,768 | 14,482 | — | 1,286 | ||||||||||||||
| 260,516 | 115,037 | (30,199 | ) | 115,280 | ||||||||||||||
| Investments in affiliates | 67 | 67 | 46,061 | 2d | — | |||||||||||||
| (73,463 | ) | 2d | ||||||||||||||||
| 27,402 | 2e | |||||||||||||||||
| Commodity derivative asset – non-current | 5,107 | 241 | — | 4,866 | ||||||||||||||
| Right of use assets | 5,689 | 3,828 | — | 1,861 | ||||||||||||||
| Other non-current assets | 980 | 734 | 3,400 | 2b | 3,646 | |||||||||||||
| Total non-current assets | 272,359 | 119,907 | (26,799 | ) | 125,653 | |||||||||||||
| Total assets | $ | 308,387 | $ | 171,684 | $ | 5,957 | $ | 142,660 | ||||||||||
CARBON
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET — (Continued)
(In thousands)
| As of March 31, 2020 | ||||||||||||||||||||
| Historical | Disposition of Business(2a) | Other Adjustments |
Pro
Forma |
|||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable and accrued liabilities | $ | 30,282 | $ | 19,255 | $ | 259 | 2g | $ | 11,286 | |||||||||||
| Firm transportation contract obligations | 5,571 | 3,629 | (1,942 | ) | 2e | — | ||||||||||||||
| Lease liability – current | 1,638 | 1,120 | — | 518 | ||||||||||||||||
| Credit facilities and notes payable – current | 3,311 | 3,311 | 2b | — | — | |||||||||||||||
| Total current liabilities | 40,802 | 27,315 | (1,683 | ) | 11,804 | |||||||||||||||
| Non-current liabilities: | — | |||||||||||||||||||
| Firm transportation contract obligations | 8,049 | 8,049 | — | — | ||||||||||||||||
| Lease liability – non-current | 3,966 | 2,708 | — | 1,258 | ||||||||||||||||
| Ad valorem taxes payable | 3,173 | 3,173 | — | — | ||||||||||||||||
| Commodity derivative liability – non-current | 25 | 25 | — | — | ||||||||||||||||
| Asset retirement obligations | 17,456 | 12,312 | 651 | 2e | 5,795 | |||||||||||||||
| Credit facilities and notes payable – non-current | 96,520 | 70,150 | 2b | (9,291 | ) | 2c | 17,079 | |||||||||||||
| Notes payable – related party | 46,517 | — | — | 46,517 | ||||||||||||||||
| Other long-term liability | — | — | — | — | ||||||||||||||||
| Total non-current liabilities | 175,706 | 96,417 | (8,640 | ) | 70,649 | |||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||||
| Preferred stock | 1 | — | — | 1 | ||||||||||||||||
| Common stock | 79 | — | — | 79 | ||||||||||||||||
| Additional paid-in capital | 86,037 | — | — | 86,037 | ||||||||||||||||
| Membership contributions | — | 46,061 | 46,061 | 2d | — | |||||||||||||||
| Accumulated deficit | (26,044 | ) | 477 | (55,928 | ) | 2d | (56,302 | ) | ||||||||||||
| (1,506 | ) | 2e | ||||||||||||||||||
| 27,653 | 2f | |||||||||||||||||||
| Total Carbon stockholders’ equity | 60,073 | 46,538 | 16,280 | 29,815 | ||||||||||||||||
| Non-controlling interest | 31,806 | 1,414 | — | 30,392 | ||||||||||||||||
| Total stockholders’ equity | 91,879 | 47,952 | 16,280 | 60,207 | ||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 308,387 | $ | 171,684 | $ | 5,957 | $ | 142,660 | ||||||||||||
See the accompanying notes which are an integral part of these unaudited pro forma consolidated financial statements.
