Item 1. Business
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates, and projections as of the date of this filing. These statements by their nature are subject to risks, uncertainties, and assumptions and are influenced by various factors. As a consequence, actual results may differ materially from those expressed in the forward-looking statements. See the risk factors set forth in Item 1A
Item 1A. Risk Factors
Risk Factors Relating to our Business
We will likely need additional financing in the next twelve months in order to fund operations and pay-off or refinance our debt.
We have incurred net losses since inception and our cash flows have been adversely affected by the current downturn in the oil market. We will likely need to sell additional shares of our common stock or preferred stock, borrow funds from private lenders or banking institutions, or in the event necessary, sell assets in order to meet our operating requirements and to pay-off or refinance the $10.5 million term note issued by GEP which matures March of 2017. We may have difficulty obtaining such additional financing as a result of the decrease in oil prices, our negative cash flow from operations and the significant decrease in our stock price. Failure to obtain additional financing would have a material adverse effect on our business operations and financial condition. See Item 7. Management's Discussion and Analysis for further discussion about the Company's liquidity.
We have failed to comply with the minimum bid price requirements for continued listing on the NASDAQ Capital Market, such that our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.
On October 23, 2015, we received a deficiency letter (the “Notice Letter”) from The NASDAQ Stock Market LLC (“NASDAQ”) indicating that the Company’s common stock for the last 30 consecutive business days had closed below the minimum $1.00 per share requirement under NASDAQ Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The Notification Letter states that Glori has 180 calendar days, until April 20, 2016 (the “Initial Compliance Period”), to regain compliance with the Minimum Bid Price Requirement. In accordance with NASDAQ Listing Rule 5810(c)(3)(A), the Company can regain compliance if the closing bid price of its common stock is at least $1.00 for a minimum of 10 consecutive business days. If the Company does not achieve compliance with the Minimum Bid Price Requirement by the end of the Initial Compliance Period, it may be granted a second 180 day compliance period, as long as (a) on the last day of the Compliance Period the Company is in compliance with the market value requirement for continued listing as well as all other listing standards and (b) the Company provides written notice of its intention to cure the deficiency during a second compliance period.
If we fail to successfully execute our business strategy or implement available options to regain compliance with the Minimum Bid Price Requirement, such as a reverse stock split, the common stock may be delisted. A delisting of our common stock from NASDAQ could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital to address our liquidity needs and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.
Oil prices are volatile, and a further decline or a continuation at the current depressed price of oil could harm our business, financial condition and results of operations.
Our results of operations and future growth will depend on the level of activity for oil development and production. Demand for the AERO System depends on our customers’ willingness to make operating and capital expenditures for waterflooding procedures and the AERO System. The continued and significant decline in oil prices, the sustained low price environment and the uncertainty about future oil prices has affected, and may continue to adversely affect the prices we can obtain from our customers or prevent us from obtaining new customers for our services. Accordingly, our number of customers with current projects dropped from 15 to 1 at December 31, 2014 and 2015, respectively. The decline in oil prices has resulted in a decrease in revenues from our oil properties and from other oil fields we acquire. Additionally, oil price volatility also may make mineral rights acquisitions more difficult. Our customers’ willingness to develop and produce oil using waterflooding and the AERO System is highly dependent on prevailing market conditions and oil prices that are influenced by numerous factors over which we have no control, including:
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changes in the supply of or the demand for oil;
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the condition of the United States and worldwide economies;
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market uncertainty;
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the level of consumer product demand;
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the actions taken by foreign oil producing nations;
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domestic and foreign governmental regulation and taxes;
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political conditions or hostilities in oil producing nations;
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the price and availability of alternate fuel sources;
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terrorism; and
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the availability of pipeline or other takeaway capacity.
Oil prices have historically been volatile and cyclical. A prolonged reduction in the price of oil will likely affect oil production levels and therefore affect demand for our services. In addition, a prolonged significant reduction in the price of oil could make it more difficult for us to collect outstanding account receivables from our customers. A material decline in oil prices or oil development or production activity levels could materially harm our business, financial condition and results of operations.
