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EX-31.1 - EXHIBIT 31.1 - Glori Energy Inc.gloriexhibit311.htm
EX-31.2 - EXHIBIT 31.2 - Glori Energy Inc.gloriexhibit312.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-55261
GLORI ENERGY INC.
(Exact name of registrant as specified in its charter)
Delaware
 
46-4527741
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
4315 South Drive
 
 
Houston, Texas 77053
 
77053
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (713) 237-8880
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
 
Accelerated filer  o
 
Non-accelerated filer o
 
Smaller reporting company þ
 
 
 
 
(Do not check if a smaller reporting company.)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act). o Yes þ No
There were 30,494,216 $0.001 par value common shares outstanding on August 11, 2014. 



INDEX TO FINANCIAL STATEMENTS
 
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1




GLORI ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
December 31, 2013
 
June 30, 2014
 
 
 
(Unaudited)
ASSETS
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
20,867

 
$
38,204

Accounts receivable, less allowance for doubtful accounts of $80 and $40 as of December 31, 2013 and June 30, 2014, respectively
307

 
1,701

Prepaid expenses and other current assets
71

 
167

Inventory
24

 
387

Total current assets
21,269

 
40,459

 
 
 
 
Property and equipment:
 
 
 
 Proved oil and gas properties - successful efforts
3,141

 
42,985

 Other property and equipment
4,892

 
5,214

 
8,033

 
48,199

 
 
 
 
 Less: accumulated depreciation, depletion and amortization
(5,223
)
 
(6,674
)
Total property and equipment, net
2,810

 
41,525

 
 
 
 
Deferred offering costs
378

 

Deferred loan costs
162

 
706

Total assets
$
24,619

 
$
82,690

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
534

 
$
1,501

Deferred revenues
1,753

 
1,280

Accrued expenses
417

 
2,430

Current portion of long-term debt
3,499

 
4,042

Total current liabilities
6,203

 
9,253

 
 
 
 
Long-term liabilities:
 

 
 

Long-term debt, less current portion
1,771

 
17,510

Other long-term liabilities
449

 
2,892

Total long-term liabilities
2,220

 
20,402

Total liabilities
8,423

 
29,655

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 

 
 

Common stock, $.0001 par value, 100,000,000 shares authorized, 22,450,688 and 31,389,716 shares issued and outstanding as of December 31, 2013 and June 30, 2014, respectively
2

 
3

Additional paid-in capital
61,609

 
105,191

Accumulated deficit
(45,415
)
 
(52,159
)
Total stockholders' equity
16,196

 
53,035

Total liabilities and stockholders' equity
$
24,619

 
$
82,690


The accompanying notes are an integral part of these consolidated financial statements.
2


GLORI ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2014
 
2013
 
2014
 
(Unaudited)
 
(Unaudited)
Revenues:
 

 
 

 
 
 
 
Oil and gas revenues
$
164

 
$
3,644

 
$
271

 
$
4,386

Service revenues
771

 
1,912

 
1,388

 
2,172

Total revenues
935

 
5,556

 
1,659

 
6,558

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Oil and gas operations
547

 
2,994

 
1,122

 
4,221

Service operations
591

 
1,517

 
1,161

 
2,058

Science and technology
405

 
397

 
772

 
717

Selling, general and administrative
1,087

 
1,370

 
2,154

 
2,632

Depreciation, depletion and amortization
126

 
1,158

 
299

 
1,606

Total operating expenses
2,756

 
7,436

 
5,508

 
11,234

 
 
 
 
 
 
 
 
Loss from operations
(1,821
)
 
(1,880
)
 
(3,849
)
 
(4,676
)
 
 
 
 
 
 
 
 
Other (expense) income:
 

 
 

 
 
 
 
Interest expense
(253
)
 
(1,257
)
 
(518
)
 
(1,604
)
Gain on change in fair value of warrants

 

 

 
2,454

  Loss on commodity derivatives

 
(2,791
)
 

 
(2,791
)
Other income (expense)

 
10

 
(15
)
 
15

Total other (expense) income, net
(253
)
 
(4,038
)
 
(533
)
 
(1,926
)
 
 
 
 
 
 
 
 
Net loss before taxes on income
(2,074
)
 
(5,918
)
 
(4,382
)
 
(6,602
)
 
 
 
 
 
 
 
 
Income tax expense

 
142

 

 
142

 
 
 
 
 
 
 
 
Net loss
$
(2,074
)
 
$
(6,060
)
 
$
(4,382
)
 
$
(6,744
)
 
 
 
 
 
 
 
 
Net loss per common share, basic and diluted
$
(1.92
)
 
$
(0.20
)
 
$
(4.09
)
 
$
(0.26
)

 

 
 

 
 
 
 
Weighted average common shares outstanding,
basic and diluted
1,078

 
29,642

 
1,071

 
26,179


The accompanying notes are an integral part of these consolidated financial statements.
3


GLORI ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
 
 
 
Stockholders' equity
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Total
 
 
Common stock
 
paid-in
 
Accumulated
 
stockholders'
 
 
Shares
 
Par value
 
capital
 
deficit
 
equity
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2013, as converted (see Note 3)
 
22,450,688

 
$
2

 
$
61,609

 
$
(45,415
)
 
$
16,196

 
 
 
 
 
 
 
 
 
 
 
Stock based compensation
 

 

 
155

 

 
155

 
 
 
 
 
 
 
 
 
 
 
Issuance, repurchase and cancellation of common shares
 

 

 
(30
)
 

 
(30
)
 
 
 
 
 
 
 
 
 
 
 
Change in fair value of warrant liability
 

 

 
(2,454
)
 

 
(2,454
)
 
 
 
 
 
 
 
 
 
 
 
Share issuance, as converted (formerly C-2 preferred shares and warrants, see Note 3)
 
1,133,869

 

 
5,049

 

 
5,049

 
 
 
 
 
 
 
 
 
 
 
Recapitalization due to merger (see Note 3)
 
6,658,449

 
1

 
34,725

 

 
34,726

 
 
 
 
 
 
 
 
 
 
 
Debt conversion to common stock
 
250,000

 

 
2,000

 

 
2,000

 
 
 
 
 
 
 
 
 
 
 
Warrants exchanged for common shares
 
483,010

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
Warrant exercises
 
413,700

 

 
4,137

 

 
4,137

 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 
(6,744
)
 
(6,744
)
 
 
 
 
 
 
 
 
 
 
 
Balances as of June 30, 2014
 
31,389,716

 
$
3

 
$
105,191

 
$
(52,159
)
 
$
53,035




The accompanying notes are an integral part of these consolidated financial statements.
4


GLORI ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended June 30,
 
2013
 
2014
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net loss
$
(4,382
)
 
$
(6,744
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation, depletion and amortization of property and equipment
299

 
1,606

Stock-based compensation
446

 
155

Amortization of deferred loan costs
98

 
223

Accretion of end-of-term charge
48

 
48

Loss on disposal of property and equipment
15

 

Gain on change in fair value of warrant liabilities

 
(2,454
)
Accretion of discount on long-term debt
33

 
33

Loss on change in fair value of commodity derivatives

 
2,568

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(113
)
 
(1,394
)
Prepaid expenses
(52
)
 
(96
)
Inventory
39

 
(36
)
Accounts payable
(7
)
 
433

Deferred revenues
17

 
(473
)
Accrued expenses
(206
)
 
864

Net cash used in operating activities
(3,765
)
 
(5,267
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of proved oil and gas property

 
(39,581
)
Purchase of other property and equipment
(272
)
 
(149
)
Net cash used in investing activities
(272
)
 
(39,730
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock, preferred stock and preferred warrants
11,703

 
5,019

Proceeds from issuance of long-term debt

 
24,035

Proceeds from exercise of warrants

 
4,137

Proceeds from merger with Infinity Corp.