CARBON
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| For the Three Months Ended March 31, 2020 | ||||||||||||||||||
| Historical | Disposition of Business | Other Adjustments |
Pro
Forma |
|||||||||||||||
| Revenue: | ||||||||||||||||||
| Natural gas sales | $ | 8,434 | $ | 8,020 | $ | — | $ | 414 | ||||||||||
| Natural gas liquids | 152 | $ | — | $ | — | 152 | ||||||||||||
| Oil sales | 7,216 | $ | 1,146 | $ | — | 6,070 | ||||||||||||
| Transportation and handling | 633 | $ | 633 | $ | — | — | ||||||||||||
| Marketing gas sales | 6,318 | $ | 6,318 | $ | — | — | ||||||||||||
| Commodity derivative gain | 19,714 | $ | 6,036 | $ | — | 13,678 | ||||||||||||
| Other loss | (2 | ) | $ | (2 | ) | $ | — | — | ||||||||||
| Total revenue | 42,465 | 22,151 | — | 20,314 | ||||||||||||||
| Expenses: | ||||||||||||||||||
| Lease operating expenses | 7,372 | $ | 4,146 | $ | — | 3,226 | ||||||||||||
| Pipeline operating expenses | 2,692 | $ | 2,692 | $ | — | — | ||||||||||||
| Transportation costs | 2,576 | $ | 1,696 | $ | — | 880 | ||||||||||||
| Production and property taxes | 10 | $ | (285 | ) | $ | — | 295 | |||||||||||
| Marketing gas purchases | 3,472 | $ | 3,472 | $ | — | — | ||||||||||||
| General and administrative | 3,303 | $ | 1,750 | $ | (688 | ) | 2h | 865 | ||||||||||
| Depreciation of property, plant and equipment | 3,811 | $ | 2,517 | $ | — | 1,294 | ||||||||||||
| Accretion of asset retirement obligations | 478 | $ | 317 | $ | — | 161 | ||||||||||||
| Total expenses | 23,714 | 16,305 | (688 | ) | 6,721 | |||||||||||||
| Operating income | 18,751 | 5,846 | 688 | 13,593 | ||||||||||||||
| Other expense: | ||||||||||||||||||
| Interest expense | (2,872 | ) | $ | (1,042 | ) | $ | 233 | 2i | (1,597 | ) | ||||||||
| Equity investment loss | (421 | ) | $ | (422 | ) | $ | — | (1 | ) | |||||||||
| Total other expense | (3,293 | ) | (1,464 | ) | 233 | (1,596 | ) | |||||||||||
| Income before income taxes | 15,548 | 4,382 | 921 | 11,997 | ||||||||||||||
| Income taxes: | ||||||||||||||||||
| Provision for income taxes | — | — | — | — | ||||||||||||||
| Net income attributable before non-controlling interest | 15,548 | 4,382 | 921 | 11,997 | ||||||||||||||
| Net income (loss) attributable to non-controlling interests | 5,659 | (60 | ) | — | 5,719 | |||||||||||||
| Net income attributable to controlling interests before preferred shares | 9,799 | $ | 4,442 | $ | 921 | 6,278 | ||||||||||||
| Net income attributable to preferred shares – preferred return | 75 | $ | — | $ | — | 75 | ||||||||||||
| Net income attributable to common shares | $ | 9,724 | $ | 4,442 | $ | 921 | $ | 6,203 | ||||||||||
CARBON
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS — (Continued)
(In thousands, except per share data)
| For the Three Months Ended March 31, 2020 | ||||||||||||||||
| Historical | Disposition of Business | Other Adjustments |
Pro
Forma |
|||||||||||||
| Net income per common share: | ||||||||||||||||
| Basic | $ | 1.25 | $ | 0.79 | ||||||||||||
| Diluted | $ | 1.20 | $ | 0.77 | ||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 7,809 | 7,809 | ||||||||||||||
| Diluted | 8,090 | 8,090 | ||||||||||||||
See the accompanying notes which are an integral part of these unaudited pro forma consolidated financial statements.
