8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported): January 7, 2019

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) 407-7030

(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))

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 13(a) of the Exchange Act.  ☐

Explanatory Note:  On January 7, 2019, Carbon Energy Corporation (the “Company” or “Carbon”) filed a Current Report (the “Original Report”) on Form 8-K to report the final closing under the May 4, 2018 Membership Interest Purchase Agreement, as amended (the “MIPA”), among the Company, as buyer, and Old Ironsides Fund II-A Portfolio Holding Company, LLC, a Delaware limited liability company (“OIE II-A”), and Old Ironsides Fund II-B Portfolio Holding Company, LLC, a Delaware limited liability company (“OIE II-B” and collectively with OIE II-A, the “Sellers”), as seller, concerning the purchase by the Company of all of the Class A Units of Carbon Appalachian Company, LLC (“Carbon Appalachia”) held by the Sellers.  The closing of the MIPA transaction resulted in the Company owning all of the outstanding Membership Interests of Carbon Appalachia, along with its direct and indirect subsidiaries (Carbon Appalachia Group, LLC, Carbon Tennessee Mining Company, LLC, Carbon Appalachia Enterprises, LLC, Carbon West Virginia Company, LLC, Cranberry Pipeline Corporation, Knox Energy, LLC, Coalfield Pipeline Company and Appalachia Gas Services Company, LLC), which are now wholly-owned subsidiaries of the Company. 

As required by Item 9.01 of Form 8-K, within 71 days of the due date of the Original Report, we are required to provide financial statements and pro forma financial information described below.

This report amends the Original Report to provide such financial statements.

Item 9.01 Financial Statements and Exhibits.

(a) Financial statements of businesses acquired

Attached hereto as Exhibit 99.1 and Exhibit 99.2 are the following:

The audited consolidated financial statements of Carbon Appalachian Company, LLC and subsidiaries as of and for the period from April 3, 2017 (inception) to December 31, 2017, and related notes thereto and the Independent Auditor’s Report.

The unaudited consolidated financial statements of Carbon Appalachian Company, LLC and subsidiaries as of and for the nine months ended September 30, 2018 and for the period from April 3, 2017 (inception) to September 30, 2017, and related notes thereto.

(b) Pro forma financial information

The unaudited pro forma condensed combined financial information of the Company as of and for the nine months ended September 30, 2018 and 2017, giving effect to the acquisition of Carbon Appalachia.

(d) Exhibits:

23.1	Consent of EKS&H, LLLP, independent accountants
99.1	Carbon Appalachian Company, LLC’s audited historical consolidated financial statements and related notes thereto as of and for the period from April, 3 2017 (inception) to December 31, 2017
99.2	Carbon Appalachian Company, LLC’s unaudited historical consolidated financial statements and related notes thereto as of and for the nine months ended September 30, 2018 and for the period from April 3, 2017 (inception) to September 30, 2017
99.3	Carbon Energy Corporation’s unaudited pro forma condensed combined financial information as of and for the nine months ended September 30, 2018 and 2017, giving effect to the acquisition of Carbon Appalachia

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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.

	CARBON ENERGY CORPORATION
March 19, 2019	/s/ Patrick R. McDonald
	Patrick R. McDonald, Chief Executive Officer

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EX-23.1

Exhibit 23.1

Consent of Independent Public Accounting Firm

We consent to the incorporation by reference in Carbon Natural Gas Company’s Registration Statement on Form S-8 (File No. 333-179184) of our report dated March 31, 2018 relating to the audit of Carbon Appalachian Company, LLC’s consolidated financial statements, which appears in the Form 8-K/A of Carbon Energy Corporation to be filed on March 19, 2019.

EKS&H LLLP

Denver, Colorado

March 19, 2019

EX-99.1

Exhibit 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Members and Board of Directors

Carbon Appalachian Company, LLC

Denver, Colorado

OPINION ON THE FINANCIAL STATEMENTS

We have audited the accompanying consolidated balance sheet of Carbon Appalachian Company, LLC (the “Company”) as of December 31, 2017, and the related consolidated statements of operations, members’ equity, and cash flows, for the period from April 3, 2017 through December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the period from April 3, 2017 through December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

BASIS FOR OPINION

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with relevant ethical requirements relating to our audit.

We conducted our audit in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting 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.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ EKS&H LLLP

EKS&H LLLP

March 31, 2018

Denver, Colorado

We have served as the Company’s auditor since 2017.

CARBON APPALACHIAN COMPANY, LLC

Consolidated Balance Sheet

(In thousands)

	December 31,
	2017
ASSETS
Current assets:
Cash and cash equivalents	$	4,512
Accounts receivable:
Revenue		10,682
Trade receivables		1,569
Commodity derivative asset		1,884
Inventories		1,660
Prepaid expense and deposits		487
Total current assets		20,794
Property and equipment (note 4)
Oil and gas properties, full cost method of accounting:
Proved, net		82,622
Unproved		1,780
Other property, plant, and equipment, net		12,677
Total property and equipment		97,079
Other non-current assets		683
Total assets	$	118,556
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	12,070
Due to related parties (note 11)		1,852
Firm transportation contract obligation		4,285
Total current liabilities		18,207
Non-current liabilities:
Asset retirement obligations		4,789
Firm transportation contract obligation		14,843
Production and property taxes payable		1,813
Revolver (note 5)		37,975
Total non-current liabilities		59,420
Commitments and contingencies (note 9)
Members’ equity:
Members’ contributions		37,924
Retained earnings		3,005
Total members’ equity		40,929
Total liabilities and members’ equity	$	118,556

See accompanying Notes to Consolidated Financial Statements.

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CARBON APPALACHIAN COMPANY, LLC

Consolidated Statement of Operations

(In thousands)

	For the period April 3, 2017 (inception) through December 31, 2017
Revenue:
Natural gas sales	$	16,128
Oil sales		685
Transportation and handling		911
Marketing gas sales		11,315
Commodity derivative gain		2,545
Total revenue		31,584
Expenses:
Lease operating		5,587
Transportation, gathering, and compression		4,160
Production and property taxes		1,464
Marketing gas purchases		9,290
General and administrative		2,044
Depreciation, depletion and amortization		2,439
Accretion of asset retirement obligations		198
Management and operating fee, related party (note 11)		1,582
Total expenses		26,764
Operating income		4,820
Other expenses:
Class B Units issuance (note 10)		924
Interest expense		891
Total other expense		1,815
Net income	$	3,005

 See accompanying Notes to Consolidated Financial Statements.

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CARBON APPALACHIAN COMPANY, LLC

Consolidated Statement of Members’ Equity

(In thousands, except unit amounts)

	Members’ Contributions														Total
	Class A Units		Amount		Class B Units		Amount		Class C Units		Amount		Retained Earnings		Members’ Equity
April 3, 2017		-	$	-			$	-		-	$	-	$	-	$	-
Initial capital members’ unit contributions (note 10)		37,000		37,000		1,000		924		121		-		-		37,924
Net income		-		-		-		-		-		-		3,005		3,005
Balances at December 31, 2017		37,000	$	37,000		1,000	$	924		121	$	-	$	3,005	$	40,929

See accompanying Notes to Consolidated Financial Statements.

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CARBON APPALACHIAN COMPANY, LLC

Consolidated Statement of Cash Flows

(In thousands)

	For the period from April 3, 2017 (inception) through December 31,
	2017
Cash flows from operating activities:
Net income	$	3,005
Items not involving cash:
Depreciation, depletion and amortization		2,439
Accretion of asset retirement obligations		198
Commodity derivative gain		(2,039	)
Amortization of Revolver issuance costs		79
Class B units issuance		924
Net change in:
Accounts receivable		(12,168	)
Inventories		270
Prepaid expense and deposits		(307	)
Accounts payable, accrued liabilities and firm transportation contract obligation		10,184
Due to related parties		1,852
Net cash provided by operating activities		4,437
Cash flows from investing activities:
Development of oil and gas properties and other property, plant, and equipment		(528	)
Acquisition of oil and gas properties		(73,585	)
Other non-current assets		(124	)
Net cash used in investing activities		(74,237	)
Cash flows from financing activities:
Members’ contributions		37,000
Proceeds from Revolver		37,975
Payments of Revolver issuance costs		(663	)
Net cash provided by financing activities		74,312
Net increase in cash and cash equivalents		4,512
Cash and cash equivalents, beginning of period		-
Cash and cash equivalents, end of period	$	4,512

See note 12 – Supplemental Cash Flow Disclosure

See accompanying Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

Note 1 – Organization

On December 16, 2016, Carbon Appalachian Company, LLC (the “Company” or “CAC”) was formed, as a Delaware limited liability company, by Carbon Natural Gas Company (“Carbon”) a Delaware Corporation, entities managed by Yorktown Energy Partners XI, L.P. (“Yorktown”), and entities managed by Old Ironsides (“Old Ironsides”), to acquire producing assets in the Appalachian Basin in Kentucky, Tennessee, Virginia and West Virginia. The Company began substantial operations on April 3, 2017 (“Inception”). The Company is engaged primarily in acquiring, developing, exploiting, producing, processing, marketing, and transporting oil and natural gas in the Appalachia Basin.

Equity and ownership

On April 3, 2017, Carbon, Yorktown and Old Ironsides entered in to a limited liability company agreement (the “Carbon Appalachia LLC Agreement”), with an initial equity commitment of $100.0 million, of which $37.0 million has been contributed as of December 31, 2017.

On April 3, 2017, the Company (i) issued Class A Units to Carbon, Yorktown and Old Ironsides for an aggregate cash consideration of $12.0 million, (ii) issued Class B Units to Carbon, and (iii) issued Class C Units to Carbon. Additionally, Carbon Appalachia Enterprises, LLC, formerly known as Carbon Tennessee Company, LLC (“Carbon Appalachia Enterprises”), a subsidiary of the Company, entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank (the “Revolver”) with an initial borrowing base of $10.0 million.

On April 3, 2017, borrowings under the Revolver, along with the initial equity contributions made to the Company, were used to complete the acquisition of natural gas producing properties and related facilities located predominantly in Tennessee (the “Knox-Coalfield Acquisition”). The purchase price was $20.0 million, subject to normal and customary closing adjustments. Carbon Appalachia Enterprises used $8.5 million drawn from the credit facility toward the purchase price.

In connection with Carbon entering into the Carbon Appalachia LLC Agreement, and Carbon Appalachia engaging in the transactions described above, Carbon received 1,000 Class B units and issued to Yorktown a warrant to purchase approximately 408,000 shares of Carbon’s common stock at an exercise price dictated by the warrant agreement (the “Appalachia Warrant”). The Appalachia Warrant is payable exclusively with Class A Units of Carbon Appalachia held by Yorktown. On November 1, 2017, Yorktown exercised the Appalachia Warrant, resulting in Carbon acquiring 2,940 Class A Units from Yorktown.

Net proceeds from the April 3, 2017 transactions were used by the Company to complete the Knox-Coalfield, Enervest, and Cabot(defined below). The remainder of the net proceeds were used to fund field development projects, future complementary acquisitions, and working capital.

On August 15, 2017, the Carbon Appalachia LLC Agreement was amended and, as a result, Carbon will contribute its initial commitment of future capital contributions as well as Yorktown’s, and Yorktown will not participate in future capital contributions. The Company issued Class A Units to Carbon and Old Ironsides for an aggregate cash consideration of $14.0 million. The borrowing base of the Revolver increased to $22.0 million and Carbon Appalachia Enterprises borrowed $8.0 million under the Revolver.

On August 15, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties and related facilities located predominantly in the state of West Virginia (the “Enervest Acquisition”). The purchase price was $21.5 million, subject to normal and customary closing adjustments. The contributions from members and funds drawn from the credit facility were used to pay the purchase price.

On September 29, 2017, the Company issued Class A Units to Carbon and Old Ironsides for an aggregate cash consideration of $11.0 million. The Revolver was amended to include East West Bank as a participating lender, the borrowing base of the Revolver increased to $50.0 million and Carbon Appalachia Enterprises borrowed $20.4 million from the Revolver.

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On September 29, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties, natural gas gathering pipelines and related facilities located predominantly in the state of West Virginia (the “Cabot Acquisition”). The purchase price was $41.3 million, subject to normal and customary closing adjustments. The contributions from members and funds drawn from the credit facility were used to pay the purchase price.

On November 30, 2017, Carbon Appalachia Enterprises amended the Revolver, resulting in the addition of Bank SNB as a participating lender. The borrowing base of $50.0 million was unchanged.

As of December 31, 2017, Old Ironsides holds 27,195 Class A Units, which equates to 72.76% Aggregate Share ownership of the Company and Carbon holds (i) 9,805 Class A Units, (ii) 1,000 Class B Units and (iii) 121 Class C Units, which equates to 27.24% Aggregate Share ownership of the Company.

As of December 31, 2017, the Revolver’s borrowing base is $50.0 million, of which $38.0 million is outstanding.

Note 2 – 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 the Company and its consolidated subsidiaries. The Company’s subsidiaries consist of Carbon Tennessee Mining Company, LLC, Carbon Appalachia Group, LLC, Carbon Appalachia Enterprises, LLC, Coalfield Pipeline Company, Knox Energy, LLC, Carbon West Virginia Company, LLC and Cranberry Pipeline Corporation. All significant intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents

Cash and cash equivalents 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 approximate fair value because of the short maturity and high credit quality of these investments. At times, the Company may have cash and cash equivalent balances more than federal insured amounts within their accounts.

The Company continually monitors its position with and the credit quality of the financial institutions in which it invests.

Accounts Receivable

The Company’s accounts receivable include i) revenue receivables primarily comprised of revenues from gas marketing sales from large, well-known industrial companies totaling approximately $8.3 million; and ii) revenue receivables primarily comprised of oil and natural gas revenues from producing wells activities and from other large well-known exploration and production companies and recorded on a net basis to the Company’s revenue interest totaling approximately $2.4 million.

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, 2017, the Company had a purchaser imbalance receivable of approximately $194,000 which is recognized as a current asset in trade receivables on the consolidated balance sheet.

Trade receivables are those from joint interest billing in the properties that the Company operates which are subject to joint operating agreements as well as any outstanding receivables associated with its acquisitions. As of December 31, 2017, trade receivables included approximately $1.6 million associated with the Cabot Acquisition. 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 oil, natural gas, and natural gas liquids production in which the Company operates and the financial condition of its customers. The Company continuously monitors collections and payments from its customers and is developing historical experience with specific customer collection issues that it has identified. At December 31, 2017, the Company had not identified any collection issues related to its oil and gas operations and therefore no allowance for doubtful accounts was provided for.

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Prepaid Expense and Deposits

The Company’s prepaid expense and deposit account is comprised of prepaid insurance, bonds and the current portion of unamortized Revolver issuance costs. The remaining unamortized Revolver issuance costs are within other non-current assets. As of December 31, 2017, the total unamortized Revolver issuance costs are $584,000, of which $180,000 are included in prepaid expense and deposits.

Inventories

Inventories, which consist primarily of natural gas, are recorded at the lower of cost or net realizable value.

Gas that is available for immediate use, referred to as working gas, is recorded within current assets.

Inventory consists of material and supplies used in connection with the Company’s maintenance, storage and handling. These inventories are stated at the lower of cost or net realizable value.

Other Non-Current Assets

Other non-current assets are comprised of bonds, the non-current portion of unamortized Revolver issuance costs and the non-current portion of derivative liabilities.

Revenue

The Company recognizes revenues for sales and services when persuasive evidence of an arrangement exists, when custody is transferred, or services are rendered, fees are fixed or determinable and collectability is reasonably assured.

