UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATIOIN

 

Exhibit 99.3

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATIOIN

 

On December 29, 2015, Lilis Energy, Inc. (“Lilis” or the “Company”), ▇▇▇▇▇ ▇▇▇▇▇▇ Sub, Inc. (“Merger Sub”) and Brushy Resources, Inc. (“Brushy”) entered into an Agreement and Plan of Merger (the “merger agreement”). Pursuant to the merger agreement, each outstanding share of Brushy common stock will be exchanged for approximately .4449 shares of Lilis common stock, after effecting a reverse stock split (the “merger consideration”), and Merger Sub will merge with and into Brushy (the “merger”) with Brushy continuing as the surviving corporation and a direct wholly-owned subsidiary of Lilis.

 

The unaudited pro forma condensed combined financial information and explanatory notes combine the historical financial statements of ▇▇▇▇▇ and Brushy at March 31, 2016 with respect to the balance sheet information (using currently available fair value information for Brushy), and as of January 1, 2016 (with respect to the statements of operations information for the three months ended March 31, 2016) and as of January 1, 2015 (with respect to the statements of operations information for the year ended December 31, 2015). The unaudited pro forma condensed combined financial information shows the pro forma impact of the merger of Lilis and Brushy on the historical financial position and results of operations under the purchase method of accounting with ▇▇▇▇▇ treated as the acquirer. Under this method of accounting, the assets and liabilities of Brushy are recorded at their estimated fair values as of the date of the merger is effective. As part of the merger and a condition of closing, Lilis was required to convert $6,846,465 in outstanding aggregate principal amount of the Company's 8% Senior Secured Convertible Debentures and convert 7,500 shares of the Company's Series A Preferred Stock with a liquidation value of $8,040,000 into 13,692,930 and 15,000,000 shares of Lilis common stock, respectively. Additionally, ▇▇▇▇▇ was required to complete a reverse stock split, assumed at a ratio of 1-for-10, to regain compliance with Nasdaq's minimum bid price requirement. Additionally, as part of the merger and a condition of closing, Brushy was required to divest of its ▇▇▇▇▇▇▇▇ properties for the elimination of its short-term debt obligation and accrued interest with SOSventures LLC, a related party, valued at $21,717,450 at March 31, 2016.

 

The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined and had the impact of possible revenue and expense efficiencies, among other factors, been considered. In addition, as explained in more detail in the accompanying notes to the unaudited pro forma condensed combined financial information, the allocation of the purchase price reflected in the pro forma condensed combined financial information is subject to adjustment and may vary from the actual purchase price allocation that will be recorded at the time the merger becomes effective.

 

 

Lilis Energy, Inc. and Subsidiary

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2016

(in thousands)

 