 
38,490

Payments for deferred offering costs
(45
)
 
(2,794
)
Payments for deferred loan costs

 
(767
)
Payments on long-term debt
(894
)
 
(5,786
)
Net cash provided by financing activities
10,764

 
62,334

 
 
 
 
Net increase in cash and cash equivalents
6,727

 
17,337

 
 
 
 
Cash and cash equivalents, beginning of period
18,707

 
20,867

 
 
 
 
Cash and cash equivalents, end of period
$
25,434

 
$
38,204

 
 
 
 
Non-cash financing and investing activities:
 

 
 

Contribution of capital equal to fair value of derivative due to termination of derivative liability
$
2,329

 
$

Fair value of preferred stock and preferred warrants in excess of proceeds
(1,194
)
 

Asset retirement obligation assumed

 
745

 
 

 
 

Changes in financial statement amounts due to purchase of the Coke Field Assets:
 
 
 
Inventory

 
327

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
398

 
$
662


The accompanying notes are an integral part of these consolidated financial statements.
5


GLORI ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 - ORGANIZATION, NATURE OF BUSINESS AND LIQUIDITY
 
Glori Energy Technology Inc., a Delaware corporation (formerly Glori Energy Inc.)("GETI"), was incorporated in November 2005 (as successor in interest to Glori Oil LLC) to increase production and recovery from mature oil wells using state of the art biotechnology solutions.
 
In October 2007, GETI formed Glori Oil (Argentina) Limited, a Delaware corporation, as a wholly-owned subsidiary, to conduct research in Argentina. In April and May 2008, GETI formed Glori Oil S.R.L. which was owned by Glori Oil (Argentina) Limited (97%) and Glori Energy Inc. (3%) and domiciled in Argentina to conduct GETI’s Argentinian operations.

Management has undertaken the dissolution of Glori Oil S.R.L. and is awaiting confirmation on the effectiveness of the dissolution. During the three months ended June 30, 2013 and June 30, 2014, the Company derived no revenues from this subsidiary and as of December 31, 2013 and June 30, 2014, the subsidiary had no assets. Management does not anticipate significant expenses for any remaining dissolution efforts.
 
In September 2010, GETI incorporated Glori Canada Ltd. (formerly Glori Oil Ltd.) in the province of Alberta, Canada, with registration in the province of Saskatchewan, as a wholly-owned subsidiary, to conduct GETI’s business operations in Canada.
 
In October 2010, GETI activated a previously dormant wholly-owned subsidiary, Glori Holdings Inc. (formerly Glori Oil Holdings Company), to acquire a 100% working interest in a leasehold in Kansas, the Etzold Field, in exchange for the assumption of the asset retirement obligation (the plugging and abandonment liability) of the existing wells on the leasehold and an overriding royalty interest. In September 2012, GETI acquired a 100% working interest in an adjacent property, in exchange for the assumption of the asset retirement obligation, cash and an overriding royalty interest.
 
In February 2011, GETI incorporated Glori California Inc. (formerly Glori Oil California Limited) to conduct operations in the state of California.
 
In September 2013, GETI incorporated OOO Glori Energy in Russia as a first step toward investigating potential projects in that country.

In January 2014, GETI entered into a merger and share exchange agreement with Infinity Cross Border Acquisition Corporation and certain of its affiliates, Glori Acquisition Corp., Glori Merger Subsidiary, Inc., and Infinity-C.S.V.C. Management Ltd., an INXB Representative. On April 14, 2014, the merger and share exchange agreement was closed and the merger was consummated. As a result of this transaction, Infinity Cross Border Acquisition Corporation merged with and into Glori Acquisition Corp., with Glori Acquisition Corp. surviving the merger. Following that merger, Glori Merger Subsidiary, Inc. merged with and into GETI, with GETI surviving the merger. Following both of these mergers, GETI became the wholly-owned subsidiary of Glori Acquisition Corp., and Glori Acquisition Corp. adopted the name "Glori Energy Inc."
 
In March 2014, GETI incorporated Glori Energy Production Inc., a wholly-owned subsidiary of Glori Holdings Inc. to purchase the Coke Field Assets (see NOTE 4) and incur the associated acquisition debt.
 
Glori Energy Inc., GETI, Glori Oil (Argentina) Limited, Glori Oil S.R.L., Glori Canada Ltd., Glori Holdings Inc., Glori California Inc., OOO Glori Energy and Glori Energy Production Inc. are collectively referred to as the “Company”, "Glori", "Glori Energy", "we", "us", and "our" in the condensed consolidated financial statements.
 


6


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. In the opinion of management, these condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s condensed consolidated balance sheets as of December 31, 2013 and June 30, 2014 (unaudited), condensed consolidated statements of operations and for the three and six months ending June 30, 2013 and 2014 (unaudited), condensed consolidated statement of stockholders’ equity for the six months ended June 30, 2014 (unaudited) and condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2014 (unaudited). All such adjustments represent normal recurring items. The financial information contained in this report for the three and six months ended June 30, 2013 and 2014, and as of June 30, 2014, is unaudited. These consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2013 and the notes thereto.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of Glori Energy Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
 
Reclassificiations
 
Certain 2013 amounts related to oil and gas revenues, service revenues, oil and gas operations, service operations and depreciation, depletion and amortization have been reclassified for comparative purposes.
 

7


NOTE 3 - MERGER WITH INFINITY CROSS BORDER ACQUISITION CORPORATION

On January 8, 2014, GETI executed a merger and share exchange agreement (the "Merger") with Infinity Cross Border Acquisition Corporation (“Infinity Corp.” - a special purpose acquisition company or blank check company publicly traded on NASDAQ) and certain of its affiliates. On April 14, 2014, the Merger was consummated. Pursuant to the terms of the Merger, in exchange for all of GETI's outstanding shares and warrants, Infinity Corp. issued 23,584,557 shares of common stock on a pro rata basis to the stockholders and warrant holders of GETI. GETI obtained effective control of Infinity Corp. subsequent to the Merger and thus the Merger was accounted as a reverse acquisition and recapitalization of GETI in accordance with ASC 805 - Business Combinations. Subsequent to the Merger, the GETI shareholders retained a substantial majority of voting interest and positions on the Board of Directors. Additionally GETI's management is retained and GETI's operations comprise the ongoing operations post Merger.

