As filed with the Securities and Exchange Commission on July 2, 2012

Registration No. 333-177172

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 4

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

Glori Energy Inc.

(Exact Name of Registrant as Specified in its Charter)

 

4315 South Drive

Houston, Texas 77053

Telephone: (713) 237-8880

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Stuart M. Page

President and

Chief Executive Officer

Glori Energy Inc.

4315 South Drive

Houston, Texas 77053

Telephone: (713) 237-8880

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

 

 

Copies to:

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

 

 

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

(Do not check if a smaller reporting company)

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED JULY 2, 2012

 

           Shares

 

 

Glori Energy Inc.

 

Common Stock

 

 

 

 

We are selling           shares of our common stock.

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $      and $      per share. We have applied to list our common stock on The Nasdaq Global Market under the symbol “GLRI”.

 

The underwriters have an option to purchase a maximum of           additional shares to cover over-allotment of shares.

 

We are an emerging growth company under the federal securities laws and are eligible for reduced public company reporting requirements.

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

 

 

Delivery of the shares of common stock will be made on or about          , 2012.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Credit Suisse

UBS Investment Bank

Piper Jaffray

 

 

The date of this prospectus is          , 2012.

 

 

 

 

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This prospectus may only be used where it is legal to sell these securities. You should not assume that the information appearing in this prospectus is accurate as of any date other than the date on the front cover of this prospectus or such other dates as are stated in this prospectus. Our business, financial condition, results of operation and prospects may have changed since any such date.

 

 

Dealer Prospectus Delivery Obligation

 

Until          , 2012 (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

PROSPECTUS SUMMARY

	•	Expand our customer base:  As of June 15, 2012, we had 11 customer projects, three of which are in the field implementation stage. We expect to add a growing number of projects that are currently in various stages of evaluation. As we continue to develop our customer base, we expect our revenue opportunities to grow significantly.

	•	Pursue acquisitions and redevelopment of oil fields with additional revenue potential through deployment of our AERO System:  In October 2010, we acquired an oil property in Kansas, which we refer to as the Etzold field, to demonstrate the application of our AERO System and accelerate adoption of our technology. We plan to strategically acquire and redevelop additional temporarily abandoned and low-producing mature oil fields with historically long-lived, predictable production profiles so that we can demonstrate the efficacy of our AERO System. We also anticipate deriving revenue from the sale of oil from these oil fields as they are redeveloped by us and as we deploy our AERO System in these fields. Once our AERO System is more widely accepted, we anticipate deemphasizing the strategy of acquiring and operating our own oil fields.

	•	Accelerate execution by leveraging additional strategic partnerships:  Commercialization of our technology could be further accelerated and expanded through additional strategic partnerships. We currently have collaboration arrangements with Statoil, TERI and the Winogradsky Institute of Microbiology of the Russian Academy of Sciences, or Winogradsky. We are currently exploring collaboration opportunities with a number of major oil companies and other potential partners.

	•	Disruptive and proven technology:  We believe that our AERO System is a transformative and disruptive innovation that manipulates the existing reservoir microbial communities to improve the recovery of oil in waterflood oil fields. Our technology has broad applicability. We believe our AERO System can be utilized in more oil fields compared to that of traditional enhanced oil recovery technologies, which consist of thermal injection, gas injection and chemical injection. Traditional enhanced oil recovery technologies are generally cost effective only in larger oil reservoirs and large scale operations and are generally impractical for offshore platforms due to the constraints of logistics and platform space. See “Our Company – Competition – Traditional Enhanced Oil Recovery Technologies”. For an oil reservoir to be a candidate for our current AERO System, the reservoir must be subject to waterflooding as a secondary oil recovery mechanism, must be composed of sandstone, must have permeability greater than 25 milli-darcies and must have a suitable water source. We believe that as much as 50% of the oil recovered in the United States has come from reservoirs appropriate for our AERO System. Although we do not have any studies of the global characteristics of reservoirs, based on our industry knowledge, we believe that a comparable percentage of reservoirs outside the United States will be suitable for our AERO System. We have not only demonstrated the commercial efficacy of our technology but have passed the significant milestone of one million incremental gallons of oil produced via our AERO System. As of June 15, 2012, we had 11 customer projects at various stages in our AERO System’s implementation process.

	•	Established commercial projects:  Our customers include international oil companies and independent oil and gas companies in North America. As of June 15, 2012, we had active projects with Husky Oil Operations Limited, Merit Energy Company, Cenovus Energy Inc., Plains Exploration and Production Company, Riyam Engineering & Services LLC (for provision of services to Petroleum Development Oman L.L.C.), T-C Oil Company, Denbury Resources Inc., ConocoPhillips Company, Enerplus Partnership, Petróleo Brasileiro S.A. and an ongoing laboratory research and development project with Shell International Exploration and Production, Inc. See “Our Company-Service Offering” for more details regarding the status of our projects.

	•	The ability to economically acquire and exploit temporarily abandoned and low-producing mature oil fields:  By leveraging our AERO System technology, we can increase production rates and economic life of fields that other participants in the oil industry have abandoned or neglected. Our first oil field acquisition was the Etzold field. Etzold is an oil field that had once been deemed uneconomic and was subsequently abandoned. As of December 31, 2011, the estimated proved oil reserves in our Etzold field were 160 mbbls. See “Our Company – Oil Reserves”. Based on production data from the primary production well at our Etzold field, after the implementation of our AERO System, the daily production rate from the impacted well increased by [     ]% from the average measured for the three months prior to AERO System implementation.

	•	Profitable stand-alone economics:  Our first commercial application of our AERO System is profitable on a project-level basis. We estimate that our cost per barrel, excluding minimal upfront capital costs, over the life of our first commercial application will be approximately $5 per incremental barrel of oil. Successful commercialization of our AERO System does not depend on the availability of government subsidies or mandates.

	•	Capital-light technology:  Implementing our AERO System does not require a substantial capital investment. Our AERO System is applied to a reservoir by utilizing our field deployment module, which requires relatively minor capital investments, alongside our customer’s existing wells. We believe our technology has the potential to create a continuing source of additional economic oil production that will extend the lives of oil fields and related infrastructure for many years.

	•	Clean alternative to traditional enhanced oil recovery:  Our AERO System increases the oil recoverable from an existing field using infrastructure already built and in place. No new wells are drilled, no new pipelines are laid, no new significant energy input is required, and there is no new disruption to the environment. Furthermore, because the activity is biological and occurs in the reservoir, there is minimal consequent carbon dioxide or other greenhouse gas footprint. Once the application of our AERO System ends, the microbes in the reservoir are no longer supplied with nutrients, and the reservoir will return to its pre-treatment status. By comparison, we believe that traditional enhanced oil recovery techniques require significant energy input, for example in the case of thermal injection, or significant additional infrastructure, for example in the case of gas injection. In addition, we believe that traditional enhanced oil recovery techniques, in particular gas injection and chemical injection techniques, introduce new environmental impacts, which result in a sizable carbon dioxide or other greenhouse gas footprint or the addition of a large quantity of chemicals or polymers into the reservoir. See “Our Company – Competition – Traditional Enhanced Oil Recovery Technologies”.

	•	Strong intellectual property position:  Our intellectual property, consisting of substantial know-how and trade secrets, is the result of decades of research and development by us, Statoil, TERI and Biotopics. We also have multiple patents and patent applications. We believe our intellectual property and decades of research creates a strong barrier to entry.

	•	Experienced management and technical team:  Our management and technical team’s expertise includes microbiology, chemistry and biochemistry, microbial genomics, engineering, geosciences and traditional E&P, and in their respective careers our team members played key roles in the commercialization of dozens of successful large-scale industrial biotechnology and traditional oilfield acquisition and development projects.

	•	Sample:  The identification and assessment of underground environments where conditions are suitable for microbial life activation.
	•	Simulate:  The performance of laboratory and field tests to assess microbial activation and to identify customized nutrient formulations that will cause the microbes to grow.
	•	Stimulate:  The implementation of our AERO System by circulating nutrient formulations in the reservoir to target indigenous microbes and support their growth and allow the recovery of more oil.

(1)		For illustrative purposes, assumes a 10% recovery of original oil in place due to our AERO System.

	•	Our business is difficult to evaluate due to our limited operating history.
	•	We have incurred substantial losses to date, anticipate continuing to incur losses in the future and may never achieve or sustain profitability.

	•	Our AERO System has only been applied to a limited number of reservoirs, and the commercial and economic viability of our AERO System in a broader range of reservoirs is still unproven.

	•	We may have difficulties gaining market acceptance and successfully marketing our AERO System to our potential customers.
	•	Our revenue to date has been derived from a small number of customers, and the loss of any of these customers would likely materially harm our business, financial condition and results of operations.
	•	Oil prices are volatile, and a decline in the price of oil could harm our business, financial condition and results of operations.
	•	Oil fields, once acquired, may not be appropriate for our purposes or may have environmental or other liabilities associated with them that may negatively affect our business, financial condition and results of operations.

Common stock offered by us		shares
Common stock outstanding after this offering		shares

Use of proceeds		We have no current specific plans for the use of the net proceeds from this offering. We intend to use a majority of the net proceeds from this offering for the acquisition, restoration and operation of additional temporarily abandoned and low-producing mature oil fields, including the implementation of our AERO System in these fields. We do not, however, have agreements or commitments for any specific property acquisitions at this time. We may also use the net proceeds from this offering for working capital and other general corporate purposes, which may include capital expenditures associated with our AERO System and expenditures relating to further research and development efforts. See “Use of Proceeds”.

Risk factors		See “Risk Factors” for a discussion of factors that you should consider carefully before deciding whether to purchase shares of our common stock.
Proposed Nasdaq Global Market symbol.		“GLRI”

	•	4,608,226 shares of our common stock issuable upon the exercise of options outstanding as of March 31, 2012 with a weighted average exercise price of $0.42 per share;

	•	[          ] shares of our common stock reserved for future issuance under our 2012 Omnibus Incentive Plan;

	•	994,269 shares of our common stock issuable upon the exercise of warrants outstanding as of March 31, 2012 with a weighted exercise price of $1.03 per share; and

	•	145,932 shares of our common stock issuable upon the exercise of a warrant issued by us to a lender on June 11, 2012 with an exercise price of $2.741 per share in connection with a loan and security agreement, or the loan agreement, that we entered into with that lender.

	•	the conversion, which will occur upon the closing of this offering, of all of our outstanding shares of preferred stock and accrued and unpaid dividends on our preferred stock into an aggregate of 52,616,197 shares of our common stock (assuming the conversion of our series C preferred stock into shares of our common stock on a one-to-one basis upon the closing of this offering, which conversion ratio is subject to adjustment based on the initial public offering price of our common stock in this offering), subject to additional shares of our common stock being issuable (x) for each day after March 31, 2012 for the daily accrual of unpaid dividends on our series A and series B preferred stock and the quarterly compounding of such dividends, which dividends accrue at the rate of 4% for our series A preferred stock and 8% for our series B preferred stock and (y) for each day after March 31, 2012 for the daily accrual of unpaid dividends on our series C preferred stock and the quarterly compounding of such dividends, which dividends accrue at the rate of 8% through December 30, 2012;

	•	the [          ]-to-one reverse split of our common stock on [          , 2012]; and
	•	no exercise by the underwriters of their option to purchase up to an additional          shares of our common stock from us to cover over-allotments.