										Merger				▇▇▇▇▇
		▇▇▇▇▇				Brushy				Pro Forma				Pro Forma
		Historical				Historical				Adjustments				Combined
Assets
Current assets:
Cash			29				864				9,170	(5)			10,063
Other current assets			1,384				1,070				-				2,454
Total current assets			1,413				1,934				9,170				12,517
Oil and gas properties (full cost method), at cost:
Unevaluated acreage, excluded from amortization			-				-				26,750	(3)			26,750
Evaluated properties			50,096				108,342				(100,830	)(2),(3)			57,608
Total oil and gas properties, at cost			50,096				108,342				(74,080	)			84,358
Less accumulated depreciation, depletion, amortization and impairment			(49,586	)			(91,976	)			91,976				(49,586	)
Oil and gas properties at cost, net			510				16,366				17,896				34,772
Other assets
Merger deposit and advances			2,358				-				(2,358	)(3)			-
Goodwill			-				960				(960	)(4)			-
Other assets			272				422				-				694
Total other assets			2,630				1,382				(3,318	)			694
Total Assets			4,553				19,682				23,748				47,983
Liabilities, Redeemable Preferred Stock and Stockholders' Equity
Current Liabilities:
Dividends accrued on preferred stock			900				-				(750	)(1)			150
Accounts payable and accrued expenses			6,196				10,209				(3,268	)(1),(2),(6)			13,137
Convertible bridge notes, net of discount			3,272				-				-				3,272
Note payable - SOS - related party			-				18,000				(17,000	)(2),(5)			1,000
Term loan - Independent Bank			-				11,385				(6,000	)(5)			5,385
Term loan - Heartland Bank			2,524				-				(2,524	)(5)			-
Other liabilities and Merger deposits			-				2,758				(2,758	)(2),(3)			-
Convertible debentures, net of discount			6,846				-				(6,846	)(1)			-
Convertible debentures conversion derivative liability			54				-				(54	)(1)			-
Total current liabilities			19,792				42,352				(39,200	)			22,944
Long term liabilities:
Other long term liabilities			285				3,290				(2,348	)(2)			1,227
Total long term liabilities			285				3,290				(2,348	)			1,227
Total Liabilities			20,077				45,642				(41,548	)			24,171
Commitments and contingencies
Conditionally redeemable 6% preferred stock			1,496				-				-				1,496
Stockholders' equity
Series A Preferred Stock			6,794				-				(6,794	)(1)			-
Series B Preferred Stock			-				-				18,194	(5)			18,194
Common Stock			3				13				(14	)(1),(8)			2
Additional paid in capital			160,684				57,250				(27,312	)(1),(7),(8)			190,622
Retained earnings (accumulated deficit)			(184,501	)			(83,223	)			81,222	(2),(6),(7)			(186,502	)
Total stockholders' equity (deficit)			(17,020	)			(25,960	)			65,296				22,316
Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity			4,553				19,682				23,748				47,983

 

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

 

 

Lilis Energy, Inc. and Subsidiary

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Three Months Ended March 31, 2016

(in thousands)

 

										Merger				▇▇▇▇▇
		▇▇▇▇▇				Brushy				Pro Forma				Pro Forma
		Historical				Historical				Adjustments				Combined
Revenue:
Oil and gas sales		$	40			$	1,232			$	(568	)(2)			704
Other revenue			2				116				-				118
Total revenue			42				1,348				(568	)			822
Costs and expenses:
Production costs and taxes			39				1,082				(556	)(2)			565
General and administrative			1,664				1,359				-				3,023
Depreciation, depletion, accretion and amortization			23				781				(479	)(2),(9)			325
Total costs and expenses			1,726				3,222				(1,035	)			3,913
Income (loss) from operations			(1,684	)			(1,874	)			467				(3,091	)
Other income (expenses):
Change in fair value of convertible debentures conversion derivative liability			(49	)			-				49	(1)			-
Interest expense			(1,334	)			(1,100	)			1,314	(1),(2),(3)			(1,120	)
Other income (expense), net			(344	)			(352	)			-				(696	)
Total other income (expense)			(1,727	)			(1,452	)			1,363				(1,816	)
Net income (loss) from continuing operations			(3,411	)			(3,326	)			1,830				(4,907	)
Income tax expense (benefit)			-				-				-	(11)			-
Net income (loss)			(3,411	)			(3,326	)			1,830				(4,907	)
Dividends on redeemable preferred stock			(30	)			-				-				(30	)
Dividend Series A Preferred stock			(150	)			-				150	(1)			-
Dividend Series B Preferred stock			-				-				(300	)(5)			(300	)
Net income (loss) attributable to common stockholders		$	(3,591	)		$	(3,326	)		$	1,680			$	(5,237	)
Net income (loss) per common share basic and diluted		$	(0.12	)		$	(0.26	)		$	0.19			$	(0.45	)
Weighted average shares outstanding basic and diluted			29,152				12,655				8,655	(12)			11,572

 

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

 

 

Lilis Energy, Inc. and Subsidiary

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2015

(in thousands)

 

