CARBON NATURAL GAS COMPANY (OTCMKTS:CRBO) Files An 8-K Entry into a Material Definitive Agreement

Item 1.01. Entry into a Material Definitive Agreement

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

On February 15, 2017, Carbon California LLC (i)issued and sold
Class A Units to two institutional investors for an aggregate
cash consideration of $22 million, (ii)entered into a Note
Purchase Agreement (the Note Purchase
Agreement) with two institutional investors for the
issuance and sale of up to $25 million of Senior Secured
Revolving Notes (the Senior Revolving
Notes) due February 15, 2022 and (iii)entered into
a Securities Purchase Agreement (the Securities
Purchase Agreement) with one institutional investor
for the issuance and sale of $10 million of Senior Subordinated
Notes (the Subordinated Notes) due
February 15, 2024. The closing of the Note Purchase Agreement and
the Securities Purchase Agreement on February 15, 2017, resulted
in the sale and issuance by Carbon California LLC of (xi)Senior
Revolving Notes in the principal amount of $10 million and
(xii)Subordinated Notes in the original principal amount of $10
million. The maximum principal amount available under the Senior
Revolving Notes is based upon the borrowing base attributable to
Carbon California LLCs proved oil and gas reserves which is to be
determined at least semi-annually. The current borrowing base is
$15,000,000.

The $42 million in gross proceeds from the issuance of Class A
Units, Senior Secured Notes and Subordinated Notes (collectively,
the Offering Transactions) is before
the reimbursement of certain expenses and legal fees incurred by
the institutional investors who purchased the Class A Units,
Senior Secured Notes and Subordinated Notes, as well as other
fees and expenses incurred by the Company in connection with the
transactions.

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

On February 21, 2017, the Company issued a press release
concerning certain events relating to this Item1.01. A copy of
the press release is attached to this Current Report on Form 8-K
as Exhibit 99.1.

In connection with the Company entering into the LLC Agreement
described above and Carbon California LLC engaging in the
transactions also described above, the Company issued to an
affiliate of one of the institutional investors which purchased
Class A Units of Carbon California LLC (which is also an
affiliate of the Companys largest stockholders), a warrant to
purchase shares of the Companys Common Stock at an exercise price
of $0.36 per share (the Warrant). The
exercise price for the Warrant is payable exclusively with Class
A Units of Carbon California LLC and the number of shares of the
Company Common Stock for which the Warrant is exercisable is
determined, as of the time of exercise, by dividing (a)the
aggregate unreturned capital of the Warrantholders Class A Units
of Carbon California LLC by (b) the exercise price. The Warrant
has a term of seven years and includes certain standard
registration rights with respect to the shares of the Companys
Common Stock issuable upon exercise of the Warrant. If exercised,
the Warrant provides to the Company an opportunity to increase
its ownership stake in Carbon California LLC without requiring
the payment of cash. As of the date hereof, the Warrant is
exercisable for an aggregate of 30,555,556 shares of the Companys
Common Stock.

Item 3.02 – Unregistered Sales of Equity
Securities

To the extent required by Item 3.02 of Form 8-K, the information
contained in Item 1.01 of this report is incorporated herein by
reference. The Warrant was issued to an exemption from the
registration requirements of the Securities Act of 1933, as
amended, provided by Section 4(a)(2) thereof and/or Rule 506 of
Regulation D promulgated thereunder.

Section 9 – Financial Statements and Exhibits

Item 9.01 Financial Statements and Exhibits.

(d)Exhibits:

* Filed herewith

About CARBON NATURAL GAS COMPANY (OTCMKTS:CRBO)

Carbon Natural Gas Company (Carbon) is a holding company. The Company owns and operates oil and natural gas and oil interests in the Appalachian and Illinois Basins of the United States. The Company produces and sells oil, natural gas, natural gas condensate and natural gas liquids. Carbon conducts its oil and natural gas operations through Nytis LLC. Carbon’s oil and gas properties are located in Illinois, Indiana, Kentucky, Ohio, Tennessee and West Virginia. Nytis LLC owns working interests in approximately 850 gross wells (over 570 net) and royalty interests located in Kentucky, Ohio, Tennessee and West Virginia, and has leasehold positions in approximately 17,000 net developed acres and over 184,800 net undeveloped acres. Nytis LLC owns working interests in approximately 60 gross (over 30 net) coalbed methane wells in the Illinois Basin, and has a leasehold position in approximately 1,700 net developed acres and over 66,700 net undeveloped acres.

CARBON NATURAL GAS COMPANY (OTCMKTS:CRBO) Recent Trading Information

CARBON NATURAL GAS COMPANY (OTCMKTS:CRBO) closed its last trading session up +0.100 at 0.400 with 309 shares trading hands.