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.

Natural Gas and Oil Sales

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 and oil revenues are recognized based on the Company’s net revenue interest.

Marketing Gas Revenue

The Company sells production purchased from third parties as well as production from its own oil and gas producing properties. From Inception through December 31, 2017, approximately $9.9 million in intercompany activity is eliminated between revenue – marketing and gas purchases - marketing on the statement of operations.

Storage

Under fee-based arrangements, the Company receives a fee for storing natural gas. The revenues earned are directly related to the volume of natural gas that flows through the Company’s systems and are not directly dependent on commodity prices.

8

Transportation, gathering, and compression

The Company generally purchases natural gas from producers at the wellhead or other receipt points, gathers the wellhead natural gas through our gathering system, and then sells the natural gas based on published index market prices. The Company remits to the producers either an agreed-upon percentage of the actual proceeds that we receive from our sales of natural gas or an agreed-upon percentage of the proceeds based on index related prices for the natural gas, regardless of the actual amount of the sales proceeds we receive. The Company’s revenues under percent-of-proceeds/index arrangements generally correlates with the price of natural gas.

Concentrations of Credit Risk

There are numerous significant purchasers in the areas where the Company sells its production and demand for the Company’s products remains high. Management does not believe that changing its primary purchasers or a loss of any other single purchaser would materially impact the Company’s business. For the period from Inception through December 31, 2017, one customer accounted for 30% of total third-party revenues. As of December 31, 2017, the same customer accounted for 16% of trade receivable and three other customers accounted for 38% of trade receivable.

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. From Inception through December 31, 2017, the Company did not recognize an unproved property impairment.

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 and related estimated asset retirement costs, net of estimated salvage values.

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

The Company performs a ceiling test 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 unweighted 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.

From Inception through December 31, 2017, the Company did not recognize a ceiling test impairment. Future declines in oil and natural gas prices could result in impairments of the Company’s oil and gas properties in future periods. The effect of price declines will impact the ceiling test value until such time commodity prices stabilize or improve. Impairments are a non-cash charge and accordingly would not affect cash flows but would adversely affect the Company’s results of operations and members’ equity.

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We capitalize interest in accordance with Financial Accounting Standards Board (“FASB”) ASC 932-835-25, Extractive Activities-Oil and Gas, Interest. Therefore, interest is capitalized for any unusually significant investments in unproved properties or major development projects not currently being depleted. We capitalize the portion of general and administrative costs that is attributable to our acquisition, exploration and development activities.

Oil and Gas Reserves

Oil and gas reserves represent theoretical quantities of crude oil, natural gas, and natural gas liquids (“NGL”) which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. There are numerous uncertainties inherent in estimating oil and gas reserves and their values, including many factors beyond the Company’s control. Accordingly, reserve estimates and the projected economic value of the Seneca properties will differ from the actual future quantities of oil and gas ultimately recovered and the corresponding value associated with the recovery of these reserves.

Other Property and Equipment

Other property and equipment are recorded at cost. Costs of renewals and improvements that substantially extend the useful lives of the assets are capitalized. Maintenance and repair costs which do not extend the useful lives of property and equipment are charged to expense as incurred. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. Office furniture, automobiles, and computer hardware and software are depreciated over three to five years. Buildings are depreciated over 27.5 years, and pipeline facilities and equipment are depreciated over twenty years. Leasehold improvements are depreciated, using the straight-line method, over the shorter of the lease term or the useful life of the asset. When other property and equipment is sold or retired, the capitalized costs and related accumulated depreciation and amortization are removed from the accounts.

Base Gas

Gas that is used to maintain wellhead pressures within the storage fields, referred to as non-working gas, is recorded other property and equipment on the consolidated balance sheet. Base gas is held in a storage field that is not intended for sale but is required for efficient and reliable operation of the facility.

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 long-lived assets have been impaired. During the period ended December 31, 2017, the Company did not recognize any impairment.

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 or assumed, 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 for asset acquisitions. 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 ARO 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 from a reassessment of expected cash flows and assumptions inherent in the estimation of the liability. Revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells. ARO is valued utilizing Level 3 fair value measurement inputs (note 7).

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The following table is a reconciliation of ARO (in thousands).

	For the period from Inception through December 31, 2017
Balance at beginning of period	$	-
Additions from acquisitions during period		4,591
Accretion expense		198
Balance at end of period	$	4,789

For the period from Inception through December 31, 2017, the addition of approximately $4.6 million to ARO is primarily due to the acquisition of producing oil and natural gas properties in the Appalachian Basin. See note 3 for further discussion on the acquisitions.

Lease Operating

Lease operating and gathering, compression, and transportation expenses are costs incurred to bring oil and natural gas out of the ground and to market, together with costs incurred to maintain our producing properties. Costs include maintenance, repairs, pipeline operations and workover expenses related to our oil and gas properties, and pipeline facilities and equipment.

Production and Property Taxes

Production and property 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.

Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivables, accounts payables and accrued liabilities, due to related parties, commodity derivative instruments and note payable. The carrying value of cash and cash equivalents, accounts receivables, accounts payables and accrued liabilities and due to related parties are 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 8. The Revolver approximated fair value with a variable interest rate, which is representative of the Company’s credit adjusted borrowing rate plus London Inter-Bank Offered Rate (“LIBOR”). As of December 31, 2017, the Revolver had an effective interest rate of 5.34%.

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 its 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 sheet and the changes in fair value are recognized as gains or losses in revenues in the consolidated statement of operations.

Income Taxes

The Company has elected to be treated as a partnership for income tax purposes. Accordingly, taxable income and losses are reported on the income tax returns of the Company’s members and no provision for income taxes has been recorded on the accompanying financial statements. Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. The Company’s tax returns are subject to examination by tax authorities through the current period for state and federal tax reporting purposes.

Pursuant to the Bipartisan Budget Act of 2015 (the “Act”), as of January 1, 2018, the Act allows the adjustment resulting from IRS audits of partnerships to be assessed at the partnership level.

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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, estimates 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 fair value of commodity derivative instruments, fair value of assets acquired and liabilities assumed qualifying as business combination or asset acquisition, estimated lives of other property and equipment, asset retirement obligations and accrued liabilities and revenues.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for Generally Accepted Accounting Principles in the United States (“GAAP”) and International Financial Reporting Standards (“IFRS”). The FASB subsequently issued ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, which deferred the effective date of ASU 2014-09 and provided additional implementation guidance. These ASUs are effective for the Company for fiscal years, beginning after December 15, 2019. The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented (the “full retrospective approach”) or (ii) recognition of a cumulative-effect adjustment as of the date of the initial application (the “modified retrospective approach”). The Company plans to adopt these ASUs effective January 1, 2019, using the modified retrospective approach. The Company is in the process of assessing its contracts with customers and evaluating the effect of adopting these standards on its financial statements, accounting policies, internal controls and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). The objective of this ASU, as amended, is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, beginning after December 15, 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact on its financial statements of adopting ASU 2016-02.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. These amendments change the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through results of operations. The amendments in this update affect investments in loans, investments in note securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years, beginning after December 15, 2021. The Company is currently evaluating the impact on its financial statements of adopting ASU 2016-13.

Recently Adopted Accounting Pronouncement

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of “a business” to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. The Company elected to adopt this pronouncement effective April 3, 2017.

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Note 3 – Acquisitions

Knox-Coalfield

On April 3, 2017, the Company acquired natural gas producing properties and related facilities located predominantly in Tennessee for a purchase price of $20.0 million, subject to normal purchase adjustments, with an effective date of February 1, 2017, for oil and gas assets and April 3, 2017 for the corporate entity acquired (the “Knox-Coalfield Acquisition”). Consideration to fund the Knox-Coalfield Acquisition was provided by contributions from the Company’s members of $12.0 million and $8.5 million in funds drawn from its Revolver (note 5).

The Knox-Coalfield Acquisition qualified as a business combination as defined by Accounting Standards Codification (“ASC”) 805, Business Combinations and, as such, the Company estimated the fair value of the assets acquired and liabilities assumed as of the closing date of April 3, 2017.

The Company, utilizing the assistance of third-party valuation specialists, 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, (vi) a market participant-based weighted average cost of capital, and (vii) real estate market conditions.

The Company expensed approximately $457,000 of transaction and due diligence costs related to the Knox-Coalfield Acquisition that were included in general and administrative expenses in the accompanying consolidated statement of operations for the period ended December 31, 2017.

The allocation of the purchase price is considered preliminary and is subject to change upon completion of the determination of the fair value of all assets acquired and liabilities assumed. The Company continues to work with our third-party valuation specialists to finalize the fair value of the pipeline and oil and gas assets and expects to finalize the valuation by April 3, 2018. The following table summarizes the preliminary consideration paid and the estimated fair value of the assets acquired and liabilities assumed.

Consideration paid:
Cash consideration	$	19,055
Recognized amounts of identifiable assets acquired and liabilities assumed:
Proved oil and gas properties	$	12,228
Unproved oil and gas properties		1,774
Property, plant, and equipment		5,858
Asset retirement obligation		(772	)
Accounts payable and accrued liabilities		(33	)
Total net assets acquired	$	19,055

The Company commenced operations on April 3, 2017. The Knox-Coalfield Acquisition closed April 3, 2017, and accordingly, the Company’s consolidated statement of operations for the period ended December 31, 2017 includes the results of operations from April 3, 2017 to December 31, 2017 of the properties acquired, including approximately $4.0 million of revenue.

Enervest

On August 15, 2017, the Company acquired natural gas producing properties and related facilities located predominantly in the state of West Virginia for a purchase price of $21.5 million, subject to normal purchase adjustments, with an effective date of May 1, 2017 (“Enervest Acquisition”). Consideration to fund the Enervest Acquisition was provided by contributions from the Company’s members of $14.0 million and $8.0 million in funds drawn from its Revolver (note 5).

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The assets acquired consist of oil and gas leases and the associated mineral interests, oil and gas wells, a field office building and associated land, vehicles and other miscellaneous equipment. The Company also acquired various contracts. The Company, utilizing the assistance of third-party valuation specialists to estimate fair value, has determined that substantially all of the fair value of the assets acquired are related to the production assets and, as such the Enervest Acquisition does not meet the definition of a business. Therefore, the Company has accounted for the transaction as an asset acquisition and has allocated the purchase price based on the relative fair value of the assets acquired.

In determining the relative fair value, the fair value of the production assets was determined using the income approach using Level 3 inputs according the ASC 820, Fair Value, hierarchy. The fair value of the other assets was determined using the market approach using Level 3 inputs. The determination of the fair value of the oil and gas and other property and equipment acquired and accrued liabilities assumed required significant judgement, including estimates relating to the production assets and the other assets acquired. The Company assumed $1.8 million in ARO, $162,000 in firm transportation contract obligation and $247,000 in accounts payable and accrued liabilities associated with the acquired assets. Below is the detail of the assets acquired (in thousands):

Identifiable assets acquired:
Assets:
Proved (producing) oil and gas properties	$	20,948
Property, plant and equipment		150
Total identified assets	$	21,098

The Company commenced operations on April 3, 2017. The Enervest Acquisition closed August 15, 2017, and accordingly, the Company’s consolidated statements of operations for the period ended December 31, 2017 includes the results of operations from August 15, 2017 to December 31, 2017 of the properties acquired, including approximately $2.27 million of revenue.

The Company incurred transaction costs related to the Enervest Acquisition in the amount of approximately $248,000. As the acquisition was accounted for as an asset acquisition, these transaction costs were capitalized and are included in oil and gas properties- proved, net on the consolidated balance sheet.

Cabot

On September 29, 2017, the Company acquired natural gas producing properties and related facilities as well as transmission pipeline facilities and equipment located predominantly in the state of West Virginia for a purchase price of $41.3 million, subject to normal purchase adjustments, with an effective date of April 1, 2017 for oil and gas assets and September 29, 2017, for the corporate entity acquired (the “Cabot Acquisition”). Consideration to fund the Cabot Acquisition was provided by contributions from the Company’s members of $11.0 million and $20.4 million in funds drawn from its Revolver (note 5).

The Cabot Acquisition qualified as a business combination as defined by ASC 805, Business Combinations and, as such, the Company estimated the fair value of the assets acquired and liabilities assumed as of the closing date of September 29, 2017.

The Company, utilizing the assistance of third-party valuation specialists, considered various factors in its estimate of fair value of the acquired assets and liabilities including (i) reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices, including price differentials, (v) future cash flows, (vi) a market participant-based weighted average cost of capital, and (vii) real estate market conditions.

The Company expensed approximately $660,000 of transaction and due diligence costs related to the Cabot Acquisition that were included in general and administrative expenses in the accompanying consolidated statement of operations for the period ended December 31, 2017.

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The allocation of the purchase price is considered preliminary and is subject to change upon completion of the determination of the fair value of all assets acquired and liabilities assumed. The Company continues to work with our third-party valuation specialists to finalize the fair value of the buildings, pipeline facilities and equipment and oil and gas assets and expects to finalize the valuation by no later than September 29, 2018. The following table summarizes the preliminary consideration paid and the estimated fair value of the assets acquired, and liabilities assumed.

Consideration paid:
Cash consideration	$	34,383
Recognized amounts of identifiable assets acquired and liabilities assumed:
Proved oil and gas properties	$	49,920
Property, plant and equipment		7,744
Inventory		467
Accounts receivable – trade receivables		850
Furniture and fixtures, computer hardware and software, and other equipment		22
Firm transportation contract obligation		(18,966	)
Production and property taxes		(2,370	)
Asset retirement obligation		(2,020	)
Accounts payable and accrued liabilities		(1,264	)
Total net assets acquired	$	34,383

The Company commenced operations on April 3, 2017. The Cabot Acquisition closed September 29, 2017, and accordingly, the Company’s consolidated statement of operations for the period ended December 31, 2017 includes the results of operations from September 29, 2017 to December 31, 2017 of the properties acquired, including approximately $22.0 million of revenue.

Note 4 – Property and Equipment

Net property and equipment at December 31, 2017 consists of the following (in thousands):

Oil and gas properties:
Proved oil and gas properties	$	84,255
Unproved properties not subject to depletion		1,780
Accumulated depreciation, depletion and amortization		(1,633	)
Net oil and gas properties		84,402
Pipeline facilities and equipment		9,339
Base gas		2,122
Buildings		1,247
Vehicles		550
Furniture and fixtures, computer hardware and software, and other equipment		225
Accumulated depreciation and amortization		(806	)
Net other property and equipment		10,555
Total property and equipment	$	97,079

The Company had approximately $1.8 million at December 31, 2017, of unproved oil and gas properties not subject to depletion. At December 31, 2017, the Company’s unproved properties consist principally of leasehold acquisition costs in Tennessee. 

During the period from Inception through December 31, 2017, no expiring leasehold costs were reclassified into proved property. 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.

Depletion expense related to oil and gas properties for the period from Inception through December 31, 2017 was approximately $1.6 million, or $0.25 per Mcfe. Depreciation and amortization expense related to buildings, furniture and fixtures, computer hardware and software, and other equipment for the period from Inception through December 31, 2017 was approximately $806,000.

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Note 5 – Revolver

On April 3, 2017, Carbon Appalachia Enterprises entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank (the “Revolver”) with an initial borrowing base of $10.0 million.

On August 15, 2017, in connection with and concurrently with the closing of the Enervest Acquisition, the borrowing base of the Revolver increased to $22.0 million and Carbon Appalachia Enterprises borrowed $8.0 million from the Revolver to partially fund the Enervest Acquisition.