In the condensed consolidated financial statements, the number of shares of common stock attributable to the Company is reflected retroactive to December 31, 2013 to facilitate comparability to prior periods. Accordingly, the number of shares of common stock presented as outstanding as of December 31, 2013 totals 22,450,688 which represents the number of common shares that were received for pre Merger GETI preferred stock, common stock and warrants as of December 31, 2013.


8


The following table (in thousands, except share amounts) presents the condensed consolidated statements of temporary equity and stockholders' equity as if the Merger had occurred on December 31, 2013. The beginning balances as of December 31, 2013, shown in the table below, represent the Company's pre Merger temporary equity and stockholders' equity previously stated as of December 31, 2013. The balances as of December 31, 2013, as converted, represent the post Merger stockholders' equity received in exchange for the pre Merger temporary equity and stockholders' equity at December 31, 2013.

 
Temporary equity - convertible redeemable preferred stock
 
Stockholders' equity
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
Additional
 
 
 
Total
 
Series A Preferred
 
Series B Preferred
 
Series C Preferred
 
Series C-1 Preferred
 
temporary
 
Common stock
 
paid-in
 
Accumulated
 
stockholders'
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
equity
 
Shares
 
Par value
 
capital
 
deficit
 
equity
 
 
Balances as of December 31, 2013
475,541

 
$
13,762

 
2,901,052

 
$
31,900

 
7,296,607

 
$
29,773

 
4,462,968

 
$
3,234

 
$
78,669

 
3,295,771

 
$
1

 
$

 
$
(76,379
)
 
$
(76,378
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reversal of pre Merger temporary equity
(475,541
)
 
(13,762
)
 
(2,901,052
)
 
(31,900
)
 
(7,296,607
)
 
(29,773
)
 
(4,462,968
)
 
(3,234
)
 
$
(78,669
)
 

 

 

 
78,669

 
78,669

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reversal of pre Merger common shares

 

 

 

 

 

 

 

 

 
(3,295,771
)
 
(1
)
 
1

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of pre Merger warrants from liability to additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 
13,905

 

 
13,905

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion of pre Merger shares to post Merger shares

 

 

 

 

 

 

 

 

 
22,450,688

 
2

 
(2
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segregate historical accumulated deficit from additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 
47,705

 
(47,705
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2013, as converted

 
$

 

 
$

 

 
$

 

 
$

 
$

 
22,450,688

 
$
2

 
$
61,609

 
$
(45,415
)
 
$
16,196

  
Not shown in the above table is the pre Merger issuance by GETI of 1,842,028 C-2 preferred shares and 1,640,924 C-2 preferred warrants for net proceeds of $5,049,000 on March 13, 2014. These shares and warrants were exchanged for 1,133,869 shares of common stock in the Merger.

9


The following table shows the number of common stock of the Company issued and outstanding related to the consummation of the Merger:

 
 
 
 
 
Number of Shares
 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
Ordinary shares issued to Infinity Corp. founder shareholders
1,437,500

Ordinary shares issued to Infinity Corp. shareholders
5,750,000

Less: Ordinary shares redeemed
(2,351,533
)
Ordinary shares issued underwriter for UPO warrant conversion
100,000

Ordinary shares issued for PIPE Investment (excluding Petro-Hunt portion of the PIPE Investment)
812,500

Ordinary shares issued for PIPE Investment (Petro-Hunt portion of PIPE Investment)
250,000

Ordinary shares issued for the optional PIPE Investment
909,982

Ordinary shares issued to Glori Energy Inc. shareholders
23,584,557

 
 
 
 
 
30,493,006

 
In connection with the Merger, the Company received approximately $24.7 million, net of certain expenses and fees, and approximately $13.8 million in cash from the private placement of 1,722,482 shares of common stock at $8.00 per share from Infinity Group, Hicks Equity Partners LLC and other investors. All of GETI’s previously outstanding common shares, preferred shares and warrants were exchanged for approximately 23,584,557 common shares in the newly merged entity, and accordingly, the Company no longer has liabilities for the fair value of such warrants and temporary equity previously reported in the Company's consolidated balance sheets. Additionally on April 14, 2014 Petro-Hunt exercised their option to convert their $2.0 million receivable from the Company to common shares at $8.00 per share or 250,000 shares (see NOTE 7).

In addition to the common stock issued in the Merger the Company has 5,326,200 warrants outstanding at June 30, 2014 to purchase common stock of the Company at a per share price of $10.
 

10


NOTE 4 - PROPERTY AND EQUIPMENT
 
Property and equipment consists of the following (in thousands):
 
December 31, 2013
 
June 30, 2014
 
 
 
(Unaudited)
 
 
 
 
Proved oil and gas properties - successful efforts
$
3,141

 
$
42,985

Construction in progress
902

 
812

Laboratory and warehouse facility
591

 
591

Laboratory and field service equipment
2,968

 
2,973

Office equipment, computer equipment, vehicles and other
431

 
838

 
8,033

 
48,199

 
 
 
 
Less:  accumulated depreciation, depletion and amortization
(5,223
)
 
(6,674
)
 
 
 
 
 Total property and equipment, net
$
2,810

 
$
41,525

  
Depreciation and amortization expense was $71,000, depletion expense was $52,000 and accretion expense related to the asset retirement obligation was $3,000 for the three months ended June 30, 2013. Depreciation and amortization expense was $112,000, depletion expense was $1,032,000 and accretion expense related to the asset retirement obligation was $14,000 for the three months ended June 30, 2014. For the six months ended June 30, 2013 depreciation and amortization expense was $208,000, depletion expense was $85,000 and accretion expense related to the asset retirement obligation was $6,000. Depreciation and amortization expense was $236,000, depletion expense was $1,259,000 and accretion expense related to the asset retirement obligation was $111,000 for the six months ended June 30, 2014.

On March 14, 2014, a subsidiary of the Company, Glori Energy Production Inc., acquired certain oil, gas and mineral leases in Wood County Texas (the “Coke Field Assets”) from Petro-Hunt L.L.C. (“Petro-Hunt”) for (i) $38.0 million in cash and a $2.0 million convertible note payable (see NOTE 7) to Petro-Hunt, subject to certain purchase price adjustments primarily for net revenues in excess of direct operating expenses of the property from January 1, 2014 through the closing date, March 14, 2014, and (ii) the assumption of the asset retirement obligation related to plugging and abandoning the Coke Field Assets.
 
The Company has included revenues and expenses related to the Coke Field Assets for the period from March 15 through June 30, 2014 in the condensed consolidated statement of operations for the six months ended June 30, 2014. For this period, the revenues and net loss attributable to the Coke Field Assets were $4,211,000 and $2,761,000, respectively. The net loss includes a $2,791,000 loss on commodity derivatives related to the Company's volume based production swaps (see NOTE 6).

Of the total $39.2 million total purchase price of the Coke Field Assets, the Company recognized at approximate fair market value assets such as office equipment and trucks included in property and equipment on the Company’s condensed consolidated balance sheet of approximately $310,000 and items such as tubular stock of $327,000 classified in inventory on the Company’s condensed consolidated balance sheet. The remaining purchase price balance was allocated to proved oil and gas properties in property and equipment on the Company’s condensed consolidated balance sheet. Also included in proved oil and gas properties, the Company recognized an asset associated with the asset retirement obligation (plugging and abandonment of wells) of $745,000 and an offsetting liability included in other long-term liabilities on the Company’s condensed consolidated balance sheet.
 

