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EX-32.2 - EXHIBIT 32.2 - Glori Energy Inc.gloriexhibit322-q3.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 September 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 31,499,303 $0.001 par value common shares outstanding on November 10, 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
 
September 30, 2014
 
 
 
(Unaudited)
ASSETS
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
20,867

 
$
32,654

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

 
2,269

Prepaid expenses and other current assets
71

 
200

Inventory
24

 
36

  Commodity derivative contracts

 
181

Total current assets
21,269

 
35,340

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

 
45,270

 Other property and equipment
4,892

 
5,721

 
8,033

 
50,991

 
 
 
 
 Less: accumulated depreciation, depletion and amortization
(5,223
)
 
(7,990
)
Total property and equipment, net
2,810

 
43,001

 
 
 
 
Deferred offering costs
378

 

Deferred loan costs
162

 
603

Total assets
$
24,619

 
$
78,944

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
534

 
$
1,345

Deferred revenues
1,753

 
857

Accrued expenses
417

 
1,674

Current portion of long-term debt
3,499

 
3,355

Total current liabilities
6,203

 
7,231

 
 
 
 
Long-term liabilities:
 

 
 

Long-term debt, less current portion
1,771

 
17,052

Other long-term liabilities
449

 
1,854

Total long-term liabilities
2,220

 
18,906

Total liabilities
8,423

 
26,137

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 

 
 

Common stock, $.0001 par value, 100,000,000 shares authorized, 22,450,688 and 31,499,303 shares issued and outstanding as of December 31, 2013 and September 30, 2014, respectively
2

 
3

Additional paid-in capital
61,609

 
105,319

Accumulated deficit
(45,415
)
 
(52,515
)
Total stockholders' equity
16,196

 
52,807

Total liabilities and stockholders' equity
$
24,619

 
$
78,944


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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2014
 
2013
 
2014
 
(Unaudited)
 
(Unaudited)
Revenues:
 

 
 

 
 
 
 
Oil and gas revenues
$
184

 
$
4,103

 
$
455

 
$
8,489

Service revenues
591

 
1,355

 
1,979

 
3,527

Total revenues
775

 
5,458

 
2,434

 
12,016

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Oil and gas operations
512

 
3,088

 
1,634

 
7,309

Service operations
542

 
657

 
1,703

 
2,715

Science and technology
386

 
449

 
1,158

 
1,166

Selling, general and administrative
934

 
1,572

 
3,088

 
4,204

Depreciation, depletion and amortization
167

 
1,325

 
466

 
2,931

Total operating expenses
2,541

 
7,091

 
8,049

 
18,325

 
 
 
 
 
 
 
 
Loss from operations
(1,766
)
 
(1,633
)
 
(5,615
)
 
(6,309
)
 
 
 
 
 
 
 
 
Other (expense) income:
 

 
 

 
 
 
 
Interest expense
(232
)
 
(705
)
 
(750
)
 
(2,309
)
Gain on change in fair value of warrants
1,183

 

 
1,183

 
2,454

  Gain (loss) on commodity derivatives

 
2,027

 

 
(764
)
Other (expense) income
(10
)
 
6

 
(25
)
 
21

Total other (expense) income, net
941

 
1,328

 
408

 
(598
)
 
 
 
 
 
 
 
 
Net loss before taxes on income
(825
)
 
(305
)
 
(5,207
)
 
(6,907
)
 
 
 
 
 
 
 
 
Income tax expense

 
51

 

 
193

 
 
 
 
 
 
 
 
Net loss
$
(825
)
 
$
(356
)
 
$
(5,207
)
 
$
(7,100
)
 
 
 
 
 
 
 
 
Net loss per common share, basic and diluted
$
(0.73
)
 
$
(0.01
)
 
$
(4.76
)
 
$
(0.25
)

 

 
 

 
 
 
 
Weighted average common shares outstanding,
basic and diluted
1,136

 
31,475

 
1,093

 
27,975


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
 

 

 
232

 

 
232

 
 
 
 
 
 
 
 
 
 
 
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
 
583,010

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
Warrant and stock option exercises
 
423,287

 

 
4,188

 

 
4,188

 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 
(7,100
)
 
(7,100
)
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2014
 
31,499,303

 
$
3

 
$
105,319

 
$
(52,515
)
 