On September 29, Carbon Appalachia Enterprises amended the Revolver, resulting in a borrowing base of $50.0 million with redeterminations as of April 1 and October 1 each year and the addition of East West Bank as a participating lender. In connection with and concurrently with the closing of the Cabot Acquisition, Carbon Appalachia Enterprises borrowed $20.4 million from the Revolver to partially fund the Cabot Acquisition.

On November 30, 2017, Carbon Appalachia Enterprises amended the Revolver, resulting in the addition of Bank SNB as a participating lender. The borrowing base of $50.0 million and commitment of $100.0 million was unchanged.

The Revolver bears interest at an applicable margin ranging from 3.00% to 4.00%, depending on utilization, plus the applicable 30, 60 or 90-day London interbank offered rate (“LIBOR”), at the Company’s election. As of December 31, 2017, the Company’s effective borrowing rate on the Revolver was 5.34%. In addition, the Revolver includes a 0.50% unused available line fee.

As of December 31, 2017, the Revolver has an outstanding balance of $38.0 million and a borrowing base of $50.0 million. The maximum principal amount available under the Revolver is based upon the borrowing base attributable to the Company’s proved oil and gas reserves which is determined at least semi-annually.

The Revolver is secured by all of the assets of the Company. The Revolver requires the Company, as of each quarter end, to hedge 75% of its anticipated production for the next 30 months. Distributions to equity members are generally restricted.

In the event of default or deficiency in borrowing base, an additional 2.0% interest rate would apply. In such event, a cure period exists allowing the Company to obtain compliance.

The Company incurred fees directly associated with the issuance of the Revolver and amortizes these fees over the life of the Revolver. The current portion of these fees are recorded as prepaid expense and deposits and the non-current portion as other non-current assets for a combined value of $584,000 as of December 31, 2017. From Inception through December 31, 2017, the Company amortized approximately $79,000 associated with these fees.

The Revolver agreement requires the Company to maintain certain financial and non-financial covenants which include the following ratios: leverage ratio, current ratio, and other qualitative covenants as defined in the Revolver agreement including commodity hedging requirements. As of December 31, 2017, the Company was compliant with its financial covenants. The Revolver is secured by all of the assets of the Company.

Interest Expense

For the period of Inception through December 31, 2017, the Company incurred interest expense of approximately $891,000 which approximately $79,000 was amortization of the Revolver issuance costs.

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Note 6 – Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at December 31, 2017 consists of the following (in thousands):

Accounts payable	$	3,878
Marketing gas sales		2,467
Accrued ad valorem taxes		1,812
Accrued lease operating		1,135
Transportation, gathering and compression		699
Property and production taxes		674
Suspense payable		544
Accrued interest		106
Other		755
Total accounts payable and accrued liabilities	$	12,070

Note 7 – 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 throughout the period presented.

The following table presents the Company’s financial assets that were accounted for at fair value on a recurring basis as of December 31, 2017 by level within the fair value hierarchy (in thousands):

	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
Assets:
Commodity derivatives - current	$	-	$	1,884	$	-	$	1,884
Commodity derivatives – other long-term assets	$	-	$	155	$	-	$	155

As of December 31, 2017, the Company’s commodity derivative financial instruments are comprised of natural gas and oil swap and collar agreements. The fair values of these agreements are determined under an income valuation technique. Swaps are valued using the income technique. Collars are valued using the option model. 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 the 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 the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy. The counterparty for all the Company’s outstanding commodity derivative financial instruments as of December 31, 2017 is BP Energy Company (“BPEC”).

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

Acquired accounts receivable, accounts payable, and other accrued liabilities were determined to be representative of fair value given their short-term nature. Acquired base gas and gas inventory was valued based on prevailing market rates for natural gas on the closing date of September 29, 2017.

The fair values 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.

Asset Retirement Obligation

The fair value of the Company’s asset retirement obligation liability is calculated as of the date of closing of each of the Company’s acquisitions, when the liability was assumed, by estimating i) the cost of abandoning oil and gas wells ranging from $15,000 to $30,000 based on market participant expectations for similar work; ii) the timing of reclamation ranging from 2-75 years based on economic lives of its properties as estimated by reserve engineers; iii) an inflation rate between 1.81% and 2.04%; and iv) a credit adjusted risk-free rate of 6.59%, which takes into account the Company’s credit risk and the time value of money (asset acquisitions) or a range of 13.5% - 15.0% representing a market participant’s weighted average cost of capital (business combinations). Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs (see note 2). During the period from Inception through December 31, 2017, the Company recorded asset retirement obligation assumed of approximately $4.6 million.

Firm Transportation Obligation

The Company assumed liabilities associated with firm transportation contracts in connection with the Enervest Acquisition and Cabot Acquisition. The fair value of these acquired firm transportation obligations was estimated based upon i) the contractual obligations assumed by the Company (including the length of contracts, committed volumes, and demand charges described in note 9), ii) estimated usage from a market-participant perspective, and iii) a discount rate of 15.0% based upon a market participant’s estimated weighted average cost of capital.

Class B Units

The Company issued Class B units to Carbon as part of entering into the Carbon Appalachia LLC Agreement. The $924,000 fair value of the Class B units was estimated by the Company utilizing the assistance of third-party valuation specialists. The fair value was based upon enterprise values derived from inputs including estimated future production rates, future commodity prices including price differentials as of the date of closing, future operating and development costs and comparable market participants.

Acquired Assets

For assets accounted for as business combinations, including the Knox-Coalfield Acquisition and Cabot Acquisition (see note 3), to determine the fair value of the assets acquired, 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 date of closing, future operating and development costs, a market participant weighted average cost of capital, and the condition of vehicles and equipment.

For the assets acquired in the Enervest Acquisition and accounted for as an asset acquisition, to determine the fair value of the assets acquired, 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 date of closing, future operating and development costs and its weighted average cost of capital.

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Note 8 – Commodity Derivatives

The Company entered into commodity-based derivative contracts at various times during 2017 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.

Pursuant to the terms of the Company’s Revolver, the Company has entered into derivative agreements to hedge certain of its oil and natural gas production for 2017 through 2020. As of December 31, 2017, these derivative agreements consisted of the following:

	Natural Gas Swaps				Natural Gas Collars				Oil Swaps
			Weighted				Weighted				Weighted
			Average				Average Price				Average
Year	MMBtu		Price (a)		MMBtu		Range (a)		Bbl		Price (b)
2018		9,100,000	$	2.99		3,630,000		$2.85 - $3.85		15,000	$	51.74
2019		11,515,000	$	2.86		480,000		$2.85 - $3.19		12,000	$	50.35
2020		3,792,000	$	2.83		-		-		-	$	-

(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. Collars are designed to establish floor and ceiling prices on anticipated future oil and gas production. The ceiling establishes a maximum price that the Company will receive for the volumes under contract, while the floor establishes a minimum price.

The following table summarizes the fair value of the derivatives recorded in the consolidated balance sheet as of December 31, 2017. These derivative instruments are not designated as cash flow hedging instruments for accounting purposes (in thousands):

Commodity derivative contracts:
Current assets	$	1,884
Other non-current assets	$	155

The table below summarizes the commodity settlements and unrealized gains and losses related to the Company’s derivative instruments for the period from Inception through December 31, 2017 and are included in commodity derivative gain or loss in the accompanying consolidated statement of operations.

Commodity derivative contracts:
Commodity derivative gain - realized	$	506
Commodity derivative gain - unrealized		2,039
Total commodity derivative gain	$	2,545

Commodity derivative gain, inclusive of unrealized gain, is included in cash flows from operating activities in the consolidated statement of cash flows.

The counterparty in the Company’s derivative instruments is BPEC. The Company has entered into an International Swaps and Derivative Association, Inc. (“ISDA”) Master Agreement with BPEC that establishes standard terms for the derivative contracts and an inter-creditor agreement with Revolver participating lenders and BPEC whereby any credit exposure related to the derivative contracts entered into by the Company and BPEC is secured by the collateral and backed by the guarantees supporting the credit facility.

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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 Company’s derivative instruments are recorded as assets in the Balance Sheet as of December 31, 2017.

						Net
	Gross					Recognized
	Recognized		Gross			Fair Value
	Assets/		Amounts			Assets/
Consolidated Balance Sheet Classification	Liabilities		Offset			Liabilities
Commodity derivative assets:
Commodity derivative asset	$	2,288	$	(404	)	$	1,884
Other non-current assets		1,150		(995	)		155
Commodity derivative assets	$	3,438	$	(1,399	)	$	2,039
Commodity derivative liabilities
Commodity derivative liability	$	404	$	(404	)	$	-
Other non-current liabilities		995		(955	)		-
Total derivative liabilities	$	1,399	$	(1,399	)	$	-

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 9 – Commitments and Contingencies

In connection with the Enervest Acquisition and Cabot Acquisition, the Company acquired long-term firm transportation contracts that were entered into to ensure the transport for certain gas production to purchasers. Firm transportation volumes and the related demand charges for the remaining term of these contracts at December 31, 2017 are summarized in the table below.

Period	Dekatherms per day	Demand Charges
Jan 2018 – October 2020	6,300	$0.21
Jan 2018 – May 2027	29,900	$0.21
Jan 2018 – August 2022	19,441	$0.56

Liabilities of approximately $19.0 million and $162,000 related to firm transportation contracts assumed in the Cabot Acquisition and Enervest Acquisition, respectively, which represent the remaining commitments, are reflected on the Company’s consolidated balance sheet as of December 31, 2017. The fair values 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 monthly as the Company pays these firm transportation obligations in the future.

Legal and Environmental

We are not aware of any legal or environmental material pending or threatened litigation or of any proceedings known to be contemplated by governmental authorities or regulators which are, or would be, likely to have a material adverse effect upon the Company or our operations, taken as a whole.

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Note 10 – Members’ Equity

On April 3, 2017, Carbon, Yorktown and Old Ironsides entered in to a limited liability company agreement (the “Carbon Appalachia LLC Agreement”), with an initial equity commitment of $100.0 million. The initial capital commitment percentages of Carbon, Yorktown and Old Ironsides was 2.0%, 24.5% and 73.5%, respectively.

On April 3, 2017, the Company (i) issued 240; 2,940; and 8,820 Class A Units at a value of $1,000 per Class A Unit to Carbon, Yorktown and Old Ironsides, respectively, for an aggregate cash consideration of $12.0 million, (ii) issued Class B Units to Carbon, and (iii) issued Class C Units to Carbon. See additional information related to each class described below. The proceeds contributed to the Knox-Coalfield Acquisition.

On April 3, 2017, in connection with the Carbon Appalachia LLC Agreement, Carbon issued to Yorktown a warrant to purchase shares of Carbon’s common stock at an exercise price dictated by the warrant agreement (the “Appalachia Warrant”). The exercise price for the Appalachia Warrant is payable exclusively with Class A Units of the Company held by Yorktown.

On August 15, 2017, the Carbon Appalachia LLC Agreement was amended and, as a result, Carbon would contribute its initial commitment of future capital contributions as well as Yorktown’s, and Yorktown would not participate in future capital contributions. The Company issued 3,710 and 10,290 Class A Units to Carbon and Old Ironsides, respectively, for an aggregate cash consideration of $14.0 million, the proceeds of which contributed to the Enervest Acquisition purchase.

On September 29, 2017, the Company issued 2,915 and 8,085 Class A Units to Carbon and Old Ironsides, respectively, for an aggregate cash consideration of $11.0 million, the proceeds of which contributed to the Cabot Acquisition purchase.

On November 1, 2017, Yorktown exercised the Appalachia Warrant, resulting in Carbon acquiring all of Yorktown’s 2,940 Class A Units.

Class A Units

As of December 31, 2017, the Company had 37,000 Class A Units outstanding, of which 9,805 and 27,195 Class A Units were held by Carbon and Old Ironsides, respectively.

Holders of Class A units i) can designate person(s) to serve on the board of directors (currently three for Old Ironsides and one for Carbon), ii) have the right to vote equal to the number of outstanding Class A units held on each and every matter submitted to the members for approval, and iii) shall be required to make capital contributions to the Company as capital calls which are unanimously approved by the majority of the members of the class. Failure to make the required capital contributions results in the member receiving a status of defaulting member. The units are recorded as members’ contribution in the statement of members’ equity.

Class B Units

As of December 31, 2017, the Company had 1,000 Class B Units outstanding, of which Carbon held all such units.

Holders of Class B Units i) have no obligation to make capital contributions, ii) have no voting rights, and iii) have the ability to participate in profits interest after certain return thresholds to holders of Class A Units are met (see “Distributions” below).

Class C Units

As of December 31, 2017, the Company had 121 Class C Units outstanding, of which Carbon held all such units. Carbon acquired its Class C Units in connection with its contribution to the Company of a portion of its working interest in Carbon’s undeveloped properties in Tennessee. If the Company agrees to drill wells on these properties, the Company will pay 100% of the cost of drilling and completion of the first 20 wells to earn a 75% working interest in such properties. Carbon, through its subsidiary, Nytis LLC, will retain a 25% working interest in the properties. No value was assigned to the Class C Units after consideration of all contemplated transactions and the entering into of the Carbon Appalachia LLC Agreement. No activity was performed related to the undeveloped properties in Tennessee during 2017.

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Holders of Class C Units i) have no obligation to make capital contributions, ii) have no voting rights except in very limited circumstances where its interests may be adversely affected, and iii) participate in distributions as outlined below (see “Distributions” below).

Distributions

The Company’s board of directors will determine, by unanimous approval, any distributions. Distributions will first be allocated to Class C members, then to Class A and Class B members.

Class A Units are entitled to a priority amount that requires that at the time of each distribution the Class A Unit receive an amount equal to an internal rate of return of 10% of the aggregate capital contributed in exchange for the Class A Unit (the Priority Amount”).

Until such time as the Priority Amount of each Class A Unit has been reduced to zero, distributions are distributed i) first to holders of Class C Units and ii) then to holders of Class A Units in proportion to their Class A Priority Amount.

After the Priority Amount has been reduced to zero, i) 80% of distributions are allocated between holders of Class A and Class C Units based on the proportionate share, and ii) 20% of distributions are allocated holders of Class B Units.

Sharing Percentage

The sharing percentage of each member shall equal the aggregate number of units held by such member divided by the aggregate number of units then outstanding (“Sharing Percentage”), as defined in the Carbon Appalachia Company, LLC Agreement, as amended, and is applicable to each class of units.

The term “Aggregate Sharing Percentage” refers to the aggregated sharing percentage when taking into consideration all classes of ownership.

Drag-along Rights

Old Ironsides may elect to execute a “Drag-Along” sale which the parameters and specifics are disclosed in the limited liability company agreement.

Note 11 – Related Parties

During the period ended December 31, 2017, the Company was engaged in the following transactions with related parties (in thousands):

On April 3, 2017, as part of entry into the Carbon Appalachia LLC Agreement and the associated transactions, Carbon received 1,000 Class B Units and 121 Class C Units, which each represent 100% of their respective class.

Nytis Exploration Company, Inc (“Nytis”) is a wholly-owned subsidiary of Carbon and the operator of the Company’s properties through an operating agreement. The operating agreement includes direct reimbursements and direct allocations made under the agreement. Approximately $1.2 million in reimbursements was included in due to related parties as of December 31, 2017.