11


The following summary presents unaudited pro forma information for the Company for the three and six months ended June 30, 2013 and 2014, as if the Coke Acquisition had been consummated at January 1, 2013 and 2014, respectively (in thousands, except per share amounts):

 
For the Three Months Ended June 30,
 
2013
 
2014
 
(Unaudited)
 
 
 
 
Total revenues
$
4,966

 
$
5,556

Net loss
(4,732
)
 
(6,060
)
 
 
 
 
Net loss per common shares, basic and diluted
$
(4.39
)
 
$
(0.20
)
 
 
 
 
Weighted average shares outstanding:
 

 
 
Basic
1,078

 
29,642

Diluted
1,078

 
29,642


 
For the Six Months Ended June 30,
 
2013
 
2014
 
(Unaudited)
 
 
 
 
Total revenues
$
9,274

 
$
9,393

Net loss
(6,631
)
 
(7,527
)
 
 
 
 
Net loss per common shares, basic and diluted
$
(6.19
)
 
$
(0.29
)
 
 
 
 
Weighted average shares outstanding:
 

 
 
Basic
1,071

 
26,179

Diluted
1,071

 
26,179


NOTE 5 – FAIR VALUE MEASUREMENTS

FASB standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
 
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
 


12


The following table summarizes the financial liabilities measured at fair value, on a recurring basis as of  June 30, 2014 (in thousands)
 
Fair value measurements using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Unaudited)
 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
     Current liability commodity derivative
$

 
$
837

 
$

 
$
837

     Non-current liability commodity derivative

 
1,731

 

 
1,731

 
$

 
$
2,568

 
$

 
$
2,568


The Level 2 instruments presented in the table above consists of derivative instruments made up of commodity swaps. The fair values of the Company's commodity derivative instruments are based upon the NYMEX futures value of oil less the contracted per barrel rate to be received. The Company records a liability associated with the futures contracts when the futures price of oil is greater than the contracted per barrel rate to be received and an asset when the futures price of oil is less than the contracted per barrel rate to be received.

NOTE 6 - DERIVATIVE INSTRUMENTS

The Company utilizes derivative financial instruments to manage risks related to changes in oil prices. The Company is currently engaged in oil commodity swaps where a fixed price is received for a portion of the Company's oil production. In return the Company pays a floating price based upon NYMEX oil prices. Although these arrangements are designed to reduce the downside risk of a decline in oil prices on the covered production they conversely limit potential income from increases in oil prices and expose the Company to the credit risk of counterparties. The Company manages the default risk of counterparties by engaging in these agreements with only high credit quality multinational energy companies and through the continuous monitoring of their performance.

As of June 30, 2014 the Company had the following open positions on our outstanding commodity derivative contracts:

Period
 
Volume/Month (Bbls)
 
Price/Unit
 
Fair Value
(Unaudited)
 
 
 
 
 
 
 
July 2014 - March 2015
 
8,400

 
$
94.11

 
596,000

April 2015 - March 2016
 
7,300

 
$
86.50

 
756,000

April 2016 - March 2017
 
6,550

 
$
82.46

 
643,000

April 2017 - March 2018
 
5,800

 
$
80.53

 
573,000


The Company has not elected to designate any of these as derivative contracts for hedge accounting. Accordingly, the derivative contracts are carried at fair value on the condensed consolidated balance sheet as assets or liabilities. For each reporting period the contracts are marked-to-market and the resulting unrealized changes in the fair value of the assets and liabilities are recognized on the condensed consolidated statements of operations. The payables and receivables resulting from the closed derivative contracts result in realized gains and losses recorded on the Company's condensed consolidated statements of operations. The unrealized and realized gains and losses on derivative instruments are recognized in the loss on derivatives line item located in other (expense) income.


13


The following tables summarize the unrealized and realized loss on commodity derivatives (in thousands):

 
 
 
Three Months Ended June 30,
 
 
 
2014
 
 
 
(Unaudited)
 
 
 
 
Unrealized loss on commodity derivatives
$
2,568

Realized loss on commodity derivatives
223

 
 
 
$
2,791


 
 
 
Six Months Ended June 30,
 
 
 
2014
 
 
 
(Unaudited)
 
 
 
 
Unrealized loss on commodity derivatives
$
2,568

Realized loss on commodity derivatives
223

 
 
 
$
2,791


 
NOTE 7 - LONG TERM DEBT
 
On June 11, 2012, the Company entered into a secured term promissory note in the amount of $8.0 million. The note contains a 10.0% annual interest rate subject to increase based upon an increase in the prime rate. The loan is secured by substantially all assets of the Company with the exception of the Coke Field Assets. The lender also received a warrant to purchase shares of the Company’s stock which was exchanged for 18,208 common shares upon consummation of the Merger. Equal monthly principal payments are due over 27 months beginning in April 2013 through June 2015 plus an end of term charge of $280,000. As of December 31, 2013 and June 30, 2014, the ratable liability for the end of term charge was $144,000 and $192,000, respectively, and it is included in accrued expenses in current liabilities on the accompanying 2014 condensed consolidated balance sheet. The loan agreement contains covenants which place restrictions on the incurrence of debt, liens and capital expenditures. As of June 30, 2014 the outstanding loan balance is $3,494,000. The Company is in compliance with all the covenants as of June 30, 2014.
 
On March 14, 2014 in connection with the closing of the acquisition of the Coke Field Assets, the Company entered into two financing agreements of $18.0 million and $4.0 million in order to fund a portion of the $38.0 million in cash required for the acquisition.
 
The $18.0 million note is a senior secured term loan facility of Glori Energy Production Inc. and is secured by the Coke Field Assets and shares of common stock. The loan has a three year term bearing interest at 11.0% per annum, subject to increase upon a LIBOR rate increase above 1%. The credit agreement requires quarterly principal payments equal to 50% of the excess cash flows, as defined, from the Coke Field Assets during the first year and 75% thereafter subject to a minimum quarterly principal payment of $112,500 plus interest. The loan was funded net of closing costs of 2%, or $360,000, which is included in deferred loan costs on the condensed consolidated balance sheets and will be amortized over the loan term. The loan agreement contains covenants which place restrictions on Glori Energy Production’s ability to incur additional debt, incur other liens, make other investments, capital expenditures and the sale of assets. Commencing with the quarter ended June 30, 2014, Glori Energy Production is also required to maintain certain financial ratios related to debt, working capital and proved reserves, all as defined in the loan agreement. Glori Energy Production was not in compliance with one of the credit agreement covenants as of June 30, 2014. Glori Energy Production and the lender have executed an amendment and waiver regarding this noncompliance. Glori Energy Production is in compliance with all other covenants as of June 30, 2014.
 
The $4.0 million note has a two year term bearing interest at 12.0% per annum and is secured by the assets of the Company but is subordinated to existing Company debt. The loan was funded net of closing costs of 2%, or $80,000, which is included in deferred loan costs on the condensed consolidated balance sheets and will be amortized over the loan term. The $4.0 million note principal and a $400,000 prepayment penalty plus accrued interest was paid in full on May 13, 2014 and the remaining related deferred loan costs were expensed.
 

