Carbon Energy (CRBO) Risk Analysis

As of June 30, 2020, we have no significant assets other than our ownership interest in Carbon California, which owns and operates oil, natural gas, and NGLs interests. More specifically: - Carbon California is managed by its governing board. Our ability to influence decisions with respect to its operations varies depending on the amount of control we exercise under the governing agreement;- We do not control the amount of cash distributed by Carbon California. Further, debt facilities at Carbon California currently restrict distributions. We may influence the amount of cash distributed through our board seats on Carbon California's governing board, but may not ultimately be successful in such efforts;- We may not have the ability to unilaterally require Carbon California to make capital expenditures, and Carbon California may require us to make additional capital contributions to fund operating and maintenance expenditures, as well as to fund expansion capital expenditures, which would reduce the amount of cash otherwise available for dividend payments by us or require us to incur additional indebtedness;- Carbon California may incur additional indebtedness without our consent, which debt payments would reduce the amount of cash that might otherwise be available for distributions; and - The operator of certain of the assets held by Carbon California and the identity of our partners could change, in some cases without our consent. Our dependence on the operators of such assets and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could have a material adverse effect on the realization of our targeted returns on capital or lead to unexpected future costs.

Because of the costs associated with preparing and filing our annual, quarterly and current reports under applicable securities laws, we have taken and will continue to take actions to terminate or suspend our ongoing reporting obligations under the Exchange Act. As more fully described in proxy materials filed with the SEC, the Board of Directors is proposing to amend the Company's amended and restated certificate of incorporation to effect the Reverse Stock Split. If the Reverse Stock Split is approved, it will allow the Company to deregister its common stock and reduce ongoing expenses with respect to filings under the Exchange Act. After the filing of Form 15 to suspend the Company's reporting obligations under Section 15(d) of the Exchange Act, the Company will no longer be subject to certain provisions of the Exchange Act. However, if we are required to continue to file annual, quarterly or current reports with the SEC, or if we again become subject to such reporting obligations, we will continue to incur the associated costs and expenses, which are substantial. Once the deregistration is effective, the Company will no longer file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Accordingly, there will be significantly less information regarding the Company available to stockholders and potential investors. In addition, the Company will no longer be subject to the provisions of the Sarbanes-Oxley Act and certain of the liability provisions of the Exchange Act, although the Company will still be subject to the antifraud provisions of the Exchange Act and any applicable state securities laws. Following deregistration, the Company's executive officers, directors and 10% stockholders will no longer be required to file reports relating to their transactions in the common stock with the SEC. The lack of public information could make trading in our shares of common stock more difficult, which may cause the value of our common stock to decrease. The Company anticipates that after the Reverse Stock Split its common stock will trade on the Pink Non-Current platform of the OTC Markets Group.

Following the closing of the Appalachia Divestiture, we have limited remaining sources of cash available to manage our business and pay our liabilities, including the Old Ironsides Notes and the liquidating distribution to Yorktown. Yorktown, as the holder of all of the Series B convertible preferred stock, waived its right to be paid a liquidating distribution of approximately $5.6 million in connection with the closing of the Appalachia Divestiture until the payment in full of the Old Ironsides Notes or the earlier termination or cancellation of the Old Ironsides Notes, at which point the liquidating distribution will become immediately due and payable by the Company out of Company's assets legally available for distribution to its stockholders. As of August 4, 2020, approximately $16.4 million in principal and accrued interest was outstanding under the Old Ironsides Notes. Pursuant to the terms of the Payoff Agreement, Carbon is required to apply certain net proceeds from the Appalachia Divestiture in repayment of the Old Ironsides Notes on specified repayment dates tied to milestones under the Purchase Agreement. The initial payment of $10.5 million was paid within three business days after the closing date of the Appalachia Divestiture. The second payment is due within three business days after the settlement and payment of the Final Base Purchase Price (as defined in the purchase agreement for the Appalachia Divestiture). If the sum of the initial payment and the second payment is at least $20.0 million, the Old Ironsides Notes will be deemed paid in full. If the sum of the initial payment and the second payment is at least $18.0 million but less than $20.0 million, the Old Ironsides Notes will be amended such that the outstanding principal balance plus all accrued and unpaid interest is equal to $21.5 million (less the amount of the initial and second payments) and the Old Ironsides Notes will remain outstanding with no other change to the existing terms. If the sum of the initial payment and the second payment is less than $18.0 million, then Carbon will have the opportunity to make a third payment. The third payment would be due within three business days after the first Contingent Payment (as defined in the purchase agreement for the Appalachia Divestiture). If the sum of the initial payment, the second payment and the third payment is at least $18.0 million, the Old Ironsides Notes will be amended such that the outstanding principal balance plus all accrued and unpaid interest is equal to $23.0 million (less the amount of the initial, second and third payments) and the Old Ironsides Notes will remain outstanding with no other change to the existing terms. If the sum of the initial payment, the second payment and the third payment is less than $18.0 million, the payments made by Carbon as of such date will be considered mandatory prepayments and the Old Ironsides Notes will remain outstanding with no change to the existing terms. Several sources of cash are not yet available to us or are only available to us on a limited basis. One source of cash available to us is our PPP Loan under the PPP, which we received in May 2020. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The PPP Loan and accrued interest are forgivable after 24 weeks as long as the borrower uses the loan proceeds for documented eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels, and we intend to apply for forgiveness of the PPP Loan as soon as we are eligible. The SBA continues to develop and issue new and updated guidance regarding the PPP loans application process, including guidance regarding required borrower certifications and requirements for forgiveness of loans made under the program. We continue to track the guidance as it is released and assess and re-assess various aspects of its application as necessary based on the guidance. However, given the evolving nature of the guidance and based on our projected ability to use the loan proceeds for qualifying expenses, we cannot give any assurance that our PPP Loan will be forgiven in whole or in part. Upon the closing of the Appalachia Divestiture and as more fully described in the Company's proxy statement related to the Appalachia Divestiture, $6.7 million of the purchase price was held in escrow, a portion of which will be released to the Company on the 18-month anniversary of the closing of the Appalachia Divestiture following satisfaction of certain indemnification obligations and the remainder of which will be released to the Company over the 36-month period following the closing of the Appalachia Divestiture if certain release requirements have been met. However, a portion or all of the escrow amount could be distributed to the purchaser in satisfaction of indemnification obligations owed by the Company or if the release requirements are not met. Further, ongoing general and corporate operations will be funded by management fees paid to the Company by Carbon California of approximately $1.2 million annually as well as any proceeds received from the contingent payment associated with the Appalachia Divestiture. The contingent payment of up to $15.0 million in the aggregate will be calculated and paid yearly by January 5 of each of 2021, 2022 and 2023 based on the contingent payment calculation for calendar years 2020, 2021 and 2022. Also, Carbon and DGOC entered into a transition services agreement to provide, on an interim basis, certain services associated with the divested assets. The services under the transition services agreement commenced on May 26, 2020 and are expected to terminate in November 2020. Further, Carbon's operations are conducted entirely through its subsidiaries, and its ability to generate cash to meet its operating obligations is dependent on the earnings and the receipt of funds from its subsidiaries through distributions or intercompany loans. Historically, Carbon California's distributions have been limited and may continue to be limited and depend on a number of factors, including development of reserves, successful acquisitions of complementary properties, advantageous drilling conditions, oil and natural gas prices, compliance with all applicable laws and regulations and other factors, which are outside our control. Access to additional capital within the current commodity price environment is limited and the terms of any available capital may not be acceptable to the Company.