Exhibit 99.2

ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

June 30, 2011

 

     Arête
Historical
    Pro Forma Adjustments          Arête
Pro Forma
 
        Acquisition          Sale/ Financing         
ASSETS               

Current Assets:

              

Cash and equivalents

   $ 21,457      $ —           $ 24,418      (e)    $ 45,875   

Oil and gas sales receivable

     —          1,229,830      (c)           1,229,830   

Prepaid expenses and other

     459,822                  459,822   
  

 

 

             

 

 

 

Total Current Assets

     481,279                  1,735,527   
  

 

 

             

 

 

 

Property and Equipment:

              

Oil and gas properties, at cost, successful efforts method:

       (189,937 )     (c)        

Proved properties

     —          7,830,265      (b)           8,540,328   
       900,000      (a)        

Unevaluated properties

     —          287,728      (b)           287,728   

Gas gathering pipeline and related assets

     461,867                  461,867   
  

 

 

             

 

 

 

Total property and equipment

     461,867                  9,289,923   

Less acc. depr., depletion & amortization

     (206,241               (206,241
  

 

 

             

 

 

 

Net Property and Equipment

     255,626                  9,083,682   
  

 

 

             

 

 

 

Separate Interests

     —          2,621,113      (b)      (2,621,113   (d)      —     
  

 

 

             

 

 

 

Deposit for acquistion of oil and gas properties

     500,000        (500,000   (a)      —             —     
  

 

 

   

 

 

      

 

 

      

 

 

 

TOTAL ASSETS

   $ 1,236,905      $ 12,178,999         $ (2,596,695      $ 10,819,209   
  

 

 

   

 

 

      

 

 

      

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY               

Current Liabilities:

              

Accounts payable

   $ 598,550      $ —           $ —           $ 598,550   

Accrued expenses

     217,805        1,039,893      (c)           1,257,698   

Note Payable for acquisition of properties

     —          10,100,000      (b)      (5,101,047   (d)      —     
            (4,998,953   (e)   

Notes payable

     355,219        400,000      (a)           755,219   
  

 

 

             

 

 

 

Total Current Liabilities

     1,171,574                  2,611,467   

Asset Retirement Obligations

     —          639,106      (b)           639,106   
  

 

 

             

 

 

 

Total Liabilities

     1,171,574                  3,250,573   
  

 

 

             

 

 

 

Stockholders’ Equity:

              

Convertible Class A preferred stock:

              

Series 1; authorized 30,000 shares, issued and outstanding 522.5 shares after pro forma adjustments

     —               5,023,371      (e)      5,023,371   

Common stock, issued and outstanding 7,664,476 shares

     16,804,154                  16,804,154   

Accumulated deficit

     (16,738,823          2,479,934      (d)      (14,258,889
  

 

 

             

 

 

 

Total Stockholders’ Equity

     65,331        —             —             7,568,636   
  

 

 

   

 

 

      

 

 

      

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,236,905      $ 12,178,999         $ (2,596,695      $ 10,819,209   
  

 

 

   

 

 

      

 

 

      

 

 

 

The Accompanying Notes are an Integral Part of These Pro Forma Financial Statements.

 

1


ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

Year Ended December 31, 2010

 

     Arête
Historical
    Pro Forma
Adjustments
         Arête
Pro Forma
 

Revenues:

         

Oil and natural gas sales

   $ —        $ 2,086,939      (f)    $ 2,086,939   

Gas gathering income

     167,625        —             167,625   
  

 

 

   

 

 

         

 

 

 

Total revenues

     167,625        2,086,939           2,254,564   
  

 

 

   

 

 

      

 

 

 

Operating Expenses:

         

Gas gathering costs

     327,591        (104,606   (i)      222,985   

Lease operating expenses

     —          1,172,340      (f)      1,172,340   

Production taxes

     —          167,742      (f)      167,742   

Depreciation, depletion, and amortization

     44,229        481,092      (g)      525,321   

General and administrative

     723,109        180,000      (h)      903,109   
  

 

 

   

 

 

        

 

 

 

Total operating expenses

     1,094,929        1,896,568           2,991,497   
  

 

 

   

 

 

      

 

 

 

Operating income (loss)

     (927,304     190,371           (736,933

Other income (expense):

         

Extinguishment of debt

     121,870        —             121,870   

Interest income

     13        —             13   

Interest expense

     (47,191     (1,050,000   (j)      (1,097,191
  

 

 

   

 

 

      

 

 

 

Total other income (expense)

     74,692        (1,050,000        (975,308
  

 

 

   

 

 

      

 

 

 

Net income (loss)

   $ (852,612   $ (859,629      $ (1,712,241
  

 

 

   

 

 

      

 

 

 

Earnings (Loss) Per Share Applicable to Common Stockholders:

         

Basic

   $ (0.17        $ (0.35
  

 

 

        

 

 

 

Diluted

   $ (0.17        $ (0.35
  

 

 

        

 

 

 

Weighted Average Number of Common Shares Outstanding:

         

Basic

     4,950,000             4,950,000   
  

 

 

        

 

 

 

Diluted

     4,950,000             4,950,000   
  

 

 

        

 

 

 

The Accompanying Notes are an Integral Part of These Pro Forma Financial Statements.