14


On March 14, 2014, in connection with the purchase of the Coke Field Assets, a subsidiary of the Company, Glori Energy Production, issued to Petro-Hunt an unsecured, subordinated convertible promissory note for $2.0 million bearing interest at 6.0% per annum. On April 14, 2014 the note was converted into 250,000 shares of post Merger common stock.

Maturities on long-term debt during the next three years are as follows (in thousands):
 
Year ending June 30,
 
Amount
 
 
(Unaudited)
 
 
 
2015
 
$
4,042

2016
 
473

2017
 
17,037

 
 
$
21,552

 
NOTE 8 - LOSS PER SHARE
 
The Company follows current guidance for share-based payments which are considered as participating securities. Share-based payment awards that contain non-forfeitable rights to dividends, whether paid or unpaid, are designated as participating securities and are included in the computation of basic earnings per share. However, in periods of net loss, participating securities other than common stock are not included in the calculation of basic loss per share because there is not a contractual obligation for owners of these securities to share in the Company’s losses, and the effect of their inclusion would be anti-dilutive.
 
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2014
 
2013
 
2014
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
Numerator:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(2,074
)
 
$
(6,060
)
 
$
(4,382
)
 
$
(6,744
)
 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
1,078

 
29,642

 
1,071

 
26,179

Effect of dilutive securities

 

 

 

Weighted-average common shares - diluted
1,078

 
29,642

 
1,071

 
26,179

 
 
 
 
 
 
 
 
Net loss per common share - basic and diluted
$
(1.92
)
 
$
(0.20
)
 
$
(4.09
)
 
$
(0.26
)

The following securities were not included in the calculation of diluted shares outstanding as they would have been anti-dilutive (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2014
 
2013
 
2014
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
Common stock warrants

 
7,177

 

 
8,864

Common stock options
1,777

 
6,724

 
1,750

 
6,716


 



15



NOTE 9 - INCOME TAXES
 
At December 31, 2013 and June 30, 2014, the Company has net operating loss carryforwards for federal income tax reporting purposes of approximately $31.4 million and $38.6 million, respectively, which will begin to expire in the year 2025, and tax credits of approximately $367,000 which will begin to expire in 2027. The NOL carry forward has been reduced by approximately $5.4 million because management estimates such amount of the loss carry forwards will expire due to limitations from changes in control.

The Company has recorded valuation allowances against the Company's deferred tax assets. The effective tax rate for the three and six months ended June 30, 2013 and 2014 varies from the statutory rate primarily due to the effect of the valuation allowance. For the three and six months ended June 30, 2014 the Company had income tax expense of $142,000 due to current taxes on foreign income.
 
As of December 31, 2013 and June 30, 2014, the Company had an uncertain tax position related to not filing Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation in the amount of approximately $31,000, for the tax years 2010 and 2011. This form would have reported cash transfers to support the operations of its subsidiary Glori Oil S.R.L. The Company intends to amend these returns and believes any liability will be abated; accordingly, the Company has not recognized any liability in the accompanying consolidated financial statements. The Company does not expect a material change to the consolidated financial statements related to uncertain tax positions in the next 12 months. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.


16


NOTE 10 - COMMITMENTS AND CONTINGENCIES
 
Litigation
 
From time to time, the Company may be subject to legal proceedings and claims that arise in the ordinary course of business. The Company is not a party to any material litigation or proceedings and is not aware of any material litigation or proceedings, pending or threatened against it.
 
Commitments
 
The Company leases two adjacent buildings in Houston, Texas and a warehouse facility in Gull Lake, Saskatchewan under operating leases. The Company's original Houston building lease which contains office space, warehouse space and a laboratory expires in May 2017 and is leased for $10,586 per month. The Company's second Houston facility, which contains office and warehouse space, rents for $8,415 per month and has a lease expiration date of May 2015. The Saskatchewan warehouse is a month-to-month lease which rents for $1,000 per month and is cancellable with 30 days’ notice.
 
In addition to the facility lease commitments, the Company also has various other commitments such as technology hardware and support and software commitments.
 
Approximate minimum future rental payments under these noncancellable operating leases as of June 30, 2014 are as follows (in thousands):

 
 
Year Ending June 30,
 
 
(Unaudited)
 
 
 
2015
 
$
244

2016
 
130

2017
 
116

 
 
$
490


Total rent expense was approximately $56,000 and $73,000 for the three months ended June 30, 2013 and June 30, 2014, respectively, and $96,000 and $149,000 for the six months ended June 30, 2013 and June 30, 2014, respectively.

NOTE 11 - STOCK-BASED COMPENSATION
 
Stock Incentive Plan
 
As a result of the Merger with Infinity Corp. which consummated on April 14, 2014, the issued and outstanding stock options were canceled and reissued as stock options in the newly merged entity at a conversion ratio of 2.9 pre merged entity stock options to 1 post merged entity stock option. The exercise price of the Glori stock options also increased by the same factor of 2.9. All option disclosures in the note below are shown as converted using these factors.

As of December 31, 2013 the total common stock available for issuance pursuant to the Glori Oil Limited 2006 Stock Option and Grant Plan (the “Plan”) was 2,581,190, as converted. As of April 14, 2014 the plan was amended such that no further options would be issued. Options are typically issued at an exercise price equal to the fair market value of the Company’s common stock at the grant date, as determined by the Board of Directors. Generally, the options vest 25 percent after 1 year, and thereafter ratably by month over the next 36 months, and may be exercised for a period of 10 years subject to vesting. 


17


The Company has computed the fair value of all options granted during the year ended December 31, 2013 and six months ended June 30, 2014, using the following assumptions:
 
 
Year ended
December 31,
 
Six months ended June 30,
 
2013
 
2014
 
 
 
(Unaudited)
 
 
 
 
Risk-free interest rate
2.23
%
 
2.44
%
Expected volatility
55
%
 
55
%
Expected dividend yield

 

Expected life (in years)
7.09

 
7.00

Expected forfeiture rate

 

 
The following table summarizes the activity of the Company’s plan related to stock options:
 
 
Number
of options
 
Weighted
average
exercise
price per share
 
Weighted
average
remaining
contractual
term (years)
Outstanding as of December 31, 2013, as converted
2,322,180

 
$
0.81

 
7.7
Awarded (unaudited)
7,103

 
$
1.16

 
 
Exercised (unaudited)
(4,310
)
 
$
1.16

 
 
Forfeited or Expired (unaudited) (1)
(10,347
)
 
$
1.16

 
 
Outstanding as of June 30, 2014 (unaudited)
2,314,626

 
$
0.81

 
7.2
Exercisable as of December 31, 2013
1,887,568

 
$
0.75

 
7.5
Exercisable as of June 30, 2014 (unaudited) (2)
2,005,852

 
$
0.78

 
7.1
 
(1)
Management considers the circumstances generating these forfeitures to be unusual and nonrecurring in nature; accordingly, no allowance for forfeitures of options to purchase shares has been considered in determining future vesting or expense.
(2)
The employee options shown as exercisable are subject to a one year lock up agreement pursuant to the terms of the Merger whereby these options, although fully vested, cannot be exercised until April 15, 2014, the day after the first anniversary of the Merger.