CARBON
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| For the Year Ended December 31, 2019 | ||||||||||||||||||
| Historical | Disposition of Business | Other Adjustments |
Pro
Forma |
|||||||||||||||
| Revenue: | ||||||||||||||||||
| Natural gas sales | $ | 56,468 | $ | 55,279 | $ | — | $ | 1,189 | ||||||||||
| Natural gas liquids | 578 | $ | — | $ | — | 578 | ||||||||||||
| Oil sales | 36,795 | $ | 5,806 | $ | — | 30,989 | ||||||||||||
| Transportation and handling | 1,928 | $ | 1,928 | $ | — | — | ||||||||||||
| Marketing gas sales | 16,920 | $ | 16,920 | $ | — | — | ||||||||||||
| Commodity derivative gain (loss) | 3,044 | $ | 8,208 | $ | — | (5,164 | ) | |||||||||||
| Other (loss) income | 892 | $ | 243 | $ | — | 649 | ||||||||||||
| Total revenue | 116,625 | 88,384 | — | 28,241 | ||||||||||||||
| Expenses: | ||||||||||||||||||
| Lease operating expenses | 29,714 | $ | 16,038 | $ | — | 13,676 | ||||||||||||
| Pipeline operating expenses | 11,153 | $ | 11,153 | $ | — | — | ||||||||||||
| Transportation costs | 6,086 | $ | 3,698 | $ | — | 2,388 | ||||||||||||
| Production and property taxes | 5,507 | $ | 3,674 | $ | — | 1,833 | ||||||||||||
| Marketing gas purchases | 18,684 | $ | 18,684 | $ | — | — | ||||||||||||
| General and administrative | 16,342 | $ | 7,147 | $ | (2,750 | ) | 2h | 6,443 | ||||||||||
| General and administrative – related party reimbursement | — | $ | — | $ | — | — | ||||||||||||
| Depreciation of property, plant and equipment | 15,757 | $ | 11,152 | $ | — | 4,605 | ||||||||||||
| Accretion of asset retirement obligations | 1,625 | $ | 1,084 | $ | — | 541 | ||||||||||||
| Impairment of oil and gas properties | — | $ | — | $ | — | — | ||||||||||||
| Total expenses | 104,868 | 72,630 | (2,750 | ) | 29,486 | |||||||||||||
| Operating income | 11,757 | 15,754 | 2,750 | (1,245 | ) | |||||||||||||
| Other income and (expense): | ||||||||||||||||||
| Interest income | 2 | $ | 2 | $ | — | — | ||||||||||||
| Interest expense | (12,850 | ) | $ | (5,359 | ) | $ | 867 | 2i | (6,624 | ) | ||||||||
| Other expenses | — | $ | — | $ | — | — | ||||||||||||
| Warrant derivative income | — | $ | — | $ | — | — | ||||||||||||
| Equity investment income (loss) | 90 | $ | 93 | $ | — | (3 | ) | |||||||||||
| Gain on sale of oil and gas properties | — | $ | — | $ | — | — | ||||||||||||
| Total other income and (expense) | (12,758 | ) | (5,264 | ) | 867 | (6,627 | ) | |||||||||||
| Loss before income taxes | (1,001 | ) | 10,490 | 3,617 | (7,872 | ) | ||||||||||||
| Income taxes: | ||||||||||||||||||
| Provision for income taxes | — | — | — | — | ||||||||||||||
| Net income attributable before non-controlling interest | (1,001 | ) | 10,490 | 3,617 | (7,872 | ) | ||||||||||||
| Net income (loss) attributable to non-controlling interests | (2,098 | ) | $ | (195 | ) | $ | — | (1,903 | ) | |||||||||
| Net income (loss) attributable to controlling interests before preferred shares | 1,097 | $ | 10,684 | $ | 3,617 | (5,969 | ) | |||||||||||
| Net income attributable to preferred shares – preferred return | 300 | $ | — | $ | — | 300 | ||||||||||||
| Net income attributable to common shares | $ | 797 | $ | 10,684 | $ | 3,617 | $ | (6,269 | ) | |||||||||
CARBON
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS — (Continued)
(In thousands, except per share data)
| For the Year Ended December 31, 2019 | ||||||||||||||||
| Historical | Disposition of Business | Other Adjustments |
Pro
Forma |
|||||||||||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic | $ | 0.10 | $ | (0.80 | ) | |||||||||||
| Diluted | $ | 0.10 | $ | (0.77 | ) | |||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 7,794 | 7,794 | ||||||||||||||
| Diluted | 8,095 | 8,095 | ||||||||||||||
See the accompanying notes which are an integral part of these unaudited pro forma consolidated financial statements.