 

2


ARÊTE INDUSTRIES, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

Six Months Ended June 30, 2011

 

     Arête
Historical
    Pro Forma
Adjustments
         Arête
Pro Forma
 

Revenues:

         

Oil and natural gas sales

   $ —        $ 1,497,315      (f)    $ 1,497,315   

Gas gathering income

     45,639        —             45,639   
  

 

 

   

 

 

      

 

 

 

Total revenues

     45,639        1,497,315           1,542,954   
  

 

 

   

 

 

      

 

 

 

Operating Expenses:

         

Gas gathering costs

     111,373        (30,815   (i)      80,558   

Lease operating expenses

     —          560,649      (f)      560,649   

Production taxes

     —          121,183      (f)      121,183   

Depreciation, depletion, and amortization

     22,110        293,126      (g)      315,236   

Acquisition expenses

     457,500        —             457,500   

General and administrative

     714,566        90,000      (h)      804,566   
  

 

 

   

 

 

      

 

 

 

Total operating expenses

     1,305,549        1,034,143           2,339,692   
  

 

 

   

 

 

      

 

 

 

Operating income (loss)

     (1,259,910     463,172           (796,738

Other income (expense):

         

Interest income

     279        —             279   

Interest expense

     (34,442     (525,000        (559,442
  

 

 

   

 

 

      

 

 

 

Total other income (expense)

     (34,163     (525,000        (559,163
  

 

 

   

 

 

      

 

 

 

Net income (loss)

   $ (1,294,073   $ (61,828      $ (1,355,901
  

 

 

   

 

 

      

 

 

 

Earnings (Loss) Per Share Applicable to Common Stockholders:

         

Basic

   $ (0.22        $ (0.23
  

 

 

        

 

 

 

Diluted

   $ (0.22        $ (0.23
  

 

 

        

 

 

 

Weighted Average Number of Common Shares Outstanding:

         

Basic

     5,995,000             5,995,000   
  

 

 

        

 

 

 

Diluted

     5,995,000             5,995,000   
  

 

 

        

 

 

 

The Accompanying Notes are an Integral Part of These Pro Forma Financial Statements.

 

3


ARÊTE INDUSTRIES, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION

Arête Industries, Inc. (the “Company”) entered into an Amended and Restated Purchase and Sale Agreement (“PSA”) on July 29, 2011. As set forth in the PSA and its related exhibits, the principal assets acquired by the Company consisted of (i) working interests in oil and gas properties located in Wyoming, Colorado, Kansas and Montana (referred to as the “Properties”), and (ii) vested contractual rights in the net proceeds from the future sale of certain properties located in Wyoming (referred to as the “Separate Interests”). With respect to the Separate Interests, a formal closing and transfer of title was not required, and did not occur, in order for the Company to realize its vested contractual rights to the proceeds related to the sale of the Separate Interests. The Company acquired the contractual rights associated with the Separate Interests on July 29, 2011, and the Company’s share of the net proceeds from the sale of the Separate Interests of $5,101,000 was received on August 23, 2011, which resulted in recognition of a gain of approximately $2,480,000. An unaudited pro forma consolidated balance sheet has been prepared to reflect (i) the purchase of the Properties, (ii) the acquisition of the vested contractual rights to the Separate Interests, (iii) the sale of the Separate Interests, and (iv) the issuance of preferred stock used to finance the acquisition of the Properties.

The unaudited pro forma consolidated balance sheet presents the acquisition of the Properties, and the acquisition and sale of the Separate Interests, as if those transactions occurred on June 30, 2011. The pro forma unaudited consolidated statements of operations present the acquisition of the Properties as if they occurred at the beginning of the periods covered by the unaudited pro forma consolidated statements of operations. The impact of the acquisition and sale of the Special Interests is reflected in the unaudited pro forma consolidated balance sheet but is not reflected in the unaudited pro forma consolidated statements of operations.

These unaudited pro forma consolidated financial statements are not necessarily indicative of the financial position or results of operations that would have occurred had the acquisition been effected on the assumed dates. Additionally, future results may vary significantly from the results reflected in the unaudited pro forma consolidated statements of operations due to normal production declines, changes in prices, future transactions, and other factors. The Company currently has provided a full valuation allowance against net deferred tax assets. The Company believes that the acquisition would not result in an immediate change in the Company’s assessment regarding the valuation allowance. As such, no income tax adjustments from the acquisition have been reflected in the unaudited pro forma consolidated financial information.