	•	the conversion, which will occur upon the closing of this offering, of all outstanding shares of our preferred stock and accrued and unpaid dividends on our preferred stock into an aggregate of 52,616,197 shares of our common stock (assuming the conversion of our series C preferred stock into shares of our common stock on a one-to-one basis upon the closing of this offering, which conversion ratio is subject to adjustment based on the initial public offering price of our common stock in this offering), subject to additional shares of our common stock being issuable (x) for each day after March 31, 2012 for the daily accrual of unpaid dividends on our series A and series B preferred stock and the quarterly compounding of such dividends, which dividends accrue at the rate of 4% for our series A preferred stock and 8% for our series B preferred stock and (y) for each day after March 31, 2012 for the daily accrual of unpaid dividends on our series C preferred stock and the quarterly compounding of such dividends, which dividends accrue at the rate of 8% through December 30, 2012; and

	•	the sale by us of           shares of common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, and our receipt of the estimated net proceeds from that sale after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

		Year Ended December 31,												Three Months Ended March 31,
		2009				2010				2011				2011				2012
		(As Restated)												(As Restated)
														(Unaudited)
		(In thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues		$	858			$	131			$	1,565			$	357			$	482
Expenses:
Operations			1,277				1,163				2,671				327				746
Research and development			1,021				1,546				1,529				342				347
Selling, general and administrative			827				1,679				2,861				576				758
Depreciation, depletion and amortization			390				442				576				125				165
Total expenses			3,515				4,830				7,637				1,370				2,016
Loss from operations			(2,657	)			(4,699	)			(6,072	)			(1,013	)			(1,534	)
Other income (expense), net			(2,611	)			921				1,524				3				10
Net loss before taxes on income			(5,268	)			(3,778	)			(4,548	)			(1,010	)			(1,524	)
Taxes on income			—				—				—				—				—
Net loss			(5,268	)			(3,778	)			(4,548	)			(1,010	)			(1,524	)
Less accretion of redeemable preferred stock and preferred stock dividends			(596	)			(2,556	)			(4,388	)			(955	)			(2,522	)
Net loss applicable to common stockholders		$	(5,864	)		$	(6,334	)		$	(8,936	)		$	(1,965	)		$	(4,046	)
Net loss per common share, basic and diluted		$	(2.05	)		$	(2.21	)		$	(3.05	)		$	(0.69	)		$	(1.33	)
Weighted average common shares outstanding, basic and diluted			2,863				2,866				2,932				2,866				3,042
Other Data:
Net cash used in operating activities		$	2,033			$	4,263			$	3,888			$	545			$	1,770
Net cash used in investing activities			49				615				2,423				954				244
Net cash provided by financing activities			7,491				5,784				8,015				—				11,620
Pro forma net loss applicable to common stockholders										$								$
Pro forma net loss per common share, basis and diluted
Pro forma weighted average common shares outstanding

		March 31, 2012
		Actual				Pro Forma
		(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	18,452			$
Total assets			23,228
Total stockholders’ equity			(35,232	)

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below before deciding to invest in our common stock. Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this prospectus, including our consolidated financial statements, before deciding to purchase any of our common stock.

 

Risks Related to Our Business

 

Our business is difficult to evaluate due to our limited operating history.

 

Since our inception in November 2005, the majority of our resources have been dedicated to our research and development efforts, and we have only recently begun to transition into the early stages of commercializing our AERO System. We do not have a stable operating history that you can rely on in connection with your evaluation of our current business or our future business prospects. Our business and prospects must be carefully considered in light of the limited history of our AERO System and the many business risks, uncertainties and difficulties that are typically encountered by companies that have sporadic revenues and are committed to focusing on research, development and technology testing for an indeterminate period of time.

 

Because of our limited operating history and our relatively recent transition into the commercial deployment of our AERO System that we are relying on to become our core revenue generator, we have limited insight into trends and conditions that may exist or might emerge and affect our business. Our proposed business strategies described in this prospectus incorporate our management’s current analysis of potential markets, opportunities and difficulties that we face. Our underlying assumptions may not accurately reflect current trends and conditions in our industry, and our AERO System may not be successful. Our business strategies may change substantially from time to time or may be abandoned as our management reassesses our opportunities and reallocates our resources. If we are unable to develop or implement these strategies, or if our AERO System becomes not economically viable, we may never realize material sales or achieve profitability. Even if we do achieve profitability, we cannot predict the level of such profitability, and it may not be sustainable.

 

We have incurred substantial losses to date, anticipate continuing to incur losses in the future and may never achieve or sustain profitability.

 

We have incurred substantial net losses since our inception, including net losses of $3.8 million, $3.7 million, $5.3 million, $3.8 million and $4.5 million for the years ended December 31, 2007, 2008, 2009, 2010 and 2011, respectively, and $1.5 million for the three months ended March 31, 2012, and we expect these losses to continue. As of March 31, 2012, we had an accumulated deficit of $35 million. We expect to incur additional costs and expenses related to the continued development and expansion of our business, including our research and development operations, the commercialization of our AERO System and the acquisition, restoration and operation of additional temporarily abandoned and low-producing mature oil fields. As a result, we may never achieve profitability.

 

Our AERO System has only been applied to a limited number of reservoirs, and the commercial and economic viability of our AERO System in a broader range of reservoirs is still unproven.

 

Our AERO System has only been applied in a limited number of sandstone reservoirs to date. The future success of our business depends on our ability to demonstrate that our AERO System has the ability to increase oil recovery on a more widespread basis and on a larger scale and on attractive economic terms. Reservoir characteristics differ and, consequently, certain elements of our services are specifically engineered for each reservoir. As a result, we may not be able to achieve results in other reservoirs consistent with those we have thus far achieved in the reservoirs where our AERO System has been applied. In addition, our data with respect to the commercial application of our AERO System is derived from the one oil producing well in our first commercial implementation of our technology. See “Our Company – Case Study: A Review of our

AERO System’s Field Performance”. Subsequent implementations of our AERO System could yield less favorable oil production rates and overall oil recovery results than those observed during that first implementation. Any inability to commercialize our AERO System applications effectively or to realize sufficiently favorable oil recovery results in a significant number of other reservoirs will limit the commercial acceptance and viability of our AERO System, which would materially harm our business, financial condition and results of operations.

 

The success of our AERO System is dependent upon the information we receive from our customers.

 

The success of an application of our AERO System to a particular reservoir is dependent upon information that we receive from our customers regarding the reservoir characteristics and geology. If this information is inaccurate, we may not be able to achieve results in such a reservoir consistent with those we have thus far achieved in the reservoirs where our AERO System has been applied successfully. Because of the uniqueness of our technology and the early stage of our development, we must educate potential customers on our technology in order to be able to generate business. New customers generally prefer to initially test our technology in a small portion of their lowest-priority oil field. Since our test only includes a small portion of the injection wells and production wells in the oil field, it is important that the customer be able to identify which injection wells are servicing the production wells in the test area. For example, on a recent project one of the customer’s injector wells in the test area was subsequently determined to be outside of the test reservoir, so any waterflooding or application of our AERO System could not be effective for the production wells in the test area since water could not flow from the injection well to the production well.

 

We may have difficulties gaining market acceptance and successfully marketing our AERO System.

 

A key component of our business strategy is to market our AERO System to oil producers. To gain market acceptance and successfully market our AERO System to oil producers, we must effectively demonstrate the commercial advantages of using our AERO System as an alternative to, or in addition to, other enhanced oil recovery methods. We must prove that our AERO System significantly increases the amount of oil that can be recovered from a reservoir cost effectively. If we are unable to demonstrate this capability to oil producers, we will not be able to penetrate this market, generate new business or retain existing customers. In addition, until the efficacy of our technology is more widely demonstrated we are likely to experience long sales cycles and long test cycles, which may harm our business, financial condition and results of operations.

 

Our revenue to date has been derived from a small number of customers, and the loss of any of these customers would likely materially harm our business, financial condition and results of operations.

 

We only have a small number of customers. For the year ended December 31, 2011, all of our service revenue was generated from three customers. For the three months ended March 31, 2012, all of our service revenue was generated from four customers. Our service contracts generally contain provisions that allow for cancellation by our customers upon short notice. If any of these customers terminates or significantly reduces its business with us or if we fail to generate new business, our business, financial condition and results of operations would be materially harmed.

 

Oil prices are volatile, and a decline in the price of oil could harm our business, financial condition and results of operations.

 

Our results of operations and future growth will depend on the level of activity for oil development and production. Demand for our AERO System depends on our customers’ willingness to make operating and capital expenditures for waterflooding procedures and our AERO System. Our business will suffer if these expenditures decline. Declining oil prices, or the perception of a future decline in oil prices, would adversely affect the prices we can obtain from our customers or prevent us from obtaining new customers for our services. Our customers’ willingness to develop and produce oil using waterflooding and our AERO System is

highly dependent on prevailing market conditions and oil prices that are influenced by numerous factors over which we have no control, including:

 

 

Oil prices have historically been volatile and cyclical. A prolonged reduction in the price of oil will likely affect oil production levels and therefore affect demand for our services. In addition, a prolonged significant reduction in the price of oil could make it more difficult for us to collect outstanding account receivables from our customers. A material decline in oil prices or oil development or production activity levels could materially harm our business, financial condition and results of operations.

 

Oil fields, once acquired, may not be appropriate for our purposes or may have environmental or other liabilities associated with them that may negatively affect our business, financial condition and results of operations.

 

We intend to acquire temporarily abandoned and low-producing mature oil fields. Oil fields we acquire may not result in commercially viable projects. The potential of a given property to continue to produce oil or resume production of oil and to be adaptable to our AERO System cannot be determined with a high level of precision prior to our acquisition of the property. Our due diligence reviews of the properties we acquire are inherently incomplete and cannot assure us of the quality of the oil fields or of the likelihood of success of our AERO System in enhancing their production of oil. It is generally not possible for us to test a property or conduct an in-depth review of its related records as part of its acquisition. Even if we are able to complete an in-depth review and sampling of these properties, such a review may not reveal existing or potential problems or permit us to become sufficiently familiar with the properties to fully assess their potential for successful application of our AERO System.

 

Even when problems are identified, it may be necessary for us to assume known or unknown environmental and other risks and liabilities to complete the acquisition of such properties. In addition, since the properties we are targeting are temporarily abandoned and low-producing mature oil fields, their existing infrastructure may be out of date, damaged, in need of repair or removal, and we could incur unanticipated costs to repair or replace this infrastructure. The discovery of any unanticipated material liabilities or remediation costs or the incurrence of any unanticipated costs associated with our oilfield acquisitions could harm our results of operations and financial condition.

 

If the injection water used in an oil field is not suitable for our AERO System, our AERO System may not work correctly or will require additional costs either to clean the water or substitute suitable water and, therefore, may not be a viable option for some oil fields.

 

Our AERO System requires that the water injected into the injection wells not be inhibitory to microbial growth and not contain substrates that will allow biofilm to grow in the injection pipeline. If suitable water is not being used, our AERO System will not work unless additional costs are expended to clean the water or to utilize an alternate source of water. These additional costs may make our AERO System less cost effective or

not a viable option for some oil fields. For example, in a recent implementation of our AERO System, the salinity of the produced water used in the waterflood operations was very high, making it hostile to most microbes. The solution was to use water from an existing nearby water well to provide a better environment for the microbes which made our AERO System more effective. We may not be able to provide suitable water to some projects, eliminating these oil fields as candidates for our AERO System.

 

Our AERO System is currently useable only in oil reservoirs with specific characteristics, which limits the potential market for our services.

 

For an oil reservoir to be suitable for our current AERO System, the reservoir must be waterflooded, must be composed of sandstone, must have permeability greater than 25 milli-darcies and must have a suitable water source. We believe that these requirements mean that approximately 50% of the world’s oil recovery comes from reservoirs that are not suitable for our AERO System as currently developed and that the market for our services is correspondingly limited.

 

Our operations involve operating hazards, which, if not insured or indemnified against, could harm our results of operations and financial condition.

 

Our operations are subject to hazards inherent in our technology, including exposure to pressurized air that may be used in our AERO System equipment and pressurized fluids that may be associated with the water injection system, and to hazards typically associated with oilfield service operations, including fire and explosions and damage or loss from natural disasters. These hazards could cause personal injury or loss of life, could result in the suspension of operations or in damage or destruction to the property and equipment involved, could lead to claims by employees, customers or third parties, could cause environmental damage and could cause substantial damage to oil producing formations or facilities. Operations also may be suspended because of equipment breakdowns and failure of subcontractors to perform or supply goods or services.