Our business is difficult to evaluate due to its limited operating history.
Since our inception in November 2005, the majority of our resources have been dedicated to our research development and testing efforts, and we have only recently begun to transition into the early stages of (i) commercializing the AERO System and (ii) acquiring, restoring and operating mature oil fields that fit our criteria for the AERO System. In addition, we do not have a stable operating history that you can rely on in connection with your evaluation of our current business and future business prospects. Our business and prospects must be carefully considered in light of the limited history of the AERO System and our acquisition of mature oil fields, and the many business risks, uncertainties and difficulties that are typically encountered by companies that have uncertain revenues and are committed to focusing on research, development and technology testing for an indeterminate period of time.
Our proposed business strategies described in this Annual Report on Form 10-K incorporate our management’s current analysis of potential markets, opportunities and difficulties that we face.
We cannot assure you that our underlying assumptions accurately reflect current trends and conditions in our industry that the AERO System will be successful or that we will be able to profitably operate any oil fields that we acquire. Our business strategies may change substantially from time to time or may be abandoned as our management reassesses opportunities and reallocates resources. If we are unable to develop or implement these strategies, or if the AERO System becomes not economically viable, we may never achieve profitability. Even if we do achieve profitability, we cannot predict the level of such profitability, and it may not be sustainable.
We have incurred substantial losses to date, may continue to incur losses in the future and may never achieve or sustain profitability.
We have incurred substantial net losses since inception, including net losses of $18.8 million and $36.3 million for the years ended December 31, 2014 and 2015 respectively, and these losses may continue. As of December 31, 2015, we had an accumulated deficit of $100.4 million. We expect to incur additional costs and expenses related to the continued development and expansion of our business, including our research and development operations, the commercialization of the AERO System and the acquisition, restoration and operation of additional mature oil fields. Our ability to achieve profitability has been impacted by the decrease in oil prices, and depends on our success in increasing industry acceptance of the AERO System, raising additional capital and the completion and successful integration of oil property acquisitions. There can be no assurance that we will achieve profitability.
The AERO System has only been applied to a limited number of reservoirs, and the viability of the AERO System in a broader range of reservoirs is still uncertain.
Our AERO System has only been applied in a limited number of sandstone reservoirs to date. The future success of our business depends on our ability (i) to demonstrate that the AERO System has the ability to increase oil recovery on a more widespread basis, on a larger scale and on attractive economic terms and (ii) to profitably restore and operate any oil fields we may acquire. Reservoir characteristics differ and, consequently, certain elements of our services are specifically engineered for each reservoir. As a result, we may not be able to achieve results in other reservoirs consistent with those we have thus far achieved in the reservoirs where the AERO System has successfully been applied. For example, as discussed in detail below, in 2010, we acquired a non-producing oil field in Kansas known as the North Etzold field, which was to be used primarily as a field laboratory for the AERO System. The North Etzold field consisted of 14 shut-in wells which had been stripped of wellbore tubulars, artificial lift equipment and the associated oil and water processing and storage facilities. While the Phase 1 recompletion resulted in a 45% increase in the daily production rate from the primary production well after implementation of the AERO System, the Phase 2 recompletion, which was done simultaneously with the implementation of the AERO System, did not result in oil production sufficient to cover the direct production costs. Consequently, implementation of the AERO System could yield less favorable oil production rates and overall oil recovery results than those thus far achieved where the AERO System has successfully been applied.
The AERO System may not be commercially viable in marginally producing wells if the base and incremental production does not support the cost of operating such wells. Accordingly, the incremental oil associated with implementation of the AERO System will also continue only as long as oil can continue to be produced economically. Any inability to broaden our customer base and increase commercialization of the AERO System applications effectively or to realize sufficiently favorable oil recovery results in a significant number of other reservoirs, including those we may acquire, will limit the commercial acceptance and viability of the AERO System, which would materially harm our business, financial condition and results of operations.
The success of the AERO System is dependent upon the information we receive.