Management services

On April 3, 2017, the Company entered into a management service agreement with Carbon whereby Carbon provides general management and administrative services to the Company. The Company initially paid Carbon a quarterly fee of $75,000; however, subsequent to the Enervest Acquisition, the amount of the reimbursement to Carbon now varies quarterly based upon the percentage of production of the Company as a percentage of the total volume of production from Carbon and the Company. The Company reimburses Carbon for all management related expenses such as travel, required third-party geological and/or accounting consulting, and other necessary expenses incurred by Carbon in the normal course of managing the Company.

22

The Company incurred approximately $1.6 million in management reimbursements for the period Inception through December 31, 2017, of which $1.3 million was recorded as management reimbursements, related party in the statement of operations. Approximately $679,000 was included in due to related parties as of December 31, 2017.

Note 12 – Supplemental Cash Flow Disclosure

Supplemental cash flow disclosures for period from Inception through December 31, 2017 are presented below (in thousands):

Cash paid during the period for:
Interest payments	$	706
Non-cash transactions:
Increase in acquired asset retirement obligations		4,591
Increase in accounts payable and accrued liabilities included in oil and gas properties		32
Accounts payable and accrued liabilities assumed in oil and gas properties (Note 4)		3,667

Note 13 – Subsequent Events

The Company evaluated activities from December 31, 2017, to the date of the independent registered public accountants report, the date these financial statements were available for issuance, and there are no subsequent events requiring recognition or disclosure.

23

EX-99.2

Exhibit 99.2

CARBON APPALACHIAN COMPANY, LLC

Consolidated Balance Sheets

(In thousands)

	September 30,		December 31,
	2018		2017
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,618	$	4,512
Accounts receivable:
Revenue		1,727		10,682
Trade receivables		4,984		1,569
Commodity derivative asset		296		1,884
Inventories		1,165		1,660
Prepaid expense and deposits		687		487
Total current assets		22,477		20,794
Property and equipment (see note 4)
Oil and gas properties, full cost method of accounting:
Proved, net		79,999		82,622
Unproved		1,833		1,780
Other property, plant, and equipment, net		15,880		12,677
Total property and equipment		97,712		97,079
Other non-current assets		1,304		683
Total assets	$	121,493	$	118,556
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	11,100	$	12,070
Due to related parties (see note 10)		1,219		1,852
Firm transportation contract obligation (see note 9)		4,280		4,285
Total current liabilities		16,599		18,207
Non-current liabilities:
Asset retirement obligations		5,486		4,789
Firm transportation contract obligation		13,625		14,843
Production and property taxes payable		2,862		1,813
Revolver (see note 5)		37,975		37,975
Total non-current liabilities		59,948		59,420
Commitments and contingencies (see note 9)
Members’ equity:
Members’ contributions		37,763		37,924
Retained earnings		7,183		3,005
Total members’ equity		44,946		40,929
Total liabilities and members’ equity	$	121,493	$	118,556

See accompanying Notes to Consolidated Financial Statements.

CARBON APPALACHIAN COMPANY, LLC

Consolidated Statement of Operations

(In thousands)

	Nine months ended			For the period April 3, 2017 through
	September 30, 2018			September 30, 2017
	(unaudited)			(unaudited)
Revenue:
Natural gas sales	$	38,189		$	3,160
Oil sales		1,079			280
Transportation and handling		1,703			318
Marketing gas sales		21,362			-
Commodity derivative gain (loss)		147			(853	)
Total revenue		62,480			2,905
Expenses:
Lease operating		16,481			962
Transportation, gathering, and compression		9,203			476
Production and property taxes		3,455			272
Marketing gas purchases		17,462			-
General and administrative		1,857			1,462
Related party management fees		3,317			348
Depreciation, depletion and amortization		4,262			907
Accretion of asset retirement obligations		405			24
Total expenses		56,442			4,451
Operating income (loss)		6,038			(1,546	)
Other expenses:
Interest expense		(1,861	)		(330	)
Total other expense		(1,861	)		(330	)
Net income (loss)	$	4,177		$	(1,876	)

 See accompanying Notes to Consolidated Financial Statements.

2

CARBON APPALACHIAN COMPANY, LLC

Consolidated Statement of Members’ Equity

(In thousands, except unit amounts) (unaudited)

	Members’ Contributions
	Class A Units		Amount			Class B Units		Amount		Class C Units		Amount		Retained Earnings		Total Members’ Equity
Balances at December 31, 2017		37,000	$	37,000			1,000	$	924		121	$	-	$	3,005	$	40,929
Net income		-		-			-		-		-		-		4,177		4,177
Distribution		-		(160	)		-		-		-		-				(160	)
Balances at September 30, 2018		37,000	$	36,840			1,000	$	924		121	$	-	$	7,182	$	44,946

See accompanying Notes to Consolidated Financial Statements.

3

CARBON APPALACHIAN COMPANY, LLC

Consolidated Statement of Cash Flows

(In thousands)

	For the Nine months ended September 30,
	2018
	(unaudited)
Cash flows from operating activities:
Net income	$	4,177
Items not involving cash:
Depreciation, depletion and amortization		4,262
Accretion of asset retirement obligations		405
Commodity derivative loss		890
Amortization of Revolver issuance costs		128
Inventory write-down		176
Net change in:
Accounts receivable		5,540
Inventories		(280	)
Prepaid expense and deposits		(200	)
Accounts payable, accrued liabilities production and property taxes and firm transportation contract obligations		(5,196	)
Due to related parties		(634	)
Net cash provided by operating activities		9,268
Cash flows from investing activities:
Purchases of property, plant and equipment		(126	)
Sale of property and equipment		225
Net cash used in investing activities		99
Cash flows from financing activities:
Member distributions		(161	)
Revolver issuance costs		(100	)
Net cash used in financing activities		(261	)
Net increase in cash and cash equivalents		9,106
Cash and cash equivalents, beginning of period		4,512
Cash and cash equivalents, end of period	$	13,618

See note 11 – Supplemental Cash Flow Disclosure

See accompanying Notes to Consolidated Financial Statements.

4

Notes to Consolidated Financial Statements

Note 1 – Organization

On December 16, 2016, Carbon Appalachian Company, LLC (the “Company” or “CAC”) was formed, as a Delaware limited liability company, by Carbon Energy Corporation (formerly Carbon Natural Gas Company, “Carbon”) a Delaware Corporation, entities managed by Yorktown Energy Partners XI, L.P. (“Yorktown”), and entities managed by Old Ironsides (“Old Ironsides”), to acquire producing assets in the Appalachian Basin in Kentucky, Tennessee, Virginia and West Virginia. The Company began substantial operations on April 3, 2017. The Company is engaged primarily in acquiring, developing, exploiting, producing, processing, marketing, and transporting oil and natural gas in the Appalachia Basin.

Equity and ownership

On April 3, 2017, Carbon, Yorktown and Old Ironsides entered in to a limited liability company agreement (the “Carbon Appalachia LLC Agreement”), with an initial equity commitment of $100.0 million, of which $37.0 million has been contributed as of September 30, 2018.

On April 3, 2017, the Company (i) issued Class A Units to Carbon, Yorktown and Old Ironsides for an aggregate cash consideration of $12.0 million, (ii) issued Class B Units to Carbon, and (iii) issued Class C Units to Carbon. Additionally, Carbon Appalachia Enterprises, LLC, formerly known as Carbon Tennessee Company, LLC (“Carbon Appalachia Enterprises”), a subsidiary of the Company, entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank (the “Revolver”) with an initial borrowing base of $10.0 million.

On April 3, 2017, borrowings under the Revolver, along with the initial equity contributions made to the Company, were used to complete the acquisition of natural gas producing properties and related facilities located predominantly in Tennessee (the “Knox-Coalfield Acquisition”). The purchase price was $20.0 million, subject to normal and customary closing adjustments. Carbon Appalachia Enterprises used $8.5 million drawn from the credit facility toward the purchase price.

In connection with Carbon entering into the Carbon Appalachia LLC Agreement, and Carbon Appalachia engaging in the transactions described above, Carbon received 1,000 Class B Units and issued to Yorktown a warrant to purchase approximately 408,000 shares of Carbon’s common stock at an exercise price dictated by the warrant agreement (the “Appalachia Warrant”). The Appalachia Warrant is payable exclusively with Class A Units of Carbon Appalachia held by Yorktown. On November 1, 2017, Yorktown exercised the Appalachia Warrant, resulting in Carbon acquiring 2,940 Class A Units from Yorktown.

Net proceeds from the April 3, 2017 transactions were used by the Company to complete the Knox-Coalfield Acquisition. The remainder of the net proceeds were used to fund field development projects, future complementary acquisitions, and working capital.

On August 15, 2017, the Carbon Appalachia LLC Agreement was amended and, as a result, Carbon will contribute its initial commitment of future capital contributions as well as Yorktown’s, and Yorktown did not participate in future capital contributions. The Company issued Class A Units to Carbon and Old Ironsides for an aggregate cash consideration of $14.0 million. The borrowing base of the Revolver increased to $22.0 million and Carbon Appalachia Enterprises borrowed $8.0 million under the Revolver.

On August 15, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties and related facilities located predominantly in the state of West Virginia (the “Enervest Acquisition”). The purchase price was $21.5 million, subject to normal and customary closing adjustments. The contributions from members and funds drawn from the credit facility were used to pay the purchase price.

On September 29, 2017, the Company issued Class A Units to Carbon and Old Ironsides for an aggregate cash consideration of $11.0 million. The Revolver was amended to include East West Bank as a participating lender, the borrowing base of the Revolver increased to $50.0 million and Carbon Appalachia Enterprises borrowed $20.4 million from the Revolver.

5

On September 29, 2017, Carbon Appalachia completed the acquisition of natural gas producing properties, natural gas gathering pipelines and related facilities located predominantly in the state of West Virginia (the “Cabot Acquisition”). The purchase price was $41.3 million, subject to normal and customary closing adjustments. The contributions from members and funds drawn from the credit facility were used to pay the purchase price.

On November 30, 2017, Carbon Appalachia Enterprises amended the Revolver, resulting in the addition of Bank SNB as a participating lender. The borrowing base of $50.0 million was unchanged.

On April 30, 2018, the Revolver was amended, resulting in an increase in the borrowing base to $70.0 million (see note 5). As of September 30, 2018, the Revolver’s borrowing base is $70.0 million, of which approximately $38.0 million is outstanding.

As of September 30, 2018, Old Ironsides holds 27,195 Class A Units, which equates to a 72.76% aggregate share ownership of the Company and Carbon holds (i) 9,805 Class A Units, (ii) 1,000 Class B Units and (iii) 121 Class C Units, which equates to a 27.24% aggregate share ownership of the Company.

Note 2 – 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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly our financial position as of September 30, 2018 and December 31, 2017, and our results of operations for the three and nine months ended September 30, 2018 and the period April 3, 2017 through September 30, 2017, and cash flows for the nine months ended September 30, 2018. Operating results for the nine months ended September 30, 2018, are not necessarily indicative of the results that may be expected for the full year because of the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results and other factors.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. The Company’s subsidiaries consist of Carbon Tennessee Mining Company, LLC, Carbon Appalachia Group, LLC, Carbon Appalachia Enterprises, LLC, Coalfield Pipeline Company, Knox Energy, LLC, Carbon West Virginia Company, LLC and Cranberry Pipeline Corporation. All significant intercompany accounts and transactions have been eliminated.

Revenue

The Company recognizes revenues for sales and services when persuasive evidence of an arrangement exists, when custody is transferred, or services are rendered, fees are fixed or determinable and collectability is reasonably assured.

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.

6

Natural Gas and Oil Sales

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 and oil revenues are recognized based on the Company’s net revenue interest.

Marketing Gas Revenue

The Company sells production purchased from third parties as well as production from its own oil and gas producing properties. For the nine months ended September 30, 2018, approximately $28.7 million in intercompany activity is eliminated between revenue – marketing and gas purchases - marketing on the statement of operations.

Storage

Under fee-based arrangements, the Company receives a fee for storing natural gas. The revenues earned are directly related to the volume of natural gas that flows through the Company’s systems and are not directly dependent on commodity prices.

Transportation, gathering, and compression

The Company generally purchases natural gas from producers at the wellhead or other receipt points, gathers the wellhead natural gas through our gathering system, and then sells the natural gas based on published index market prices. The Company remits to the producers either an agreed-upon percentage of the actual proceeds that we receive from our sales of natural gas or an agreed-upon percentage of the proceeds based on index related prices for the natural gas, regardless of the actual amount of the sales proceeds we receive. The Company’s revenues under percent-of-proceeds/index arrangements generally correlates with the price of natural gas.

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. From Inception through December 31, 2017, the Company did not recognize an unproved property impairment.

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 and related estimated asset retirement costs, net of estimated salvage values.

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

The Company performs a ceiling test 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 unweighted 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.

7

For the nine months ended September 30, 2018 and Inception to September 30, 2017, the Company did not recognize a ceiling test impairment. Future declines in oil and natural gas prices could result in impairments of the Company’s oil and gas properties in future periods. The effect of price declines will impact the ceiling test value until such time commodity prices stabilize or improve. Impairments are a non-cash charge and accordingly would not affect cash flows but would adversely such time commodity prices stabilize or improve. Impairments are a non-cash charge and accordingly would not affect the Company’s results of operations and members’ equity.

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 or assumed, and the amount of such liability is recorded as an increase in the carrying amount of the related long-lived asset. 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 ARO 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 from a reassessment of expected cash flows and assumptions inherent in the estimation of the liability. As of September 30, 2018, the Company has $5.5 million as a non-current liability and $641,000 as a current liability within accounts payable. 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. ARO is valued utilizing Level 3 fair value measurement inputs (see note 7).

The following table is a reconciliation of ARO (in thousands).

	For the nine months ended September 30, 2018
Balance at beginning of period	$	4,789
Accretion expense		405
ARO additions		933
Balance at end of period	$	6,127

Income Taxes

The Company has elected to be treated as a partnership for income tax purposes. Accordingly, taxable income and losses are reported on the income tax returns of the Company’s members and no provision for income taxes has been recorded on the accompanying financial statements. Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. The Company’s tax returns are subject to examination by tax authorities through the current period for state and federal tax reporting purposes.

Pursuant to the Bipartisan Budget Act of 2015 (the “Act”), as of January 1, 2018, the Act allows the adjustment resulting from IRS audits of partnerships to be assessed at the partnership level.

8

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, estimates 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 fair value of commodity derivative instruments, fair value of assets acquired and liabilities assumed qualifying as business combination or asset acquisition, estimated lives of other property and equipment, asset retirement obligations and accrued liabilities and revenues.

Recently Adopted Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which establishes a comprehensive new revenue recognition standard designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In March 2016, the FASB released certain implementation guidance through ASU 2016-08 (collectively with ASU 2014-09, the “Revenue ASUs”) to clarify principal versus agent considerations. The Revenue ASUs allow for the use of either the full or modified retrospective transition method, and the standard is effective for annual reporting periods beginning after December 15, 2017 including interim periods within that period, with early adoption permitted for annual reporting periods beginning after December 15, 2016. We will adopt the guidance using the modified retrospective method on January 1, 2019. We did not record a cumulative-effect adjustment to the opening balance of retained earnings as no adjustment was necessary. We do not anticipate the adoption of the Revenue ASUs to have a material impact net income or cash flows.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease standard designed to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP standards. ASU 2016-02 is effective for fiscal years, beginning after December 15, 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact on its financial statements of adopting ASU 2016-02.

There were various updates recently issued by the FASB, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our reported financial position, results of operations, or cash flows.