CARBON
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| For the Year Ended December 31, 2018 | ||||||||||||||||||
| Historical | Disposition of Business | Other Adjustments |
Pro
Forma |
|||||||||||||||
| Revenue: | ||||||||||||||||||
| Natural gas sales | $ | 16,018 | $ | 14,778 | $ | — | $ | 1,240 | ||||||||||
| Natural gas liquids | 1,143 | $ | — | $ | — | 1,143 | ||||||||||||
| Oil sales | 30,891 | $ | 5,724 | $ | — | 25,167 | ||||||||||||
| Transportation and handling | — | $ | — | $ | — | — | ||||||||||||
| Marketing gas sales | — | $ | — | $ | — | — | ||||||||||||
| Commodity derivative gain (loss) | 4,894 | $ | (45 | ) | $ | — | 4,939 | |||||||||||
| Other (loss) income | 105 | $ | 80 | $ | — | 25 | ||||||||||||
| Total revenue | 53,051 | 20,537 | — | 32,514 | ||||||||||||||
| Expenses: | ||||||||||||||||||
| Lease operating expenses | 15,960 | $ | 7,229 | $ | — | 8,731 | ||||||||||||
| Pipeline operating expenses | — | $ | — | $ | — | — | ||||||||||||
| Transportation costs | 4,453 | $ | 2,519 | $ | — | 1,934 | ||||||||||||
| Production and property taxes | 1,813 | $ | 1,035 | $ | — | 778 | ||||||||||||
| Marketing gas purchases | — | $ | — | $ | — | — | ||||||||||||
| General and administrative | 15,778 | $ | 3,536 | $ | (750 | ) | 2j | 5,546 | ||||||||||
| (3,947 | ) | 2k | ||||||||||||||||
| (1,999 | ) | 2n | ||||||||||||||||
| General and administrative – related party reimbursement | (4,547 | ) | $ | (600 | ) | $ | 3,947 | 2k | — | |||||||||
| Depreciation of property, plant and equipment | 8,108 | $ | 4,398 | $ | — | 3,710 | ||||||||||||
| Accretion of asset retirement obligations | 868 | $ | 476 | $ | — | 392 | ||||||||||||
| Impairment of oil and gas properties | — | $ | — | $ | — | — | ||||||||||||
| Total expenses | 42,433 | 18,593 | (2,749 | ) | 21,091 | |||||||||||||
| Operating income | 10,618 | 1,944 | 2,749 | 11,423 | ||||||||||||||
| Other income and (expense): | ||||||||||||||||||
| Interest income | 2 | $ | 2 | $ | — | — | ||||||||||||
| Interest expense | (5,922 | ) | $ | (8 | ) | $ | 1,814 | 2l | (4,100 | ) | ||||||||
| Other expenses | (3 | ) | $ | — | $ | — | (3 | ) | ||||||||||
| Warrant derivative income | 225 | $ | (2 | ) | $ | — | 227 | |||||||||||
| Equity investment income (loss) | 2,469 | $ | 85 | $ | (2,383 | ) | 2m | 1 | ||||||||||
| Gain on sale of oil and gas properties | 5,390 | $ | — | $ | — | 5,390 | ||||||||||||
| Total other income and (expense) | 2,161 | 77 | (569 | ) | 1,515 | |||||||||||||
| Loss before income taxes | 12,779 | 2,021 | 2,180 | 12,938 | ||||||||||||||
| Income taxes: | ||||||||||||||||||
| Provision for income taxes | — | — | — | — | ||||||||||||||
| Net income attributable before non-controlling interest | 12,779 | 2,021 | 2,180 | 12,938 | ||||||||||||||
| Net income (loss) attributable to non-controlling interests | 4,375 | $ | (82 | ) | $ | — | 4,457 | |||||||||||
| Net income (loss) attributable to controlling interests before preferred shares | 8,404 | $ | 2,103 | $ | 2,179 | 8,481 | ||||||||||||
| Net income attributable to preferred shares – beneficial conversion feature | 1,125 | $ | — | $ | — | 1,125 | ||||||||||||
| Net income attributable to preferred shares – preferred return | 224 | $ | — | $ | — | 224 | ||||||||||||
| Net income attributable to common shares | $ | 7,055 | $ | 2,103 | $ | 2,179 | $ | 7,132 | ||||||||||
CARBON
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS — (Continued)
(In thousands, except per share data)
| For the Year Ended December 31, 2018 | ||||||||||||||||
| Historical | Disposition of Business | Other Adjustments |
Pro
Forma |
|||||||||||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic | $ | 0.94 | $ | 0.95 | ||||||||||||
| Diluted | $ | 0.87 | $ | 0.91 | ||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 7,525 | 7,525 | ||||||||||||||
| Diluted | 7,839 | 7,839 | ||||||||||||||
See the accompanying notes which are an integral part of these unaudited pro forma consolidated financial statements.
NOTES
TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Basis of Pro Forma Presentation
The pro forma adjustments have been prepared as if the Transactions had taken place on March 31, 2020 in the case of the pro forma balance sheet and on January 1, 2018 in the case of the pro forma statements of operations. The pro forma adjustments are described in Note 2. “Unaudited Pro Forma Adjustments” to these unaudited pro forma consolidated financial statements.
