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:
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  

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