Note 3 – Acquisitions

Old Ironsides Membership Interest Purchase Agreement

On May 4, 2018, Carbon entered into a Membership Interest Purchase Agreement (the “MIPA”) with Old Ironsides. Old Ironsides owns 73.5%, and Carbon owns the remaining 26.5%, of the issued and outstanding Class A Units of Carbon Appalachia. Carbon also owns all of the Class B and Class C Units of Carbon Appalachia. Pursuant to the MIPA, Carbon may acquire all of Old Ironsides’ membership interests of Carbon Appalachia. Following the closing of the transaction, Carbon would own 100% of the issued and outstanding ownership interests in Carbon Appalachia, and Carbon Appalachia will become a wholly-owned subsidiary of Carbon.

9

Subject to the terms and conditions of the MIPA, Carbon will pay Old Ironsides, approximately $58.0 million at closing, subject to adjustment, in accordance with the MIPA. Carbon intends to fund the acquisition through the issuance of additional equity, for which Carbon has already filed a registration statement.

The MIPA contains termination rights for Carbon and Old Ironsides, including, among others, if the closing of the transaction has not occurred on or before October 15, 2018. The MIPA may also be terminated by mutual written consent of Carbon and Old Ironsides. See note 12.

Note 4 – Property and Equipment

Net property and equipment at September 30, 2018 and December 31, 2017 consists of the following (in thousands):

	As of September, 30			As of December 31,
	2018			2017
Oil and gas properties:
Proved oil and gas properties	$	85,010		$	84,255
Unproved properties not subject to depletion		1,833			1,780
Accumulated depreciation, depletion and amortization		(5,011	)		(1,633	)
Net oil and gas properties		81,832			84,402
Pipeline facilities and equipment		12,713			9,338
Base gas		2,122			2,122
Buildings		1,827			1,247
Vehicles		557			550
Furniture and fixtures, computer hardware and software, and other equipment		351			226
Accumulated depreciation and amortization		(1,690	)		(806	)
Net other property and equipment		15,880			12,677
Total property and equipment	$	97,712		$	97,079

The Company had approximately $1.8 million at September 30, 2018 and December 31, 2017, of unproved oil and gas properties not subject to depletion. At September 30, 2018 and December 31, 2017, the Company’s unproved properties consist principally of leasehold acquisition costs in Tennessee. 

During the three and nine months ended September 30, 2018, no expiring leasehold costs were reclassified into proved property. 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.

Depletion expense related to oil and gas properties for the three and nine months ended September 30, 2018 was approximately $1.1 million, or $0.27 per Mcfe, and $3.4 million, or $0.27 per Mcfe, respectively. Depreciation and amortization expense related to buildings, furniture and fixtures, computer hardware and software, and other equipment for the three and nine months ended September 30, 2018 was approximately $188,000 and $885,000, respectively.

Note 5 – Revolver

On April 3, 2017, Carbon Appalachia Enterprises entered into a 4-year $100.0 million senior secured asset-based revolving credit facility with LegacyTexas Bank (the “Revolver”) with an initial borrowing base of $10.0 million.

On August 15, 2017, in connection with and concurrently with the closing of the Enervest Acquisition, the borrowing base of the Revolver increased to $22.0 million and Carbon Appalachia Enterprises borrowed $8.0 million from the Revolver to partially fund the Enervest Acquisition.

10

On September 29, 2017, Carbon Appalachia Enterprises amended the Revolver, resulting in a borrowing base of $50.0 million with redeterminations as of April 1 and October 1 each year and the addition of East West Bank as a participating lender. In connection with and concurrently with the closing of the Cabot Acquisition, Carbon Appalachia Enterprises borrowed $20.4 million from the Revolver to partially fund the Cabot Acquisition.

On November 30, 2017, Carbon Appalachia Enterprises amended the Revolver, resulting in the addition of Bank SNB as a participating lender. The borrowing base of $50.0 million and commitment of $100.0 million was unchanged.

The Revolver bears interest at an applicable margin ranging from 3.00% to 4.00%, depending on utilization, plus the applicable 30, 60 or 90-day London interbank offered rate (“LIBOR”), at the Company’s election. As of September 30, 2018, the Company’s effective borrowing rate on the Revolver was 5.90%. In addition, the Revolver includes a 0.50% unused available line fee.

On April 30, 2018, the Revolver was amended, resulting in an increase in the borrowing base to $70.0 million (see note 5).

As of September 30, 2018, the Revolver has an outstanding balance of $38.0 million and a borrowing base of $70.0 million. The maximum principal amount available under the Revolver is based upon the borrowing base attributable to the Company’s proved oil and gas reserves which is determined at least semi-annually.

The Revolver is secured by all of the assets of the Company. The Revolver requires the Company, as of each quarter end, to hedge 75% of its anticipated production for the next 30 months. Distributions to equity members are generally restricted.

In the event of default or deficiency in the borrowing base, an additional 2.0% interest rate would apply. In such an event, a cure period exists allowing the Company to obtain compliance.

The Company incurred fees directly associated with the issuance of the Revolver and amortizes these fees over the life of the Revolver. The current portion of these fees are recorded as prepaid expense and deposits and the non-current portion as other non-current assets for a combined value of $536,000 and $584,000 as of September 30, 2018 and December 31, 2017, respectively. For the three and nine months ended September 30, 2018, the Company amortized approximately $53,000 and $148,000, respectively, associated with these fees.

The Revolver agreement requires the Company to maintain certain financial and non-financial covenants which include the following ratios: leverage ratio, current ratio, and other qualitative covenants as defined in the Revolver agreement including commodity hedging requirements. As of September 30, 2018, the Company was compliant with its covenants.

Interest Expense

For the three and nine months ended September 30, 2018, the Company incurred interest expense of approximately $674,000 and $1.9 million, respectively. Approximately $53,000 and $148,000 was amortization of the Revolver issuance costs for the three and nine months ended September 30, 2018.

11

Note 6 – Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at September 30, 2018 and December 31, 2017 consists of the following (in thousands):

	September 30, 2018		December 31, 2017
Accounts payable	$	2,837	$	3,878
Accrued liabilities		1,608		3,011
Accrued ad valorem taxes		2,354		1,812
Accrued lease operating		1,082		1,135
Transportation, gathering and compression		1,104		699
Property and production taxes		1,425		675
Accrued interest		510		107
Other		180		755
Total accounts payable and accrued liabilities	$	11,100	$	12,070

Note 7 – 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 throughout the period presented.

The following table presents the Company’s financial assets that were accounted for at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 by level within the fair value hierarchy (in thousands):

	Fair Value Measurements Using
At September 30, 2018	Level 1		Level 2		Level 3		Total
Assets:
Commodity derivatives - current	$	-	$	296	$	-	$	296
Commodity derivatives – other non-current assets	$	-	$	852	$	-	$	852
At December 31, 2017
Assets:
Commodity derivatives – current	$	-	$	1,884	$	-	$	1,884
Commodity derivatives – other non-current assets	$	-	$	155	$	-	$	155

As of September 30, 2018, the Company’s commodity derivative financial instruments are comprised of natural gas and oil swap and collar agreements. The fair values of these agreements are determined under an income valuation technique. Swaps are valued using the income technique. Collars are valued using the option model. 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 the 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 the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy. The counterparty for all the Company’s outstanding commodity derivative financial instruments as of September 30, 2018 is BP Energy Company (“BPEC”).

12

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

Acquired accounts receivable, accounts payable, and other accrued liabilities were determined to be representative of fair value given their short-term nature. Acquired base gas and gas inventory was valued based on prevailing market rates for natural gas on the closing date of the Cabot Acquisition on September 29, 2017.

The fair values of each of the following assets and liabilities, measured upon the acquisition date in year ended December 31, 2017, 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.

Asset Retirement Obligation

The fair value of the Company’s asset retirement obligation liability is calculated as of the date of closing of each of the Company’s acquisitions, when the liability was assumed, by estimating i) the cost of abandoning oil and gas wells ranging from $15,000 to $30,000 based on market participant expectations for similar work; ii) the timing of reclamation ranging from 2-75 years based on economic lives of its properties as estimated by reserve engineers; iii) an inflation rate between 1.81% and 2.04%; and iv) a credit adjusted risk-free rate of 6.59%, which takes into account the Company’s credit risk and the time value of money (asset acquisitions) or a range of 11.0% - 15.0% representing a market participant’s weighted average cost of capital (business combinations). Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs (see note 2).

Firm Transportation Obligation

The Company assumed liabilities associated with firm transportation contracts in connection with the Enervest Acquisition and Cabot Acquisition. The fair value of these acquired firm transportation obligations was estimated based upon i) the contractual obligations assumed by the Company (including the length of contracts, committed volumes, and demand charges described in note 9), ii) estimated usage from a market-participant perspective, and iii) a discount rate of 11.0% based upon a market participant’s estimated weighted average cost of capital.

Class B Units

The Company issued Class B Units to Carbon as part of entering into the Carbon Appalachia LLC Agreement. The $924,000 fair value of the Class B Units was estimated by the Company utilizing the assistance of third-party valuation specialists. The fair value was based upon enterprise values derived from inputs including estimated future production rates, future commodity prices including price differentials as of the date of closing, future operating and development costs and comparable market participants.

Acquired Assets

For assets accounted for as business combinations, including the Knox-Coalfield Acquisition and Cabot Acquisition (see note 3), to determine the fair value of the assets acquired, 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 date of closing, future operating and development costs, a market participant weighted average cost of capital, and the condition of vehicles and equipment.

For the assets acquired in the Enervest Acquisition and accounted for as an asset acquisition, to determine the fair value of the assets acquired, 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 date of closing, future operating and development costs and its weighted average cost of capital.

13

Note 8 – Commodity Derivatives

The Company has entered into commodity-based derivative contracts at various times 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.

Pursuant to the terms of the Company’s Revolver, the Company has entered into derivative agreements to hedge certain of its oil and natural gas production for 2018 through 2021. As of September 30, 2018, these derivative agreements consisted of the following:

	Natural Gas Swaps				Natural Gas Collars				Oil Swaps
			Weighted				Weighted				Weighted
			Average				Average Price				Average
Year	MMBtu		Price (a)		MMBtu		Range (a)		Bbl		Price (b)
2018		2,670,000	$	2.97		320,000	$	2.85 - $3.19		4,000	$	50.35
2019		11,515,000	$	2.86		480,000	$	2.85 - $3.19		12,000	$	50.35
2020		11,418,000	$	2.74		-		-		6,000	$	54.75
2021		2,598,000	$	2.69		-		-		-		-

(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. Collars are designed to establish floor and ceiling prices on anticipated future oil and gas production. The ceiling establishes a maximum price that the Company will receive for the volumes under contract, while the floor establishes a minimum price.

The following table summarizes the fair value of the derivatives recorded in the unaudited consolidated balance sheet as of September 30, 2018 and audited consolidated balance sheet as of December 31, 2017. These derivative instruments are not designated as cash flow hedging instruments for accounting purposes (in thousands):

	September 30, 2018		December 31, 2017
Commodity derivative contracts:
Current assets	$	296	$	1,884
Other non-current assets	$	852	$	155

The table below summarizes the commodity settlements and unrealized gains and losses related to the Company’s derivative instruments for the three and nine months ended September 30, 2018 and are included in commodity derivative gain or loss in the accompanying unaudited consolidated statement of operations.

	Three months ended					Nine months ended			For the period April 3, 2017 through
	September 30, 2018		September 30, 2017			September 30, 2018			September 30, 2017
Commodity derivative contracts:
Commodity derivative gain - realized	$	135	$	95		$	1,037		$	(128	)
Commodity derivative (loss) – unrealized		482		(1,103	)		(890	)		981
Total commodity derivative gain	$	617	$	(1,008	)	$	147		$	853

Commodity derivative gains and losses that have settled are included in cash flows from operating activities in the unaudited consolidated statement of cash flows.

14

The counterparty in the Company’s derivative instruments is BP Energy Company (“BPEC”). The Company has entered into an International Swaps and Derivative Association, Inc. (“ISDA”) Master Agreement with BPEC that establishes standard terms for the derivative contracts and an inter-creditor agreement with participating lenders in the Revolver and BPEC whereby any credit exposure related to the derivative contracts entered into by the Company and BPEC is secured by the collateral and backed by the guarantees supporting the revolver.

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 Company’s derivative instruments are recorded as assets in the unaudited balance sheet as of September 30, 2018.

Consolidated Balance Sheet Classification	Gross Recognized Assets/ (Liabilities)			Gross Amounts Offset			Net Recognized Fair Value Assets/ (Liabilities)
At September 30, 2018
Commodity derivative assets:
Commodity derivative asset	$	1,184		$	(888	)	$	296
Other non-current assets		1,534		$	(682	)		852
Commodity derivative assets	$	2,718		$	(1,570	)	$	1,148
Commodity derivative liabilities
Commodity derivative liability	$	(888	)	$	888		$	-
Other non-current liabilities		(682	)		682			-
Total derivative liabilities	$	(1,570	)	$	1,570		$	-
At December 31, 2017
Commodity derivative assets:
Commodity derivative asset	$	2,288		$	(404	)	$	1,884
Other non-current assets		1,150			(995	)		155
Commodity derivative assets	$	3,438		$	(1,399	)	$	2,039
Commodity derivative liabilities
Commodity derivative liability	$	404		$	(404	)	$	-
Other non-current liabilities		995			(955	)		-
Total derivative liabilities	$	1,399		$	(1,399	)	$	-

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.

15

Note 9 – Commitments and Contingencies

In connection with the Enervest Acquisition and Cabot Acquisition, the Company acquired long-term firm transportation contracts that were entered into to ensure the transport for certain gas production to purchasers. Firm transportation volumes and the related demand charges for the remaining term of these contracts at September 30, 2018 are summarized in the table below.

Period	Dekatherms per day		Demand Charges
Oct 2018 – Oct 2020		6,300	$	0.21
Oct 2018 – May 2027		29,900	$	0.21
Oct 2018 – Aug 2022		19,441	$	0.56

As of September 30, 2018, the remaining commitment related to the firm transportation contracts assumed in the Cabot Acquisition and Enervest Acquisition is $17.9 million and reflected in the Company’s unaudited consolidated balance sheet. The fair values 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 monthly as the Company pays these firm transportation obligations in the future.

Legal and Environmental

We are not aware of any legal or environmental material pending or threatened litigation or of any proceedings known to be contemplated by governmental authorities or regulators which are, or would be, likely to have a material adverse effect upon the Company or our operations, taken as a whole.

Note 10 – Related Parties

During the period ended September 30, 2018, the Company was engaged in the following transactions with related parties (in thousands):

Nytis Exploration Company LLC (“Nytis”) is a subsidiary of Carbon and the operator of the Company’s properties through an operating agreement. The operating agreement includes reimbursements and allocations made under the agreement. Approximately $1.2 million in reimbursements was included in due to related parties as of September 30, 2018.

Management Services

The Company entered into a management service agreement with Carbon whereby Carbon provides general management and administrative services to the Company. The amount of the reimbursement to Carbon is based upon the percentage of production of the Company as a percentage of the total volume of production from Carbon and the Company. The Company reimburses Carbon for all management related expenses such as travel, required third-party geological and/or accounting consulting, and other necessary expenses incurred by Carbon in the normal course of managing the Company.

The Company incurred approximately $744,000 and $2.2 million in management reimbursements for the three and nine months ended September 30, 2018, respectively. Additionally, the Company reimbursed Carbon for approximately $375,000 and $1.1 million in general and administrative expenses and was recorded as Management fees and Reimbursements—related party in the statement of operations for the three and nine months ended September 30, 2018, respectively. Approximately $1.2 million was included in due to related parties as of September 30, 2018.

