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Item 1.01.
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Entry Into a Material
Definitive Agreement
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Overview of Transactions
On December 31, 2018
(the “
Closing Date
”), Carbon Energy Corporation (the “
Company
”), completed
the acquisition of all of the Class A Units of Carbon Appalachian Company, LLC, a Delaware limited liability company (“
Carbon
Appalachia
”) owned by 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
”)
pursuant to that certain Membership Interest Purchase Agreement (the “
Purchase Agreement
”) by and among
the Company and the Sellers dated May 4, 2018, as amended (the “
Acquisition
”). As a result of the Acquisition,
the Company now holds all of the issued and outstanding ownership interests of Carbon Appalachia and 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), are now wholly-owned subsidiaries of the Company.
A copy of the amendment
executed in connection with the closing of the Acquisition is attached as Exhibit 10.1 to this Current Report on Form 8-K. The
material terms of the Purchase Agreement are described in the Current Report on Form 8-K previously filed with the Securities and
Exchange Commission on May 4, 2018. The description of the amendment in this Current Report on Form 8-K is a summary and is qualified
in its entirety by reference to the complete text of the amendment.
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
”) on the Closing Date in exchange for all of the Class A Units of Carbon Appalachia
owned by the Sellers (such Class A Units representing 73.5% of all of the issued and outstanding Class A Units). 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. 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 Seller Notes also provide
for mandatory prepayments upon the occurrence of certain subsequent liquidity events and a one-time principal reduction payment
in the aggregate amount of $2,000,000 on or before February 1, 2019.
Additional funds used
to close the Acquisition were provided in connection with the amendment and restatement of Carbon Appalachia Enterprises, LLC’s
credit facility described in more detail below.
In connection with
and concurrently with the closing of the Acquisition, the Company’s subsidiaries amended and restated Carbon Appalachia Enterprises,
LLC’s Credit Agreement, dated April 3, 2017 (the “
Existing Credit Agreement
”; as amended, the “
Amended
and Restated Credit Agreement
”) among Carbon Appalachia Enterprises, LLC (“
CAE
”), various
other subsidiaries of the Company from time to time party thereto (including Nytis Exploration (USA) Inc., the Company’s
wholly-owned subsidiary (“
Nytis USA
” and together with CAE, the “
Borrowers
”),
which was added as a co-borrower under the Amended and Restated Credit Agreement), the financial institutions from time to time
party thereto as lenders and LegacyTexas Bank, as administrative agent. 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 New Credit
Facility includes a sublimit of $1.5 million for letters of credit. 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 provided by
that certain Credit Agreement dated October 3, 2016, by and among the Company, the financial institutions from time to time party
thereto as lenders and LegacyTexas Bank, as administrative agent, as amended (the “
Carbon Credit Agreement
”).
Under the New Credit Facility, the Company is neither a borrower nor a guarantor.
The New Credit Facility
Principal and Maturity
On the Closing Date,
the Borrowers entered into the Amended and Restated Credit Agreement, for which facility LegacyTexas Bank acts as administrative
agent. The New Credit Facility has a maximum availability of $500 million (with a $1.5 million sublimit for letters of credit),
which availability is subject to the amount of the borrowing base. The borrowing base calculation under the New Credit Facility
is based on the loan value to be assigned to the proved oil and gas reserves of the Borrowers and their respective subsidiaries
located in the United States based upon Reserve Reports delivered to the administrative agent twice per year. The initial borrowing
base established under the New Credit Facility is $75 million.
The New Credit Facility
will mature on the earlier of (x) December 31, 2022 and (y) the date on which the Commitment of each Lender terminates in accordance
with the Amended and Restated Credit Agreement.
Guarantees and Security
The Borrowers and their
respective subsidiaries and certain other subsidiaries of the Company (including Carbon Appalachia, Nytis Exploration Company LLC,
Carbon Tennessee Mining Company, LLC, Carbon Appalachia Group, LLC, Carbon West Virginia Company, LLC, Cranberry Pipeline Corporation,
Knox Energy, LLC, Coalfield Pipeline Company and Appalachia Gas Services Company, LLC, collectively, the “
Restricted
Subsidiaries
” and with the Borrowers, the “
Restricted Group
”), are subject to the covenants
under the Amended and Restated Credit Agreement. The New Credit Facility is guaranteed by each existing and future direct
or indirect subsidiary of the Borrowers and certain other subsidiaries of the Company (subject to various exceptions). The obligations
of the Restricted Group under the New Credit Facility are secured by essentially all tangible and intangible personal and real
property of the Restricted Group (subject to certain exclusions).
Interest and Fees
Interest accrues on
borrowings under the New Credit Facility at a rate per annum equal to either (i) the base rate plus an applicable margin equal
to 0.25%, 0.50%, or 0.75% depending on the New Credit Facility utilization percentage or (ii) the Adjusted LIBOR rate plus an applicable
margin equal to 2.75%, 3.00%, 3.25%, 3.50% or 3.75% depending on the New Credit Facility utilization percentage, at the Borrowers’
option. The Borrowers are obligated to pay certain fees and expenses in connection with the New Credit Facility, including a commitment
fee for any unused amounts of 0.50% and an origination fee of 0.50%. Loans under the New Credit Facility may be prepaid without
premium or penalty.
The Borrowers will
be required to pay interest only, (x) on a quarterly basis in arrears in the case of any base rate advance and (y) on the last
day of each interest period therefor in the case of any LIBOR rate advance, during the term of the New Credit Facility, with all
outstanding principal and unpaid interest due upon termination of the New Credit Facility. The Company may prepay the New Credit
Facility, in whole or in part, at any time without fees or penalty, provided that any LIBOR borrowing prepaid on any day other
than the last day of the applicable interest period is subject to the Company indemnifying each applicable Lender for any loss,
cost or expense incurred by it resulting therefrom.
The New Credit Facility
also provides for a $15 million term loan in favor of the Borrowers which bears interest at a rate of 6.25% per annum and is payable
in 18 equal monthly installments beginning February 1, 2019 with the last such payment due on June 30, 2020.
Affirmative and Negative Covenants
The Amended and Restated
Credit Agreement contains certain affirmative and negative covenants that, among other things, limit the Restricted Group’s
ability to (i) incur additional debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge
or consolidate, wind-up, dissolve or liquidate; (v) make dividends and distributions on, or repurchases of, equity; (vi) make
certain investments; (vii) enter into certain transactions with their affiliates; (viii) enter into sale-leaseback transactions;
(ix) make optional or voluntary payment of debt other than obligations under the New 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 Amended and Restated Credit Agreement requires the Borrowers’ compliance, on a consolidated basis, with (i) leverage
ratio and (ii) current ratio covenants tested quarterly commencing with the quarter ending March 31, 2019.
The foregoing description
of the Amended and Restated Credit Agreement is qualified in its entirety by reference to the full text of the Amended and Restated
Credit Agreement, which is filed as Exhibit 10.2 hereto and is incorporated herein by reference. In the ordinary course of business,
certain of the lenders under the Amended and Restated Credit Agreement and their affiliates have provided, and may in the future
provide, investment banking, commercial banking, cash management or other financial services to the Company and/or one or more
of its subsidiaries for which they have received, and may in the future receive, compensation.