 

Some of these risks are either not insurable or insurance is available only at rates that we consider uneconomical. We may not always be successful in obtaining contractual indemnification from our customers, and customers who provide contractual indemnification protection may not maintain adequate insurance or otherwise have the financial resources necessary to support their indemnification obligations. Our insurance or indemnification arrangements may not adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a customer to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition.

 

The loss of key personnel or the failure to attract and retain highly qualified personnel could compromise our ability to effectively manage our business and pursue our growth strategy.

 

Our future performance depends on the continued service of our key technical, development, sales, services and management personnel. In particular, we are heavily dependent on the following key employees: Stuart M. Page, our President and Chief Executive Officer, Thomas Ishoey, our Chief Technology Officer, and William M. Bierhaus II, our Senior Vice President of Business Development. The loss of key employees could result in significant disruptions to our business, and the integration of replacement personnel could be costly and time consuming, could cause additional disruptions to our business and could be unsuccessful. We do not carry key person life insurance covering any of our employees.

 

Our future success also depends on our continued ability to attract and retain highly qualified technical, development, sales, services and management personnel. A significant increase in the wages paid by competing employers could reduce our skilled labor force and increase the wages that we must pay to motivate, retain or recruit skilled employees.

 

In addition, wage inflation and the cost of retaining our key personnel in the face of competition for such personnel may increase our costs faster than we can offset these costs with increased prices or increased sales of our AERO System.

We may require substantial additional financing to achieve our goals and to make future acquisitions, and a failure to obtain this capital when needed or on acceptable terms could force us to delay, limit, reduce or terminate our research and development and commercialization efforts.

 

Since our inception, most of our resources have been dedicated towards research and development, as well as demonstrating the effectiveness of our AERO System in our labs and in the field. We intend to expend substantial resources for the foreseeable future on further developing our AERO System. Also, we anticipate that we will expend significant resources on the acquisition and operation of additional temporarily abandoned and low-producing mature oil fields to continue to test and demonstrate our AERO System in reservoirs with a variety of characteristics. Debt or equity financing may not be available or sufficient to meet our requirements. For example, a decline in the trading price of our common stock from the price at which it is sold in this offering could limit our ability to raise equity financing in the future. Our inability to access sufficient amounts of capital on acceptable terms, or at all, for our operations could materially harm our business, financial condition and results of operations.

 

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technology.

 

We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and licensing arrangements. To the extent that we raise additional capital through the sale or issuance of equity, warrants or other convertible securities, ownership interests of our stockholders will be diluted, and the terms of those securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. If we raise capital through debt financing, such debt financing may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures, declaring dividends or purchasing our common stock. If we raise additional funds through strategic partnerships and licensing agreements with third parties, we may have to relinquish valuable rights to our technology or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our commercialization efforts.

 

Our quarterly operating results may fluctuate in the future.

 

Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations are described elsewhere in this prospectus. Accordingly, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.

 

Our industry is highly competitive, and if we do not compete successfully, our business, financial condition and results of operations will be harmed.

 

The enhanced oil recovery industry is large and intensely competitive. Our competition comes mainly from other methods of enhanced oil recovery, such as thermal injection (for example, steam), gas injection (for example, carbon dioxide) and chemical injection (for example, surfactants) into producing properties. There are also other companies developing or planning to commercialize microbial technology that is similar to our AERO System or other emerging enhanced oil recovery technologies, including TIORCO, Geo Fossil Fuels, LLC, Titan Oil Recovery, Inc. and Micro-Bac International, Inc. Some of our competitors have longer operating histories, greater recognition in the industry and substantially greater financial and other resources for developing new technologies as well as for recruiting and retaining qualified personnel than we do. Their greater financial resources may also make them better able to withstand downturns in the market, expand into new areas more aggressively or operate in developing markets without immediate financial returns. Strong competition and significant investments by competitors to develop new and better technology may make it difficult for us to maintain and expand our customer base, force us to reduce our prices or increase our costs to develop new technology.

Our success will depend on our ability to adapt to these competitive forces, to adapt to technological advances and to educate potential customers about the benefits of using our technology rather than our competitors’ technology. Our failure to respond successfully to these competitive challenges could harm our business, financial condition and results of operations.

 

Our industry is characterized by technological change, and if we fail to keep up with these changes, our business, financial condition and results of operations will be harmed.

 

The enhanced oil recovery industry is characterized by changes in technology, evolving methods of oil recovery and emerging competition. Our future business prospects largely depend on our ability to anticipate and respond to technological changes and to develop competitive products. If other enhanced oil recovery methods yield better results or are less expensive than our method, our business will suffer. We may not be able to respond successfully to new technological developments and challenges or identify and respond to new market opportunities, services or products offered by competitors. In addition, our efforts to respond to new methods of oil recovery and competition may require significant capital investments and resources, and we may not have the necessary resources to respond to these challenges. Failure to keep up with future technological changes could harm our business, financial condition and results of operations.

 

If we engage in any acquisitions, we will incur a variety of costs and could face numerous risks that would adversely affect our business and operations.

 

In addition to temporarily abandoned and low-producing mature oil fields that we intend to acquire, we may acquire businesses, assets, technologies or products to enhance our business in the future if appropriate opportunities become available. In connection with any future acquisitions, we could:

 

 

Acquisitions involve numerous risks, including problems integrating the purchased operations, technologies or products, unanticipated costs and other liabilities, diversion of management’s attention from our core business, adverse effects on existing business relationships with current and/or prospective partners, customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. We may not be able to successfully integrate any businesses, assets, products, technologies or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, if at all. The integration process could divert management time from focusing on operating our business, result in a decline in employee morale and cause retention issues to arise from changes in compensation, reporting relationships, future prospects or the direction of the business. Acquisitions may also require us to record goodwill, non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our operating results and financial condition. In addition, we may acquire companies that have insufficient internal financial controls, which could impair our ability to integrate the acquired company and adversely impact our financial reporting. If we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business, financial condition and results of operations may be materially harmed.

 

If we fail to manage future growth effectively, our business could be harmed.

 

If our AERO System becomes commercially accepted, we may experience rapid growth. Any such growth would likely place significant demands on our management and on our operational and financial infrastructure. To manage growth effectively, we would need to, among other things, improve and enhance our managerial, operational and financial controls, hire sufficient numbers of capable employees and upgrade our infrastructure. We would also need to manage an increasing number of relationships with our customers,

suppliers, business partners and other third parties. These activities would require significant expenditures and allocation of valuable management resources. If we fail to maintain the efficiency of our organization as we grow, our revenues and profitability may be harmed, and we might be unable to achieve our business objectives.

 

Many of our contracts will be governed by non-U.S. law, which may make them more difficult or expensive to enforce than contracts governed by United States law.

 

We expect that many of our customer contracts will be governed by non-U.S. law, which may create both legal and practical difficulties in case of a dispute or conflict. We plan to establish operations in regions where the ability to protect contractual and other legal rights may be limited compared to regions with better-established legal systems. In addition, having to pursue litigation in a non-U.S. country may be more difficult or expensive than pursuing litigation in the United States.

 

Our business operations in countries outside the United States are subject to a number of United States federal laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act as well as trade sanctions administered by the Office of Foreign Assets Control of the United States Department of Treasury and the United States Department of Commerce, which could adversely affect our operations if violated.

 

We must comply with all applicable export control laws and regulations of the United States and other countries. We cannot provide services to certain countries subject to United States trade sanctions administered by the Office of Foreign Asset Control of the United States Department of the Treasury or the United States Department of Commerce unless we first obtain the necessary authorizations. In addition, we are subject to the Foreign Corrupt Practices Act, which generally prohibits bribes or unreasonable gifts to non-U.S. governments or officials. Violations of these laws or regulations could result in significant additional sanctions including fines, more onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of our international business. In certain countries, we may engage third party agents or intermediaries to act on our behalf in dealings with government officials, such as customs agents, and if these third party agents or intermediaries violate applicable laws, their actions may result in penalties or sanctions being assessed against us.

 

Our international operations are subject to additional or different risks than our United States operations.

 

We intend to expand our operations into a number of countries outside the United States. There are many risks inherent in conducting business internationally that are in addition to or different than those affecting our United States operations, including:

 

 

 

Operating internationally exposes our business to increased regulatory and political risks in some non-U.S. jurisdictions where we operate. In addition to different laws and regulations, changes in governments or changes in governmental policies in these jurisdictions may alter current interpretation of laws and regulations affecting our business. We also face increased risk of incidents such as war or other international conflict and nationalization.

 

Many of the countries in which we plan to operate have legal systems that are less developed and less predictable than legal systems in the United States. It may be difficult for us to obtain effective legal redress in the courts of some jurisdictions, whether in respect of a breach of law or regulation, or in an ownership dispute because of: (i) a high degree of discretion on the part of governmental authorities, which results in less predictability; (ii) a lack of judicial or administrative guidance on interpreting applicable rules and regulations; (iii) inconsistencies or conflicts between or within various laws, regulations, decrees, orders and resolutions; (iv) the relative inexperience of the judiciary and courts in such matters or (v) a predisposition in favor of local claimants against United States companies. In certain jurisdictions, the commitment of local business people, government officials and agencies and the judicial system to abide by legal requirements and negotiated agreements may be unreliable. In particular, agreements may be susceptible to revision or cancellation and legal redress may be uncertain or time-consuming. Actions of governmental authorities or officers may adversely affect joint ventures, licenses, license applications or other legal arrangements, and such arrangements in these jurisdictions may not be effective or enforced.

 

The authorities in the countries where we operate, or plan to operate, may introduce additional regulations for the oil industry with respect to, but not limited to, various laws governing prospecting, development, production, taxes, price controls, export controls, currency remittance, expropriation of property, foreign investment, maintenance of claims, environmental legislation, land use, land claims of local people, water use, labor standards, occupational health network access and other matters. New rules and regulations may be enacted or existing rules and regulations may be applied or interpreted in a manner which could limit our ability to provide our technology. Amendments to current laws and regulations governing operations and activities in the oil and gas industry could harm our operations and financial results.

 

Compliance with and changes in tax laws or adverse positions taken by taxing authorities could be costly and could affect our operating results. Compliance related tax issues could also limit our ability to do business in certain countries. Changes in tax laws or tax rates, the resolution of tax assessments or audits by various taxing authorities, disagreements with taxing authorities over our tax positions and the ability to fully utilize our tax loss carry-forwards and tax credits could have a significant financial impact on our future operations and the way we conduct, or if we conduct, business in the affected countries.

 

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

 

As of March 31, 2012, we had net operating loss carryforwards, or NOLs, of approximately $22.5 million. In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to

offset future taxable income. We believe that our issuance of series B preferred stock on October 15, 2009 resulted in a Section 382 ownership change limitation. We estimate that approximately $5.4 million of our NOLs will expire unused due to Section 382 ownership change limitations. In addition, if we undergo an ownership change in connection with or after this public offering, our ability to utilize NOLs could be limited further by Section 382. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations.

 

We have identified a material weakness in our internal control over financial reporting related to the recognition of certain complex equity transactions. If we fail to remediate this material weakness or otherwise fail to achieve and maintain effective internal control over financial reporting, we could face difficulties in preparing timely and accurate financial statements, which could cause us to fail to file our periodic reports timely, result in inaccurate financial reporting or restatements of our financial statements, subject our stock to delisting and materially harm our business reputation and stock price.

 

In connection with our preparation of the consolidated financial statements for the year ended December 31, 2011, a material error in the audited consolidated financial statements as of December 31, 2010 and the years ended December 31, 2009 and 2010 and the related interim periods in 2009, 2010 and 2011 was identified. We have corrected this error, which resulted in a reclassification of our preferred stock between temporary equity and stockholders’ equity within the consolidated balance sheet as of December 31, 2010 in the aggregate amount of $29,137,000, and restated our reported results of operations for the years ended December 31, 2009 and 2010 by increasing our net loss by $2,547,000 for the year ended December 31, 2009 and reducing our net loss by $920,000 for the year ended December 31, 2010. We have also restated the results of operations for the three months ended March 31, 2010 and 2011. The restatements of our results of operations resulted from the recognition of the right of the holders of preferred stock to convert the preferred stock to common stock as an embedded derivative which requires recognition at fair value.