The total intrinsic value of options exercised for the three months ended June 30, 2013 and June 30, 2014 was $64,000 and $0, respectively. The total intrinsic value of options exercised for the six months ended June 30, 2013 and June 30, 2014 was $95,000 and $29,000, respectively. The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2013 and June 30, 2014 is $724,000 and $21,249,000, respectively. The total fair value of options vested during the three months ended June 30, 2013 and June 30, 2014 was $310,000 and $80,000. The total fair value of options vested during the six months ended June 30, 2013 and June 30, 2014 was $453,000 and $159,000, respectively.
 
Stock-based compensation expense is included primarily in selling, general and administrative expense and was $374,000 and $78,000 for the three months ended June 30, 2013 and June 30, 2014, respectively. Stock-based compensation expense was $446,000 and $155,000 for the six months ended June 30, 2013 and June 30, 2014. The Company has future unrecognized compensation expense for nonvested shares at June 30, 2014 of $391,000 which are maintaining weighted average vesting period of 1.8 years



18


NOTE 12 – SEGMENT INFORMATION
 
The Company generates revenues through the production and sale of oil and natural gas (the “Oil and Gas Segment”) and through the Company’s services provided to third party oil companies (the “AERO Service Segment”).
The Oil and Gas Segment produces and develops the Company’s acquired oil and natural gas interests. The revenues derived from the segment are from sales to the first purchaser. The Company uses two such arrangements, one for the Etzold Field located in Seward County, Kansas and another for the Coke and Quitman Fields located in Wood County, Texas.
 
The AERO Services Segment derives revenues from external customers by providing the Company’s biotechnology solutions of enhanced oil recovery through a two-step process consisting of (1) Analysis Phase and (2) Field Deployment Phase.
 
The Analysis Phase work is a reservoir screening process whereby the Company obtains field samples and evaluates the Company’s potential for Service Segment success. This process is performed at the Company’s Houston laboratory facilities. The Science and Technology expenses shown on the Company’s condensed consolidated statements of operations are the expenses that are directly attributable to the Analysis Phase and expenses associated with the Company’s on-going research and development of its technology.
 
In the Field Deployment Phase the Company deploys skid mounted injection equipment used to inject nutrient solution in the oil reservoir. The work in this phase is performed in oil fields of customers located in the United States and internationally and in the Company’s own oil fields. The service operations expense shown on the Company’s condensed consolidated statements of operations are the expenses that are directly attributable to the Field Deployment Phase.
 
Earnings of industry segments exclude income taxes, interest income, interest expense and unallocated corporate expenses.
 
Although the AERO Services Segment provides enhanced oil recovery services to the Oil and Gas Segment, the Company does not utilize intercompany charges. The direct costs of the services such as the injection solution, transportation of the solution and expenses associated with the injection are charged directly to the Oil and Gas Segment. All of the AERO Service Segment capital expenditures and depreciation associated with injection equipment is viewed as part of the AERO Service Segment.
 
The following table sets forth the operating segments of the Company and the associated revenues and expenses (in thousands):
 
 
Oil and Gas (1)
 
AERO Services
 
Corporate
 
Total
 
(Unaudited)
 
 
 
 
 
 
 
 
Three months ended June 30, 2013
 

 
 

 
 

 
 

Revenues
$
164

 
$
771

 
$

 
$
935

Total operating expenses
547

 
591

 
1,492

 
2,630

Depreciation, depletion and amortization
52

 
62

 
12

 
126

(Loss) income from operations
(435
)
 
118

 
(1,504
)
 
(1,821
)
 
 
 
 
 
 
 
 
Other expense, net

 

 
(253
)
 
(253
)
Net (loss) income
$
(435
)
 
$
118

 
$
(1,757
)
 
$
(2,074
)


19


 
Oil and Gas (1)
 
AERO Services
 
Corporate
 
Total
 
(Unaudited)
 
 
 
 
 
 
 
 
Three months ended June 30, 2014
 

 
 

 
 

 
 

Revenues
$
3,644

 
$
1,912

 
$

 
$
5,556

Total operating expenses
2,994

 
1,517

 
1,767

 
6,278

Depreciation, depletion and amortization
1,071

 
78

 
9

 
1,158

(Loss) income from operations
(421
)
 
317

 
(1,776
)
 
(1,880
)
 
 
 
 
 
 
 
 
Other expense, net
(2,791
)
 

 
(1,247
)
 
(4,038
)
 
 
 
 
 
 
 
 
Taxes on income

 

 
142

 
142

 
 
 
 
 
 
 
 
Net (loss) income
$
(3,212
)
 
$
317

 
$
(3,165
)
 
$
(6,060
)
 
(1)
The oil and gas revenues for the three months ended June 30, 2014 includes direct revenues of $3,541,000, operating expenses (including severance taxes) of $2,382,000, depreciation, depletion and amortization of $1,005,000 and loss on commodity derivatives of $2,791,000 related to the Coke Field Assets which are not included in the three months ended June 30, 2013. Total operating expenses for the Oil and Gas segment also includes expenses for our Etzold field greenfield lab in Kansas and the compensation expense for our acquisitions and production professional staff and their related expenses in connection with identifying and analyzing potential acquisitions and managing our oil and gas assets.
 
 
Oil and Gas (1)
 
AERO Services
 
Corporate
 
Total
 
(Unaudited)
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 

 
 

 
 

 
 

Revenues
$
271

 
$
1,388

 
$

 
$
1,659

Total operating expenses
1,122

 
1,161

 
2,926

 
5,209

Depreciation, depletion and amortization
93

 
186

 
20

 
299

(Loss) income from operations
(944
)
 
41

 
(2,946
)
 
(3,849
)
 
 
 
 
 
 
 
 
Other expense, net

 

 
(533
)
 
(533
)
Net (loss) income
$
(944
)
 
$
41

 
$
(3,479
)
 
$
(4,382
)


20


 
Oil and Gas (1)
 
AERO Services
 
Corporate
 
Total
 
(Unaudited)
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 

 
 

 
 

 
 

Revenues
$
4,386

 
$
2,172

 
$

 
$
6,558

Total operating expenses
4,221

 
2,058

 
3,349

 
9,628

Depreciation, depletion and amortization
1,400

 
190

 
16

 
1,606

Income (loss) from operations
(1,235
)
 
(76
)
 
(3,365
)
 
(4,676
)
 
 
 
 
 
 
 
 
Other (expense) income, net
(2,791
)
 

 
865

 
(1,926
)
 
 
 
 
 
 
 
 
Taxes on income

 

 
142

 
142

 
 
 
 
 
 
 
 
Net loss
$
(4,026
)
 
$
(76
)
 
$
(2,642
)
 
$
(6,744
)

(1)
The oil and gas revenues for the six months ended June 30, 2014 includes three months and sixteen days of direct revenues of $4,211,000, operating expenses (including severance taxes) of $2,971,000, depreciation, depletion and amortization of $1,210,000 and loss on commodity derivatives of $2,791,000 related to the Coke Field Assets of which are not included in the six months ended June 30, 2014. Total operating expenses for the Oil and Gas segment also includes expenses for our Etzold field greenfield lab in Kansas and the compensation expense for our acquisitions and production professional staff and their related expenses in connection with identifying and analyzing potential acquisitions and managing our oil and gas assets.