The pro forma adjustments represent management’s estimates based on information available as of the date of this document and are subject to change as additional information becomes available and additional analyses are performed. The pro forma financial statements do not reflect transaction or other costs following the Transactions that are not expected to have a continuing impact. Further, one-time transaction-related expenses anticipated to be incurred prior to, or concurrent with, closing the Transactions are not included in the pro forma statements of operations. However, the impact of such transaction expenses is reflected in the pro forma balance sheet.
2. Unaudited Pro Forma Adjustments
The following notes describe the basis for and/or assumptions regarding the pro forma adjustments included in the Company’s unaudited pro forma statements.
All dollar amounts (except share and per share data) presented in the notes to our unaudited pro forma condensed consolidated financial statements are stated in thousands of dollars, unless otherwise noted. Amounts may not foot due to rounding.
| (a) | Recording of the disposition of CAC and Nytis LLC |
The amounts include the assets and liabilities attributable to the business being sold.
| (b) | Recording of the net proceeds, net of estimated transaction related expenses |
Set forth below is a calculation of the net proceeds. The fair value of the contingent payment receivable of $3,400 has been estimated using a discounted, probability-weighted model based on Nymex strip pricing for Henry Hub as of April 3, 2020.
| Cash proceeds from sale, net of adjustments | $ | 99,204 | |||
| Contingent payment receivable | 3,400 | ||||
| Less: repayment of Credit Facility with Prosperity Bank | (73,500 | ) | |||
| Less: transaction costs, including legal, accounting and severance-related items | (11,569 | ) | |||
| Net proceeds | $ | 17,535 |
| (c) | Recording of repayment of Credit Facility with Prosperity Bank and promissory notes held by entities managed by Old Ironsides Energy, LLC |
The March 31, 2020 pro forma payoff of the Credit Facility was initially estimated at $73,500, the outstanding amount under the Credit Facility. However, the ultimate payoff at the closing of the Transactions, after consideration of principal payments made between April 1, 2020 and May 26, 2020, was approximately $72,300. The difference of approximately $1,200 in funds will be utilized to make a minimum $10,500 payment to Old Ironsides Energy, LLC.
| Cash proceeds from sale, net of adjustments | $ | 99,204 | |||
| Less: repayment of Credit Facility with Prosperity Bank | (73,500 | ) | |||
| Less: transaction costs | (11,569 | ) | |||
| Less: funds to be held in escrow (restricted cash) | (4,844 | ) | |||
| Less: proceeds retained by Nytis Exploration (USA) Inc. | — | ||||
| Net cash proceeds from sale | $ | 9,291 | |||
| Partial repayment of promissory notes | (9,291 | ) | |||
| Total cash proceeds less repayment of debt | $ | — |
| (d) | The estimated loss on the sale of the business if we had completed the sale as of March 31, 2020 is calculated as follows: |
| Net proceeds less transaction costs (Note 2(b)) | $ | 17,535 | |||
| Net assets sold | (73,463 | ) | |||
| Loss on sale | $ | (55,928 | ) |
Carbon’s Investments in affiliates account (representing its investments in Nytis LLC and CAC) is eliminated against Nytis LLC’s and CAC’s Membership contributions account when presented on a consolidated basis, as represented in the Historical balance sheet above. Therefore, when Nytis LLC and CAC are represented on a combined standalone basis (without consolidating with Carbon), an adjustment of $46,061 to reverse the effects of this elimination is required to re-establish the Investment in affiliates balance on Carbon’s balance sheet. Net assets sold are removed from Carbon’s Investments in affiliates account. The loss on sale is adjusted within accumulated deficit.
| (e) | Recording reversal of historical purchase price accounting basis step up |
In December 2018, Carbon purchased Old Ironsides’ membership interests in CAC, requiring Carbon to consolidate CAC. Historical purchase price accounting entries associated with the consolidation of CAC included (i) a step up in basis of the purchased proved oil and gas assets of $30,199, which is reversed above; (ii) an increase in firm transportation contract obligations of $1,942, which is reversed above; (iii) a decrease in asset retirement obligation of $651, which is reversed above; (iv) an adjustment to Carbon’s investment in CAC of $27,402, which is reversed above within Investments in affiliates; and (v) an increase in intercompany receivable between Carbon and CAC of $1,506, which is reversed above within accumulated deficit as a partial offset to the elimination described in Note 2(f).