 

Management believes that we did not have the appropriate resources or personnel to provide a full review of complex transactions to allow us in the normal course of business to prevent or identify this misstatement on a timely basis and that constituted a material weakness in our internal control over financial reporting under the standards established by the United States Public Company Accounting Oversight Board, or the “PCAOB Standards.” Under the PCAOB Standards, a material weakness is defined as a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. In 2012, we have taken steps to improve our internal controls over financial reporting by implementing procedures to review complex equity or similar transactions and complex technical accounting policies periodically and have added an additional accountant with public company reporting experience. As of December 31, 2011, the cumulative effect of the complex equity transactions affecting net loss was not material to our consolidated financial position. Upon completion of this offering, our preferred stock will be converted into shares of our common stock. As a result, the provisions giving rise to this restatement will no longer exist, and the associated accounting treatment will no longer be required in future consolidated financial statements.

 

Upon the completion of this offering, we will have had only limited experience with the internal control improvements we have made to date. We cannot assure you that the measures we have taken to date, or any future measures we may implement, will ensure that we maintain adequate control over our financial processes and reporting. In addition, it is possible that we or our independent registered public accounting firm may identify additional errors in our financial statements that may be considered material weaknesses in our internal control over financial reporting.

 

As of each year end beginning with the year ending December 31, 2013, our management will be required to evaluate our internal control over financial reporting and to provide in our Form 10-K its assessment of our internal controls to our shareholders. However, since we are an emerging growth company as defined in the recently adopted Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our registered independent public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of

the year following our first annual report required to be filed with the SEC, or the date we are no longer an emerging growth company as defined in the JOBS Act. To the extent we find additional material weaknesses or other deficiencies in our internal controls, we may determine that we have ineffective internal controls, which may delay the conclusion of an annual audit or a review of our quarterly financial results.

 

As a public company, we will be required to file annual and quarterly periodic reports containing our financial statements with the Securities and Exchange Commission, or the SEC, within prescribed time periods. As part of The Nasdaq Global Market listing requirements, we are also required to provide our periodic reports, or make them available, to our shareholders within prescribed time periods. We may not be able to produce reliable financial statements or to file these financial statements as part of a periodic report in a timely manner with the SEC and to comply with The Nasdaq Global Market listing requirements. If these events occur, our common stock listing on The Nasdaq Global Market could be suspended or terminated. In addition, we could make errors in our financial statements that could require us to restate our financial statements in the future. If we are required to restate our financial statements in the future, any specific adjustment may be adverse and may cause our operating results and financial condition, as restated, on an overall basis to be materially and adversely impacted. As a result, we or members of our management could be the subject of adverse publicity, investigations and sanctions by such regulatory authorities as the SEC and be subject to shareholder lawsuits. Any of the above consequences could cause our stock price to decline materially and could impose significant unanticipated costs on us.

 

We are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an emerging growth company, as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, only having to provide two years of audited financial statements in addition to any required interim financial statements and correspondingly reduced disclosure in management’s discussion and analysis of financial condition and results of operations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the issuance, in any three-year period, by our company of more than $1.0 billion in non-convertible debt securities held by non-affiliates; and (iv) the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We may choose to take advantage of some but not all of these reduced reporting burdens. We have not taken advantage of any of these reduced reporting burdens in this prospectus, although we may choose to do so in future filings and if we do, the information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not adopt the new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of our election, our financial statements may not be comparable to the financial statements of other public companies. We may take advantage of these reporting exemptions until we are no longer an emerging growth company.

 

Our loan agreement places financial restrictions and operating restrictions on our business, which may limit our flexibility to respond to opportunities and may harm our business, financial condition and results of operations.

 

The operating and financial restrictions and covenants in our loan agreement restrict any future financing agreements and could restrict our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, our loan agreement restricts our ability to:

 

 

 

 

 

 

These limitations are subject to a number of important qualifications and exceptions. Our compliance with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures, finance acquisitions or withstand a future downturn in our business.

 

Our ability to comply with the covenants and restrictions contained in our loan agreement may be affected by events beyond our control. If we violate any of the restrictions or covenants in our loan agreement, the indebtedness under the loan agreement may become immediately due and payable. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Even if we could obtain alternative financing, that financing may not be on terms that are favorable or acceptable to us. In addition, our obligations under our loan agreement are secured by substantially all of our assets, except for our intellectual property. If we are unable to repay amounts borrowed, the holders of the debt could initiate a bankruptcy proceeding or foreclose on the collateral.

 

Our estimated proved reserves are based on many assumptions that may turn out to be inaccurate. The actual quantities and present value of our proved reserves may prove to be materially lower than we have estimated.

 

The process of estimating oil reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to current and future economic conditions and commodity prices. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in this prospectus. See “Our Company — Oil Reserves” and Note P “Supplemental Information for Oil and Gas Producing Activities” to our consolidated financial statements included elsewhere in this prospectus for information about our estimated oil reserves as of December 31, 2011.

 

In order to prepare our estimates, we must project production rates and the timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil prices, operating expenses, capital expenditures, taxes and availability of funds. Although the reserve information contained herein is reviewed by independent reserve engineers, estimates of oil and natural gas reserves are inherently imprecise. Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same available data.

 

Actual future production, oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil reserves will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of reserves shown in this prospectus. In addition, we may adjust estimates of proved reserves to reflect production history, prevailing oil prices and other factors, many of which are beyond our control.

Risks Related to Our Intellectual Property

 

We may not be able to protect our proprietary information or technology adequately.

 

Our success depends on our proprietary information and technology. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us with any meaningful protection or any competitive advantage. Existing or future patents may be challenged, including with respect to the development and ownership thereof, or narrowed, invalidated or circumvented, which could limit our ability to stop competitors from developing and marketing similar technology or limit the length of terms of patent protection we may have for our technology. In addition, any such challenge could be costly and become a significant diversion of our management’s time and resources. Further, other companies may design around technology we have patented, licensed or developed and, therefore, diminish any competitive advantage we may have from our technology. Also, changes in patent laws or their interpretation in the United States and other countries could diminish the value of our intellectual property or narrow the scope of our patent protection.

 

These concerns apply equally to patents we have licensed or may in the future license, which may likewise be challenged, invalidated or circumvented. In addition, we generally do not control the patent prosecution and maintenance of subject matter that we license from others. Generally, the licensors are primarily or wholly responsible for the patent prosecution and maintenance activities pertaining to the patent applications and patents we license, while we may only be afforded opportunities to comment on such activities. Accordingly, we are unable to exercise the same degree of control over licensed intellectual property as we exercise over our own intellectual property, and we face the risk that our licensors will not prosecute or maintain it as effectively as we would like.

 

Third parties may infringe or misappropriate our patents or other intellectual property rights, which could adversely affect our business, financial condition and results of operations. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. In order to protect or enforce our intellectual property rights, we may initiate litigation against third parties, such as infringement suits or interference proceedings. Such litigation may be costly and may not be successful. Litigation may be necessary to:

 

 

The steps we have taken to deter misappropriation of our proprietary information and technology may be insufficient to protect us, and we may be unable to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive in the future from our proprietary rights. In addition, if we operate in foreign jurisdictions in the future, we may not be able to protect our intellectual property in the foreign jurisdictions in which we operate. The legal systems of certain countries do not favor the aggressive enforcement of intellectual property and the laws of certain foreign countries may not protect our rights to the same extent as the laws of the United States. Any actions taken in those countries may have results that are different than if such actions were taken under the laws of the United States. Patent litigation and other challenges to our patents are costly and unpredictable and represent a significant diversion of our management’s time and resources. Our intellectual property may also fall into the public domain. If we are unable to protect our proprietary rights, we may be at a disadvantage to others who did not incur the substantial time and expense we have incurred to create our technology.

Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.

 

We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect. The measures we have taken to protect our trade secrets and proprietary information may not be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that know-how and inventions conceived by the individual in the course of rendering services to us are our exclusive property. Nevertheless, these agreements may be breached or may not be enforceable, our proprietary information may be disclosed, and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, and we may not have adequate remedies for any resulting losses. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

Our technology may infringe upon the intellectual property rights of others. Intellectual property infringement claims would be time consuming and expensive to defend and may result in limitations on our ability to use the intellectual property subject to these claims.

 

Claims asserting that we have violated or infringed upon third party intellectual property rights may be brought against us in the future. We may be unaware of intellectual property rights of others that may cover some of our technology or third parties may have or eventually be issued patents on which our current and future technology may infringe. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Any claims and any resulting litigation could subject us to significant liability for damages, cause us to incur significant expenses and divert management time. A court could enter orders temporarily, preliminarily or permanently enjoining us from making, using, selling or importing any current and future technology or could enter an order mandating that we undertake certain remedial activities. An adverse determination in any litigation of this type could require us to design around a third party’s patent or license alternative technology from another third party, which may not be available on acceptable terms or at all. If we could not do these things on a timely and cost-effective basis, our revenues may decrease substantially and we could be exposed to significant liability. In addition, litigation is time-consuming and expensive to defend and could result in limitations on our ability to use the intellectual property subject to these claims.

 

Environmental and Regulatory Risks

 

We are subject to complex laws and regulations, including environmental regulations, which can adversely affect the cost, manner or feasibility of our business.

 

Our operations are subject to federal, state and local laws and regulations, including environmental and health and safety laws and regulations governing, among other things, the generation, storage, handling, emission, use, transportation and discharge of hazardous substances and other materials into the environment, the integrity of groundwater aquifers and the health and safety of our employees. These laws and regulations can adversely affect the cost, manner or feasibility of doing business. We incur, and expect to continue to incur, capital and operating costs to comply with environmental laws and regulations. Many laws and regulations require permits for the operation of various facilities, and these permits are subject to revocation, modification and renewal. Governmental authorities have the power to enforce compliance with their regulations, and violations could subject us to fines, injunctions or both.

 

We could be held liable for contamination at or from our current or former properties and any sites we acquire in the future, as well as for contamination at or from third party sites where we have operated or have disposed of waste, regardless of our fault. We could also be subject to claims from landowners alleging

property damage as a result of our operations. Further, we could be held liable for any and all consequences arising out of human exposure to hazardous substances or other environmental damage. In addition, if we are named in an environmental lawsuit alleging contamination at any such site, even if we are not at fault, any such lawsuit could harm our reputation and be costly and become a significant diversion of our management’s time and resources.

 

Environmental laws are complex, change frequently and have tended to become more stringent over time. Changes in, or additions to, environmental and health and safety laws and regulations could lead to increased operating and compliance costs. Therefore, our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances or other materials may materially harm our business, financial condition and results of operations.

 

We rely on oil producers to obtain the appropriate permits to operate their wells and waterflood systems, and if they fail to obtain proper permits they could be subject to fines or penalties, and that could harm our business.

 

In the typical application of our AERO System to a reservoir, the well operator will be responsible for having all applicable permits for operating its wells and waterflood systems. If the well operator fails to have such permits, it could be subject to fines or penalties, which could, in turn, harm our business.

 

Climate change legislation and regulatory initiatives could result in increased operating costs and decreased demand for our products and services.

 

Changes in environmental requirements may negatively impact demand for our services. For example, oil exploration and production may decline as a result of environmental requirements (including land use policies responsive to environmental concerns). State, national, and international governments and agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil industry, existing or future laws, regulations, treaties or international agreements related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws, regulations, treaties, or international agreements reduce the worldwide demand for oil. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture and use of greenhouse gases such as carbon dioxide that could adversely affect our business, financial condition and results of operations.