The success of an application of the AERO System to a particular reservoir is dependent upon information that we receive regarding the reservoir characteristics and geology. If this information is inaccurate, we may not be able to achieve results in such a reservoir consistent with those we have thus far achieved in the reservoirs where the AERO System has been applied successfully. With respect to our customers, because of the uniqueness of our technology and the early stage of its development, we must educate potential customers on our technology in order to be able to generate business. New customers generally prefer to initially test our technology in a small portion of their lowest-priority oil field.
Since our test only includes a small portion of the injection wells and production wells in the oil field, it is important that the customer be able to identify which injection wells are servicing the production wells in the test area.
We may have difficulties gaining market acceptance and successfully marketing the AERO System to our potential customers.
A primary component of our business strategy is to market the AERO System to oil producers. To gain market acceptance and successfully market the AERO System to oil producers, we must effectively demonstrate the commercial advantages of using the AERO System as an alternative to, or in addition to, other enhanced oil recovery methods. We must prove that the AERO System is a cost effective method of significantly increasing the amount of oil that can be recovered from a reservoir. If we are unable to demonstrate this to oil producers, we will not be able to penetrate this market, generate new business or retain existing customers. In addition, until the efficacy of our technology is more widely demonstrated we are likely to experience long sales cycles and long test cycles, which may harm our business, financial condition and results of operations.
Our revenue to date has been derived from a limited number of customers, and the loss of any of these customers could materially harm our business, financial condition and results of operations.
We have a limited number of customers. For the year ended December 31, 2015, all of our service revenue was generated from four customers. As these projects reach completion and if we fail to generate new business, our business, financial condition and results of operations could be materially harmed. As of December 31, 2015 we had one service customer.
Oil fields, once acquired, may not be appropriate for our purposes or may have environmental or other liabilities associated with them that may negatively affect our business, financial condition and results of operations.
In addition to marketing the AERO System, we intend to acquire mature fields and implement the AERO System. We cannot provide assurance that the oil fields we acquire will result in commercially viable projects.
The potential of a given property to continue to produce oil or resume production of oil and to be adaptable to the AERO System cannot be determined with a high level of precision prior to our acquisition of the property. We will continue to perform due diligence reviews of the properties we seek to acquire in a manner that we believe is both consistent with practices in the industry and necessary to determine the characteristics of such properties and the viability of the oil fields for the application of the AERO System. However, these reviews are inherently incomplete and cannot assure us of the quality of the oil fields or of the likelihood of success of the AERO System in enhancing their production of oil. It is generally not possible for us to test a property or conduct an in-depth review of its related records as part of its acquisition. Even if we are able to complete an in-depth review and sampling of these properties, such a review may not reveal existing or potential problems or permit us to become sufficiently familiar with the properties to fully assess their potential for successful application of the AERO System.
Even when problems are identified, it may be necessary for us to assume known or unknown environmental and other risks and liabilities to complete the acquisition of such properties. In addition, since the properties we are targeting are older, mature oil fields, their existing infrastructure may be out of date, damaged, in need of repair or removed, and we could incur unanticipated costs to repair or replace this infrastructure. The discovery of any unanticipated material liabilities or remediation costs or the incurrence of any unanticipated costs associated with our oil field acquisitions could harm our results of operations and financial condition.
If water that is not toxic to microbes is not available at a well site, the AERO System will not work or will require additional costs either to clean the water or bring in non-toxic water to the AERO System to perform correctly and, therefore, may not be a viable option for some oil fields.
The AERO System requires non-toxic water to support microbial activity in the reservoir. The water used in waterflooding does not have to be potable water, but if suitable water is not being used, the AERO System will not work unless the water is remediated or replaced with a more suitable water source which may cause additional costs to be expended. These additional costs may make the AERO System less cost effective or not cost effective for some oil fields. For example, in a recent implementation of the AERO System, the salinity of the produced water used in the waterflood operations was very high, making it toxic to most microbes. While our customer began using water from an existing nearby water well to provide a better environment for the microbes, which made the AERO System more effective, we may not be able to provide non-toxic water to some oil fields, eliminating these oil fields as candidates for the AERO System.