21


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a Houston-based energy technology company known for our proprietary AERO System, a highly efficient, biotechnology process for increasing oil recovery from existing reservoirs. 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. We derive revenues from fees earned as a service provider of our technology to third party exploration and production ("E&P") companies, and also operate oil fields and use our technology to increase oil production in these fields that we acquire and redevelop in the United States.

On January 8, 2014, we executed a merger and share exchange agreement with Infinity Infinity Corp. and certain of its affiliates. On April 14, 2014, the Merger was consummated. We obtained effective control of Infinity Corp. subsequent to the Merger and thus the Merger was accounted for as a reverse acquisition and recapitalization of the Company. Subsequent to the Merger, our shareholders retained a substantial majority of voting interest and positions on the Board of Directors. Additionally our management is retained and our operations comprise the ongoing operations post Merger. In connection with the Merger, we received approximately $24.7 million, net of certain expenses and fees, and approximately $13.8 million in cash from the private placement of common stock for total proceeds of $38.5 million.

On March 14, 2014, we acquired the Coke Field Assets from Petro-Hunt for (i) $38.0 million in cash and a $2.0 million convertible note payable to Petro-Hunt, subject to certain purchase price adjustments primarily for net revenues in excess of direct operating expenses of the property from January 1, 2014 through the closing date, March 14, 2014, and (ii) the assumption of the asset retirement obligation related to plugging and abandoning the Coke Field Assets. Subsequent to the Merger the note payable to Petro-Hunt was converted into common stock.

Net loss for the second quarter of 2014, which includes a loss from commodity derivatives of $2.8 million and a $480,000 charge from debt prepayment and $233,000 of merger and acquisition costs, was $6.1 million, or a loss of $0.20 per share. Excluding the loss from commodity derivatives, debt prepayment charges and merger and acquisition costs, the net loss was $2.6 million or an adjusted loss of $0.09 per share. This compares to a second quarter 2013 net loss of $2.1 million, or a loss of $1.92 per share.

Revenues for the second quarter of 2014 were $5.6 million, up from $935,000 in the second quarter of 2013. Oil and gas revenues increased to $3.6 million from $164,000 in the second quarter 2013 due to the Coke Field acquisition. Revenues from our AERO technology services segment increased to $1.9 million in the second quarter of 2014 from $771,000, an increase of 148% from the second quarter of 2013.

Oil and gas operating expenses in the second quarter of 2014 were $3.0 million compared to $547,000 in the second quarter of 2013 due principally to the Coke Field acquisition, additions to professional and technical staff associated with the growth of our oil and gas segment, acquisition costs and costs associated with the sourcing and evaluation of potential oil property acquisitions. Included in operating expenses are lease operating expenses, workover costs, production and ad valorem taxes and compensation expense for our acquisitions and production professional staff and related expenses in connection with identifying and analyzing potential acquisitions and managing our oil and gas assets. Lease operating expenses in the Coke Field were higher in the second quarter of 2014 than our expectations, and higher than historical levels, due primarily to maintenance, repairs and upgrades on surface equipment. Total operating expenses for the oil and gas segment also includes expenses for our Etzold field greenfield lab in Kansas.

Services operating expenses increased to $1.5 million in the second quarter of 2014 compared to $591,000 in the prior year quarter due to the increased services activities with third party E&P client projects. Services operating expenses include nutrient solution, materials, supplies, travel and transportation and costs of personnel engaged in our AERO services field deployment phase.

As of June 30 2014, we had $1.3 million in services deferred revenues on the balance sheet. The deferred revenues will be recognized over the next 12 months, as we commence the field deployment phase of certain AERO service contracts and also begin to earn additional monthly fees related to such projects. Our profit margin on service revenues can vary from quarter to quarter dependent on the timing of the recognition of revenues on projects and the incurrence of start-up costs on new projects prior to the recognition of revenues.


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Science and technology expenses decreased slightly to $397,000 in the second quarter of 2014 compared to $405,000 in the prior year second quarter. Science and technology expenses include personnel expenses, supplies and other administrative expenses attributable to the Analysis Phase of our AERO service projects and on-going research and development of technology performed at out Houston laboratory facility.

Selling, general and administrative ("SG&A") expense was $1.4 million in the second quarter of 2014, compared to $1.1 million in the prior-year period. Included in SG&A for the second quarter of 2014 were expenses estimated at $493,000 consisting of third party professional fees associated with acquisition due-diligence, acquisition-related audit fees, financing fees and outside professional services for setup and configuring of new software.

Depreciation, depletion and amortization ("DD&A") was $1.2 million in the second quarter of 2014, up from $126,000 in the prior-year period. The year-over-year increase in DD&A expense was the result of higher overall production as a result of the Coke Field acquisition.

Interest expense totaled $1.3 million in the second quarter of 2014, compared with $253,000 in the second quarter of 2013.  The increase was the result of borrowings in connection with the Coke Field acquisition in March 2014. Included in interest expense in the second quarter of 2014 are charges totaling $480,000 in connection with debt prepayment.

We had swap derivatives in place covering approximately 68% of our oil and condensate production for the second quarter of 2014. We continue to maintain swaps covering a portion of our estimated future production. In the second quarter ended June 30, 2014, we incurred a loss on commodity derivatives in the amount of $2.8 million, which includes $223,000 in total cash settlements paid on derivatives. We did not engage in swaps in the previous year’s second quarter.



23


Results of Operations
 
Historical Results of Operations for Glori
 
The following table sets forth selected financial data for the periods indicated (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2014
 
2013
 
2014
 
(Unaudited)
 
(Unaudited)
Revenues:
 

 
 

 
 
 
 
Oil and gas revenues
$
164

 
$
3,644

 
$
271

 
$
4,386

Service revenues
771

 
1,912

 
1,388

 
2,172

Total revenues
935

 
5,556

 
1,659

 
6,558


 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Oil and gas operations
547

 
2,994

 
1,122

 
4,221

Service operations
591

 
1,517

 
1,161

 
2,058

Science and technology
405

 
397

 
772

 
717

Selling, general and administrative
1,087

 
1,370

 
2,154

 
2,632

Depreciation, depletion and amortization
126

 
1,158

 
299

 
1,606

Total operating expenses
2,756

 
7,436

 
5,508

 
11,234


 
 
 
 
 
 
 
Loss from operations
(1,821
)
 
(1,880
)
 
(3,849
)
 
(4,676
)

 
 
 
 
 
 
 
Other (expense) income:
 

 
 

 
 
 
 
Interest expense
(253
)
 
(1,257
)
 
(518
)
 
(1,604
)
Gain on change in fair value of warrants

 

 

 
2,454

  Loss on commodity derivatives

 
(2,791
)
 

 
(2,791
)
Other income (expense)

 
10

 
(15
)
 
15

Total other (expense) income, net
(253
)
 
(4,038
)
 
(533
)
 
(1,926
)
 
 
 
 
 
 
 
 
Income tax expense

 
142

 

 
142

 
 
 
 
 
 
 
 
Net loss
$
(2,074
)
 
$
(6,060
)
 
$
(4,382
)
 
$
(6,744
)
 
Three Months Ended June 30, 2013 and 2014
 
Oil and gas revenues. Oil and gas revenues increased $3,480,000 to $3,644,000 for the three months ended June 30, 2014, from $164,000 for the three months ended June 30, 2013. The increase was attributable to the Coke Field Acquisition which we closed on March 14, 2014 which resulted in the inclusion of an additional $3,541,000 of oil and gas revenues related to the period from April 1, 2014 to June 30, 2014.
 