 

The adoption of any future federal or state laws or implementing regulations imposing restrictions on hydraulic fracturing, if extended to oil recovery operations, could materially harm our business, financial condition and results of operations.

 

The Environmental Protection Agency, or EPA, has recently focused on concerns about the risk of water contamination and public health problems from drilling and hydraulic fracturing activities. The EPA is conducting a comprehensive research study on the potential adverse effects that hydraulic fracturing may have on water quality and public health. While our technology is unrelated to hydraulic fracturing, it is possible that any federal, state and local laws and regulations that might be imposed on fracturing activities could also apply to oil recovery operations. We cannot predict the outcome of the EPA’s study or whether any new legislation or regulations would impact our business. Any such future laws and regulations could result in increased compliance costs or additional operating restrictions, which, in turn, could materially harm our financial position, results of operations and cash flows.

 

Risks Related to This Offering

 

Some of our stockholders could together exert control over us after completion of this offering.

 

As of March 31, 2012, our six largest stockholders, consisting of GTI Glori Oil Fund I L.P. and its related funds, or GTI, KPCB Holdings, Inc., or KPCB, Oxford Bioscience Partners V L.P. and its related funds, or Oxford, Rawoz Technology Company Ltd., or Rawoz, Malaysian Life Sciences Capital Fund Ltd., or MLSCF, and ETV

owned in the aggregate shares representing approximately 89.5% of our outstanding voting power. After the completion of this offering, these stockholders will own in the aggregate shares representing approximately     % of our outstanding voting power, or approximately     % if the underwriters exercise their over-allotment option in full. After completion of this offering, these stockholders, if they act together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This concentration of ownership could therefore depress our stock price.

 

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely be adversely affected. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of, or recommendations regarding, our stock, cease providing research coverage on our stock or provide more favorable relative recommendations about our competitors, the trading price of our stock could be adversely affected.

 

We have broad discretion in the use of net proceeds from this offering and may not use them effectively.

 

We will have broad discretion in the application of the net proceeds and may apply them in ways with which you and other investors in this offering may not agree. Our failure to apply these net proceeds effectively could affect our ability to yield a significant return, if any, on any investment of these net proceeds.

 

The market price for our common stock may be highly volatile and you may be unable to sell all of your shares at or above the offering price.

 

The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market after this offering. The market price of shares of our common stock could be subject to wide fluctuations in response to the risks described in this section and others beyond our control, including:

 

 

 

Financial markets from time to time experience significant price and volume fluctuations that affect the market prices of equity securities of companies and that may, in many cases, be unrelated to the operating performance, underlying asset values or prospects of such companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively impact the trading price of our common stock. If the trading price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation, and we may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, possibly causing serious harm to our business.

 

No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering.

 

Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you desire or at the price you desire. The inability to sell your shares in a declining market because of such illiquidity or at a price you desire may substantially increase your risk of loss. Furthermore, an inactive trading market may impair our ability to raise capital to continue to fund our operations by selling shares and may also impair our ability to make acquisitions of other companies by using our shares as consideration.

 

Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

If our existing stockholders sell or indicate an intention to sell substantial amounts of our common stock in the public market, the trading price of our common stock could decline substantially. After this offering, approximately      million shares of our common stock will be outstanding if the underwriters do not exercise their over-allotment option. Of these shares,      million shares of our common stock sold in this offering will be freely tradable, without restriction, in the public market and the remaining outstanding shares are subject to 180-day contractual lock-up agreements with our underwriters. Credit Suisse Securities (USA) LLC may, in its discretion, permit our directors, officers, employees and current stockholders who are subject to these contractual lock-ups to sell shares prior to the expiration of the lock-up agreements. These lock-ups

are subject to extension for up to an additional 34 days under some circumstances. See “Shares Eligible for Future Sale — Lock-Up Agreements”.

 

After the lock-up agreements pertaining to this offering expire, up to an additional approximately      million shares will be eligible for sale in the public market, approximately      million of which are held by directors and executive officers and our other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. In addition, the approximately      million shares underlying options that are either subject to the terms of our equity compensation plans or reserved for future issuance under our equity compensation plans and warrants will become eligible for sale in the public market to the extent permitted by the provisions of various option agreements, warrants and Rules 144 and 701 under the Securities Act. For additional information, see “Shares Eligible for Future Sale”.

 

You will experience immediate and substantial dilution in your investment.

 

The offering price of the common stock is substantially higher than the net tangible book value per share of our common stock, which on a pro forma basis was $      per share of common stock as of March 31, 2012. See “Dilution”. As a result, you will experience immediate and substantial dilution in net tangible book value when you buy common stock in this offering. This means that you will pay a higher price per share than the amount of our total tangible assets, less our total liabilities, divided by the number of shares of common stock outstanding. Holders of our common stock will experience further dilution if the underwriters’ over-allotment option to purchase additional shares of common stock from us pursuant to this offering is exercised, if options or other rights to purchase our common stock that are outstanding or that we may issue in the future are exercised or converted, or if we issue additional shares of our common stock at prices lower than our net tangible book value at such time.

 

Provisions in our organizational documents and in the Delaware General Corporation Law may discourage or prevent takeover attempts that could be beneficial to our stockholders.

 

Certain provisions of our post-offering organizational documents and Delaware law could discourage potential acquisition proposals, delay or prevent a change in control of us or limit the price that investors may be willing to pay in the future for shares of our common stock. For example, our post-offering certificate of incorporation and post-offering bylaws will:

 

 

These and other provisions in our organizational documents could allow our board of directors to affect your rights as a stockholder in a number of ways, including making it more difficult for stockholders to replace members of the board of directors. Because our board of directors is responsible for approving the appointment of members of our management team, these provisions could in turn affect any attempt to replace the current management team. These provisions could also limit the price that investors would be willing to pay in the future for shares of our common stock.

Section 203 of the Delaware General Corporation Law also imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock. See “Description of Capital Stock — Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws”.

 

We do not plan to pay dividends on our common stock and, consequently, the only opportunity to achieve a return on an investment in our common stock is if the price of our common stock appreciates.

 

We do not plan to pay dividends on our common stock for the foreseeable future. In addition, our loan agreement limits our ability to pay dividends on our common stock. The only opportunity to achieve a positive return on an investment in our common stock for the foreseeable future may be if the market price of our common stock appreciates.

 

This prospectus, including the sections entitled “Prospectus Summary”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and “Our Company”, contains forward-looking statements. We may, in some cases, use words such as “project”, “believe”, “anticipate”, “plan”, “expect”, “estimate”, “intend”, “should”, “would”, “could”, “potentially” or “may” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this prospectus include statements about:

 

 

 

 

 

 

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this prospectus under the caption “Risk Factors” and elsewhere. You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on that information and other similar sources and on our knowledge of the markets for our services. That information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe that information from third-party sources used in this prospectus is generally reliable, we have not independently verified the accuracy or completeness of this information. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

Statements made in this prospectus regarding our belief that “as much as 50% of the oil recovered in the United States has come from reservoirs suitable for our AERO System” are based on data obtained by Nehring Associates, Inc. from their proprietary database on September 28, 2011, or the Nehring Data, and our own limited field data from our AERO System projects. For an oil reservoir to be suitable for our AERO System, the reservoir must be waterflooded, must be composed of sandstone, must have a permeability range greater than 25 milli-darcies and must have a suitable water source. The Nehring Data indicates that, as of 2008, 68.9% of the oil recovered in the United States has come from sandstone reservoirs and 84.9% of that oil has come from sandstone reservoirs having a permeability range greater than 25 milli-darcies. In addition, injection water analysis of our first ten projects for AERO System compatibility resulted in only one project that did not support our AERO System without incurring additional material costs to obtain a suitable water source. Based on the Nehring Data’s sandstone and permeability analysis and our limited field data on water suitability, we calculate that as much as 50% (i.e., 68.9% multiplied by 84.9% multiplied by 90%) of the oil recovered in the United States has been recovered from oil reservoirs suitable for our AERO System.

 

We estimate that the net proceeds we will receive from this offering will be approximately $      million (or approximately $      million if the underwriters exercise their option to purchase additional shares of common stock in full), based on the assumed initial public offering price of $      per share, which is the midpoint of the range included on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease the net proceeds we receive from this offering by approximately $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

 

We have no current specific plans for the use of the net proceeds from this offering. We intend to use a majority of the net proceeds from this offering for the acquisition, restoration and operation of additional temporarily abandoned and low-producing mature oil fields, including the implementation of our AERO System in these fields. We do not, however, have agreements or commitments for any specific property acquisitions at this time. We may also use the net proceeds from this offering for working capital and other general corporate purposes, which may include capital expenditures associated with our AERO System and expenditures relating to further research and development efforts. We will have broad discretion in the way we use the net proceeds.

 

Pending use of the net proceeds from this offering described above, we intend to invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government.

 

The primary purposes of this offering are to raise additional capital, create a public market for our common stock, allow us quicker access to the public markets should we need more capital in the future, increase our profile with existing and possible future customers, vendors and strategic partners and make our stock more attractive to our employees and potential employees for compensation purposes.

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to finance the growth and development of our business. Accordingly, we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with our loan agreement, which restricts our ability to pay dividends, and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2012:

 

 

 

You should read the following table in conjunction with the sections titled “Selected Consolidated Financial Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements included elsewhere in this prospectus.

 

 

 

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

This table excludes the following shares:

 

 

 

 

 

In connection with this offering, all of our outstanding preferred stock will be converted into common stock. The antidilution provisions that apply to our series C preferred stock adjust the conversion ratio in the event the initial public offering price is less than $[     ] per share. In this prospectus, we have assumed the conversion of our series C preferred stock into shares of our common stock on a one-to-one basis upon the closing of this offering.

 

If the initial public offering price is equal to or greater than $[     ] per share, each share of series C preferred stock would be converted into one share of common stock, subject to additional shares of our common stock being issuable for each day after March 31, 2012 for the daily accrual of unpaid dividends on our series C preferred stock and the quarterly compounding of such dividends, which dividends accrue at the rate of 8% through December 30, 2012. If the initial public offering price is less than $[     ] per share, the conversion ratio of our series C preferred stock will adjust so that a greater number of shares of common stock are issued upon conversion. If the initial public offering price is less than $[     ] per share, each share of series C preferred stock will convert into a number of shares of common stock equal to (x) the per share purchase price for our series C preferred stock at issuance, divided by (y) 0.6 multiplied by our initial public offering price per share. For example, if the initial public offering price is $[     ] ([     ]% below $[     ]), an additional [          ] shares of our common stock will be issued upon conversion of our series C preferred stock.

 

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma net tangible book value per share of our common stock after this offering.

 

Our net tangible book value as of March 31, 2012 was $20.5 million, or $6.68 per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding. On a pro forma basis, after giving effect to (i) the automatic conversion of all outstanding shares of our preferred stock and accrued and unpaid dividends on our preferred stock into an aggregate of 52,616,197 shares of our common stock (assuming the conversion of our series C preferred stock into shares of our common stock on a one-to-one basis upon the closing of this offering, which conversion ratio is subject to adjustment based on the initial public offering price of our common stock in this offering), subject to additional shares of our common stock being issuable (x) for each day after March 31, 2012 for the daily accrual of unpaid dividends on our series A and series B preferred stock and the quarterly compounding of such dividends, which dividends accrue at the rate of 4% for our series A preferred stock and 8% for our series B preferred stock and (y) for each day after March 31, 2012 for the daily accrual of unpaid dividends on our series C preferred stock and the quarterly compounding of such dividends, which dividends accrue at the rate of 8% through December 30, 2012; and (ii) our issuance and sale of           shares of common stock in this offering, less the estimated underwriting discounts and commissions and estimated offering expenses payable by us, based upon an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, our pro forma net tangible book value as of March 31, 2012 would have been $      million, or $      per share of common stock. This represents an immediate increase in net tangible book value per share of $      to existing stockholders and an immediate dilution of $      per share to new investors. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the initial public offering price per share paid by a new investor. The following table illustrates the per share dilution:

 

 

If the underwriters exercise their option to purchase additional shares of our common stock from us in full in this offering, the pro forma net tangible book value per share after the offering would be $      per share, the increase in pro forma net tangible book value per share to existing stockholders would be $      per share and the dilution to new investors purchasing shares in this offering would be $      per share.