										Merger				▇▇▇▇▇
		▇▇▇▇▇				Brushy				Pro Forma				Pro Forma
		Historical				Historical				Adjustments				Combined
Revenue:
Oil and gas sales		$	369			$	8,607			$	(4,970	)(2)			4,006
Other revenue			27				-				-				27
Total revenue			396				8,607				(4,970	)			4,033
Costs and expenses:
Production costs and taxes			223				4,047				(2,737	)(2)			1,533
Exploration expense			-				50				(50	)(10)			-
General and administrative			7,930				4,980				-				12,910
Depreciation, depletion, accretion and amortization			584				22,697				(21,760	)(2),(9)			1,521
Impairment of evaluated oil and gas properties			24,478				55,753				(42,237	)(2)			37,994
Total costs and expenses			33,215				87,527				(66,784	)			53,958
Income (loss) from operations			(32,819	)			(78,920	)			61,814				(49,925	)
Other income (expenses):
Change in fair value of convertible debentures conversion derivative liability			1,244				-				(1,244	)(1)			-
Interest expense			(1,697	)			(4,149	)			4,996	(1),(2),(5)			(850	)
Other income (expense), net			911				3,247				-				4,158
Total other income (expense)			458				(902	)			3,752				3,308
Net income (loss) from continuing operations			(32,361	)			(79,822	)			65,566				(46,617	)
Income tax expense (benefit)			-				(14,057	)			14,040	(11)			(17	)
Net income (loss)			(32,361	)			(65,765	)			51,526				(46,600	)
Dividends on redeemable preferred stock			(120	)			-				-				(120	)
Dividend Series A Preferred stock			(600	)			-				600	(1)			-
Dividend Series B Preferred stock			-				-				(1,200	)(5)			(1,200	)
Net income (loss) attributable to common stockholders		$	(33,081	)		$	(65,765	)		$	50,926			$	(47,920	)
Net income (loss) per common share basic and diluted		$	(1.21	)		$	(5.20	)		$	5.88			$	(4.14	)
Weighted average shares outstanding basic and diluted			27,268				12,655				8,655	(12)			11,572

  

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

 

 

Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

 

Condition of Closing - Lilis

 

(1)

As a condition of closing, Lilis was required to convert $6,846,465 in outstanding aggregate principal amount of the Company's 8% Senior Secured Convertible Debentures and convert 7,500 shares of the Company's Series A Preferred Stock with a liquidation value of $8,100,000 into 13,692,930 and 15,000,000 shares of Lilis common stock, respectively. Additionally, ▇▇▇▇▇ was required to complete a reverse stock split, assumed at a ratio of 1-for-10, to regain compliance with Nasdaq's minimum bid price requirement.

 

Balance Sheet Impact

 

		Historical								Adjusted
		▇▇▇▇▇								▇▇▇▇▇
		March 31, 2016				Adjustments				March 31, 2016
		(in thousands)				(in thousands)				(in thousands)
Liabilities, Redeemable Preferred Stock and Stockholders' Equity
Current Liabilities:
Dividends accrued on preferred stock		$	900			$	(750	)(a)		$	150
Accounts payable and accrued expenses			6,196				(1,551	)(a)			4,645
Convertible bridge notes, net of discount			3,272				-				3,272
Term loan			2,524				-				2,524
Convertible debentures, net of discount			6,846				(6,846	)(b)			-
Convertible debentures conversion derivative liability			54				(54	)(b)			-
Total current liabilities			19,792				(9,201	)			10,591
Total long term liabilities			285				-				285
Total Liabilities			20,077				(9,201	)			10,876
Commitments and contingencies
Conditionally redeemable 6% preferred stock			1,496				-				1,496
Stockholders' equity
Series A Preferred stock			6,794				(6,794	)(b)			-
Common stock			3				3	(b)			6
Additional paid in capital			160,684				15,992	(b)			176,676
Retained earnings (accumulated deficit)			(184,501	)			-				(184,501	)
Total stockholders' equity (deficit)			(17,020	)			9,201				(7,819	)
Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity		$	4,553			$	-			$	4,553

 

(a)	To eliminate the accrued interest and dividend payables on the convertible debentures and Series A Preferred Stock on Lilis’s historical Balance Sheet at March 31, 2016 that were converted into Lilis common stock.

 

 

(b)	To convert 8% Senior Secured Debentures and Series A Preferred Stock to Common stock at March 31, 2016.