$
52,807




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)
 
Nine Months Ended September 30,
 
2013
 
2014
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net loss
$
(5,207
)
 
$
(7,100
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation, depletion and amortization of property and equipment
466

 
2,931

Stock-based compensation
534

 
232

Amortization of deferred loan costs
127

 
326

Accretion of end-of-term charge
72

 
72

Loss on disposal of property and equipment
25

 

Gain on change in fair value of warrant liabilities
(1,183
)
 
(2,454
)
Accretion of discount on long-term debt
50

 
50

Loss on change in fair value of commodity derivatives

 
362

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
38

 
(1,985
)
Prepaid expenses
(17
)
 
(129
)
Inventory
15

 
(12
)
Accounts payable
(9
)
 
409

Deferred revenues
521

 
(896
)
Accrued expenses
(222
)
 
1,041

Net cash used in operating activities
(4,790
)
 
(7,153
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of proved oil and gas property

 
(41,048
)
Purchase of other property and equipment
(447
)
 
(643
)
Net cash used in investing activities
(447
)
 
(41,691
)
 
 
 
 
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 and stock options

 
4,188

Proceeds from merger with Infinity Corp. including private placement of common stock

 
38,441

Payments for deferred offering costs
(79
)
 
(3,337
)
Payments for deferred loan costs
(36
)
 
(767
)
Payments on long-term debt
(1,785
)
 
(6,948
)
Net cash provided by financing activities
9,803

 
60,631

 
 
 
 
Net increase in cash and cash equivalents
4,566

 
11,787

 
 
 
 
Cash and cash equivalents, beginning of period
18,707

 
20,867

 
 
 
 
Cash and cash equivalents, end of period
$
23,273

 
$
32,654

 
 
 
 
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
(1,938
)
 

Asset retirement obligation assumed

 
885

 
 

 
 

Supplemental cash flow information:
 
 
 
Interest paid
$
573

 
$
1,397


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 nine months ended September 30, 2013 and September 30, 2014, the Company derived no revenues from this subsidiary and as of December 31, 2013 and September 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 ("INXB") 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.
 

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

6


December 31, 2013 and September 30, 2014 (unaudited), condensed consolidated statements of operations for the three and nine months ending September 30, 2013 and 2014 (unaudited), condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2014 (unaudited) and condensed consolidated statements of cash flows for the nine months ended September 30, 2013 and 2014 (unaudited). All such adjustments represent normal recurring items. The financial information contained in this report for the three and nine months ended September 30, 2013 and 2014, and as of September 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 on the balance sheet and statement of stockholders' equity. 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 $13.7 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 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 convertible note 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 5,321,700 warrants outstanding at September 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
 
September 30, 2014
 
 
 
(Unaudited)
 
 
 
 
Proved oil and gas properties - successful efforts
$
3,141

 
$
45,270

Construction in progress
902

 
816

Laboratory and warehouse facility
591

 
591

Laboratory and field service equipment
2,968

 
2,975

Office equipment, computer equipment, vehicles and other
431

 
1,339

 
8,033

 
50,991

 
 
 
 
Less:  accumulated depreciation, depletion and amortization
(5,223
)
 
(7,990
)
 
 
 
 
 Total property and equipment, net
$
2,810

 
$
43,001

  
Depreciation and amortization expense was $112,000, depletion expense was $52,000 and accretion expense related to the asset retirement obligation was $3,000 for the three months ended September 30, 2013. Depreciation and amortization expense was $117,000, depletion expense was $1,199,000 and accretion expense related to the asset retirement obligation was $9,000 for the three months ended September 30, 2014. For the nine months ended September 30, 2013 depreciation and amortization expense was $318,000, depletion expense was $138,000 and accretion expense related to the asset retirement obligation was $10,000. Depreciation and amortization expense was $352,000, depletion expense was $2,458,000 and accretion expense related to the asset retirement obligation was $121,000 for the nine months ended September 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 September 30, 2014 in the condensed consolidated statement of operations for the nine months ended September 30, 2014. For this period, the revenues and net loss attributable to the Coke Field Assets were $8,138,000 and $251,000, respectively. The net loss includes a $764,000 loss on commodity derivatives related to the Company's volume based production price swaps (see NOTE 6).

