Recovery Energy Reports Second Quarter Financial Results And Provides Operations Update

Please replace the release dated Aug. 16, 2011 with the following corrected version as specified.

The corrected release reads:

RECOVERY ENERGY REPORTS SECOND QUARTER FINANCIAL RESULTS AND PROVIDES OPERATIONS UPDATE

Recovery Energy, Inc. (OTCBB: RECV), an independent oil and gas exploration and production company with operations and assets in the Denver-Julesburg (DJ) Basin, reported its financial and operational results for the quarter ended June 30, 2011. Highlights include:
  • The Company drilled and completed its first two horizontal Niobrara wells which are currently flowing back completion fluids and hydrocarbons
  • Production for the second quarter 2011 was up sequentially 7% over first quarter 2011
  • Significant progress identifying and confirming widespread prospectivity of the Niobrara, Codell and Greenhorn formations throughout Company leasehold

Chairman and CEO Roger A. Parker commented: “The Company drilled and completed the Tylosaurus 19-31H and the Platecarpus 27-24H wells in the second quarter. We are currently flowing back completion fluid and the results are still being evaluated. Our engineering data shows good formation characteristics and confirms the presence of hydrocarbons in both wells. Additionally, insight that we have gained from these two wells, coupled with other data, confirm the viability of the Chugwater area as a promising Niobrara prospect, and also shows interesting potential in the Greenhorn formation.

“We are very enthusiastic about our continuing geologic review, including confirmation of hydrocarbon maturity throughout Company leasehold as it relates to the Niobrara and other formations,” said Parker. “Additionally, we have made substantial progress in reworking various properties and stabilizing production. Production for the second quarter of 2011 was up 7% over the first quarter of 2011.”

2Q11 Financial Results

The Company has made a non-cash adjustment to its financial and operational results for the quarter ended June 30, 2011 from what was reported on August 16, 2011. The Company has determined that it is appropriate to expense in the quarter ended June 30, 2011 approximately $3,551,000 allocated to the value of Recovery common stock provided for in the separation agreement with its former chief financial officer in connection with his separation from the Company in April, 2011. As a result net loss for the quarter is $3,551,000 greater than previously reported. This increased non-cash charge does not change the previously reported oil and gas revenues or EBITDAX or other results.

For the three months ended June 30, 2011 the Company reported oil and gas revenues of $2,258,000 compared to $4,158,000 for the second quarter of 2010. Net loss for the period was $4,763,000 compared to a net loss of $3,197,000 for the same period in 2010. EBITDAX for the quarter ended June 30, 2011 was $548,917, up sequentially from the first quarter of 2011 by 312%. The net loss for the first quarter 2011 includes a one-time non-cash charge of $3,551,000 for non-cash stock based compensation related to shares issued to the Company's former chief financial officer in connection with his separation agreement, other stock based compensation of $577,803, non-cash charges of depreciation, depletion, amortization and accretion of $1,065,426, stock issued for services of $124,929, amortization of deferred financing costs of $1,366,258, cash interest expense of $928,119, and an unrealized gain on commodity hedges of $700,700. The net loss for the quarter also includes the effect of a non-cash gain of $1.6 million related to the mark to market adjustment of a derivative liability associated with the embedded conversion feature of the Company’s convertible debentures. The calculation of EBITDAX excludes these non-cash items and is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for net income, income from operations, or cash flow provided by (used in) operating activities prepared in accordance with GAAP. A more detailed description of EBITDAX is included below.

The Company’s production volume on a BOE basis decreased 54% from 59,289 BOE during the second quarter of 2010 to 27,083 BOE during the second quarter of 2011. This decrease is primarily attributable to natural production declines related to existing production. The reduction in production volumes was partially offset by price increases during the quarter. Our average oil price increased to $83.39 per barrel for the second quarter of 2011, compared to $70.13 per barrel for the same period in 2010. This increase in price realization during the second quarter of 2011 was partially offset by a realized loss on hedges of approximately $164,000 compared to a realized hedge gain of approximately $273,000 for the same period in 2010. The decrease in oil production was also offset by an increase in production of natural gas. Natural gas production increased from zero during to the three months ended June 30, 2010 to 29,681 Mcf during the same period in 2011, due to production from a new gas well that commenced production in the first quarter of 2011.