For financial accounting purposes, the acquisition of the working interests and the Separate Interests are not considered a business combination under SFAS No. 141R, Business Combinations, as codified in FASB ASC Topic 805, Business Combinations. This determination was arrived at by considering key processes that were not acquired as part of the acquisition. No employees were acquired as part of the acquisition. Specifically, after the acquisition the Company will require highly specialized employees and/or consulting resources to manage and replicate key elements related to the Properties that were previously provided by the Sellers. Key processes that were not acquired include the geological, geophysical and engineering expertise directly related to these specific properties that will be needed to fully exploit the horizontal and recompletion potential for the Properties.

 

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These unaudited pro forma consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, the Statements of Operating Revenues and Direct Operating Expenses for the years ended December 31, 2009 and 2010 and for the six months ended June 30, 2010 (unaudited) and 2011 (unaudited).

The acquisition agreement also provides for contingent consideration based on future increases in oil and gas prices and the results of future drilling activities. Contingent consideration that may be payable in the future will generally be recognized when it is probable and reasonably estimable. As December 31, 2011, $250,000 of additional consideration became payable due to the $90 oil price threshold and this amount is not reflected in the pro forma financial information.

 

Base Purchase Price:

  

Consideration Paid for Acquisition:

  

Cash

   $ 900,000   

Note payable to seller

     10,100,000   
  

 

 

 

Total base purchase price paid for acquisition

   $ 11,000,000   
  

 

 

 

Allocation of Purchase Price:

  

Separate Interests

   $ 2,621,113   

Proved oil and gas properties

     8,540,328   

Unproved oil and gas properties

     287,728   
  

 

 

 

Total fair value of oil and gas properties acquired

     11,449,169   

Working capital acquired

     189,937   

Asset retirement obligations assumed

     (639,106
  

 

 

 

Fair value of net assets acquired

   $ 11,000,000   
  

 

 

 

Working capital acquired was estimated as follows:

  

Oil & gas sales receivable

   $ 1,229,830   

Non-interest bearing payable to seller

     (576,791

Accrued lease operating expenses

     (463,102
  

 

 

 

Total working capital acquired

   $ 189,937   
  

 

 

 

 

2. PRO FORMA ADJUSTMENTS TO THE CONSOLIDATED BALANCE SHEET

Presented below is an explanation of the pro forma adjustments to the accompanying unaudited pro forma consolidated balance sheet:

 

(a) Reflects borrowings in July 2011 used to fund an additional deposit of $400,000 under the PSA. This deposit plus the original deposit of $500,000 were applied to the purchase price of the properties at closing.

 

5


(b) Under the PSA, the sellers provided interim financing of $10,100,000 and the Company assumed the asset retirement obligations related to the Properties, resulting in a preliminary purchase allocation of $2,621,113 to the Separate Interests, $287,728 to unevaluated properties and the remainder of $8,540,328 was assigned to the Properties.

 

(c) The effective date of the acquisition was April 1, 2011. The net proceeds from oil and gas sales of $1,229,830, less accrued lease operating expenses of $463,102 incurred prior to the July 29, 2011 acquisition date are reflected as a net reduction of $766,728 to the purchase price allocation ($628,260 for the Properties and $138,468 for the Separate Interests). The purchase consideration also included a non-interest bearing payable of $576,791 and the pro forma adjustment for this amount is also included under accrued expenses.

 

(d) On August 23, 2011, the Separate Interests were sold and the Company’s share of the net proceeds of $5,101,047 was used to retire a portion of the note payable to Sellers. After deducting the portion of the purchase price allocated to the Special Interests of $2,621,113, the Company recognized a gain of $2,479,934 which is reflected as a reduction in the accumulated deficit in the pro forma balance sheet.

 

(e) On September 29, 2011, the Company issued in a private placement 522.5 shares of its Series A1 Preferred Stock for gross proceeds of $5,225,000. After deducting offering costs of $201,629 the Company received net proceeds of $5,023,371 which were primarily used to retire the remaining balance of the seller note payable.

 

3. PRO FORMA ADJUSTMENTS TO THE CONSOLIDATED STATEMENTS OF OPERATIONS

Presented below is an explanation of the pro forma adjustments to the accompanying unaudited pro forma consolidated statements of operations:

 

(f) The actual oil and gas revenues and direct operating expenses for the acquired working interest properties are included as a pro forma adjustment as if the acquisition occurred at the beginning of the period.

 

(g) Depreciation, depletion, amortization and accretion are based on historical production and estimated reserves for the acquired working interest properties. The cost assigned to each field is based upon the preliminary purchase price allocation.

 

(h) The cost of administrative support services under a post-acquisition contract operating agreement of approximately $15,000 per month are shown as an increase in general and administrative expenses. This agreement was entered into with the former owners in connection with the acquisition agreement.

 

(i) Gas gathering production costs incurred with the former owners of the acquired properties are eliminated since the Company purchased the coal bed methane property and will not incur these costs after the acquisition.

 

(j) Adjustment to record interest expense on $10.1 million of seller financing and an additional $400,000 borrowed to finance a deposit for the acquisition. Interest is provided based on the 10% per annum rate in the Seller note payable.

 

6