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease our pro forma net tangible book value as of March 31, 2012 by approximately $      million, the pro forma net tangible book value per share after this offering by $      per share and the dilution in pro forma net tangible book value per share to new investors in this offering by $      per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

If additional shares of our common stock are issued in connection with the conversion of our series C preferred stock, see “Capitalization”, there will be increased dilution per share to new investors.

 

The following table summarizes, as of March 31, 2012, on the pro forma basis described above, the number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of our common stock in this offering assuming no additional shares of our common stock are issued in connection with the conversion of our series C preferred stock:

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease total consideration paid to us by investors participating in this offering by approximately $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

As of March 31, 2012, there were options and warrants outstanding to purchase a total of 5,602,495 shares of common stock at a weighted average exercise price of $0.53 per share. The above discussion and table assumes no exercise of options and warrants outstanding as of March 31, 2012 or of any later issued options or warrants. If all of these options and warrants were exercised, our existing stockholders, including the holders of these options and warrants, would own     % of the total number of shares of common stock outstanding upon the closing of this offering and our new investors would own     % of the total number of shares of our common stock upon the closing of this offering.

 

The following table sets forth our selected consolidated statements of operations, consolidated balance sheets and other data for the periods indicated. The selected consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011, and the consolidated balance sheets data as of December 31, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2007, 2008 and 2009 and the selected consolidated statements of operations data for the year ended December 31, 2008, which includes expense reclassifications for consistency with subsequent periods, have been derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated statements of operations data for the year ended December 31, 2007 has been derived from our unaudited consolidated financial statements that are not included in this prospectus. Our selected consolidated financial data as of March 31, 2011 and 2012 and for the three months ended March 31, 2011 and 2012 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements as of March 31, 2011 and 2012 and for the three months ended March 31, 2011 and 2012 have been prepared on the same basis as our annual consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary in the opinion of management for the fair presentation of this data in all material respects. The following table should be read in conjunction with “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this prospectus. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

 

 

 

 

You should read the following discussion together with our consolidated financial statements included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We work with oil producers to integrate our AERO System into existing production infrastructure to increase oil recovery. Our mission is to use biotechnology to efficiently recover large quantities of oil currently trapped in reservoirs using existing oil wells.

 

Conventional oil recovery technology is commonly understood to only extract a cumulative total of one-third of all discovered oil, leaving significant crude oil underground. We focus our proprietary AERO System on increasing the amount of oil that can be recovered by stimulating a waterflood reservoir’s naturally occurring microbes. Based on the results of our first commercial application of our AERO System, our technology extends the life and economic viability of mature oil fields.

 

Our Operations

 

Our AERO System is designed, tested and developed to be unique to a specific reservoir. Our AERO System is customized for our customers through the three step S3 process:

 

 

Because we deploy our AERO System only within reservoirs with existing waterflood production and utilize the existing infrastructure of that waterflood, the capital costs of implementation are minimized.

 

Our business plan is to provide services primarily under master service agreements with our customers, with services for specific projects being provided through separate contracts under a master service agreement. Fees for the Sample and Simulate phases are generally quoted as a single fixed amount for services, while fees for the Stimulate phase are usually quoted as a fixed fee per month based upon the scope of the project. Our customers often view the initial Stimulate phase services as a field validation of laboratory results and accordingly the contracted initial stimulation period may be six to twelve months. After the initial field validation is complete, we expect to enter into a longer term contract with our customer for a fee that is higher than the initial Stimulate field validation phase to continue the use of our AERO System to the end of life of the field. Post-validation fees for the Stimulate phase are targeted to reflect the value we create for our customers based on our internal estimates of incremental production from our AERO System.

 

In April 2011, we initiated oil production from our Etzold field in Kansas, where we revitalized an oil field that had not been in production for several years. This project provides our scientists and engineers with a working oil field to demonstrate our AERO System technology and accelerate customer adoption. We plan to strategically acquire and develop additional temporarily abandoned and low-producing mature oil fields in geographies that we expect will improve our portfolio of demonstration projects and accelerate customer adoption of our technology. We record revenue from the sale of oil when delivery to the buyer has occurred. See “Our Company — Oil Reserves — Oil and Gas production, production prices and production costs.”

 

Based upon our preliminary screening of reservoirs best suited for our technology, we are initially focusing our marketing efforts in Texas, Kansas, Oklahoma, Louisiana and California, and in the Canadian

province of Alberta. We have opened sales and field offices in Calgary, Alberta, Bakersfield, California, Liberal, Kansas and Hazlett, Saskatchewan, and have contracts for our services for oil fields in Kansas, Oklahoma, California and Alberta.

 

Operating expenses consist primarily of the cost of materials used in our nutrient formulations, including blending, transportation to the injection site, injection and warehousing. Cost of revenues also includes field personnel engaged in periodic visits to injection sites for repair and maintenance, well monitoring and sampling as indicated by production results.

 

Research and development expenses consist primarily of the compensation paid to scientists, engineers and research assistants working in our Houston, Texas laboratory, consulting fees for research assistance, third party laboratory testing and supplies and materials consumed in the research process.

 

Selling, general and administrative expenses consist primarily of the compensation paid to administrative officers and employees and sales personnel, professional fees, travel, and direct office support expenses.

 

Depreciation, depletion and amortization consists primarily of depreciation on our leasehold improvements, our laboratory equipment in Houston, the skid-mounted injection equipment used in our AERO System applications and depletion of intangible drilling costs and surface equipment at our Etzold field.

 

We have relatively few customers, we have not generated substantial revenues from operations, and our costs are largely fixed. As we continue to establish ourselves as a low cost technology service provider, we anticipate generating additional revenues with relatively modest increases in fixed costs, except for the increased costs of being a public company.

 

Critical Accounting Policies

 

The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue, bad debts, long-lived assets, income taxes and stock-based compensation. These estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates, and the impact of such differences may be material to our consolidated financial statements.

 

Critical accounting policies are those policies that, in management’s view, are most important in the portrayal of our financial condition and results of operations. The footnotes to our consolidated financial statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Those critical accounting policies and estimates that require the most significant judgment are discussed below.

 

Revenue Recognition

 

Revenue is recognized when all services are concluded, and there is evidence that the customer has accepted the services, which generally coincides with invoicing. For contracts which have multiple deliverable arrangements, including those contracts lacking objective and reliable evidence regarding the fair value of the undelivered items, revenue recognition is deferred in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition: Multiple-element Arrangements.

In this regard, our contracts have historically fallen into three categories and each category receives distinct application of revenue recognition based upon management’s assessment of its contractual elements:

 

 

Oil and Gas Activities

 

Successful Efforts Method.  We use the successful efforts method of accounting for oil producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized.

 

Revenue Recognition.  We follow the “sales” method of accounting for crude oil revenue. Under this method, we recognize revenue on production as it is taken and delivered to its purchasers.

 

Depletion.  The estimates of crude oil reserves utilized in the calculation of depletion are estimated in accordance with guidelines established by the Society of Petroleum Engineers, the SEC and the Financial Accounting Standards Board, which require that reserve estimates be prepared under existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements. We emphasize that reserve estimates are inherently imprecise. Accordingly, the estimates are expected to change as more current information becomes available. Our policy is to amortize capitalized costs on the unit of production method, based upon these reserve estimates.

 

We assess our proved properties for possible impairment on an annual basis as a minimum, or as circumstances warrant, based on geological trend analysis, changes in proved reserves or relinquishment of acreage. When impairment occurs, the adjustment is recorded to accumulated depletion.

 

Asset Retirement Obligation.  In October 2010, we acquired the Etzold field in exchange for nominal consideration, our agreement to indemnify the seller for certain environmental matters and the assumption of liabilities relating to the leasehold interest, including the asset retirement obligation (plugging and abandonment) for the existing wells on the leasehold. We account for our asset retirement obligation, or ARO, in accordance with ASC 410, Asset Retirement and Environmental Obligations. The fair value of a liability for an ARO is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and the associated retirement costs are capitalized as part of the carrying amount of the long-lived asset. We determine our ARO by calculating the present value of the estimated cash flows related to the liability based upon estimates derived from management and external consultants familiar with the requirements of the retirement and our ARO is reflected in the accompanying consolidated balance sheets as a noncurrent liability. We have not funded nor dedicated any assets to this retirement obligation. The liability is periodically adjusted to reflect (1) new liabilities incurred; (2) liabilities settled during the period; (3) accretion expense; and (4) revisions to estimated future plugging and abandonment costs.

 

Property and Equipment

 

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and depreciated over the remaining estimated useful lives of the associated assets, and repairs and maintenance costs are charged to expense as incurred. When property and equipment are retired or otherwise

disposed, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the results of operations for the respective period.

 

Depreciation and amortization for long lived assets are recognized over the estimated useful lives of the respective assets by the straight line method.

 

Stock-Based Compensation

 

Prior to the adoption of our 2012 Omnibus Incentive Plan, we had one stock-based compensation plan, the Glori Oil Limited Amended and Restated 2006 Stock Option and Grant Plan, or the 2006 Plan. All equity instruments granted under the 2006 Plan are settled in stock. Since the adoption of our 2006 Plan, we have recorded all share based payment expenses in accordance with the provisions of ASC 718, Compensation- Stock Compensation. The following table summarizes the stock options granted in 2009, 2010, 2011 and 2012 with their exercise prices and the fair value of the underlying common stock per share. No stock options have been granted after February 10, 2012.

 

 

In the absence of a public market for our common stock, prior to 2009, the fair value of our common stock underlying stock options has historically been determined by our board of directors based upon pre-money valuations of equity offerings. In connection with making these determinations in 2009 and 2010, we engaged a third-party valuation advisor to provide a valuation of our stock as of October 15, 2009, coincident with the conclusion of our series B preferred stock transaction. Our board of directors considered the October 15, 2009 valuation in making its fair value determination as of October 15, 2009. Our board of directors continued to utilize the October 15, 2009 common stock valuation to establish the exercise price for the stock options granted throughout 2010, as it was the most recent valuation of our common stock, and our board of directors determined that no material developments had occurred in our business to change that valuation materially.

 

In 2011, our board of directors determined that there have been material developments in our business and, accordingly, engaged the same third-party valuation advisor that provided the 2009 valuation to provide a valuation of our common stock as of October 31, 2011. Our board of directors considered the October 31, 2011 valuation in making its fair value determination as of October 31, 2011. Our board of directors continued to utilize the October 31, 2011 common stock valuation to establish the exercise price for the stock options granted from December 26, 2011 through February 10, 2012, as it was the most recent valuation of our common stock, and our board of directors determined that no material developments had occurred in our business to change that valuation materially.

 

We recognize expense for stock-based compensation using the calculated fair value of options on the grant date of the awards. We did not issue fractional shares nor pay cash in lieu of fractional shares and currently do not have any awards accounted for as a liability.

Our policy is to recognize compensation expense for service-based awards on a straight-line basis over the requisite service period for the entire award. Stock-based compensation expense is based on awards ultimately expected to vest.

 

The fair value of each option award was estimated on the grant date using a Black-Scholes option valuation model, which uses certain assumptions as of the date of grant:

 

 

We have computed the fair value of all options granted during the years ended December 2009, 2010 and 2011, using the following assumptions:

 

 

Taxes

 

We account for income taxes using the asset and liability method wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to net operating loss carry forwards, measured by enacted tax rates for years in which taxes are expected to be paid, recovered or settled. A valuation allowance is established to reduce deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

We follow ASC 740, Income Taxes (ASC 740), which creates a single model to address accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the consolidated financial statements. We do not have a tax position meeting the criteria of ASC 740.