 

		Historical / Liquidation				Conversion				Conversion
		Value				Rate				Shares
		(in thousands)								(in thousands)
Convertible debentures, net of discount		$	6,846			$	0.50				13,692
Series A Preferred stock			7,500			$	0.50				15,000
											28,692
Par value of Common stock										$	0.0001
Common stock adjustment										$	3
Convertible debentures, net of discount adjustment										$	6,846
Convertible debentures conversion derivative liability											54
Convertible debentures accrued interest											1,551
Series A Preferred Stock adjustment											6,794
Series A Preferred Stock accrued dividends											750
											15,995
Less: Common stock adjustment											(3	)
Additional paid in capital adjustment										$	15,992

 

Statement of Operations Impact

 

		Three Months Ended				Year Ended
		March 31, 2016				December 31, 2015
		(in thousands)				(in thousands)
▇▇▇▇▇ reported net loss		$	(3,411	)		$	(32,361	)
Change in fair value of convertible debentures conversion derivative liability			49				(1,244	)(e)
Interest and amortization expense			312				1,236	(f)
Lilis adjusted net loss		$	(3,050	)		$	(32,369	)
Dividends on redeemable preferred stock as reported			(30	)			(120	)
Dividend Series A Preferred stock			150				600	(g)
Dividend Series B Preferred stock			(300	)			(1,200	)(h)
Lilis adjusted net income (loss) attributable to common stockholders		$	(3,230	)		$	(33,089	)

 

 

		Three Months				Year Ended
		Ended March 31, 2016				December 31, 2015
▇▇▇▇▇ reported net loss per common share basic and diluted		$	(0.12	)		$	(1.21	)
Adjustments			0.07				0.63
Lilis adjusted net loss per common share basic and diluted		$	(0.05	)		$	(0.58	)
Adjustments			(0.01	)			(0.01	)
Lilis adjusted net income (loss) attributable to common stockholders per common share basic and diluted		$	(0.06	)		$	(0.59	)

 

		Three Months Ended				Year Ended
		March 31, 2016				December 31, 2015
		(in thousands)				(in thousands)
▇▇▇▇▇ reported weighted average shares outstanding basic and diluted			29,152				27,268
Common stock issued to the convertible debentures upon conversion			13,692				13,692	(i)
Common stock issued to the Series A Preferred stock holders upon conversion			15,000				15,000	(j)
Lilis adjusted weighted average shares outstanding basic and diluted			57,844				55,960

 

(e)	To eliminate the change in fair value of the conversion derivative liability relating to the 8% Senior Secured Convertible Debentures exchanged for Lilis' common stock.
(f)	To eliminate the interest expense on the 8% Senior Secured Convertible Debentures exchanged for Lilis common stock.
(g)	To eliminate the dividends of $150,000 for the three months ended March 31, 2016 and $600,000 for the year ended December 31, 2015, respectively relating to the Series A Preferred Stock exchanged for Lilis common stock.
(h)	To record the dividends of $300,000 for the three months ended March 31, 2016 and $1.2 million for the year ended December 31, 2015, respectively relating to the Series B Preferred Stock issued in connection with the Merger.
(i)	To adjust ▇▇▇▇▇’s weighted average common stock outstanding for shares issued to the 8% Senior Secured Convertible Debenture holders upon conversion.
(j)	To adjust Lilis' weighted average common stock outstanding for shares issued to the Series A Preferred Stock holders upon conversion.

 

In conjunction with the merger, Lilis was required to complete a reverse stock split to regain compliance with Nasdaq's minimum bid price requirements. This pro forma presentation assumes a reverse stock split ratio of 1-for-10. Prior to the merger, after giving effect to the reverse stock split, Lilis will have 5,785,952 shares of Lilis common stock outstanding with a par value of $1.00 per share as described below: 

 

		Common Stock				Common Stock Outstanding
		Outstanding				Post-Split
		(in thousands)				(in thousands)
Lilis Common stock outstanding at March 31, 2016			29,167				2,917
Convertible debentures, net of discount			13,692				1,369
Series A Preferred stock			15,000				1,500
Lilis Common stock outstanding before reverse stock split			57,859				5,786