For the six months ended June 30, 2011 the Company reported oil and gas revenues of $4,169,000 compared to $4,780,000 for the comparable period of 2010. Net loss for the period was $8,506,000 compared to a net loss of $6,017,000 for the same period in 2010. EBITDAX for the six months ended June 30, 2011 was $724,752. The net loss for the six month period in 2011 includes non-cash charges of depreciation, depletion, amortization and accretion of $2,141,355, stock issued for services of $251,412, stock based compensation of $4,675,332, amortization of deferred financing costs of $2,203,725, cash interest expense of $1,782,821, and an unrealized gain on commodity hedges of $222,788. Stock based compensation expenses for the period includes a one-time non-cash charge of $3,551,000 for non-cash stock based compensation related to shares issued to the Company's former chief financial officer in connection with his separation agreement. The net loss for the six month period of 2011 also includes the effect of a non-cash gain of $1.6 million related to the mark to market adjustment of a derivative liability associated with the embedded conversion feature of the Company’s convertible debentures.

Production volumes on a BOE basis decreased 23% from 68,186 BOE during the first half of 2010 to 52,411 BOE during the first half of 2011. This decrease is primarily attributable to natural declines related to existing production. The decrease in production volume was partially offset by increased prices during the first half of 2011 versus the first half of 2010 with oil price realization increasing by 19% to $79.54 per BOE for the first half of 2011, compared to $70.11 per BOE for the same period in 2010. This increase in price realization during 2011 was partially offset by a realized loss on hedges of approximately $332,000 compared to a realized hedge gain of approximately $273,000 for the same period in 2010. The decrease in oil production was also offset by an increase in production of natural gas. Natural gas production increased from zero during to the six months ended June 30, 2010 to 56,650 Mcf during the same period in 2011.

About Recovery Energy, Inc.

Recovery Energy, Inc. (OTCBB: RECV) is a Denver-based independent oil and gas exploration and production company focused on the Denver-Julesburg (DJ) Basin where it holds 155,000 gross, 137,000 net acres, and where management has more than 80 years’ experience. Recovery Energy’s primary focus is on growing revenue, cash-flow and reserves through its conventional drilling program on low-risk, low-cost, in-field targets, as well as through an unconventional drilling program targeting the various prospective oil shale horizons on its land. In addition to being prospective for the Niobrara oil shale formation, the Company’s asset base is comprised of current production and reserves from the “J” sand along with extensive leasehold prospective for other hydrocarbon-bearing formations such as the Pierre Shale, Codell, Greenhorn and Paleozoic horizons. For more information, please visit: www.recoveryenergyco.com.

This press release may include “forward-looking statements” as defined by the Securities and Exchange Commission (the "SEC"), including statements, without limitation, regarding the Company’s expectations, beliefs, intentions or strategies regarding the future. Such forward-looking statements relate to, among other things the Company's: (1) proposed exploration and drilling operations, (2) expected production and revenue, and (3) estimates regarding the reserve potential of its properties. These statements are qualified by important factors that could cause the Company’s actual results to differ materially from those reflected by the forward-looking statements. Such factors include but are not limited to: (1) the Company’s ability to finance its the continued exploration and drilling operations, (2) positive confirmation of the reserves, production and operating expenses associated with the Company's properties; and (3) the general risks associated with oil and gas exploration and development, including those risks and factors described from time to time in the Company’s reports and registration statements filed with the SEC.
             

RECOVERY ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
 
June 30, December 31,
2011 2010
Assets
Current Assets
Cash $ 2,325,155 $ 5,528,744
Restricted cash 1,140,488 1,150,541
Accounts receivable 3,710,824 857,554
Prepaid assets   120,162   27,772
Total current assets   7,296,629   7,564,611
 
Oil and gas properties (full cost method), at cost:
Undeveloped properties 49,122,917 33,605,594
Developed properties 29,697,866 26,307,975
Wells in progress   1,432,428   1,219,397
Total oil and gas properties 80,253,211 61,132,966
 
Less accumulated depreciation, depletion and amortization   (7,109,784 )   (5,008,606 )
Net oil and gas properties   73,143,427   56,124,360
 
Other assets
Office equipment, net 62,421 56,236
Prepaid advisory fees 776,804 979,449
Deferred financing costs, net 3,731,149 3,211,566
Restricted cash and deposits   185,867   185,707
Total other assets   4,756,241   4,432,958
 
