Recovery Energy Announces Third Quarter Financial Results

DENVER--(BUSINESS WIRE)--Recovery Energy, Inc. (NASDAQ: RECV), an independent oil and gas exploration and production company with operations and assets in the Denver-Julesburg (DJ) Basin, reported its financial results for the quarter ended September 30, 2011.

Operations Update

Recovery Energy holds 150,000 gross and 132,500 net acres in the Denver-Julesburg Basin. The Company has continued to review 3D seismic, geologic data, chemical analysis and well results throughout its leasehold position which supports prospectivity of the Niobrara shale and other horizons. In its Chugwater prospect area, where the Company has drilled two horizontal Niobrara test wells which are still in progress, management is developing additional operational efforts for both the Niobrara shale and the Greenhorn limestone as well as other horizons.

The Company recently completed the listing of its shares on the NASDAQ Stock Market LLC, under the symbol: RECV.

3Q11 Financial Results

For the three months ended September 30, 2011 the Company reported oil and gas revenues of $1,812,000 compared to $2,653,000 for the third quarter of 2010. Net loss for the period was $3,028,000 compared to a net loss of $7,491,000 for the same period in 2010. EBITDAX for the quarter ended September 30, 2011 was $1,215,198, up sequentially from the second quarter of 2011 by 221%. The net loss for the third quarter 2011 includes stock based compensation of $917,306, non-cash charges of depreciation, depletion, amortization and accretion of $1,052,946, stock issued for services of $121,822, amortization of deferred financing costs of $1,497,648, and cash interest expense of $639,756. The net loss for the quarter also includes the effect of a non-cash loss of $13,338 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 34% from 38,538 BOE during the third quarter of 2010 to 25,408 BOE during the third 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. Its average oil price increased to $81.94 per barrel for the third quarter of 2011, compared to $68.84 per barrel for the same period in 2010. In addition to the increase in price realization during the third quarter of 2011, the Company realized a gain on hedges of approximately $734,000 compared to a realized hedge gain of approximately $293,000 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 September 30, 2010 to 31,579 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 nine months ended September 30, 2011 the Company reported oil and gas revenues of $5,981,000 compared to $7,433,000 for the comparable period of 2010. Net loss for the period was $11,534,000 compared to a net loss of $13,509,000 for the same period in 2010. EBITDAX for the nine months ended September 30, 2011 was $1,940,110. The net loss for the nine month period in 2011 includes non-cash charges of depreciation, depletion, amortization and accretion of $3,194,301, stock issued for services of $373,234, stock based compensation of $5,592,638, amortization of deferred financing costs of $3,701,373, cash interest expense of $2,422,737, 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 nine month period of 2011 also includes the effect of a non-cash gain of $1,587,699 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 27% from 106,724 BOE during the first nine months of 2010 to 77,819 BOE during the first nine months 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 nine months of 2011 versus the first months of 2010 with oil price realization increasing by 26% to $87.69 per BOE for the first nine months of 2011, compared to $69.65 per BOE for the same period in 2010. This increase in price realization during 2011 was partially offset by a realized gain on hedges of approximately $402,000 compared to a realized hedge gain of approximately $566,000 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 nine months ended September 30, 2010 to 88,229 Mcf during the same period in 2011.

About Recovery Energy, Inc.

Recovery Energy, Inc. (RECV) is a Denver-based independent oil and gas exploration and production company focused on the Denver-Julesburg (DJ) Basin where it holds 150,000 gross, 132,500 net acres. Recovery Energy’s mission statement is to grow reserves and production through a combination of acquisitions and conventional and unconventional drilling activity, targeting the various hydrocarbon bearing formations that produce in the Denver-Julesburg Basin.

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)
				December 31,
	September 30, 2011			2010 (Restated)
Assets
Current Assets
Cash	$	646,070		$	5,528,744
Restricted cash		1,006,540			1,150,541
Accounts receivable		1,748,631			857,554
Prepaid assets		60,177			27,772
Total current assets		3,461,418			7,564,611
Oil and gas properties (full cost method), at cost:
Undeveloped properties		49,329,396			33,605,594
Developed properties		30,053,964			26,307,975
Wells in progress		4,411,110			1,219,397
Total oil and gas properties		83,794,470			61,132,966
Less accumulated depreciation, depletion and amortization		(8,143,835	)		(5,008,606	)
Net oil and gas properties		75,650,635			56,124,360
Other assets
Office equipment, net		70,256			56,236
Prepaid advisory fees		675,482			979,449
Deferred financing costs, net		2,971,604			3,211,566
Restricted cash and deposits		185,867			185,707
Total other assets		3,903,209			4,432,958
TOTAL ASSETS	$	83,015,262		$	68,121,929