16

Note 11 – Supplemental Cash Flow Disclosure

Supplemental cash flow disclosures for the nine months ended September 30, 2018 are presented below (in thousands):

Cash paid during the period for:
Interest payments	$	1,609
Inventories		599
Oil and gas properties, proved		1,920
Other property, plant and equipment		(5,161	)
Firm transportation contract obligation		2,642

Note 12 – Subsequent Events

On December 31, 2018, the Company closed the acquisition described within the MIPA (see note 3). As a result of the closing of the acquisition, Carbon owns 100% interest of CAC.

17

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial information and the related notes present our unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2018 and for the year ended December 31, 2017, and the unaudited pro forma consolidated balance sheet as of September 30, 2018. The unaudited pro forma consolidated financial information has been derived by aggregating our audited and unaudited historical consolidated financial statements, the audited and unaudited historical financial statements of Carbon California Company (“Carbon California”), the audited and unaudited historical financial statements of Carbon Appalachia Company (“Carbon Appalachia”), the audited and unaudited historical statements of revenues and direct operating expenses for the properties acquired in the Seneca Acquisition and the audited historical statements of revenues and direct operating expenses for the properties acquired in the Cabot Acquisition, and making certain pro forma adjustments to such aggregated financial information to give effect to the transactions defined below, collectively the Transactions:

● the increase in Carbon’s ownership of Carbon California from 17.81% to 56.41% of voting and profits interest on February 1, 2018 in connection with the exercise of certain warrants by Yorktown and the resulting consolidation of Carbon California (“Carbon California Acquisition”) (note 2);

● the Seneca Acquisition by Carbon California (note 3);

● additional borrowings under the Carbon Credit Facility (note 4);

● the exercise of the Carbon Appalachian Warrant (“Appalachia Warrant”) (note 5);

● the acquisition by Carbon of Old Ironsides’ 73.5% of voting interest in Carbon Appalachia for approximately $58 million, resulting in Carbon Appalachia becoming a wholly owned subsidiary of Carbon (“Old Ironsides Buyout”) (note 6);

● the Cabot Acquisition made by Carbon Appalachia (note 7); and

● the Enervest Acquisition made by Carbon Appalachia (note 8).

The Transactions, along with the assumptions and estimates underlying the adjustments to the unaudited pro forma consolidated financial information, are described in more detail in the accompanying notes, which should be read together with the unaudited pro forma consolidated financial information.

The unaudited pro forma consolidated balance sheet as of September 30, 2018 and unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 have been prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma consolidated financial information.

The unaudited pro forma consolidated financial information has been presented for illustrative purposes only and is based upon available information and reflects estimates and certain assumptions made by our management that we believe are reasonable. Actual adjustments may differ materially from the information presented herein. The unaudited pro forma consolidated financial information does not purport to represent what our consolidated results of operations and financial position would have been had the Transactions occurred on the dates indicated. They are also not intended to project our consolidated results of operations or financial position for any future period or date.

The unaudited pro forma consolidated financial information does not reflect the realization of any expected cost savings, operating efficiencies or other synergies that may result from the Transactions as a result of restructuring activities or other planned cost savings initiatives following the completion of the Transactions.

1

The unaudited pro forma consolidated financial information presented herein should be read in conjunction with:

● the Company’s audited historical consolidated financial statements from its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed on March 31, 2018;

● the Company’s unaudited historical consolidated financial statements and related notes thereto contained in its Quarterly Reports on Form 10-Q for the three months ended March 31, 2018, six months ended June 30, 2018, and nine months ended September 30, 2018, filed with the SEC on May 19, 2018, August 14, 2018 and November 14, 2018, respectively;

● Carbon Appalachia Company’s audited historical consolidated financial statements and related notes thereto as of and for the period from April, 3 2017 (inception) to December 31, 2017, attached to this Current Report on Form 8-K/A as Exhibit 99.1;

● Carbon Appalachia Company’s unaudited historical consolidated financial statements and related notes thereto as of and for the nine months ended September 30, 2018 and for the period from April 3, 2017 (inception) to September 30, 2017, attached to this Current Report on Form 8-K/A as Exhibit 99.2.

● Carbon California Company’s audited historical consolidated financial statements and related notes thereto as of and for the period from February 15, 2017 (inception) to December 31, 2017, attached to our Form S-1/A filing on September 6, 2018;

● Cabot Acquisition Properties’ audited statements of revenues and direct operating expenses and related notes thereto as of and for the period from January 1, 2017 to September 29, 2017 and for the year ended December 31, 2016, attached to our Form S-1/A filing on September 6, 2018;

● Seneca Acquisition Properties audited statements of revenues and direct operating expenses and related notes thereto as of and for the years ended December 31, 2017 and 2016, attached to our Form S-1/A filing on September 6, 2018; and

● Seneca Acquisition Properties unaudited statements of revenues and direct operating expenses and related notes thereto as of and for the three ended June 30, 2018 and 2017, attached to our Form S-1/A filing on September 6, 2018.

2

Carbon Energy Corp

Unaudited Pro Forma Consolidated Statement of Operations

For the nine months ended September 30, 2018

(In Thousands, Except Per Share Data)

	Carbon Historical			CAC Historical (6c)			Seneca Historical (3b)		Adjustments for Carbon California Acquisition (2)				Adjustments for Old Ironsides Buyout (6)				Other Adjustments (3)				Total
Revenue:
Natural gas and liquid sales	$	12,954		$	38,189		$	127	$	10		2c	$	-			$	-			$	51,280
Oil sales		22,924			1,079			4,036		760		2c		-				-				28,799
Transportation and handling		-			1,703			-		-				-				-				1,703
Marketing gas sales		-			21,362			-		-				-				-				21,362
Commodity derivative (loss) gain		(10,550	)		147			-		(973	)	2c		-				-				(11,376	)
Other income		35			-			-		-				-				-				35
Total revenue		25,363			62,480			4,163		(203	)			-				-				91,803
Expenses:
Lease operating expenses		10,824			16,481			1,219		250		2c		-				-				28,774
Transportation and gathering costs		3,786			9,203			-		87		2c		-				-				13,076
Production and property taxes		1,792			3,455			140		42		2c		-				-				5,429
Marketing gas purchases		-			17,462			-		-				-				-				17,462
General and administrative		9,007			1,855			-		312		2c		-				-				11,174
General and administrative-related party reimbursement		(3,383	)		-			-		64		2b		3,319		6d		-				-
Depreciation, depletion and amortization		6,202			4,262			-		77		2c		808		6f		277		3c		11,626
Management and operating fee, related party		-			3,319			-		-				(3,319	)	6d		-				-
Accretion of asset retirement obligations		510			405			-		17		2c		-				-				932
Total expenses		28,738			56,442			1,359		849				808				277				88,473
Operating (loss) income		(3,375	)		6,038			2,804		(1,052	)			(808	)			(277	)			3,330
Other income and (expense):
Interest expense		(3,331	)		(1,861	)		-		(196	)	2c		(3,241	)	6g		(794	)	3d		(9,423	)
Warrant derivative gain		225			-			-		(225	)	2b		-				-				-
Investment in affiliate		-			-			-		-				-				-				-
Equity investment loss		6,511			-			-		(5,390	)	2b		(948	)	6d		-				173
Total other income and (expense)		3,405			(1,861	)		-		(5,811	)			(4,189	)			(794	)			(9,250	)
Income (loss) before income taxes		30			4,177			2,804		(6,863	)			(4,997	)			(1,071	)			(5,920	)
Provision for income taxes		-			-			-		-				-				-				-
Net income (loss) before non-controlling interest		30			4,177			2,804		(6,863	)			(4,997	)			(1,071	)			(5,920	)
Net income (loss) attributable to non-controlling interests		(2,234	)		-			-		(2,992	)	2b						628		3e		(4,598	)
Net income (loss) attributable to controlling interest	$	2,264		$	4,177		$	2,804	$	(3,871	)		$	(4,997	)		$	(1,699	)		$	(1,322	)
Pro forma net income (loss) per common share:
Basic	$	0.30																			$	(0.22	)
Diluted	$	0.10																			$	(0.22	)
Proforma weighted average common shares outstanding (in thousands):
Basic		7,466								1,528		2d										7,786
Diluted		7,466																				8,185

See notes to unaudited pro forma consolidated financial information.

3

Carbon Energy Corp

Unaudited Pro Forma Consolidated Statement of Operations

For the year Ended December 31, 2017

(In Thousands, Except Per Share Data)

	Carbon Historical			CCC Historical (2a)			Seneca Historical (3a)		CAC Historical (6b)			Cabot Historical (7b)		Adjustments for Carbon California Acquisition (2)				Adjustments for Old Ironsides Buyout (6)				Other Adjustments (3, 4, 5, 7, 8)				Total
Revenue:
Natural gas and liquid sales	$	15,298		$	1,592		$	130	$	16,128		$	27,042	$	-			$	-			$	2,914		8a	$	63,104
Oil sales		4,213			7,024			13,143		685			454		-				-				-				25,519
Transportation and handling		-			-			-		911			-		-				-				-				911
Marketing gas sales		-			-			-		11,315			12,070		-				-				-				23,385
Commodity derivative (loss) gain		2,928			(1,381	)		-		2,545			-		-				-				-				4,092
Other income		34			-			-		-			363		-				-				29		8a		426
Total revenue		22,473			7,235			13,273		31,584			39,929		-				-				2,943				117,437
Expenses:
Lease operating expenses		6,141			3,726			5,690		5,587			8,982		-				-				1,367		8a		31,493
Transportation and gathering costs		2,172			1,442			-		4,160			9,179		-				-				709		8a		17,662
Production and property taxes		1,276			527			516		1,464			4,183		-				-				96		8a		8,062
Marketing gas purchases		-			-			-		9,290			10,389		-				-				-				19,679
General and administrative		9,528			2,177			-		2,044			-		-				-				(660	)	7a		13,089
General and administrative-related party reimbursement		(2,703	)		-			-		-			-		1,000		2b		1,703		6d		-				-
Depreciation, depletion and amortization		2,544			1,304			-		2,439			-		275		2e		3,955		6f		830		3c		13,918
																							1,904		7d
																							667		8c
Accretion of asset retirement obligations		307			192			-		198			-		-				-				-				697
Management and operating fee, related party		-			525			-		1,582			-		(525	)	2b		(1,582	)	6d						-
Impairment of oil and gas properties		-			-			-		-			-		-				-				-				-
Total expenses		19,265			9,893			6,206		26,764			32,733		750				4,076				4,913				104,600
Operating (loss) income		3,208			(2,658	)		7,067		4,820			7,196		(750	)			(4,076	)			(1,970	)			12,837
Other income and (expense):
Interest expense		(1,202	)		(2,040	)		-		(891	)		-		-				(4,322	)	6g		(221	)	4		(12,131	)
																							(817	)	7c
																							(255	)	8b
																							(2,383	)	3d
Warrant derivative gain		3,133			-			-		-			-		(3,752	)	2b		-				619		5		-
Equity investment gain		1,158			-			-		-			-		-				(1,090	)	6d		-				68
Class B Unit Issuance		-			(1,854	)		-		(924	)		-		1,854		2b		924		6d		-				-
Other		28			-			-		-			-		-				-				-				28
Total other income and (expense)		3,117			(3,894	)		-		(1,815	)		-		(1,898	)			(4,488	)			(3,057	)			(12,035	)
Income (loss) before income taxes		6,325			(6,552	)		7,067		3,005			7,196		(2,648	)			(8,563	)			(5,027	)			802
Provision for income taxes		(74	)		-			-		-			-		-				-				-				(74	)
Net income (loss) before non-controlling interest		6,399			(6,552	)		7,067		3,005			7,196		(2,648	)			(8,563	)			(5,027	)			876
Net income (loss) attributable to non-controlling interests		81			-			-		-			-		(2,856	)	2b						1,613		3e		(1,162	)
Net income (loss) attributable to controlling interest	$	6,318		$	(6,552	)	$	7,067	$	3,005		$	7,196	$	208			$	(8,563	)		$	(6,640	)		$	2,039
Proforma net income (loss) per common share:
Basic	$	1.12																								$	0.25
Diluted	$	0.49																								$	0.09
Proforma weighted average common shares outstanding (in thousands):
Basic		5,662													1,528		2d						432		5		8,176
Diluted		6,465																									8,966

See notes to unaudited pro forma consolidated financial information.

4

Carbon Energy Corp

Unaudited Pro Forma Consolidated Balance Sheet - As of September 30, 2018

(In Thousands)

	Carbon Historical			Adjustment for Old Ironsides Buyout (6)				Total
Current assets:
Cash and cash equivalents	$	4,477		$	12,283		6a	$	16,760
Accounts receivable:
Revenue		7,002			21,092		6a		28,094
Joint interest billings and other		1,562			2,222		6a		3,784
Receivable - related party		-			-				-
Due from related parties		1,272			(1,218	)	6e		54
Insurance receivable		871			-				871
Other		-			-				-
Commodity derivative asset		-			198		6a		198
Inventories		-			900		6a		900
Prepaid expense, deposits, and other current assets		2,051			448		6a		2,499
Total current assets		17,235			35,925				53,160
Property and equipment
Oil and gas properties, full cost method of accounting:
Proved, net		128,093			109,172		6a		237,265
Unproved		3,616			1,869		6a		5,485
Other property, equipment, net		1,989			15,649		6a		17,638
Total property and equipment, net		133,698			126,690				260,388
Investments in affiliates		13,459			(12,831	)	6e		628
Other long-term assets		3,200			472		6a		3,672
Total assets	$	167,592		$	150,256			$	317,848
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities
Accounts payable and accrued liabilities	$	14,378		$	30,087		6a	$	43,247
					(1,218	)	6e
Due to related parties		-			-				-
Asset retirement obligations		-			-				-
Firm transportation contract obligations		52			-				52
Commodity derivative liability		6,502			-				6,502
Total current liabilities		20,932			28,869				49,801
Non-current liabilities:
Firm transportation contract obligations		115			18,348		6a		18,463
Commodity derivative liability		4,299			-				4,299
Production and property taxes payable		849			-				849
Warrant derivative liability		-			-				-
Asset retirement obligations		10,935			5,671		6a		16,606
Notes, related party, net		-			-				-
Credit facility, related party		49,995			-				49,995
Credit facility		26,141			37,975		6a		97,116
					33,000		6e
Long-term debt		65			25,065		6e		25,130
Total non-current liabilities		92,399			120,059				212,458
Stockholders’ equity:
Preferred stock		1			-				1
Common stock		77			-				77
Additional paid-in capital		75,858			-				75,858
Accumulated deficit		(45,863	)		1,328		6e		(44,535	)
Total Carbon stockholders’ equity		30,073			1,328				31,401
Non-controlling interests		24,188			-				24,188
Total stockholders’ equity		54,261			1,328				55,589
Total liabilities and stockholders’ equity	$	167,592		$	150,256			$	317,848

See notes to unaudited pro forma consolidated financial information

5

Carbon Energy Corporation
Notes to Unaudited Pro Forma Consolidated Financial Information

All amounts are in thousands, unless specifically stated otherwise or for share data

1. Basis of presentation

The unaudited pro forma consolidated financial information is based upon the historical financial statements of the Company, the audited and unaudited historical financial statements of Carbon California, the audited and unaudited historical financial statements of Carbon Appalachia, the audited and unaudited historical statements of revenues and direct operating expenses for the properties acquired in the Seneca Acquisition and the audited historical statements of revenues and direct operating expenses for the properties acquired in the Cabot Acquisition, as adjusted for the impact of the Transactions, as if the Transactions occurred on January 1 of the applicable period. The historical financial statements have been adjusted to give pro forma effect to events that are (i) directly attributable to the Transactions, (ii) factually supportable and (iii) with respect to the unaudited pro forma consolidated statements of operations, expected to have a continuing impact on the consolidated results following the Transactions.