 

Condition of Closing - Brushy

 

(2)	As a condition of closing, Brushy was required to divest of its ▇▇▇▇▇▇▇▇ properties for the elimination of its short term debt and accrued interest obligation with SOSventures LLC (SOS), a related party, valued at $20.1 million at March 31, 2016.  The impact of this adjustment is detailed below:

 

 

Balance Sheet Impact

 

										Adjusted
		Historical								Historical
		Brushy								Brushy
		March 31, 2016				Adjustments				March 31, 2016
		(in thousands)				(in thousands)				(in thousands)
Assets
Current assets:
Cash		$	864			$	-			$	864
Other current assets			1,070				-				1,070
Total current assets			1,934				-				1,934
Total oil and gas properties, at cost, net			16,366				(7,578	)(a)			8,788
Total other assets			1,382				-				1,382
Total Assets			19,682				(7,578	)			12,104
Liabilities, Redeemable Preferred Stock and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses			10,209				(3,717	)(b)			6,492
Short term loan - related parties			18,000				(18,000	)(b)			-
Term loan			11,385				-				11,385
Other short term liabilities			2,758				(400	)(c)			2,358
Total current liabilities			42,352				(22,117	)			20,235
Long term liabilities:
Other long term liabilities			3,290				(2,348	)(c)			942
Total long term liabilities			3,290				(2,348	)			942
Total liabilities			45,642				(24,465	)			21,177
Stockholders' equity
Common stock			13				-				13
Additional paid in capital			57,251				-				57,251
Accumulated deficit			(83,224	)			16,887	(d)			(66,337	)
Total stockholders' equity (deficit)			(25,960	)			16,887				(9,073	)
Total Liabilities and Stockholders' Equity		$	19,682			$	(7,578	)		$	12,104

   

(a)	To eliminate the historical net cost basis of the ▇▇▇▇▇▇▇▇ oil and gas assets.
(b)	To eliminate the short-term debt and accrued interest obligation to SOSventures LLC, a related party.
(c)	To eliminate the long-term asset retirement obligations from the ▇▇▇▇▇▇▇▇ oil and gas assets.
(d)	The excess value between the historical cost basis of the ▇▇▇▇▇▇▇▇ oil and gas assets exchanged for the elimination of debt is considered a deemed dividend as this transaction is between related entities under common control.

 

 

  

		March 31, 2016
		(in thousands)
Historical net cost basis of the ▇▇▇▇▇▇▇▇ oil and gas assets		$	7,578
Adjustments:
Short-term and long-term asset retirement obligations			(2,748	)
Adjusted basis for the ▇▇▇▇▇▇▇▇ oil and gas assets			4,830
Short-Term debt obligation with SOSventures LLC			21,717
Deemed dividend		$	(16,887	)

 

Statement of Operations Impact

 

		Three Months Ended				Year Ended
		March 31, 2016				December 31, 2015
		(in thousands)				(in thousands)
Revenue:
Oil and gas sales		$	(568	)(h)			(4,970	)(e)
Costs and expenses:
Production costs and taxes			(556	)(i)			(2,737	)(f)
Depreciation, depletion, accretion and amortization			(358	)(j)			(19,135	)(g)
Impairment of oil and gas properties			-	(k)			(42,237	)(h)
Total costs and expenses			(914	)			(64,109	)
Income from operations			346				59,139
Other income (expenses):
Interest expense			819	(l)			2,674
Total other income (expense)			819				2,674
Net income from continuing operations			1,165				61,813
Income tax expense (benefit)			-				-
Net income		$	1,165			$	61,813
Net income per common share basic and diluted		$	0.09			$	4.88
Weighted average shares outstanding basic and diluted			12,655				12,655

  

(h)	To eliminate the oil and gas revenue from the ▇▇▇▇▇▇▇▇ oil and gas assets.
(i)	To eliminate the production costs and taxes from the ▇▇▇▇▇▇▇▇ oil and gas assets.
(j)	To eliminate the depreciation, depletion, accretion and amortization from the ▇▇▇▇▇▇▇▇ oil and gas assets.
(k)	To eliminate the impairment of the ▇▇▇▇▇▇▇▇ oil and gas assets.
(l)	To eliminate the interest expense from the SOS debt financing exchanged for the ▇▇▇▇▇▇▇▇ oil and gas assets.