| (f) | Recording elimination of intercompany balances between Carbon and the disposed entities of CAC and Nytis LLC |
| (g) | Presentation adjustment |
A reclassification entry is made between cash and cash equivalents and accounts payable to reflect a pro forma zero cash balance.
| (h) | Recording reduction in staffing and consulting expenses associated with disposed assets |
| (i) | Recording reduction in interest expense associated with partial payment of the promissory notes held by entities managed by Old Ironsides Energy, LLC (See Note 2(c)) |
| (j) | Recording reduction of approximately $750 in consulting expenses associated with the disposition of CAC and Nytis LLC |
| (k) | Prior to Carbon’s consolidation of CAC in December 2018, Carbon earned management fees from CAC, which were included within General and administrative – related party reimbursement on its consolidated statements of operations. An adjustment is made to eliminate these management fees and the associated staffing costs incurred at Carbon in providing those services, each in the amount of $3,947 (after giving effect to the $600 partial elimination associated with the disposition of CAC and Nytis LLC). |
| (l) | Recording reduction in interest expense associated with prior credit facility at Carbon that was collateralized by the Nytis LLC assets |
| (m) | Recording elimination of CAC-related equity investment income |
Prior to Carbon’s consolidation of CAC in December 2018, Carbon accounted for its minority equity interest in CAC as an equity investment. The adjustment removes the associated equity investment income.
| (n) | Recording elimination of expenses associated with abandoned equity raise |
In 2018, Carbon incurred $1,999 in non-recurring expenses associated with a potential equity raise that was abandoned.
3. Supplemental Financial Data — Oil and Gas Producing Activities
Estimated Proved Oil, Natural Gas, and Natural Gas Liquid Reserves
The following tables present the estimated pro forma net proved, net proved developed, and net proved undeveloped oil, natural gas, and natural gas liquid reserves as of December 31, 2019, along with a summary of changes in the net proved oil, natural gas, and natural gas liquids reserves during the year ended December 31, 2019. The pro forma reserve information set forth below gives effect to the Transactions as if they had been completed on January 1, 2019. Proved oil, natural gas, and natural gas liquid 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. Proved developed oil, natural gas, and natural gas liquids 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, natural gas, and natural gas liquids 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.
|
Oil
MBbls |
||||||||||||
| Historical | Disposition of Business | Pro Forma | ||||||||||
| Proved reserves, beginning of year | 18,898 | 1,382 | 17,516 | |||||||||
| Revisions of previous estimates | (1,362 | ) | 1 | (1,363 | ) | |||||||
| Extensions and discoveries | 826 | — | 826 | |||||||||
| Production | (589 | ) | (109 | ) | (480 | ) | ||||||
| Purchases of reserves in-place | — | — | — | |||||||||
| Sales of reserves in-place | (31 | ) | (27 | ) | (4 | ) | ||||||
| Proved reserves, end of year | 17,742 | 1,247 | 16,495 | |||||||||
| Proved developed reserves at: | ||||||||||||
| End of year | 12,972 | 1,247 | 11,725 | |||||||||
| Proved undeveloped reserves at: | ||||||||||||
| End of year | 4,770 | — | 4,770 | |||||||||
|
Natural Gas
MMcf |
||||||||||||
| Historical | Disposition of Business | Pro Forma | ||||||||||
| Proved reserves, beginning of year | 455,400 | 433,296 | 22,104 | |||||||||
| Revisions of previous estimates | 24,194 | 27,052 | (2,858 | ) | ||||||||
| Extensions and discoveries | 1,187 | — | 1,187 | |||||||||
| Production | (21,436 | ) | (21,026 | ) | (410 | ) | ||||||
| Purchases of reserves in-place | — | — | — | |||||||||
| Sales of reserves in-place | (8,980 | ) | (8,980 | ) | — | |||||||
| Proved reserves, end of year | 450,365 | 430,342 | 20,023 | |||||||||
| Proved developed reserves at: | ||||||||||||
| End of year | 444,104 | 430,342 | 13,762 | |||||||||