RECOVERY ENERGY, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
				December 31,
	September 30, 2011			2010 (Restated)
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable	$	3,406,078		$	968,295
Commodity price derivative liability		-			398,840
Related party payable		17,023			11,638
Accrued expenses		1,629,957			1,540,592
Short term note payable		357,014			208,881
Total current liabilities		5,410,072			3,128,246
Asset retirement obligation		601,195			507,280
Term note payable		19,824,863			20,229,801
Convertible notes payable, net of discount		4,502,251			-
Convertible notes conversion derivative liability		3,534,093			-
Total long term liabilities		28,462,402			20,737,081
Total liabilities		33,872,474			23,865,327
Commitments and contingencies – Note 7
Common Stock Subject to Redemption Rights, $0.0001 par value; 0 and 10,625 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively		-			86,258
Shareholders’ Equity
Common stock, $0.0001 par value: 100,000,000 shares authorized;
15,825,854 and 14,453,593 shares issued and outstanding (excluding 0 and 10,625 shares subject to redemption) as of September 30, 2011 and December 31, 2010, respectively		1,583			5,781
Additional paid in capital		110,325,305			93,814,977
Accumulated deficit		(61,184,100	)		(49,650,414	)
Total shareholders' equity		49,142,788			44,170,344
TOTAL LIABILITIES, COMMON STOCK SUBJECT TO REDEMPTION RIGHTS AND SHAREHOLDERS’ EQUITY	$	83,015,262		$	68,121,929

RECOVERY ENERGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
	Three months ended September 30,						Nine months ended September 30,
	2011			2010 (Restated)			2011			2010 (Restated)
Revenue
Oil sales	$	1,650,702		$	2,652,840		$	5,534,325		$	7,433,192
Gas sales		161,029			-			446,386			-
Operating fees		85,372			1,697			110,282			4,500
Realized gain on commodity price derivatives		733,830			292,805			402,256			565,634
Unrealized gains (loss) on commodity price derivatives		-			(394,552	)		222,788			234,654
Total Revenues		2,630,933			2,552,790			6,716,037			8,237,980
Costs and expenses
Production costs		344,927			290,554			1,114,220			636,531
Production taxes		191,364			299,730			630,718			820,642
General and administrative		1,981,026			6,408,939			8,837,802			11,820,958
Depreciation, depletion and amortization		1,052,946			1,454,197			3,194,301			3,895,610
Total costs and expenses		3,570,263			8,453,420			13,777,041			17,173,741
Loss from operations		(939,330	)		(5,900,630	)		(7,061,004	)		(8,935,761	)
Other income		62,000			1,210			63,115			25,277
Convertible notes conversion derivative gain (loss)		(13,338	)		-			1,587,699			-
Interest expense		(2,136,950	)		(1,591,826	)		(6,123,496	)		(4,598,255	)
Net Loss	$	(3,027,618	)	$	(7,491,246	)	$	(11,533,686	)	$	(13,508,739	)
Net loss per common share
Basic and diluted	$	(0.19	)	$	(0.63	)	$	(0.75	)	$	(1.75	)
Weighted average shares outstanding:
Basic and diluted		15,775,135			11,851,531			15,388,772			7,700,114

RECOVERY ENERGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
	Nine months ended
	September 30,
	2011			2010 (Restated)
Cash flows from operating activities:
Net loss	$	(11,533,686	)	$	(13,508,739	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of stock issued for services		373,234			166,239
Share based compensation		5,592,638			5,495,346
Warrant modification expense		-			2,953,450
Change in fair value of commodity price derivatives		(398,840	)		(234,654	)
Change in fair value of convertible notes conversion derivative		(1,587,699	)		-
Compensation expense recognized for assignment of overrides		-			1,578,080
Amortization of deferred financing costs and issuance of stock for convertible debt interest		3,701,373			2,752,376
Depreciation, depletion, amortization and accretion		3,194,301			3,895,610
Changes in operating assets and liabilities:
Accounts receivable		(891,076	)		(904,672	)
Other assets		(19,674	)		66,673
Accounts payable		2,428,101			315,142
Restricted cash		144,001			(871,102	)
Related party payable		15,067			(70,808	)
Accrued expenses		297,330			1,148,742
Net cash provided by operating activities		1,315,070			2,781,683
Cash flows used in investing activities:
Additions of producing properties and equipment (net of purchase price adjustments)		-			(21,345,443	)
Acquisition of undeveloped properties		(9,033,007	)		(24,944,600	)
Drilling capital expenditures		(6,876,232	)		(926,882	)
Proceeds from sale of drilling rigs		-			100,000
Additions of office equipment		(40,648	)		(2,914	)
Investment in operating bonds		(160	)		(75,605	)
Net cash used in investing activities		(15,950,047	)		(47,195,444	)
Cash flows from financing activities:
Proceeds from sale of common stock, units and exercise of warrants		2,129,801			28,032,727
Proceeds from debt		8,000,000			28,500,000
Net change in debt		(377,498	)		(6,963,731	)
Net cash provided by financing activities		9,752,303			49,568,996
Change in cash and cash equivalents		(4,882,674	)		5,155,235
Cash and cash equivalents at beginning of period		5,528,744			108,400
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	646,070		$	5,263,635

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	Nine Months Ended
	September 30, 2011	September 30, 2011
Net Loss	$ (3,027,618)	$ (11,533,686)
Non-cash expenses
Depreciation, depletion, amortization and accretion	1,052,946	3,194,301
Amortization of stock issued for services	121,822	373,234
Share based compensation	917,306	5,592,638
Amortization of deferred financing costs	1,497,648	3,701,373
Total non-cash expenses	3,589,722	12,861,546
Convertible notes derivative loss (gain) (non-cash)	13,338	(1,587,699)
Unrealized gains on commodity price derivatives	-	(222,788)
Interest expense (paid in cash)	639,756	2,422,737
EBITDAX	$ 1,215,198	$ 1,940,110