TOTAL ASSETS $ 85,196,297 $ 68,121,929
 
 
             

RECOVERY ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
 
June 30, December 31,
2011 2010
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 4,275,883 $ 968,295
Commodity price derivative liability 176,052 398,840
Related party payable 14,563 11,638
Accrued expenses 1,521,761 1,540,592
Short term note payable   555,734   208,881
Total current liabilities   6,543,993   3,128,246
 
Asset retirement obligation 589,700 507,280
Term note payable 19,664,942 20,229,801
Convertible notes payable, net of discount 4,118,897 -
Convertible notes conversion derivative liability   3,520,755   -
Total long term liabilities   27,894,294   20,737,081
 
Total liabilities   34,438,287   23,865,327
 
Common Stock Subject to Redemption Rights, $0.0001 par value; 0 and 42,500 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively - 86,258
 
 
Shareholders’ Equity

Common stock, $0.0001 par value: 100,000,000 shares authorized; 62,621,758 and 57,814,369 shares issued and outstanding (excluding 0 and 42,500 shares subject to redemption) as of June 30, 2011 and December 31, 2010, respectively
6,262 5,781
Additional paid in capital 108,908,230 93,814,977
Accumulated deficit   (58,156,482 )   (49,650,414 )
Total shareholders' equity   50,758,010   44,170,344
 
TOTAL LIABILITIES, COMMON STOCK SUBJECT TO REDEMPTION RIGHTS AND SHAREHOLDERS’ EQUITY $ 85,196,297 $ 68,121,929
                     

RECOVERY ENERGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
 
Three months ended June 30, Six months ended June 30,
2011 2010 2011 2010
 
Revenue
Oil sales $ 2,081,809 $ 4,157,757 $ 3,883,623 $ 4,780,352
Gas sales 176,528 - 285,357 -
Operating fees 16,682 1,688 24,910 2,813
Realized gain (loss) on commodity price derivatives (164,290 ) 272,829 (331,574 ) 272,829
Unrealized gains on commodity price derivatives   700,700   762,575   222,788   629,206
 
Total Revenues   2,811,429   5,194,849   4,085,104   5,685,200
 
Costs and expenses
Production costs 322,308 224,111 769,293 345,988
Production taxes 237,055 485,424 439,354 520,911
General and administrative 5,256,182 3,068,698 6,856,776 5,412,019
Depreciation, depletion and amortization   1,065,425   2,209,496   2,141,355   2,441,413
 
Total costs and expenses   6,880,970   5,987,729   10,206,778   8,720,331
 
Loss from operations (4,069,541 ) (792,880 ) (6,121,674 ) (3,035,131 )
 
Unrealized gain on Lock-up - 8,858 1,115 24,067
Convertible notes conversion derivative gain 1,601,037 - 1,601,037 -
Interest expense   (2,294,377 )   (2,412,757 )   (3,986,546 )   (3,006,428 )
 
Net Loss $ (4,762,881 ) $ (3,196,779 ) $ (8,506,068 ) $ (6,017,492 )
 
Net loss per common share
Basic and diluted $ (0.08 ) $ (0.13 ) $ (0.14 ) $ (0.32 )
 
Weighted average shares outstanding:
Basic and diluted   62,541,384   25,451,688   60,769,555   18,619,320
 
 
     

RECOVERY ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
 
Six Months Ended

June 30,
2011         2010
 
Cash flows from operating activities:
Net loss $ (8,506,068 ) $ (6,017,492 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of stock issued for services 251,412 66,363
Share based compensation 4,675,332 2,781,467
Change in fair value of commodity price derivatives (222,788 ) (629,206 )
Change in fair value of convertible notes conversion derivative (1,601,037 ) -
Compensation expense recognized for assignment of overrides - 1,578,080
Amortization of deferred financing costs 2,203,725 2,022,974
Depreciation, depletion, amortization and accretion 2,141,355 2,441,413
Changes in operating assets and liabilities:
Accounts receivable (2,853,269 ) (1,467,821 )
Other assets (59,158 ) 12,457
Accounts payable 3,297,906 395,628
Restricted cash 10,053 (163,618 )
Related party payable 12,606 38,914
Accrued expenses   (18,830)   658,933
Net cash provided by (used in) operating activities   (668,761)   1,718,092
 
