Note 7 – Credit Facilities and Notes Payable

The table below summarizes the outstanding credit facilities and notes payable as of December 31, 2018 (in thousands):

2018 Credit Facility – revolver	$	69,150
2018 Credit Facility – term note		15,000
Old Ironsides Notes		25,065
Non-current debt		57
Total gross notes payable		109,272
Less: Notes discount		(134	)
Total net notes payable	$	109,138

The table below summarizes the outstanding notes payable – related party as of December 31, 2018 (in thousands):

Senior Revolving Notes, related party, due February 15, 2022	$	38,500
Subordinated Notes, related party, due February 15, 2024		13,000
Total gross notes payable		51,500
Less: Deferred notes costs		156
Less: Notes discount		(1,737	)
Total net notes payable	$	49,919

2018 Credit Facility

In connection with and concurrently with the closing of the OIE Membership Acquisition, the Company and its subsidiaries amended and restated the Credit Facility and the CAE Credit Facility which provides for a $500.0 million senior secured asset-based revolving credit facility (the “2018 Credit Facility”) which matures December 31, 2022 and a $15.0 million term loan which matures in 2020. The 2018 Credit Facility includes a sublimit of $1.5 million for letters of credit. The borrowers under the 2018 Credit Facility are CAE and various other subsidiaries of the Company (including Nytis Exploration (USA) Inc., the Company’s wholly-owned subsidiary (“Nytis USA” and together with CAE the “Borrowers”). Under the 2018 Credit Facility, Carbon Energy Corporation is neither a borrower nor a guarantor. The initial borrowing base under the 2018 Credit Facility is $75.0 million.

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

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

The 2018 Credit Facility also provides for a $15.0 million term loan which bears interest at a rate of 6.25% and is payable in 18 equal monthly installments beginning February 1, 2019 with the last payment due on June 30, 2020.

The 2018 Credit Facility contains certain affirmative and negative covenants that, among other things, limit the Company’s ability to (i) incur additional debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge or consolidate, wind-up, dissolve or liquidate; (v) make dividends and distribution on, or repurchase of, equity; (vi) make certain investments; (vii) enter into certain transactions with their affiliates; (viii) enter in sale-leaseback transactions; (ix) make optional or voluntary payment of debt other than obligations under the 2018 Credit Facility; (x) change the nature of their business; (xi) change their fiscal year or make changes to the accounting treatment or reporting practices; (xii) amend their constituent documents; and (xiii) enter into certain hedging transactions.

The affirmative and negative covenants are subject to various exceptions, including certain basket amounts and acceptable transaction levels. In addition, the 2018 Credit Facility requires the Borrower’s compliance, on a consolidated basis, with a maximum Net Debt (all debt of the Borrowing Parties minus all unencumbered cash and cash equivalents of the Borrowers not to exceed $3.0 million) / EBITDAX (as defined) ratio of 3.50 to 1.00 and a current ratio minimum of 1.00 to 1.00, tested quarterly, commencing with the quarter ending March 31, 2019. We expect to be in compliance with these covenants throughout the next twelve month period.

Fees paid in connection with the 2018 Credit Facility included origination fees of $450,000 and arrangement fees of $80,000. As of December 31, 2018, there was approximately $70.0 million in outstanding borrowings and letters of credit and $5.0 million of additional borrowing capacity under the 2018 Credit Facility.

The terms of the 2018 Credit Facility require us to enter into derivative contracts at fixed pricing for a certain percentage of our production. We are party to an ISDA Master Agreement with BP Energy Company that establishes standard terms for the derivative contracts and an inter-creditor agreement with LegacyTexas Bank and BP Energy Company whereby any credit exposure related to the derivative contracts entered into by us and BP Energy Company is secured by the collateral and backed by the guarantees supporting the 2018 Credit Facility.

We incurred fees of approximately $962,000 directly associated with the issuance of our previous credit facility and amortized these fees over the life of the credit facility. The unamortized amount of fees associated with the previous credit facility was written off on December 31, 2018 in connection with the amendment. The current portion of unamortized fees is included in prepaid expense, deposits and other current assets and the non-current portion is included in other non-current assets. As of December 31, 2017, we had unamortized deferred issuance costs of $484,000 associated with the previous credit facility. During the years ended December 31, 2018 and 2017, we amortized approximately $786,000 and $176,000, respectively, as interest expense associated with the previous credit facility.

Old Ironsides Notes

On December 31, 2018, as part of the OIE Membership Acquisition, we delivered unsecured, promissory notes in the aggregate original principal amount of approximately $25.1 million to Old Ironsides (the “Old Ironsides Notes”). The Old Ironsides Notes bear interest at 10% per annum and have a term of five years, the first three of which require interest-only payments at the end of each calendar quarter beginning with the quarter ending March 31, 2019. At the end of the three-year interest-only period, the then current outstanding principal balance and interest is to be paid in 24 equal monthly payments. The Old Ironsides Notes also require mandatory prepayments upon the occurrence of certain subsequent liquidity events and a one-time principal reduction payment in the aggregate amount of $2.0 million on or before February 1, 2019. Subsequent to the closing of the OIE Membership Acquisition Old Ironsides ceased to be a related party.

Carbon California – Credit Facilities

Effective as of February 1, 2018, our ownership in Carbon California increased to 56.41% due to the exercise of the California Warrant. As a result of this transaction, we consolidate Carbon California for financial reporting purposes.