Of the total $39.2 million purchase price of the Coke Field Assets, the Company recognized at approximate fair value assets such as office equipment and trucks of $310,000 and items such as tubular stock of $327,000 included in other property and equipment 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.

In September 2014, the Company purchased additional oil, gas and mineral leases adjacent to the Coke Field Assets (the "Southwest Operating Assets"). The Company purchased the Southwest Operating Assets for $2,000,000 and assumed an asset retirement obligation of an estimated $140,000.
 

11


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

 
For the Three Months Ended September 30,
 
2013
 
2014
 
(Unaudited)
 
 
 
 
Total revenues
$
5,327

 
$
5,458

Net loss
(1,058
)
 
(356
)
 
 
 
 
Net loss per common share, basic and diluted
$
(0.93
)
 
$
(0.01
)
 
 
 
 
Weighted average shares outstanding:
 

 
 
Basic
1,136

 
31,475

Diluted
1,136

 
31,475


 
For the Nine Months Ended September 30,
 
2013
 
2014
 
(Unaudited)
 
 
 
 
Total revenues
$
14,601

 
14,831

Net loss
(6,527
)
 
(6,609
)
 
 
 
 
Net loss per common share, basic and diluted
$
(5.97
)
 
$
(0.24
)
 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
1,093

 
27,975

Diluted
1,093

 
27,975


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  September 30, 2014 (in thousands)
 
Fair value measurements using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Unaudited)
 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
     Commodity derivative (current asset)
$

 
$
181

 
$

 
$
181

 
 
 
 
 
 
 
 
     Commodity derivative (other long-term liabilities)

 
543

 

 
543

 

 

 

 


The Level 2 instruments presented in the table above consists of derivative instruments made up of commodity price swaps. The fair values of the Company's commodity derivative instruments are based upon the NYMEX futures value of oil compared to 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 price swaps where a fixed price is received from the counterparty 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 September 30, 2014, the Company had the following open positions on outstanding commodity derivative contracts:

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

 
$
94.11

 
229,000

April 2015 - March 2016
 
7,300

 
$
86.50

 
(58,000
)
April 2016 - March 2017
 
6,550

 
$
82.46

 
(244,000
)
April 2017 - March 2018
 
5,800

 
$
80.53

 
(289,000
)

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 gain (loss) on commodity derivatives line item located in other (expense) income.


13


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

 
 
 
Three Months Ended September 30,
 
 
 
2014
 
 
 
(Unaudited)
 
 
 
 
Unrealized gain on commodity derivatives
$
2,206,000

Realized loss on commodity derivatives
(179,000
)
 
 
 
$
2,027,000


 
 
 
Nine Months Ended September 30,
 
 
 
2014
 
 
 
(Unaudited)
 
 
 
 
Unrealized loss on commodity derivatives
$
(362,000
)
Realized loss on commodity derivatives
(402,000
)
 
 
 
$
(764,000
)

 
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 September 30, 2014, the ratable liability for the end of term charge was $144,000 and $216,000, 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 September 30, 2014 the outstanding loan balance is $2,622,000. The Company is in compliance with all the covenants as of September 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. Glori Energy Production is also required to maintain certain financial ratios related to leverage, working capital and proved reserves, all as defined in the loan agreement. As of September 30, 2014 the outstanding loan balance is $17,734,000. Glori Energy Production is in compliance with all covenants as of September 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 September 30,
 
Amount
 
 
(Unaudited)
 
 
 
2015
 
$
3,355

2016
 
473

2017
 
16,579

 
 
$
20,407

 
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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2014
 
2013
 
2014
 
(Unaudited)
 
(Unaudited)
Numerator:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(825
)
 
$
(356
)
 
$
(5,207
)
 
$
(7,100
)
 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
1,136

 
31,475

 
1,093

 
27,975

Effect of dilutive securities

 

 

 

Weighted-average common shares - diluted
1,136

 
31,475

 
1,093

 
27,975

 
 
 
 
 
 
 
 
Net loss per common share - basic and diluted
$
(0.73
)
 
$
(0.01
)
 
$
(4.76
)
 
$
(0.25
)

The following weighted-average securities outstanding during the three and nine months ended September 30, 2013 and 2014 were not included in the calculation of diluted shares outstanding as they would have been anti-dilutive (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2014
 