 

 

(3)

These adjustments reflect the elimination of the components of Brushy's historical stockholder's equity, the estimated value of the consideration to be paid by ▇▇▇▇▇ in the merger using the closing price of Lilis Common Stock on March 31, 2016 and to reflect the adjustments to the historical book values of Brushy's assets and liabilities as of March 31, 2016 to their estimated fair values, in accordance with acquisition accounting. The following table reflects the preliminary allocation of the total purchase price of Brushy to the assets acquired and the liabilities assumed and resulting goodwill (unevaluated oil and gas properties) based on the preliminary estimated fair value:

 

						March 31, 2016
						(in thousands)
Purchase Price (a)
Total Lilis common stock to be issued to Brushy stockholders							5,786
Lilis common stock price, adjusted for reverse stock split						$	1.70
Fair value of Lilis common stock issued							9,836
Cash consideration paid to SOS						$	500
Note payable - SOS - related party							1,000
Fair value of Lilis warrants issued to SOS							248
Merger deposit and advances							2,358
						$	13,942
Estimated Fair Value of Liabilities Assumed:
Current Liabilities:
Accounts payable and accrued expenses		$	6,491
Note payable - SOS - related party			1,500
Term loan - Independent Bank			11,385			$	19,376
Long Term Liabilities		$	942				942
Amount attributable to liabilities assumed							20,318
Total purchase price plus liabilities assumed						$	34,260
Estimated Fair Value of Assets Acquired:
Current Assets:
Cash		$	864
Other current assets			1,070			$	1,934
Oil and Gas Properties:
Evaluated cost basis		$	7,512
Goodwill (Unevaluated oil and gas properties)			24,392
Evaluated fair market value							31,904
Other assets
Other assets		$	422
							422
Total Asset Value						$	34,260

 

(a)	Pursuant to the terms of the merger agreement, Brushy stockholders will own 50% of the combined entity.  The total purchase price is based upon the closing price of $.17 ($1.70 post reverse stock split) per share of Lilis common stock on March 31, 2016.
	The closing price was $.12 ($1.20 post reverse stock split) per share on June 23, 2016, actual closing date. The actual goodwill (unevaluated oil and gas properties) was $20.6 million.
(b)	Weighted average commodity prices utilized in the determination of the pro forma fair value of oil and gas properties were $51.07 per barrel of oil and $2.67 per Mcf of natural gas, after adjustment for transportation fees and regional price differentials.  An increase or decrease in commodity prices as of the closing date of the merger will result in a corresponding increase or decrease in the fair value of the properties and related deferred tax liabilities and a decrease or increases in goodwill.

 

(4)	To eliminate ▇▇▇▇▇▇'s historical goodwill of $960,000.

 

 

(5)