On May 1, 2018, Carbon California closed the Seneca Acquisition. Following the exercise of the California Warrant by Yorktown and the Seneca Acquisition, we own 53.9% of the voting and profits interests, and Prudential owns 46.08% voting and profit interest in Carbon California.

Carbon California – Senior Revolving Notes, Related Party

On February 15, 2017, Carbon California entered into the Note Purchase Agreement with Prudential Legacy Insurance Company of New Jersey and Prudential Insurance Company of America for the issuance and sale of the Senior Revolving Notes due February 15, 2022. We are not a guarantor of the Senior Revolving Notes. The closing of the Note Purchase Agreement on February 15, 2017, resulted in the sale and issuance by Carbon California of Senior Revolving Notes in the principal amount of $10.0 million. The maximum principal amount available under the Senior Revolving Notes is based upon the borrowing base attributable to Carbon California’s proved oil and gas reserves which is to be determined at least semi-annually. As of December 31, 2018, the borrowing base was $41.0 million, of which $38.5 million was outstanding.

Carbon California may elect to incur interest at either (i) 5.0% plus the London interbank offered rate (“LIBOR”) or (ii) 4.00% plus the Prime Rate (which is defined as the interest rate published daily by JPMorgan Chase Bank, N.A.). As of December 31, 2018, the effective borrowing rate for the Senior Revolving Notes was 7.39%. In addition, the Senior Revolving Notes include a commitment fee for any unused amounts at 0.50% as well as an annual administrative fee of $75,000, payable on February 15 each year.

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

Carbon California incurred fees directly associated with the issuance of the Senior Revolving Notes and amortizes these fees over the life of the Senior Revolving Notes. The current portion of these fees are included in prepaid expense and deposits and the long-term portion is included in other non-current assets for a combined value of approximately $900,000. For the year ended December 31, 2018, Carbon California amortized fees of $217,000.

The Note Purchase Agreement requires Carbon California to maintain certain financial and non-financial covenants which include the following ratios: total leverage ratio, senior leverage ratio, interest coverage ratio, current ratio, and other qualitative covenants as defined in the Note Purchase Agreement. As of December 31, 2018, Carbon California was in compliance with its financial covenants.

2017 Carbon California – Subordinated Notes

On February 15, 2017, Carbon California entered into the Securities Purchase Agreement with Prudential Capital Energy Partners, L.P. for the issuance and sale of the Subordinated Notes due February 15, 2024, bearing interest of 12% per annum. We are not a guarantor of the Subordinated Notes. The closing of the Securities Purchase Agreement on February 15, 2017, resulted in the sale and issuance by Carbon California of Subordinated Notes in the original principal amount of $10.0 million, of which $10.0 million remains outstanding as of December 31, 2018.

Prudential received an additional 1,425 Class A Units, representing 5% of total sharing percentage, for the issuance of the Subordinated Notes. Carbon California valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the outstanding Subordinated Notes of $10.0 million. The Company then allocated the non-cash value of the units of approximately $1.3 million, which was recorded as a discount to the Subordinated Notes. As of December 31, 2018, Carbon California has an outstanding discount of $1.7 million, which is presented net of the Subordinated Notes within Credit facility-related party on the consolidated balance sheets.

The Subordinated Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production at such time for year one, two and three at a rate of 67.5%, 58.5% and 45%, respectively.

Prepayment of the Subordinated Notes is available after February 15, 2019. Prepayment is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is not subject to a prepayment fee after February 17, 2020. Distributions to equity members are generally restricted.

The Securities Purchase Agreement requires Carbon California to maintain certain financial and non-financial covenants, which include the following ratios: total leverage ratio, senior leverage ratio, interest coverage ratio, asset coverage ratio, current ratio, and other qualitative covenants as defined in the Securities Purchase Agreement. As of December 31, 2018, Carbon California was in compliance with its financial covenants.

Carbon California – 2018 Subordinated Notes

On May 1, 2018, Carbon California entered into an agreement with Prudential for the issuance and sale of the Carbon California 2018 Subordinated Notes in the amount of $3.0 million, of which $3.0 million remains outstanding as of December 31, 2018.

Prudential received 585 Class A Units, representing an approximate 2% additional sharing percentage, for the issuance of the Carbon California 2018 Subordinated Notes. Carbon California valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the outstanding Carbon California 2018 Subordinated Notes of $3.0 million. The Company then allocated the non-cash value of the units of approximately $490,000, which was recorded as a discount to the Carbon California 2018 Subordinated Notes. As of December 31, 2018, Carbon California had an outstanding discount of $390,000 associated with these notes, which is presented net of the Carbon California 2018 Subordinated Notes within Credit facility – related party on the consolidated balance sheets. During the year ended December 31, 2018, Carbon California amortized $57,000.

The Carbon California 2018 Subordinated Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production at such time for year one, two and three at a rate of 67.5%, 58.5% and 45%, respectively.

The Carbon California 2018 Subordinated Notes agreement requires Carbon California to maintain certain financial and non-financial covenants, which include the following ratios: total leverage ratio, senior leverage ratio, interest coverage ratio, asset coverage ratio, current ratio, and other qualitative covenants as defined in the Carbon California 2018 Subordinated Notes. As of December 31, 2018, Carbon California was in compliance with its financial covenants.