2013
 
2014
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
Common stock warrants

 
5,517

 

 
4,752

Common stock options
2,021

 
2,307

 
1,841

 
2,315


 



15



NOTE 9 - INCOME TAXES
 
At December 31, 2013 and September 30, 2014, the Company has net operating loss carryforwards for federal income tax reporting purposes of approximately $31.4 million and $41.8 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 nine months ended September 30, 2013 and 2014 varies from the statutory rate primarily due to the effect of the valuation allowance. For the three and nine months ended September 30, 2014 the Company had income tax expense of $51,000 and $193,000, respectively due to current taxes on foreign income.
 
As of December 31, 2013 and September 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 has amended 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, is leased for $8,415 per month and has a lease expiration date of May 2015. The Company has vacated this facility and will not renew the lease upon expiration. The Saskatchewan warehouse is a month-to-month lease which rents for $1,000 per month and is cancelable 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 noncancelable operating leases as of September 30, 2014 are as follows (in thousands):

 
 
Year Ending September 30,
 
 
(Unaudited)
 
 
 
2015
 
$
204

2016
 
129

2017
 
85

 
 
$
418


Total rent expense was approximately $60,000 and $74,000 for the three months ended September 30, 2013 and September 30, 2014, respectively, and $156,000 and $217,000 for the nine months ended September 30, 2013 and September 30, 2014, respectively.

The Company signed a lease for office space subsequent to September 30, 2014 which is not included in the table above (see NOTE 13).

NOTE 11 - STOCK-BASED COMPENSATION
 
Stock Incentive Plan
 
As a result of the Merger with Infinity Corp. which was 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 to 1.0 of pre-Merger stock options to post-Merger stock options. 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 issued at an exercise price equal to the fair market value of the Company’s common stock at the grant date. Generally, the options vest 25 percent after 1 year, and thereafter ratably each month over the following 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 nine months ended September 30, 2014, using the following assumptions:
 
 
Year ended
December 31,
 
Nine months ended September 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)
(9,397
)
 
$
1.16

 
 
Forfeited or Expired (unaudited) (1)
(16,864
)
 
$
1.16

 
 
Outstanding as of September 30, 2014 (unaudited)
2,303,022

 
$
0.82

 
7.0
Exercisable as of December 31, 2013
1,887,568

 
$
0.75

 
7.5
Exercisable as of September 30, 2014 (unaudited) (2)
2,049,188

 
$
0.78

 
6.8
 
(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, 2015, the day after the first anniversary of the Merger.

The total intrinsic value of options exercised for the three months ended September 30, 2013 and September 30, 2014 was $0 and $40,000, respectively. The total intrinsic value of options exercised for the nine months ended September 30, 2013 and September 30, 2014 was $74,000 and $70,000, respectively. The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2013 and September 30, 2014 is $782,000 and $14,590,000, respectively. The total fair value of options vested during the three months ended September 30, 2013 and September 30, 2014 was $106,000 and $77,000. The total fair value of options which vested during the nine months ended September 30, 2013 and September 30, 2014 was $583,000 and $236,000, respectively.
 
Stock-based compensation expense is included primarily in selling, general and administrative expense and was $87,000 and $78,000 for the three months ended September 30, 2013 and September 30, 2014, respectively. Stock-based compensation expense was $534,000 and $232,000 for the nine months ended September 30, 2013 and September 30, 2014, respectively. The Company has future unrecognized compensation expense for nonvested shares at September 30, 2014 of $311,000 with a weighted average vesting period of 1.7 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 AERO services provided to third party oil companies (the “AERO Services 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 solution of enhanced oil recovery through a two-step process consisting of (1) the Analysis Phase and (2) the 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 AERO Services 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 Services Segment capital expenditures and depreciation associated with injection equipment is viewed as part of the AERO Services 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 September 30, 2013
 

 
 

 
 

 
 

Revenues
$
184

 
$
591

 
$

 
$
775

Total operating expenses
512

 
542

 
1,320

 
2,374

Depreciation, depletion and amortization
56

 
101

 
10

 
167

Loss from operations
(384
)
 
(52
)
 
(1,330
)
 
(1,766
)
 
 
 
 
 
 
 
 
Other income, net

 

 
941

 
941

 
 
 
 