 

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations. In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards, or NOLs, to offset future taxable income. We believe that our issuance of series B preferred stock on October 15, 2009 resulted in a Section 382 ownership change limitation. We estimate that approximately $5.4 million of our $22.5 million NOLs at March 31, 2012 will expire unused due to Section 382 ownership change limitations. In addition, if we undergo an ownership change in connection with or after this public offering, our ability to utilize NOLs could be limited further by Section 382. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations.

New Accounting Pronouncements

 

See our audited and unaudited consolidated financial statements included elsewhere in this prospectus for details regarding our implementation and assessment of new accounting standards. Our management has assessed other accounting standards not adopted and determined that, at this time, there will be no material impact to us from these other accounting standards.

 

New and Revised Financial Accounting Standards

 

Section 107 of the JOBS Act provides that an “emerging growth company” like us can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not adopt the new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of this election, our financial statements may not be comparable to the financial statements of other public companies. We may take advantage of these reporting exemptions until we are no longer an emerging growth company.

 

Results of Operations

 

The following table sets forth selected financial data for the periods indicated:

 

 

Three Months Ended March 31, 2012 and 2011

 

Revenue.  Revenue increased by $125,000, or 35.0%, to $482,000 for the three months ended March 31, 2012 from $357,000 for the three months ended March 31, 2011. The increase was primarily attributable to revenues from the sale of oil from our Etzold field of $119,000.

 

Operations.  Operations expenses increased by $419,000, or 128.1%, to $746,000 for the three months ended March 31, 2012 from $327,000 for the three months ended March 31, 2011. The increase in operations expenses was primarily attributable to new areas of operations: production operations in our Etzold field of $291,000, service operations in Canada and California of $47,000 and $27,000, respectively, and travel related to these new operations of $30,000.

 

Research and development.  Research and development expenses increased $5,000, or 1.5%, to $347,000 for the three months ended March 31, 2012 from $342,000 for the three months ended March 31, 2011. The

increase was primarily due to increased field trials of $27,000 and legal expenses related to intellectual property of $34,000, reduced by $45,000 for the termination of operations in Argentina in the first quarter of 2011.

 

Selling, general and administrative.  Selling, general and administrative expenses increased by $182,000, or 31.6%, to $758,000 for the three months ended March 31, 2012 from $576,000 for the three months ended March 31, 2011. The increase was primarily attributable to compensation related expenses of additional personnel of $139,000, an increase in legal expenses of $50,000 and an increase in promotional expenses of $36,000, offset by a decrease in recruiting expenses of $40,000.

 

Depreciation, depletion and amortization.  Depreciation, depletion and amortization increased by $40,000, or 32.0%, to $165,000 for the three months ended March 31, 2012 from $125,000 for the three months ended March 31, 2011. The increase was primarily attributable to depletion and accretion of the asset retirement obligation related to our Etzold field of $16,000 and deprecation on more operating assets in service.

 

Other income (expense) net.  Other income for the three months ended March 31, 2012 and 2011 consisted of interest income of $3,000 for both periods, and a $7,000 gain on the change in fair value of derivative liabilities for the three months ended March 31, 2012.

 

Years Ended December 31, 2011 and 2010

 

Revenue.  Revenue increased by $1.4 million to $1.6 million for the year ended December 31, 2011 from $131,000 for the year ended December 31, 2010. The increase in revenue was primarily attributable to revenue from the sale of oil of $280,000, the recognition of revenue from a pilot project commenced in 2010 of $670,000 and AERO System services provided to a new customer of $357,000.

 

Operations.  Operations expenses increased by $1.5 million, or 129.7%, to $2.7 million for the year ended December 31, 2011 from $1.2 million for the year ended December 31, 2010. The increase in operations expenses was primarily attributable to an increase in lease operating expenses for oil production of $418,000, an increase in operating expenses attributable to new AERO System projects in Canada and in California of $502,000 and increases in personnel, materials and travel expenses totaling $687,000 associated with higher service revenues.

 

Research and development.  Research and development expenses were essentially unchanged, generally remaining at $1.5 million for the years ended December 31, 2011 and 2010. Increases in compensation of $160,000 and field trials of $101,000 were offset by decreases from the discontinuance of operations in Argentina of $183,000, reduced fees to third parties of $33,000 and reduced recruiting expense of $15,000.

 

Selling, general and administrative.  Selling, general and administrative expenses increased by $1.2 million, or 70.4%, to $2.9 million for the year ended December 31, 2011 from $1.7 million for the year ended December 31, 2010. The increase was attributable to a full year of marketing efforts in Canada of $83,000, increased promotional efforts of $228,000, increased professional fees of $222,000, increased recruiting fees of $130,000, and increased compensation related expenses of $580,000.

 

Depreciation, depletion and amortization.  Depreciation, depletion and amortization increased by $134,000, or 30.3%, to $576,000 for the year ended December 31, 2011 from $442,000 for the year ended December 31, 2010. The increase was attributable to an increase in depreciation, depletion and amortization expense from our oil production of $32,000 and having more assets deployed in the delivery of stimulation services.

 

Other income (expense), as restated.  Other income increased by $603,000, or 65%, to $1.5 million for the year ended December 31, 2011 from $921,000 for the year ended December 31, 2010 as a result of the gain in fair value of the derivative liabilities of $1.6 million in 2011 compared to $920,000 in 2010.

 

Years Ended December 31, 2010 and 2009

 

Revenue.  Revenue decreased by $727,000, or 84.7%, to $131,000 for the year ended December 31, 2010 from $858,000 for the year ended December 31, 2009. The decrease in revenue was primarily attributable to the conclusion of a laboratory research project and the conclusion of a field project performed in Wyoming

which contributed $238,000 and $395,000, respectively, to revenues for the year ended December 31, 2009. Our pilot project that started in May 2010 did not start generating material revenue until 2011.

 

Operations.  Operations expenses decreased by $114,000, or 8.9%, to $1.2 million for the year ended December 31, 2010. The decrease was primarily the result of decreased material costs totaling $72,000 attributable to the substantial reduction in services provided to customers and decreased recruiting expenses of $19,000.

 

Research and development.  Research and development expenses increased by $525,000, or 51.4%, to $1.5 million for the year ended December 31, 2010 from $1.0 million for the year ended December 31, 2009, primarily due to the significant addition of research scientists to support our technical development in the amount of $288,000 and the related consumption of materials, supplies and supporting expenses used in the research process totalling $229,000.

 

Selling, general and administrative.  Selling, general and administrative expenses increased by $852,000, or 103.0%, to $1.7 million for the year ended December 31, 2010 from $827,000 for the year ended December 31, 2009. The increase was primarily due to additional salary expense of $130,000, increased bonus compensation expense of $41,000, increased travel expense of $151,000, expenses related to the hiring of two full time sales personnel during the year of $296,000 and increased marketing expenses, including opening a sales office in Alberta for $43,000.

 

Depreciation, depletion and amortization.  Depreciation, depletion and amortization increased by $52,000, or 13.3%, to $442,000 for the year ended December 31, 2010 from $390,000 for the year ended December 31, 2009. The increase was primarily due to the addition of property and equipment including the purchase of the Etzold field in October 2010.

 

Other income (expense), as restated.  Other income (expense) increased $3.5 million to an income of $921,000 for the year ended December 31, 2010 from an expense of $2.6 million for the year ended December 31, 2009 as a result of the gain in fair value of the derivative liabilities of $920,000 for the year ended December 31, 2010 and the loss on the fair value of derivative liabilities of $2.5 million recognized in the year ended December 31, 2009.

 

Liquidity and Capital Resources

 

Our primary sources of liquidity and capital since our formation have been proceeds from equity issuances. To date, our primary use of capital has been to fund our research and development activities and our operations. Through March 31, 2012, we raised approximately $45.6 million of net proceeds through private offerings of our common and preferred stock. On December 30, 2011 and January 19, 2012, we issued and sold an aggregate of 7,296,607 shares of series C preferred stock for aggregate consideration of approximately $20 million. On June 11, 2012, we entered into the loan agreement with a lender that provides for a total lending commitment of $8 million. We have borrowed $4 million under the loan agreement.

 

At March 31, 2012, we had working capital of $17.3 million, including cash and cash equivalents of $18.5 million, accounts receivable of $81,000 and other current assets of $167,000, offset by $402,000 in accounts payable, $779,000 in deferred revenue, $220,000 in accrued expenses and $5,000 in derivative liabilities.

 

At December 31, 2011, we had working capital of $7.0 million, including cash and cash equivalents of $8.8 million, accounts receivable of $372,000 and other current assets of $104,000, offset by $1.1 million in accounts payable, $633,000 in deferred revenue, $503,000 in accrued expenses and $12,000 in derivative liabilities.

 

At December 31, 2010, we had working capital of $5.2 million, including cash and cash equivalents of $7.1 million, accounts receivable of $164,000 and other current assets of $187,000, offset by $395,000 in accounts payable, $125,000 in deferred revenue, $131,000 in accrued expenses and $1.6 million in derivative liability.

 

Since 2008 through the first quarter of 2012, we have spent $3.3 million on capital expenditures, principally to revitalize our Etzold field, for field and laboratory equipment and to construct our AERO System deployment modules and related equipment.

 

During the twelve months after completion of this offering, we expect our principal sources of liquidity to be the net proceeds from this offering, revenues from operating activities and borrowings under our loan agreement. In forecasting our cash flows we have considered factors including the expenses of maintaining a publicly traded corporation, the increased personnel required to implement our business strategy and the capital expenditures required for the acquisition of oil properties to accelerate the adoption of our technical services. As of March 31, 2012, we did not have any commitments for the acquisition of oil properties or any other significant capital commitments.

 

During the twelve months ended December 31, 2011 and the three months ended March 31, 2012 we expended $2.4 million and $244,000, respectively, on capital expenditures, primarily to redevelop our Etzold field and construct and transport equipment used with our AERO System process. Our capital expenditures were funded from available working capital and private equity issuances. We expect that the net proceeds from this offering, cash flows from operations and borrowings under our loan agreement will fully fund our capital expenditure requirements and working capital needs for at least the next twelve months.

 

Although we believe that we will have sufficient liquidity and capital resources to meet our operating requirements and expansion plans for the next twelve months, we may want to pursue additional expansion opportunities which could require additional financing, either debt or equity. If we are unable to secure additional financing at favorable terms in order to pursue such additional expansion opportunities, our ability to maintain our desired level of revenue growth could be materially adversely affected.

 

The following table sets forth the major sources and uses of cash for the periods presented:

 

 

Operating Activities

 

During the three months ended March 31, 2012, our operating activities used $1.8 million in cash. Our net loss for the three months ended March 31, 2012 was $1.5 million. Non-cash expenses totaled $220,000, consisting of $165,000 of depreciation, depletion and amortization and $62,000 for stock based compensation expense, which was offset partially by a $7,000 gain on derivative liabilities. Prepaid expenses increased by $63,000, accounts payable decreased by $727,000 and accrued expenses decreased by $113,000, while accounts receivable decreased by $291,000 and deferred revenue increased by $146,000. The increase in prepaid expenses was attributable to a commitment fee of $35,000 attributable to our loan agreement and payment of certain annual insurance premiums. The decrease in accounts payable resulted from the payment of invoices attributable to significant purchasing activity late in 2011, the payment of invoices for professional fees associated with deferred offering costs and the exercise of a warrant to settle a liability in the amount of $170,000. The decrease in accounts receivable resulted from the collection of year-end invoices without significant additional billings, and the increase in deferred revenue resulted from the commencement of new projects for which revenue could not yet be recognized.