The business combination was accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”), Topic 805, Business Combinations.

The unaudited pro forma consolidated financial statements do not necessarily reflect what the company’s financial condition or results of operations would have been had the Transactions occurred on the dates indicated. They also may not be useful in predicting our future financial condition and results of operations. Our actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

The historical audited statements of Carbon California and Carbon Appalachia are prepared from the date of their formation, February 15, 2017 and April 3, 2017, respectively, through December 31, 2017. The CRC Acquisition and the Mirada Acquisition closed on the date of formation of Carbon California, as such, the operations of the assets acquired in the CRC Acquisition and Mirada Acquisition are included in the entire historical period presented in the audited historical statements of Carbon California. The CNX Acquisition closed on the date of formation of Carbon Appalachia, as such, the CNX Acquisition is included in the entire historical period presented within the audited historical financial statements of Carbon Appalachia. No pro forma adjustments have been made to include the CRC, Mirada and CNX Acquisitions as if they occurred on January 1, 2017 because it is impracticable to do so prior to the formation of Carbon California and Carbon Appalachia. We believe that excluding these acquisitions for these periods – for Carbon California excluding 45 days of the operations of the assets assumed in the CRC and Mirada Acquisitions and for Carbon Appalachia excluding 123 days of the operations of the assets assumed in the CNX Acquisition – does not have a material effect on our unaudited consolidated pro forma statement of operations.

2. Adjustments for the increase in Carbon’s ownership of Carbon California from 17.81% to 56.41% of voting and profit interest on February 1, 2018 in connection with the exercise of certain warrants by Yorktown and the resulting consolidation of Carbon California

Carbon California was formed on February 15, 2017 by Carbon and other institutional investors to acquire, divest and operate oil and gas properties in the Ventura Basin of California.

In connection with the entry into the Carbon California LLC Agreement, we received Class B Units and issued to Yorktown a warrant to purchase approximately 1.5 million shares of our common stock at an exercise price of $7.20 per share (the “California Warrant”). The exercise price for the California Warrant is payable exclusively with Class A Units of Carbon California held by Yorktown and the number of shares of our common stock for which the California Warrant is exercisable is determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of Yorktown’s Class A Units of Carbon California by (b) the exercise price. The California Warrant had a term of seven years and included certain standard registration rights with respect to the shares of our common stock issuable upon exercise of the California Warrant. Yorktown exercised the California Warrant on February 1, 2018.

The issuance of the Class B Units and the warrant were in contemplation of each other, and under non-monetary related party guidance, we accounted for the California Warrant, at issuance, based on the fair value of the California Warrant as of the date of grant (February 15, 2017) and recorded a long-term warrant liability with an associated offset to APIC. Future changes to the fair value of the California Warrant are recognized in earnings. We accounted for the fair value of the Class B Units at their estimated fair value at the date of grant, which became our investment in Carbon California with an offsetting entry to APIC.

6

On February 1, 2018, Yorktown exercised the California Warrant resulting in the issuance of 1,527,778 shares of our common stock in exchange for Yorktown’s Class A Units of Carbon California representing approximately 46.96% of the outstanding Class A Units of Carbon California and a profits interest of approximately 38.59%. After giving effect to the exercise on February 1, 2018, we own 56.41% of the voting and profits interests of Carbon California.

The exercise of the warrant and the acquisition of the additional ownership interest, which is a majority financial interest, qualifies as a change of control and should be accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). The Company will consolidate the results of Carbon California into its consolidated financial statements from the date of the acquisition forward.

(a) Audited Historical Statement of Operations. Reflects the inclusion of Carbon California ’s audited historical statement of operations for the period ended December 31, 2017, included within the Company’s Form S-1/A filing on September 6, 2018.

(b) Effect of acquisition of Carbon California on unaudited pro forma consolidated statements of operations. Reflects the following adjustments to the pro forma consolidated statement of operations to reflect the exercise of the Warrant as if it occurred on the date of formation of Carbon California:

Description	Adjustment for nine months ended September 30, 2018		Adjustment for year ended December 31, 2017		Explanation
Reduction of unrealized gain on warrant liability	$	225	$	3,752	Due to the conversion of the warrant, there will no longer be an ongoing effect to the statement of operations, as such this adjustment reflects removal of the unrealized gain
Decrease of General and administrative-related party reimbursement	$	64	$	1,000	This reimbursement is paid by Carbon California to Carbon. As Carbon California will be a consolidated entity going forward the reimbursement amount has been eliminated.
Decrease of Management and operating fee, related party	$	-	$	525	This fee was paid to Carbon, as Carbon California will now be a consolidated entity this expense would be eliminated
Decrease to loss on Class B issuance	$	-	$	1,854	Elimination of loss on class B share issuance because the holder of the shares is Carbon
Decrease of Gain on derecognized equity investment in affiliate	$	5,390	$	-	Eliminate the gain on step acquisition following fair value method of Carbon California upon gaining control

Adjustments to increase (decrease) Net loss attributable to non-controlling interest for the portion of earnings attributable to the non-controlling interest for Carbon California:

	Amount			NCI %			Adjustment
For the year ended December 31, 2017	$	6,552			43.59	%	$	2,856
For the nine months ended September 30, 2018 – Cumulative adjustment for 2c $(1,183) and 2b ($5,680)	$	(6,863	)		43.59	%	$	(2,992	)

7

(c) Adjustment for results of operations for Carbon California from January 1, 2018 to January 31, 2018. Carbon California became a consolidated entity as of February 1, 2018, this adjustment reflects the results of operations for Carbon California as if the conversion of the California Warrant occurred on January 1, 2018.

	For the period from January 1, 2018 to January 31, 2018
Revenue:
Natural gas and liquid sales	$	10
Oil sales		760
Commodity derivative (loss) gain		(973	)
Other income		-
Total revenue		(203	)
Expenses:
Lease operating expenses		250
Transportation and gathering costs		87
Production and property taxes		42
General and administrative		312
Depreciation, depletion and amortization		77
Accretion of asset retirement obligations		17
Total expenses		785
Operating (loss) income		(988	)
Other income and (expense):
Interest expense		(196	)
Total other income and (expense)		(196	)
Income (loss) before income taxes		(1,184	)
Provision for income taxes		-
Net income (loss) before non-controlling interest		(1,184	)
Net income (loss) attributable to non-controlling interests		-
Net income (loss) attributable to controlling interest	$	(1,184	)

(d) Earnings per share. 1,527,778 shares of Carbon common stock were issued to the warrant holder, we have adjusted weighted average shares outstanding to reflect these additional shares as if the exercise occurred on January 1 of the each of the periods presented.

(e) Depletion expense. Reflects the calculation of the estimated depletion expense based on the estimated fair value of oil and gas assets be acquired based on the historical depletion rate of the assets to be acquired in Carbon California Acquisition. This estimation is based on the fair value of the proved oil and gas assets multiplied by the historical Carbon California annual depletion rate of 1.72%.

	Depletable base		Depletion Rate			For the year ended December 31, 2017
Estimated Depletion	$	86,747		1.72	%	$	1,494
Remove: actual depletion							(1,219	)
Pro forma adjustment						$	275

The adjustment for depletion for the period when Carbon California was not consolidated, from January 1, 2018 through January 31, 2018, is considered immaterial, thus, no adjustment has been made.

(f) Income taxes. Carbon California has elected to be treated as a partnership for income tax purposes. Accordingly, taxable income and losses are reported on the income tax returns of the Carbon California’s members, which includes the Company. Due to the utilization of net operating losses, the Company will not incur income tax expense, therefore, no adjustment has been recorded.

8

3. Adjustments for the Seneca Acquisition by Carbon California

In October 2017, Carbon California signed a Purchase and Sale Agreement to acquire certain operated and non-operated oil and gas leases, and fee interests in and to certain lands, situated in the Ventura Basin, together with associated wells, pipelines, facilities, equipment and other property rights for a purchase price of $43.0 million, subject to customary and standard purchase price adjustments. After effective date adjustments, we expect the purchase price to be approximately $37.4 million. We contributed approximately $5.0 million to Carbon California to fund our portion of the purchase price, with the remainder funded by other equity members and debt.

The Seneca Acquisition closed on May 1, 2018, with an effective date as of October 1, 2017. We raised our $5.0 million through the issuance of 50,000 shares of Series B Convertible Preferred Stock, par value $0.01 per share (the “Preferred Stock”), to Yorktown. Upon the completion of an offering of common stock, the Preferred Stock will automatically convert into shares of common stock. The conversion ratio at which the Preferred Stock will convert into common stock is equal to an amount per share of $100 plus all accrued but unpaid dividends payable in respect thereof (together, the “Liquidation Preference”) divided by the greater of (i) $8.00 per share or (ii) the price that is 15% less than the lowest price per share of shares sold in the offering.

The Seneca Acquisition meets the definition of a business under Rule 11-01 (d) of Regulation S-X. As Carbon California is a consolidated entity based on our acquisition of a majority financial interest in Carbon California (see note 2) and due to the significance of the Seneca Acquisition, we have made an adjustment to reflect the Seneca Acquisition within the unaudited consolidated pro forma financial statements.

The Seneca acquisition was financed through an equity contribution of $10 million ($5 million by the Company and $5 million by other investors), a draw on the Revolver of $24.4 million and issuance of $3 million of new senior subordinated notes.

In connection with the issuance of the $3.0 million in new subordinated notes, an investor of Carbon California received an additional equity interest, which reduced Carbon’s ownership interest to approximately 53.92%, or a reduction of 2.49% from the ownership interest acquired in the Carbon California acquisition (see Note 2)

(a) Audited historical statement of revenues and direct operating expenses. Reflects the inclusion of the revenues and direct operating expenses from the audited statements of revenues and direct operating expenses for the properties acquired in the Seneca Acquisition, included within our Form S-1/A filing on September 6, 2018.

(b) Unaudited historical statement of revenues and direct operating expenses. Reflects the inclusion of the revenues and direct operating expenses from the unaudited statements of revenues and direct operating expenses for the properties acquired in the Seneca Acquisition, included within our Form S-1/A filing on September 6, 2018.

The unaudited statement of revenues and direct operating expenses is for the three months ended March 31, 2018. The Seneca Acquisition closed on May 1, 2018, therefore, there was one additional month of activity between the date of the unaudited historical data provided and the closing date. The additional month of activity has not been included because it does not have a material effect on our unaudited consolidated pro forma statement of operations.

(c) Depletion expense. Reflects the calculation of the estimated depletion expense based on the estimated fair value of oil and gas assets be acquired based on the historical depletion rate for the assets acquired in the Seneca Acquisition.

Proved Reserves (Mcfe)	104,027,133
Production (Mcfe)	2,359,827
Estimated Depletion Rate (Production/Proved Reserves)	2.22	%

	Depletable base		Depletion Rate			For the nine months ended September 30, 2018		For the year ended December 31, 2017
Estimated Depletion	$	37,400		2.22	%	$	277	$	830

9

(d) Interest expense. Reflects the pro forma increase to interest expense from an anticipated additional draw of $24,400 on the Carbon California revolver (increase in capacity to $41,000) and the remaining $3,000 from issuance of additional senior subordinated notes to fund the Seneca Acquisition, as if the draw had occurred on January 1, 2017. A hypothetical 1/8 percent change in the rates applicable to our Revolver would not have a material impact on our unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2018 nor for the year ended December 31, 2017.

	Estimated Principal		Weighted Average Rate			For the nine months ended September 30, 2018		For the year ended December 31, 2017
Interest expense on Revolver	$	24,400		8.29	%	$	674	$	2,023
Additional subordinated notes	$	3,000		12.00	%		120		360
Total pro forma adjustment						$	794	$	2,383

(e) Non-controlling interest. Reflect 46.08% of the results of operations related to the assets acquired in the Seneca Acquisition as Net Income attributable to non-controlling interests and the reduction to the non-controlling interest for the change of the 2.49% ownership interest for Carbon California as follows:

	Earnings (loss)			NCI %			For the nine months ended September 30, 2018
Seneca Historical	$	2,804			46.08	%	$	1,292
Cumulative effect of 3c and 3d	$	(1,071	)		46.08	%		(494	)
Effect of ownership percentage change on cumulative Carbon California adjustments (See Net loss before non-controlling interest on pro forma income statement column 4)	$	(6,863	)		2.49	%		(171	)
Total pro forma adjustment							$	628

	Earnings (loss)			NCI %			For the year ended December 31, 2017
Seneca Historical	$	7,067			46.08	%	$	3,256
Cumulative effect of 3c and 3d	$	(3,213	)		46.08	%		(1,480	)
Update for Carbon California results for change in ownership	$	(6,552	)		2.49	%		(163	)
Total pro forma adjustment							$	1,613

10

4. Adjustments for the additional borrowings under the Carbon Credit Facility

In the third quarter of 2017, the Company contributed approximately $6,625 to Carbon Appalachia. This funding was provided with borrowings under the Carbon Credit Facility.

This adjustment reflects the increased interest expenses related to the additional borrowing under the credit facility as if the borrowing occurred on January 1, 2017. A hypothetical 1/8 percent change in the rates applicable to our Revolver would not have a material impact on our unaudited pro forma consolidated statements of operations for the year ended December 31, 2017.

	Principal		Weighted Average Rate			Interest expense for the year ended December 31, 2017
Interest expense	$	6,625		5.82	%	$	386
Remove actual interest incurred							(165	)
Pro forma adjustment						$	221

5. Adjustments for the exercise of the Appalachia Warrant

On April 3, 2017, we issued to Yorktown a warrant to purchase approximately 408,000 shares of our common stock at an exercise price of $7.20 per share. The exercise price for the Appalachia Warrant is payable exclusively with Class A Units of Carbon Appalachia held by Yorktown, and the number of shares of our common stock for which the Appalachia Warrant is exercisable is determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of Yorktown’s Class A Units of Carbon Appalachia plus a 10% internal rate of return by (b) the exercise price. The Appalachia Warrant had a term of seven years and included certain standard registration rights with respect to the shares of our common stock issuable upon exercise of the Appalachia Warrant.

On November 1, 2017, Yorktown exercised the Appalachia Warrant resulting in the issuance of 432,051 shares of our common stock in exchange for Class A Units representing approximately 7.95% of then outstanding Class A Units of Carbon Appalachia. We accounted for the exercise through extinguishment of the warrant liability associated with the Appalachia Warrant of approximately $1,900 and the receipt of Yorktown’s Class A Units as an increase to investment in affiliates in the amount of approximately $2,900. After giving effect to the exercise on November 1, 2017, we owned 26.5% of Carbon Appalachia’s outstanding Class A Units, 100% of its Class B Units and 100% of its Class C Units.

The related warrant derivative liability was being fair valued in accordance with ASC 820, Fair Value Measurements, at each reporting period and as this warrant has been exercised we have removed the related unrealized gains of $619 recognized during the year ended December 31, 2017 from the pro forma statement of operations.

Additionally, 432,051 shares of Carbon common stock were issued to the warrant holder, we have adjusted weighted average share outstanding to reflect these additional shares as if the exercise occurred on January 1, 2017.