 
 
 
 
Net loss
$
(384
)
 
$
(52
)
 
$
(389
)
 
$
(825
)


19


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

 
 

 
 

 
 

Revenues
$
4,103

 
$
1,355

 
$

 
$
5,458

Total operating expenses
3,088

 
657

 
2,021

 
5,766

Depreciation, depletion and amortization
1,245

 
73

 
7

 
1,325

(Loss) income from operations
(230
)
 
625

 
(2,028
)
 
(1,633
)
 
 
 
 
 
 
 
 
Other income (expense), net
2,027

 

 
(699
)
 
1,328

 
 
 
 
 
 
 
 
Income tax expense

 

 
51

 
51

 
 
 
 
 
 
 
 
Net income (loss)
$
1,797

 
$
625

 
$
(2,778
)
 
$
(356
)
 
(1)
The oil and gas revenues for the three months ended September 30, 2014 includes direct revenues of $4,030,000, operating expenses (including severance taxes) of $2,294,000, depreciation, depletion and amortization of $1,177,000 and gain on commodity derivatives of $2,206,000 related to the Coke Field Assets and Southwest Operating Assets which are not included in the three months ended September 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)
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
 

 
 

 
 

 
 

Revenues
$
455

 
$
1,979

 
$

 
$
2,434

Total operating expenses
1,634

 
1,703

 
4,246

 
7,583

Depreciation, depletion and amortization
149

 
287

 
30

 
466

Loss from operations
(1,328
)
 
(11
)
 
(4,276
)
 
(5,615
)
 
 
 
 
 
 
 
 
Other income, net

 

 
408

 
408

 
 
 
 
 
 
 
 
Net loss
$
(1,328
)
 
$
(11
)
 
$
(3,868
)
 
$
(5,207
)


20


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

 
 

 
 

 
 

Revenues
$
8,489

 
$
3,527

 
$

 
$
12,016

Total operating expenses
7,309

 
2,715

 
5,370

 
15,394

Depreciation, depletion and amortization
2,645

 
263

 
23

 
2,931

(Loss) income from operations
(1,465
)
 
549

 
(5,393
)
 
(6,309
)
 
 
 
 
 
 
 
 
Other (expense) income, net
(764
)
 

 
166

 
(598
)
 
 
 
 
 
 
 
 
Income tax expense

 

 
193

 
193

 
 
 
 
 
 
 
 
Net (loss) income
$
(2,229
)
 
$
549

 
$
(5,420
)
 
$
(7,100
)

(1)
The oil and gas revenues for the nine months ended September 30, 2014 includes six months and sixteen days of direct revenues of $8,138,000, operating expenses (including severance taxes) of $5,264,000, depreciation, depletion and amortization of $2,361,000 and loss on commodity derivatives of $764,000 related to the Coke Field Assets and Southwest Operating Assets which are not included in the nine months ended September 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.



21


NOTE 13 – SUBSEQUENT EVENTS

On October 2, 2014, the Company executed and commenced a two-year lease agreement for 7,805 square feet of office space in Houston's Westchase District for $18,498 per month. The Company has a one-year extension option at a 4% increase in rent and two one-year extension options at a mutually agreed upon market rate with the lessor.


22


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

Overview

We are a Houston-based energy technology company focused on enhanced oil recovery using our proprietary AERO System technology to increase the amount of oil that can be produced from conventional oil fields. 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 use our technology to increase oil production in fields that we acquire and operate in the United States.

On January 8, 2014, we executed a merger and share exchange agreement with 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 $13.7 million in cash from the private placement of common stock for total proceeds of $38.4 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 third quarter of 2014 was $356,000 or $0.01 per share. This compares to a third quarter 2013 net loss of $825,000, or a loss of $0.73 per share.

Revenues for the third quarter of 2014 were $5.5 million, up from $775,000 in the third quarter of 2013. Oil and gas revenues increased to $4.1 million from $184,000 in the third quarter 2013 due principally to the Coke Field acquisition. Revenues from our AERO technology services segment increased to $1.4 million in the third quarter of 2014 from $591,000, an increase of 129% from the third quarter of 2013.