To record the sources and uses required under the merger agreement. Prior to closing, Lilis is required to use its best efforts to raise a $15.0 million minimum debt or equity financing for the merged company. ▇▇▇▇▇ raised $20 million Series B Convertible Preferred stock with a 6% coupon and warrants to purchase 9.1 million shares of common stock post-split.  Additionally, in connection with the completion of the Merger, Lilis and Independent Bank (the “Lender”), ▇▇▇▇▇▇’s senior secured lender, entered into an amendment to Brushy’s forbearance agreement with the Lender (the “Fourth Amendment”), which, among other things, provided for a pay-down of approximately $6.0 million of the principal amount outstanding on the loan (the “Loan”), plus fees and other expenses incurred in connection with the Loan, in exchange for an extension of the maturity date through December 15, 2016, at an interest rate of 6.5%, payable monthly. Additionally, the Company agreed to (i) guaranty the approximately $5.4 million aggregate principal amount of the Loan, (ii) ▇▇▇▇▇ ▇ ▇▇▇▇ in favor of the Lender on all of the Company’s real and personal property, (iii) restrict the incurrence of additional debt including the requirement to pay off Heartland Bank and (iv) maintain certain deposit accounts with various restrictions with the Lender.). Also at closing, to incentivize SOS to exchange its existing debt with Brushy for certain oil and gas properties (See footnote 2 above), ▇▇▇▇▇ has agreed to pay SOS $500,000, enter into a 6% subordinated debt agreement in the amount of $1.0 million and issue 2,000,000 warrants to purchase Lilis common stock with an exercise price of $2.50 and a term of 2 years. The value of these warrants is $248,000 using the Black Scholes pricing model and recorded as an additional liability and amortized over the life of the loan. The pro forma effect of these items resulted in an increase in dividends on the Series B Preferred stock of $300,000 and $1.2 million for the three months ended March 31, 2016 and year ended December 31, 2015, respectively and a decrease to interest and amortization expense of $183,000 and $1.1 million for the three months ended March 31, 2016 and year ended December 31, 2015, respectively.

 

		March 31, 2016
		(in thousands)
Sources
Series B Preferred stock, net of cash fees		$	18,194
Uses
Term loan - Independent Bank			(6,000	)
Term loan - Heartland Bank			(2,524	)
SOS exchange incentive			(500	)
		$	9,170

 

(6)	To accrue for estimated transaction costs of $2.0 million related to the merger with Brushy not reflected in the financial statements. No adjustments have been made to the unaudited pro forma statements of operations as these costs are non-recurring in nature.

 

(7)	To eliminate ▇▇▇▇▇▇'s historical components of stockholder's equity. Detail provided below:

 

		March 31, 2016
		(in thousands)
Common stock		$	13
Additional paid in capital			57,251
Accumulated deficit			(66,337	)
▇▇▇▇▇▇'s historical stockholder's equity		$	(9,073	)

 

(8)	To record the issuance of Lilis common stock to Brushy in exchange for 100% of their outstanding shares.

 

		March 31, 2016
		(in thousands)
Common stock, $.0001 par value		$	1
Additional paid in capital			13,941
Fair value of Lilis common stock issued to Brushy		$	13,942

 

(9)

To adjust the historical depletion, depreciation and amortization (DD&A) provision to the estimated total for the combination of Lilis and Brushy under Full Cost method of accounting. The assets of Lilis at cost were combined with Brushy's assets based on the fair market value of the oil and gas properties and other operating property and equipment of Brushy as the time of the merger. The DD&A was recalculated assuming the combined company's assets under the Full Cost method of accounting. For evaluated oil and gas properties, the units of production method were applied consistently with the Full Cost method of accounting. For other property and equipment, the assets were depreciated based upon the estimated useful life of the properties. This resulted in a decrease to DDA of $121,000 for the three months ended March 31, 2016 and 2.6 million for the year ended December 31, 2015.

 

(10)	To eliminate exploration expenses that are capitalized to the oil and gas properties cost pool under the Full Cost method of accounting.

 

(11)

To adjust the income tax provision for the estimated efforts combining Lilis' and ▇▇▇▇▇▇'s operations and other, pre-tax pro forma adjustments (which were adjusted for income taxes using a combined federal and state tax rate of 34%. The pro-forma net loss would have eliminated all tax expense (benefit) except for the Texas franchise tax expense.

 

(12)

In conjunction with the merger, Lilis was required to complete a reverse stock split to regain compliance with Nasdaq's minimum bid price requirement. This pro forma presentation assumes a reverse stock split ratio of 1-for-10. Prior to the merger, after giving effect to the reverse stock split, Lilis will have 5,785,952 shares of Lilis common stock outstanding with a par value of $1.00 per share as described below:

 

						March 31, 2016
						(in thousands)
Common stock outstanding – pre merger (reverse stock split 1-for-10)							2,917
Convertible debentures, net of discount			1,369
Series A Preferred stock			1,500
▇▇▇▇▇▇ issued to Brushy			5,786				8,655
Common stock outstanding – post merger							11,572