6. Adjustments for the acquisition by Carbon of Old Ironsides’ 73.5% of voting interest in Carbon Appalachia for approximately $58 million, resulting in Carbon Appalachia becoming a wholly owned subsidiary of Carbon

Carbon Appalachia was formed in 2016 by us, Yorktown and Old Ironsides to acquire producing assets in the Appalachian Basin in Kentucky, Tennessee, Virginia and West Virginia. On April 3, 2017, we, Yorktown and Old Ironsides Energy, LLC, entered in to a limited liability company agreement (the “Carbon Appalachia LLC Agreement”), with an initial equity commitment of $100.0 million, of which $37.0 million had been contributed as of December 31, 2017.

In connection with the formation of Carbon Appalachia, we issued to Yorktown a warrant to purchase approximately 408,000 shares of our common stock at an exercise price of $7.20 per share (the “Appalachia Warrant”). The Appalachia Warrant was payable exclusively with Class A Units of Carbon Appalachia held by Yorktown and the number of shares of our common stock for which the Appalachia Warrant was exercisable was determined, as of the time of exercise, by dividing (a) the aggregate unreturned capital of Yorktown’s Class A Units of Carbon Appalachia plus a required 10% internal rate of return by (b) the exercise price.

11

As of December 31, 2017, we owned 26.5% of the ownership interests in Carbon Appalachia and accounted for our ownership in Carbon Appalachia as an equity method investment. On December 31, 2018, we completed the acquisition of the additional 73.5% interest in Carbon Appalachia from Old Ironsides. The Company paid the Sellers $33 million in cash and delivered its promissory notes in the aggregate original principal amount of approximately $25 million (the “Seller Notes”) in exchange for all of 73.5%. The Seller Notes bear interest at 10% per annum and have a term of five years, the first three of which require interest-only payments at the end of each calendar quarter beginning with the quarter ending March 31, 2019.

In connection with and concurrently with the closing of the Acquisition, we amended and restated the Carbon Appalachia Enterprises, LLC’s Credit Agreement, dated April 3, 2017 (the “Existing Credit Agreement”; as amended, the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provides for a $500 million senior secured asset-based revolving credit facility (the “New Credit Facility”) that matures in December 2022 and a $15 million term loan in favor of the Borrowers which matures in June 2020. The Amended and Restated Credit Agreement replaces the Existing Credit Agreement as well as that certain existing $100 million senior secured asset-based revolving credit facility. The $33 million in cash used to purchase the 73.5% interest was drawn from this facility.

Based on the tests required by Rule 8-04 of Regulation S-X, the Old Ironsides Buyout meets the threshold for inclusion. In addition, the Old Ironsides Buyout also meets the definition of a business under Rule 11-01 (d) of Regulation S-X.

The acquisition of the additional ownership interest qualifies as a change of control and would be accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). The Company will consolidate the results of Carbon Appalachia into its consolidated financial statements from the date of the acquisition forward.

(a) Estimated consideration and preliminary purchase price allocation. As noted above, the Old Ironsides Buyout qualifies as a business combination under ASC 805. As such, the Company recognizes the identifiable assets to be acquired and liabilities to be assumed at their respective fair value as of the date of the acquisition. The Company expects to pay $58.0 million for the remaining 73.5% ownership interest in Carbon Appalachia.

The table below represents the preliminary purchase price allocation for the Old Ironsides Buyout:

	Amount
Fair value of consideration transferred	$	58,065
Fair value of previously held interest		14,158
Fair value of business acquired	$	72,224

Assets acquired and liabilities assumed

	Amount
Cash acquired	$	12,283
Accounts receivable:
Revenue		21,092
Joint interest billings and other		2,222
Commodity derivative asset acquired		198
Inventories		900
Prepaid expense, deposits, and other current assets		448
Oil and gas properties acquired:
Proved		109,172
Unproved		1,869
Other property and equipment, net		15,649
Other long term assets		472
Accounts payable and accrued liabilities		(30,087	)
Firm transportation contract obligation		(18,348	)
Asset retirement obligations assumed		(5,671	)
Revolver		(37,975	)
Total net assets acquired	$	72,224

12

The assets to be acquired and liabilities to be assumed are on a preliminary basis and reflect our expectations based on the information currently available to us. There may be material changes to the preliminary purchase price allocation, but we are unable to estimate the effect of these changes may be at this time. We expect the purchase price allocation to be finalized during fiscal year 2019.

(b) Audited Historical Statement of Operations. Reflects the inclusion of Carbon Appalachia’s audited historical statement of operations for the period ended December 31, 2017, included within our Form S-1/A filing on September 6, 2018.

(c) Unaudited Historical Statement of Operations. Reflects the inclusion of Carbon Appalachia’s unaudited historical statement of operations for the nine months ended September 30, 2018, included within this filing, as if the Old Ironsides Buyout occurred on January 1, 2018.

(d) Effect of Old Ironsides Buyout on statement of operations. Reflects the following adjustments to the pro forma consolidated statement of operations the Old Ironsides Buyout as if it occurred on January 1 of each respective period:

Description	Adjustment for nine months ended September 30, 2018		Adjustment for year ended December 31, 2017		Explanation
Decrease of General and administrative-related party reimbursement	$	3,319	$	1,703	This reimbursement is paid by Carbon Appalachia to Carbon. As Carbon Appalachia will be a consolidated entity going forward the reimbursement amount has been eliminated.
Decrease of Management and operating fee, related party	$	3,319	$	1,582	This fee was paid to Carbon, as Carbon Appalachia will now be a consolidated entity this expense would be eliminated
Decrease to loss on Class B issuance	$	-	$	924	Elimination of loss on class B share issuance because the holder of the shares will be Carbon upon completion of the acquisition
Decrease of equity investment gain	$	948	$	1,090	Removal of equity investment gain on Carbon Appalachia. Carbon Appalachia will be a consolidated entity, as such, there will be no such gains after the acquisition

13

(e) Effect of Old Ironsides Buyout on balance sheet. Reflects the following adjustments to the pro forma consolidated statement of operations to reflect the Old Ironsides Buyout as if it occurred on September 30, 2018:

Description	Amount		Explanation
Reduction of receivable due from related party	$	1,218	Elimination of related party receivable due from Carbon Appalachia, upon acquisition this would be eliminated in the consolidated balance sheet
Elimination of investment in affiliate	$	12,831	After the acquisition, Carbon Appalachia would be a consolidated entity not an equity method investee. This adjustment eliminates the equity method investment for Carbon Appalachia as of September 30, 2018
Reduction of accounts payable	$	1,218	Reduce accounts payable by the amount due to Carbon from Carbon Appalachia, which would be eliminated upon acquisition
Increase in amounts due under Credit Facility	$	33,000	Increase due to draw on New Credit Facility for the Old Ironsides Buyout
Increase in Long-term debt	$	25,065	Increase due to Seller Notes issued to complete the Old Ironsides Buyout
Decrease in accumulated deficit	$	1,328	Difference between the book value of the investment in Carbon Appalachia of $12,831 and the fair value of the previously held interest of $14,158 would represent a gain on the previously held interest

(f) Depletion expense. Reflects the calculation of the estimated depletion expense based on the estimated fair value of oil and gas assets be acquired based on the historical depletion rate of the assets to be acquired in the Old Ironsides Buyout. This estimation is based on the preliminary fair value of the proved oil and gas assets multiplied by the historical Carbon Appalachia depletion rate of 5.12%.

	Depletable base		Depletion Rate			For the nine months ended September 30, 2018			For the year ended December 31, 2017
Estimated Depletion	$	109,072		5.12	%	$	4,164		$	5,588
Remove: actual depletion							(3,357	)		(1,633	)
Pro forma adjustment						$	808		$	3,955

(g) Interest expense. To complete the Old Ironsides Buyout we drew $33 million from the New Credit Facility and issued promissory notes in the aggregate original principal amount of approximately $25 million (“Seller Notes”). The Seller Notes bear interest at 10% per annum and have a term of five years, the first three of which require interest-only payments at the end of each calendar quarter beginning with the quarter ending March 31, 2019. This adjustment reflects the increased interest expense related to the Seller Notes as if the borrowing occurred on January 1 of the applicable period. A hypothetical 1/8 percent change in the rates applicable to the Seller Notes and the New Credit Facility would not have a material impact on our unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2018 nor for the year ended December 31, 2017.

	Principal		Interest Rate			Interest expense for the nine months ended September 30, 2018		Interest expense for the year ended December 31, 2017
Interest expense on Seller Notes	$	25,065		10.00	%	$	1,880	$	2,506
Interest expense on draw from New Credit Facility	$	33,000		5.5	%		1,361		1,815
Total increase in interest expense						$	3,241	$	4,321

(h) Income taxes. Carbon Appalachia has elected to be treated as a partnership for income tax purposes. Accordingly, taxable income and losses are reported on the income tax returns of the Carbon Appalachia’s members, which after Old Ironsides Buyout would be the Company. Due to the utilization of net operating losses, the Company will not incur income tax expense, therefore, no adjustment has been recorded.

7. Adjustment for the Cabot Acquisition made by Carbon Appalachia

On September 29, 2017, Carbon Appalachia acquired natural gas producing properties and related facilities as well as transmission pipeline facilities and equipment located predominantly in the state of West Virginia for a purchase price of $41.3 million, subject to normal purchase adjustments, with an effective date of April 1, 2017 for oil and gas assets and September 29, 2017, for the corporate entity acquired. Consideration to fund the Cabot Acquisition was provided by contributions from the Company’s members of $11.0 million and $20.4 million in funds drawn from its Revolver.

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The Cabot Acquisition qualified as a business combination as defined by ASC 805, Business Combinations and, as such, Carbon Appalachia estimated the fair value of the assets acquired and liabilities assumed as of the closing date of September 29, 2017. As Carbon Appalachia is expected to become a consolidated entity based on the Old Ironsides Buyout (see note 6) and due to the significance of the Cabot Acquisition, we have made an adjustment to reflect the Cabot Acquisition within the unaudited consolidated pro forma financial statements.

(a) Carbon Appalachia expensed approximately $660 of transaction and due diligence costs related to the Cabot Acquisition that were included in general and administrative expenses in the accompanying consolidated statement of operations for the period ended December 31, 2017. This adjustment reflects the elimination of these costs.

(b) As the Cabot Acquisition closed on September 29, 2017, the Carbon Appalachia audited historical financial statements included the results of operations from the properties acquired in the Cabot Acquisition from September 30, 2017 to December 31, 2017. Based on the Old Ironsides Buyout (see note 6), Carbon Appalachia would become a consolidated entity, as such an adjustment should be made as if the Cabot Acquisition occurred on January 1, 2017.

This adjustment reflects the results of operations related to the Cabot Acquisition Properties for the period from January 1, 2017 to September 29, 2017. These amounts are derived from audited historical statements of revenues and direct operating expense included within our Form S-1/A filing on September 6, 2018.

	Period from January 1, 2017 through September 29,
(In thousands)	2017
Revenues:
Natural gas sales	$	27,042
Oil sales		454
Marketing gas sales		12,070
Storage and other		363
Total revenues		39,929
Direct operating expenses:
Lease operating		8,982
Transportation, gathering, and compression		9,179
Marketing gas purchases		10,389
Production and property taxes		4,183
Total direct operating expenses		32,733
Revenues in excess of direct operating expenses	$	7,196

(c) Interest expense. Reflects the additional interest expense that would have been incurred on the Carbon Appalachia Revolver draw made to finance the Cabot Acquisition as if it occurred on January 1, 2017. A hypothetical change of 1/8 percent would not have a material effect on the Company’s financial statements:

	Principal		Weighted Average Rate			Interest expense for period from January 1 to September 29, 2017
Interest expense on Revolver	$	20,400		5.34	%	$	817

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(d) Depletion expense. Reflects the calculation of the estimated depletion expense for the assets to be acquired. This estimation is based on the fair value of the proved oil and gas assets multiplied by the historical Carbon Appalachia depletion rate of 5.12%. This provides a reasonable estimation of the depletion for the assets acquired in the Cabot Acquisition.

	Depletable base		Depletion Rate			For the period from January 1, 2017 to September 29, 2017
Estimated Depletion	$	49,920		5.12	%	$	1,904

(e) Income taxes. The Cabot Acquisition was made by Carbon Appalachia and Carbon Appalachia has elected to be treated as a partnership for income tax purposes. Accordingly, taxable income and losses are reported on the income tax returns of the Carbon Appalachia’s members, which after the acquisition would be the Company. Due to the utilization of net operating losses, the Company will not incur income tax expense, therefore, no adjustment has been recorded.

8. Adjustment for Enervest Acquisition made by Carbon Appalachia

On August 15, 2017, the Carbon Appalachia acquired natural gas producing properties and related facilities located predominantly in the state of West Virginia for a purchase price of $21.5 million, subject to normal purchase adjustments, with an effective date of May 1, 2017. Consideration to fund the Enervest Acquisition was provided by contributions from the Carbon Appalachia’s members of $14.0 million and $8.0 million in funds drawn from Carbon Appalachia’s Revolver.

The assets acquired consist of oil and gas leases and the associated mineral interests, oil and gas wells, a field office building and associated land, vehicles and other miscellaneous equipment.

This acquisition did not qualify as a business combination under ASC 805, but qualifies as a business under Rule 11-01 (d) of Regulation S-X. As Carbon Appalachia is expected to become a consolidated entity based on the Old Ironsides Buyout (see note 6) and due to the significance of the Enervest Acquisition, we have elected to reflect an adjustment for the acquisition within the unaudited consolidated pro forma financial statements.

(a) As the Enervest Acquisition closed on August 15, 2017, the Carbon Appalachia audited historical statement of operations included the results of operations from the properties acquired in the Enervest Acquisition from August 16, 2017 to December 31, 2017. Based on the Old Ironsides Buyout (see note 6), Carbon Appalachia would become a consolidated entity, as such an adjustment should be made as if the Enervest Acquisition occurred on January 1, 2017.

This adjustment reflects the results of operations related to the properties acquired in the Enervest Acquisition for the period from January 1, 2017 to August 15, 2017. These amounts are derived from unaudited historical records related to the properties acquired in the Enervest Acquisition.

	Period from January 1, 2017 through August 15,
(In thousands)	2017
Revenues:
Natural gas sales	$	2,914
Storage and other		29
Total revenues		2,943
Direct operating expenses:
Lease operating		1,367
Transportation, gathering, and compression		709
Production and property taxes		96
Total direct operating expenses		2,172
Revenues in excess of direct operating expenses	$	771

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(b) Interest expense. Reflects the additional interest expense that would have been incurred on the Revolver draw made to purchase the Enervest properties as if it occurred on January 1, 2017. A hypothetical change of 1/8 percent would not have a material effect on the Company’s financial statements:

	Principal		Weighted Average Rate			Interest expense for period from January 1 to August 15, 2017
Interest expense on Revolver	$	8,000		5.34	%	$	255

(c) Depletion expense. Reflects the calculation of the estimated depletion expense for the assets to be acquired. This estimation is based on the fair value of the proved oil and gas assets multiplied by the historical CAC depletion rate of 5.12%. This provides a reasonable estimation of the depletion expense for the assets acquired in the Enervest Acquisition.

	Depletable base		Depletion Rate			For the period from January 1, 2017 to August 15, 2017
Estimated Depletion	$	20,948		5.12	%	$	667

(d) Income taxes. The Envervest Acquisition was made by CAC and CAC has elected to be treated as a partnership for income tax purposes. Accordingly, taxable income and losses are reported on the income tax returns of the CAC’s members, which after the acquisition would be the Company. Due to the utilization of net operating losses, the Company will not incur income tax expense, therefore, no adjustment has been recorded.

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