During the third quarter of 2014, we produced 46,143 net barrels of oil equivalents ("BOE") or approximately 502 BOE per day and received an average realized price of $94.23. After the effect of oil swap settlements our oil price per barrel for the quarter was approximately $91.00 per barrel. Production from liquids (oil and condensate) represented approximately 92% of total production.

Oil and gas operating expenses in the third quarter of 2014 were $3.1 million compared to $512,000 in the third 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 oil and gas operating expenses for the third quarter of 2014 are direct lease operating expenses of approximately $2,100,000, production taxes of $192,000, acquisition expenses of $278,000 and compensation and other administrative expenses associated with our acquisitions and production professional personnel of $491,000. Acquisition expenses consist of legal and third party fees associated with sourcing and analyzing potential acquisitions. Acquisition expenses of $278,000 in the third quarter of 2014 increased from acquisition costs of $29,000 in the second quarter of 2014.

Services operating expenses increased to $657,000 in the third quarter of 2014 compared to $542,000 in the prior year third quarter due to the increased AERO 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 September 30, 2014, we had $857,000 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 increased to $449,000 in the third quarter of 2014 compared to $386,000 in the prior year third 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 $1.6 million in the third quarter of 2014, compared to $934,000 in the prior-year period. The increase is primarily due to increased compensation expense for additional staff, increased consulting and accounting fees and higher legal fees for various regulatory filings such as those associated with being a new public company such as form S-8 and the final filing of our predecessor, Infinity Corp., through form 20-F.

Depreciation, depletion and amortization ("DD&A") was $1.3 million in the third quarter of 2014, up from $167,000 in the prior-year period. The year-over-year increase in DD&A expense was the result of higher overall production and higher capitalized costs as a result of the Coke Field acquisition.

Interest expense totaled $705,000 in the third quarter of 2014, compared with $232,000 in the third quarter of 2013. The increase was the result of borrowings in connection with the Coke Field acquisition in March 2014. Interest expense in the third quarter 2014 included $102,000 in amortization of deferred loan costs versus $29,000 in the third quarter 2013.

We had price swap derivatives in place covering approximately 60% of our oil and condensate production for the third quarter of 2014. We continue to maintain price swaps covering a portion of our estimated future production. In the third quarter ended September 30, 2014, we incurred a gain on commodity derivatives of approximately $2.0 million, which includes $179,000 in total cash settlements paid on derivatives. We did not engage in price swaps in the previous year’s third quarter.



24


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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2014
 
2013
 
2014
 
(Unaudited)
 
(Unaudited)
Revenues:
 

 
 

 
 
 
 
Oil and gas revenues
$
184

 
$
4,103

 
$
455

 
$
8,489

Service revenues
591

 
1,355

 
1,979

 
3,527

Total revenues
775

 
5,458

 
2,434

 
12,016


 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Oil and gas operations
512

 
3,088

 
1,634

 
7,309

Service operations
542

 
657

 
1,703

 
2,715

Science and technology
386

 
449

 
1,158

 
1,166

Selling, general and administrative
934

 
1,572

 
3,088

 
4,204

Depreciation, depletion and amortization
167

 
1,325

 
466

 
2,931

Total operating expenses
2,541

 
7,091

 
8,049

 
18,325


 
 
 
 
 
 
 
Loss from operations
(1,766
)
 
(1,633
)
 
(5,615
)
 
(6,309
)

 
 
 
 
 
 
 
Other (expense) income:
 

 
 

 
 
 
 
Interest expense
(232
)
 
(705
)
 
(750
)
 
(2,309
)
Gain on change in fair value of warrants
1,183

 

 
1,183

 
2,454

  Gain (loss) on commodity derivatives

 
2,027

 

 
(764
)
Other (expense) income
(10
)
 
6

 
(25
)
 
21

Total other (expense) income, net
941

 
1,328

 
408

 
(598
)
 
 
 
 
 
 
 
 
Income tax expense

 
51

 

 
193

 
 
 
 
 
 
 
 
Net loss
$
(825
)
 
$
(356
)
 
$
(5,207
)
 
$
(7,100
)
 
Three Months Ended September 30, 2013 and 2014
 
Oil and gas revenues. Oil and gas revenues increased $3,919,000 to $4,103,000 for the three months ended September 30, 2014, from $184,000 for the three months ended September 30, 2013. The increase was primarily attributable to the Coke Field acquisition which we closed on March 14, 2014 which resulted in the inclusion of an additional $4,030,000 of oil and gas revenues related to the period from July 1, 2014 to September 30, 2014.
 