Service revenues. Service revenues increased $1,141,000 to $1,912,000 for the three months ended June 30, 2014 from $771,000 in the three months ended June 30, 2013. The increase in revenues was attributable to an increase in both the Field Deployment Phase and Analysis Phase services. The total Field Deployment Phase service revenues increase was $986,000. There were $1,731,000 in Field Deployment Phase service revenue in the second quarter 2014 versus $745,000 in the second quarter of 2013. This increase in second quarter 2014 was primarily due to an increase in Canadian project revenues of $1,337,000 over the second quarter 2014 due to higher revenues per project. This Canadian increase was partially offset by a decrease of $351,000 in other Field Deployment Phase services primarily related to a decrease in $293,000 in Texas projects due to a decline in the number of projects during the period. The Analysis Phase work also contributed to the increase in revenues by $155,000 primarily due to the conclusion of two projects which resulted in approximately $169,000 of revenues recognized from deferred revenues during the second quarter 2014.
  

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Oil and gas operations. Oil and gas operating expense increased by $2,447,000 to $2,994,000 in the three months ended June 30, 2014 compared to $547,000 in the three months ended June 30, 2013. The increase was mainly attributable to the acquisition of the Coke Field which was completed on March 14, 2014 and resulted in the inclusion of an additional $2,382,000 of expenses during the second quarter 2014.
 
Service operations. The second quarter 2014 resulted in service operations expense of $1,517,000, a increase of $926,000 or 157%, compared to second quarter 2013 expenses of $591,000. The increase is primarily attributable to an increase in expenses related to nutrient and trucking of $855,000 during the quarter which related to Canadian projects. Additionally there were $60,000 of increased expenses of contract labor charges related to a project in Brazil which is planned to commence later in 2014.
 
Science and technology. Science and technology expenses decreased by $8,000, or 2%, to $397,000 for the three months ended June 30, 2014, from $405,000 for the three months ended June 30, 2013. The slight decrease was attributable to a decline in legal expenses related to intellectual property and facilities charges partially offset by an increase in employee compensation.
 
Selling, general and administrative. Selling, general and administrative expenses increased by $283,000, or 26%, to $1,370,000 for the three months ended June 30, 2014, from $1,087,000 for the three months ended June 30, 2013. This increase was largely related to legal, accounting and other professional fees incurred in connection with the Merger and acquisition of the Coke Field Assets.
 
Depreciation, depletion and amortization. Depreciation, depletion and amortization increased by $1,032,000 to $1,158,000 for the three months ended June 30, 2014, from $126,000 for the three months ended three months ended June 30, 2013. The increase was primarily attributable to an increase in depletion expense of $979,000 due to the depletion associated with the acquisition of the Coke Field Assets.
 
Total other (expense) income, net. Total other (expense) income, net increased $3,785,000 from an expense of $253,000 during the three months ended June 30, 2013 to an expense of $4,038,000 during the three months ended June 30, 2014. The increase in expense was primarily due to the loss on change in commodity derivative $2,791,000 and an interest expense increase of $1,004,000. Interest expense increased $558,000 related to the $18.0 million senior note secured by the Coke Field Assets and $512,000 related to the prepayment penalty, expense of deferred loan costs and interest associated with the $4.0 million subordinated debt.

Six Months Ended June 30, 2013 and 2014
 
Oil and gas revenues. Oil and gas revenues increased $4,115,000 to $4,386,000 for the six months ended June 30, 2014, from $271,000 for the six months ended June 30, 2013. The increase was attributable to purchase of the Coke Field Assets which closed on March 14, 2014 and resulted in the inclusion of an additional $4,211,000 of oil and gas revenues related to the period from March 14, 2014 to June 30, 2014.
 
Service revenues. Service revenues increased $784,000 to $2,172,000 for the six months ended June 30, 2014 from $1,388,000 in the six months ended June 30, 2013. The increase in revenues was attributable to an increase in Field Deployment Phase services of $667,000 and $117,000 in Analysis Phase work. The increase in revenues from Field Deployment Phase services for the six months ended June 30, 2014 was primarily due to an increase of $1,365,000 of Canadian revenues due to higher revenues on a per project basis. This revenues increase was partially offset by a decline in Texas revenues of $475,000 as a result fewer projects in Texas in the six months ended June 30, 2014 when compared to the six months ended June 30, 2013. The additional decline of $223,000 in Field Deployment Phase services was a result of more projects in various other locations in the six months ended June 30, 2013 than in the six months ended June 30, 2014. The increase in Analysis Phase work was primarily caused by two projects which concluded and resulted in $169,000 in deferred revenues recognized during the six months ended June 30, 2014.
    
Oil and gas operations. Oil and gas operating expense increased by $3,099,000 to $4,221,000 in the six months ended June 30, 2014 compared to $1,122,000 in the six months ended June 30, 2013. The increase was mainly attributable to the acquisition of the Coke Field Assets which was completed on March 14, 2014 and resulted in the inclusion of an additional $2,971,000 of expenses of which $2,771,000 related to lease operating expenses and $200,000 related to severance taxes for the period from March 14, 2014 to June 30, 2014. The remaining increase of $128,000 is primarily due to third party due diligence costs related to the acquisition of the Coke Field Assets. Oil and gas operations expense also includes expenses for our Etzold field greenfield lab in Kansas and the compensation expense for our acquisitions and production professional staff and their related expenses in connection with identifying and analyzing potential acquisitions and managing our oil and gas assets.
 

25


Service operations. The six months ended June 30, 2014 resulted in service operations expense of $2,058,000, a increase of $897,000 or 77.3%, compared to six months ended June 30, 2013 expenses of $1,161,000. The majority of the increase, $830,000, is attributable to increased nutrient and trucking costs related to Canadian projects during six months ended June 30, 2014. During the six months ended June 30, 2014 we also incurred costs of $102,000 related to contract labor costs in preparation for a project in Brazil which is planned to commence in the latter half of 2014.
 
Science and technology. Science and technology expenses decreased by $55,000, or 7.1%, to $717,000 for the six months ended June 30, 2014, from $772,000 for the six months ended June 30, 2013. The decrease was mainly attributable to a decrease in employee compensation expense of $46,000.
 
Selling, general and administrative. Selling, general and administrative expenses increased by $478,000, or 22.2%, to $2,632,000 for the six months ended June 30, 2014, from $2,154,000 for the six months ended June 30, 2013. This increase was primarily related to legal, accounting and other professional fees incurred in connection with the Merger and acquisition of the Co