Cash flows from investing activities:
Additions of producing properties and equipment (net of purchase price adjustments) - (21,102,540 )
Acquisition of undeveloped properties (9,008,928 ) (24,352,980 )
Drilling capital expenditures (3,541,453 ) (402,944 )
Proceeds from sale of drilling rigs - 100,000
Additions of office equipment (25,411 ) (1,688 )
Investment in operating bonds   (160 )   (75,400 )
Net cash used in investing activities   (12,575,952 )   (45,835,552 )
 
Cash flows from financing activities:
Proceeds from sale of common stock, units and exercise of warrants 2,129,801 22,911,727
Proceeds from debt 8,000,000 28,500,000
Net change in debt   (88,677 )   (5,247,505 )
Net cash provided by financing activities   10,041,124   46,164,222
 
Change in cash and cash equivalents (3,203,589 ) 2,046,762
Cash and cash equivalents at beginning of period   5,528,744   108,400
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,325,155 $ 2,155,162
 
 

EBITDAX

"EBITDAX" means, for any defined period, the sum of net income for the period plus the following expenses, charges or income, in each case, to the extent deducted from or added to net income in the period: interest, income taxes, depreciation, depletion, amortization, accretion, unrealized losses from financial derivatives, share based compensation, and other similar non-cash charges, minus all non-cash income (without limitation) income from unrealized financial derivatives, added to net income. EBITDAX is used as a financial measure by Recovery Energy's management team and by other users of its financial statements to analyze such things as:
  • Recovery Energy's operating performance and return on capital in comparison to those of other companies in its industry, without regard to financial or capital structure;
  • The financial performance of the company's assets and valuation of the entity, without regard to financing methods, capital structure or historical cost basis;
  • Recovery Energy's ability to generate cash sufficient to pay interest costs, support its indebtedness; and
  • The viability of acquisitions and capital expenditure projects and the overall rates or return on alternative investment opportunities

EBITDAX is not a calculation based on GAAP financial measures and should not be considered as an alternative to net income (loss) in measuring the company's performance, nor used as an exclusive measure of cash flow, because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions, and other sources and uses of cash, which are disclosed in the company's statements of cash flows.

Recovery Energy has reported EBITDAX because it is a financial measure used by its existing commercial lenders, and because this measure is commonly reported and widely used by investors as an indicator of a company's operating performance and ability to incur and service debt. You should carefully consider the specific items included in the company's computations of EBITDAX. While Recovery Energy has disclosed its EBITDAX to permit a more complete comparative analysis of its operating performance and debt servicing ability relative to other companies, you are cautioned that EBITDAX as reported by the company may not be comparable in all instances to EBITDAX as reported by other companies. EBITDAX amounts may not be fully available for management's discretionary use, due to requirements to conserve funds for capital expenditures, debt service and other commitments.

Recovery Energy believes that EBITDAX assists its lenders and investors in comparing a company's performance on a consistent basis without regard to certain expenses, which can vary significantly depending upon accounting methods. Because the company may borrow money to finance its operations, interest expense is a necessary element of its costs and ability to generate cash available for distribution. Because Recovery Energy uses capital assets, depreciation and amortization are also necessary elements of its costs. Additionally, the company may, at some point, be required to pay federal and state taxes, which are necessary elements of its costs. Therefore, any measures that exclude these elements have material limitations.

To compensate for these limitations, Recovery Energy believes it is important to consider both net income (loss) determined under GAAP and EBITDAX to evaluate its performance.

The following table presents a reconciliation of the company's net (loss) to its EBITDAX for each of the periods presented:
     
RECOVERY ENERGY, INC.
Reconciliation of Net loss to EBITDAX
         
Three Months Ended Six Months Ended
June 30, 2011 June 30, 2011
Net Loss $ (4,762,881 ) $ (8,506,068 )
 
Non-cash expenses
Depreciation, depletion, amortization and accretion 1,065,426 2,141,355
Amortization of stock issued for services 124,929 251,412
Share based compensation 4,128,803 4,675,332
Amortization of deferred financing costs   1,366,258     2,203,725  
Total non-cash expenses 6,685,416 9,271,824
 
Convertible notes derivative gain (non-cash) (1,601,037 ) (1,601,037 )
Unrealized gains on commodity price derivatives (700,700 ) (222,788 )
Interest expense (paid in cash)   928,119     1,782,821  
 
EBITDAX $ 548,917   $ 724,752  

Copyright Business Wire 2010

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