Service revenues. Service revenues increased $764,000 to $1,355,000 for the three months ended September 30, 2014 from $591,000 in the three months ended September 30, 2013. The increase in revenues was primarily attributable to an increase in Analysis Phase revenues of $833,000, which was partially offset by a decrease in Field Deployment Phase revenues of $69,000. The increase in Analysis Phase revenues was due to seven projects in process in the third quarter 2014 compared to two projects in the third quarter of 2013. There were $481,000 in Field Deployment Phase service revenues in the third quarter 2014 versus $550,000 in the third quarter of 2013. There were six projects in the Field Deployment Phase in the third quarter of 2014 compared to seven projects in the 2013 third quarter.


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Oil and gas operations. Oil and gas operating expense increased by $2,576,000 to $3,088,000 in the three months ended September 30, 2014 compared to $512,000 in the three months ended September 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 $2,294,000 of expenses during the third quarter 2014 and additional professional staff and administrative expenses in connection with the additional staffing for analyzing potential oil property acquisitions and the management of the Coke Field. The additional expenses related to the Coke Field are primarily related to lease operating expenses of approximately $2,100,000 and severance taxes of $192,000. 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.
 
Service operations. The third quarter 2014 resulted in service operations expense of $657,000, an increase of $115,000 or 21%, compared to third quarter 2013 expenses of $542,000. The increase is primarily attributable to an increase in contract labor charges of $115,000 during the quarter related to a project in Brazil which began in the third quarter of 2014.
 
Science and technology. Science and technology expenses increased by $63,000, or 16%, to $449,000 for the three months ended September 30, 2014, from $386,000 for the three months ended September 30, 2013. The increase was attributable to increases in expenses for employee compensation and lab supplies.
 
Selling, general and administrative. SG&A expenses increased by $638,000, or 68%, to $1,572,000 for the three months ended September 30, 2014, from $934,000 for the three months ended September 30, 2013. The increase was partially attributable to legal fees of $334,000 incurred for various, primarily nonrecurring filings associated with being a new public company such as form S-8 and filing the final SEC form 20-F of our predecessor, Infinity Corp, as well as other general shareholder matters. The overall increase was also attributable to an increase of $183,000 in recruiting and compensation expenses, due to an increase in professional staff, and to an increase of $132,000 in consulting and accounting fees.
 
Depreciation, depletion and amortization. DD&A increased by $1,158,000 to $1,325,000 for the three months ended September 30, 2014, from $167,000 for the three months ended three months ended September 30, 2013. The increase was a result of an increase in depletion expense associated with the acquisition of the Coke Field Assets.
 
Total other (expense) income, net. Total other (expense) income, net, increased $387,000 from income of $941,000 during the three months ended September 30, 2013 to income of $1,328,000 during the three months ended September 30, 2014. The increase in other income was primarily due to a $2,027,000 gain on the change in fair value of commodity derivatives which was partially offset by a prior period gain of $1,183,000 on the change in fair value of warrants which were no longer outstanding during the third quarter 2014. Interest expense also increased $473,000 due to the $18.0 million senior note secured by the Coke Field Assets which further offset the commodity derivative gain.

Nine Months Ended September 30, 2013 and 2014
 
Oil and gas revenues. Oil and gas revenues increased $8,034,000 to $8,489,000 for the nine months ended September 30, 2014, from $455,000 for the nine months ended September 30, 2013. The increase was attributable to the purchase of the Coke Field Assets which closed on March 14, 2014 and resulted in the inclusion of an additional $8,138,000 of oil and gas revenues related to the period from March 14, 2014 to September 30, 2014.
 
Service revenues. Service revenues increased $1,548,000, or 78%, to $3,527,000 for the nine months ended September 30, 2014 from $1,979,000 in the nine months ended September 30, 2013. The increase in revenues was attributable to increases of $952,000 in Analysis Phase services and $596,000 in Field Deployment Phase services. The increase in Analysis Phase work was derived from eleven projects in the Analysis Phase during the nine months ended September 30, 2014 compared to four projects during the nine months ended September 30, 2013. The increase in Field Deployment Phase revenues was primaril