| Proved undeveloped reserves at: | ||||||||||||
| End of year | 6,261 | — | 6,261 | |||||||||
|
NGL
MBbls |
||||||||||||
| Historical | Disposition of Business | Pro Forma | ||||||||||
| Proved reserves, beginning of year | 1,923 | — | 1,923 | |||||||||
| Revisions of previous estimates | (618 | ) | — | (618 | ) | |||||||
| Extensions and discoveries | 77 | — | 77 | |||||||||
| Production | (36 | ) | — | (36 | ) | |||||||
| Purchases of reserves in-place | — | — | — | |||||||||
| Sales of reserves in-place | — | — | — | |||||||||
| Proved reserves, end of year | 1,346 | — | 1,346 | |||||||||
| Proved developed reserves at: | ||||||||||||
| End of year | 936 | — | 936 | |||||||||
| Proved undeveloped reserves at: | ||||||||||||
| End of year | 410 | — | 410 | |||||||||
|
Total
MMcfe |
||||||||||||
| Historical | Disposition of Business | Pro Forma | ||||||||||
| Proved reserves, beginning of year | 580,326 | 441,586 | 138,740 | |||||||||
| Revisions of previous estimates | 12,310 | 27,055 | (14,745 | ) | ||||||||
| Extensions and discoveries | 6,605 | — | 6,605 | |||||||||
| Production | (25,182 | ) | (21,680 | ) | (3,502 | ) | ||||||
| Purchases of reserves in-place | — | — | — | |||||||||
| Sales of reserves in-place | (9,166 | ) | (9,143 | ) | (23 | ) | ||||||
| Proved reserves, end of year | 564,893 | 437,818 | 127,075 | |||||||||
| Proved developed reserves at: | ||||||||||||
| End of year | 527,555 | 437,818 | 89,737 | |||||||||
| Proved undeveloped reserves at: | ||||||||||||
| End of year | 37,338 | — | 37,338 | |||||||||
Standardized Measure of Discounted Future Net Cash Flows
The pro forma standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves as of December 31, 2019 is as follows. 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 our proved reserves. Management does not rely upon the information that follows in making investment decisions.
| December 31, 2019 | ||||||||||||
| (in thousands) | Historical | Disposition of Business | Pro Forma | |||||||||
| Future cash inflows | $ | 2,212,049 | $ | 1,098,503 | $ | 1,113,546 | ||||||
| Future production costs | (1,306,608 | ) | (665,403 | ) | (641,204 | ) | ||||||
| Future development costs | (77,952 | ) | — | (77,952 | ) | |||||||
| Future income taxes | (146,951 | ) | (63,757 | ) | (83,194 | ) | ||||||
| Future net cash flows | 680,539 | 369,343 | 311,196 | |||||||||
| 10% annual discount | (408,691 | ) | (235,265 | ) | (173,426 | ) | ||||||
| Standardized measure of discounted future net cash flows | $ | 271,848 | $ | 134,078 | $ | 137,770 | ||||||
The changes in the pro forma standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves for the year ended December 31, 2019 are as follows:
| December 31, 2019 | ||||||||||||
| (in thousands) | Historical | Disposition of Business | Pro Forma | |||||||||
| Standardized measure of discounted future net cash flows, beginning of period | $ | 392,068 | $ | 190,360 | $ | 201,708 | ||||||
| Sales of oil and gas, net of production costs and taxes | (49,746 | ) | (34,787 | ) | (14,959 | ) | ||||||
| Price revisions | (158,799 | ) | (98,429 | ) | (60,370 | ) | ||||||
| Extensions, discoveries and improved recovery, less related costs | 10,822 | — | 10,822 | |||||||||
| Changes in estimated future development costs | (3,041 | ) | (157 | ) | (2,884 | ) | ||||||
| Development costs incurred during the period | 6,685 | 542 | 6,143 | |||||||||
| Quantity revisions | 5,565 | 26,321 | (20,756 | ) | ||||||||
| Accretion of discount | 39,207 | 19,036 | 20,171 | |||||||||
| Net changes in future income taxes | 39,929 | 17,932 | 21,997 | |||||||||
| Purchases of reserves-in-place | — | — | — | |||||||||
| Sales of reserves-in-place | (4,004 | ) | (3,954 | ) | (49 | ) | ||||||
| Changes in production rate timing and other | (6,838 | ) | 17,214 | (24,052 | ) | |||||||
| Standardized measure of discounted future net cash flows, end of period | $ | 271,848 | $ | 134,078 | $ | 137,770 | ||||||
The twelve-month weighted averaged adjusted prices in effect at December 31, 2019 were as follows:
| 2019 | ||||
| Oil (per Bbl) | $ | 55.69 | ||
| Natural Gas (per Mcf) | $ | 2.58 | ||