 

During the year ended December 31, 2011, our operating activities used $3.9 million in cash. Our net loss for the year ended December 31, 2011 was $4.5 million. Non-cash items totaled to a non-cash gain of $900,000

consisting of a gain on derivative liabilities of $1.6 million offset partially by $576,000 for depreciation, depletion and amortization, $105,000 for stock-based compensation expense and $34,000 loss on disposition of equipment. Accounts payable increased by $734,000, deferred revenue increased by $508,000, accrued expenses increased by $443,000, inventory decreased by $20,000, accounts receivable increased by $208,000 and prepaid expenses decreased by $63,000. The increase in deferred revenue relates to additional contracts, with the revenue for some contracts being deferred because they contained multiple deliverable elements. The increase in the accounts payable and accrued expenses resulted from the deferred offering costs.

 

During the year ended December 31, 2010, our operating activities used $4.3 million in cash. Our net loss for the year ended December 31, 2010 was $3.8 million. Non-cash items totaled to a non-cash gain of $433,000, consisting of $442,000 of depreciation and amortization and $45,000 for stock-based compensation expense and loss on the disposal of assets. The non-cash expenses were offset by a gain on derivative liability of $920,000. Accounts receivable increased $140,000, accrued expenses decreased $109,000 and prepaid expenses increased $86,000, offset in part by an increase in accounts payables of $140,000, an increase in deferred revenue of $125,000 and a decrease in inventory of $18,000. The increase in accounts receivable resulted from the reimbursement of certain research costs not collected until after year end, while the increase in prepaid expenses is related to increased prepaid insurance premiums and deposits on laboratory equipment. The increase in accounts payable was due to obligations incurred in the evaluation of the Etzold property that were settled after year end, and the increase in deferred revenue is related to a prepayment on a research contract that was not completed until after year end.

 

Our cash flow from operations is subject to many variables, the most significant of which is the adoption rate of our technology and the demand for our services, which can also be impacted by the level of oil prices and the capital expenditure budgets of our customers and potential customers. Our future cash flow from operations will depend on our ability to increase our contracted services through our sales and marketing efforts.

 

Investing Activities

 

Our capital expenditures were $244,000 for the three months ended March 31, 2012 compared to $954,000 for the three months ended March 31, 2011. Capital expenditures for the three months ended March 31, 2012 consisted primarily of construction of skid mounted injection equipment used in our AERO System process of $94,000 and laboratory equipment of $76,000. Capital expenditures for the three months ended March 31, 2011 consisted primarily of expenditures in redeveloping our Etzold field of $640,000 and construction of skid mounted injection equipment used in our AERO System process of $293,000.

 

Our capital expenditures were $2.4 million for the year ended December 31, 2011 compared to $615,000 for the year ended December 31, 2010. Capital expenditures for the year ended December 31, 2011 consisted primarily of expenditures in connection with redeveloping our Etzold field for $1.4 million and the construction of skid-mounted injection equipment used in our AERO System process totalling $859,000.

 

Capital expenditures were $615,000 for the year ended December 31, 2010 compared to $49,000 for the year ended December 31, 2009, consisting primarily of equipment and expenditures related to the Etzold field.

 

Financing Activities

 

During the three months ended March 31, 2012, cash provided by financing activities was $11.6 million, primarily due to the net proceeds of $11.6 million from our sale of 4,420,566 shares of our series C preferred stock on January 19, 2012.

 

During the year ended December 31, 2011, cash provided by financing activities was $8.0 million, primarily due to the sale to ETV of a $1.5 million convertible promissory note, or the ETV Note, and the net proceeds of $1.4 million from our sale of series B preferred stock to ETV. The ETV Note was a convertible promissory note maturing in November 2012, subject to extension and bearing interest at 8%. On December 30, 2011, we issued and sold an aggregate of 2,876,041 shares of series C preferred stock for net proceeds of $7.5 million. At the closing of the December 30, 2011 sale of our series C preferred stock and in payment of the ETV Note, the ETV Note was converted into 572,793 shares of series C preferred stock in

accordance with the terms of the ETV Note by taking the principal outstanding under the ETV Note, plus all accrued and unpaid interest through December 30, 2011, and dividing this amount by the series C purchase price per share. Also in 2011, there was a $1.0 million cash outflow in deferred offering costs.

 

During the year ended December 31, 2010, cash provided by financing activities was $5.8 million resulting from the net proceeds from our sale of series B preferred stock.

 

During the year ended December 31, 2009, cash provided by financing activities was $7.5 million, primarily due to net proceeds of approximately $8.6 million from our initial sale of series B preferred stock, offset in part by the repayment of $1.1 million, net, under our secured long-term debt arrangement.

 

Term Loan

 

On June 11, 2012, we entered into the loan agreement with a lender for a total commitment of $8 million of which $4 million was borrowed at closing. We may request additional term loan advances in an aggregate amount up to an additional $4 million through August 31, 2012. The loan agreement provides for interest only payments until April 2013, followed by monthly principal payments until the final maturity date in June 2015. Amounts outstanding under the loan agreement bear interest at a rate of the greater of 10% or the sum of 10%, plus the prime rate minus 3.25%. The loan agreement imposes certain restrictions, including on our ability to incur additional indebtedness, make certain investments and to declare or pay dividends. The loan agreement also restricts our ability to merge with other entities or to sell or otherwise dispose of our assets, including our oil properties. The loan agreement is secured by substantially all of our assets, except for our intellectual property. After the completion of this offering, any new oil properties that we acquire will not be considered collateral under the loan agreement so long as we maintain an unrestricted cash balance in excess of $16 million. In connection with the loan agreement, we also issued a warrant to the lender to purchase 145,932 shares of series C preferred stock, which, upon the closing of this offering, will be exercisable for 145,932 shares of our common stock (assuming the conversion of our series C preferred stock into shares of our common stock on a one-to-one basis upon the closing of this offering, which conversion ratio is subject to adjustment based on the initial public offering price of our common stock in this offering).

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, except for operating lease obligations presented in the table below.

 

Contractual Obligations and Commercial Commitments

 

At December 31, 2011, we had contractual obligations and commercial commitments as follows (in thousands):

 

 

 

 

 

On June 11, 2012, we entered into the loan agreement that provides for a total lending commitment of $8 million. We have borrowed $4 million under the loan agreement.

Quantitative and Qualitative Disclosures about Market Risk

 

Interest rate risk

 

We had unrestricted cash and cash equivalents totaling approximately $6.2 million, $7.1 million, $8.8 million and $18.4 million at December 31, 2009, December 31, 2010, December 31, 2011 and March 31, 2012, respectively. These amounts were invested primarily in demand deposit savings accounts and are held for working capital purposes. The primary objective of our investment activities is to preserve our capital for the purpose of funding our operations.

 

Foreign currency risk

 

Historically, substantially all of our contracts have been denominated in United States dollars, though management anticipates that certain foreign markets will present opportunities in the future resulting in foreign currency denominated contracts. Should this occur, we will be subject to a variety of risks, including foreign currency exchange rate fluctuations relating to foreign operations and certain purchases from foreign vendors. In the normal course of business, we shall assess these risks and have established policies and procedures to manage our exposure to fluctuations in foreign currency values.

 

Our Company

 

We are a clean-technology energy company that uses biotechnology designed to release potentially large quantities of oil that remain trapped in oil reservoirs after implementation of conventional oilfield technologies. We deploy our technology to increase oil recovery for oil company customers and for our own oil fields that we acquire and redevelop.

 

Only about one-third of the oil discovered in a typical reservoir is recoverable using conventional oil production technology, leaving the remaining two-thirds trapped in the reservoir rock. Our AERO System technology stimulates the native microorganisms that reside in the reservoir to improve the recoverability of this trapped oil. Our AERO System incorporates a dedicated field deployment unit designed to work with the customer’s existing waterflood operations. Waterflooding is a commonly used process of injecting water into the reservoir in order to increase oil recovery. Our AERO System does not have any significant new impact on the environment because it utilizes existing production equipment and infrastructure and does not introduce environmental risks into the reservoir. We believe that traditional enhanced oil recovery techniques, consisting of the injection of gas, steam or chemicals into the reservoir, introduce new environmental risks and are more expensive. Implementation of our AERO System does not change the nature of the customer’s oil production operations and does not require the drilling of new wells nor does it require other significant new capital investment.

 

Our AERO System economically increases the oil production rate and the ultimate quantity of oil recovered over the life of the oil field, and extends the life of the field by integrating sophisticated biotechnology with traditional oil production techniques. Results from the first commercial and longest running field deployment of our AERO System, as reported in a Society of Petroleum Engineers paper we published with Merit Energy Company and Statoil Petroleum AS, or Statoil, in July 2011, derived from one oil producing well indicate that our AERO System may recover up to 20% of the oil that would otherwise be left behind at the end of the economic life of the well. This project also demonstrates a 60% to 100% improvement in total production rate, and we estimate that our cost for this project, excluding minimum upfront capital costs, will be approximately $5 per incremental barrel of oil. We expect that the costs for future full scale commercial implementations of our technology would not be higher than $5 per barrel, particularly if the size of the project is larger than our first AERO System commercial field deployment.

 

We have performed extensive laboratory and field testing to validate, integrate and advance technology transferred from three different scientific groups that collectively represents decades of funded research and development. Our technology is protected by several patents and patent applications. We and our technology partners, Statoil, TERI and Biotopics, have applied our predecessor technologies and the AERO System in more than 100 wells throughout the world. For more information about our technology partners, see “Our Company — Technology — Research and Development”. We estimate that these predecessor technology implementations have recovered over 6 million barrels of oil that would not have otherwise been recovered. We have developed our AERO System technology based upon a philosophy of continual improvement and research and development both internally and with the assistance of our technology partners and their prior research and development. Our AERO System is an advancement of those predecessor technologies.

 

We estimate that the first commercial application of our AERO System, starting in May 2010, had produced more than 26,000 incremental barrels of oil by May 2011; and it continues to yield positive results. We currently have commercial projects with 11 international and domestic E&P companies and anticipate continuing to demonstrate results with AERO System technology and expanding our customer base as well as utilizing AERO System technology on our own oil fields.

 

We were incorporated as Glori Oil Limited, a Delaware corporation, in November 2005 and changed our name to Glori Energy Inc. in May 2011. We have successfully concluded a series of venture capital and private equity offerings through January 2012 totaling approximately $46 million. Our principal stockholders include the following stockholders and some of their affiliates: GTI Group, Kleiner Perkins Caufield & Byers, Oxford Bioscience Partners, Rawoz Technology Company Ltd., Malaysian Life Sciences Capital Fund Ltd. and Energy Technology Ventures, LLC, which is a joint venture of General Electric, ConocoPhillips and NRG Energy.

 

Our Business Strategy

 

Our mission is to use biotechnology applied through existing oil wells to efficiently recover large quantities of oil currently trapped in reservoirs. We derive revenue from fees earned as a service provider of our AERO System technology to E&P companies, and we also intend to use our AERO System technology to increase oil production in oil fields that we acquire. To build this business we intend to:

 

 

 

 

Our Competitive Strengths

 

 

 

 

 

 

 

 

 

Our Market Opportunity

 

Our market consists of domestic and international oil production waterflood sites. According to a 2011 report from the EIA, demand for oil globally is projected to grow from 85.7 million barrels per day in 2008 to 112.2 million barrels per day in 2035. As oil trades on a global market, the price of oil is not significantly sensitive to local demand and supply fluctuations. Global demand for oil is forecasted to grow, and there is an increasing gap between new discoveries and production. The world’s oil reserves are decreasing as it is becoming harder and more expensive to find new oil reservoirs. As a result, enhanced oil recovery technology to improve oil production is increasingly important to offset declining reserves.

 

According to a 2008 Shell Technology publication entitled Enhanced Oil Recovery, 4% of global production (approximately 3 million barrels per day) in 2008 came from traditional enhanced oil recovery techniques of thermal injection, gas injection and chemical injection. According to that same publication, 14% of United States production (649,000 barrels per day) in 2008 was produced through these methods. The global enhanced oil recovery market value is forecasted to grow at a compounded annual rate of 63% from 2009 through 2015 according to the SBI Report. By 2015, the annual enhanced oil recovery market is projected to be over $1.3 trillion according to the SBI Report.