The AERO System is currently usable only in oil reservoirs with specific characteristics, which limits the potential market for our services.
For an oil reservoir to be suitable for the AERO System, the reservoir must be waterflooded or a candidate for waterflooding, must be composed of sandstone, must have permeability greater than 75 milli-darcies and must have a suitable water source. This limits the potential market for our services, which may negatively impact our results of operations and profitability.
Our operations involve operating hazards, which, if not insured or indemnified against, could harm our results of operations and financial condition.
Our operations are subject to hazards inherent in our technology, including exposure to pressurized air that may be used in the AERO System equipment and pressurized fluids that may be associated with the water injection system, and to hazards typically associated with oil field service operations, oil field development and oil production activities, including fire, explosions, blowouts, spills and damage or loss from natural disasters, each of which could result in substantial damage to the oil producing formations and oil wells, production facilities, other property, equipment and the environment or in personal injury or loss of life.
These hazards could also result in the suspension of operations or in claims by employees, customers or third parties which could have a material adverse effect on our financial condition. Operations also may be suspended because of equipment breakdowns and failure of subcontractors to perform or supply goods or services.
Some of these risks are either not insurable or insurance is available only at rates that we consider uneconomical. Although we will maintain liability insurance in an amount that we consider consistent with industry practice, the nature of these risks is such that liabilities could exceed policy limits. We may not always be successful in obtaining contractual indemnification from our customers, and customers who provide contractual indemnification protection may not maintain adequate insurance or otherwise have the financial resources necessary to support their indemnification obligations. Our insurance or indemnification arrangements may not adequately protect it against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a customer to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition.
Our operations involve risks associated with the sale and distribution of crude oil.
The sale of our crude oil production (if any) depends on a number of factors beyond our control, including the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and transportation facilities owned by third parties. In addition, lack of financing, construction and permitting delays, permitting costs and other constraints could limit or delay the construction of new gathering, processing, compression and transportation facilities by third parties or us, and we may experience delays or increased costs in accessing the pipelines, gathering systems or rail systems necessary to transport our production to points of sale or delivery. Any significant change in market or other conditions affecting gathering, processing, or transportation facilities or the availability of these facilities, including due to our failure or inability to obtain access to these facilities on terms acceptable to us or at all, could materially and adversely affect our business and, in turn, our financial condition and results of operations.
A portion of our oil production in any region may be interrupted, or shut in, from time to time for numerous reasons, including as a result of weather conditions, accidents, loss of pipeline or gathering system access, field labor issues or strikes, or capital constraints that limit the ability of third parties to construct gathering systems, processing facilities, or interstate pipelines to transport our production, or we might voluntarily curtail production in response to market conditions. If a substantial amount of our production is interrupted at the same time, it could temporarily adversely affect our cash flows.
The loss of key personnel or the failure to attract and retain highly qualified personnel could compromise our ability to effectively manage our business and pursue our growth strategy.
Our future performance depends on the continued service of our key technical, development, sales, services and management personnel. In particular, we are heavily dependent on the following key employees: Stuart M. Page, President and Chief Executive Officer, Michael Pavia, Chief Technology Officer, Thomas Holland, Senior Vice President of Production, Ken Nimitz, Senior Vice President of Operations, and Victor M. Perez, Chief Financial Officer. The loss of key employees could result in significant disruptions to our business, and the integration of replacement personnel could be costly and time consuming, could cause additional disruptions to our business and could be unsuccessful. We do not carry key person life insurance covering any of our employees.
Our future success also depends on the continued ability to attract and retain highly qualified technical, development, sales, services and management personnel. A significant increase in the wages paid by competing employers could reduce our skilled labor force and increase the wages that we must pay to motivate, retain or recruit skilled employees.
In addition, wage inflation and the cost of retaining our key personnel in the face of competition for such personnel may increase our costs faster than we can offset these costs with increased prices or increased sales of the AERO System.
We may require substantial additional financing to achieve our goals and to make future acquisitions, and a failure to obtain this capital when needed or on acceptable terms could materially affect our growth rate and force us to delay, limit, reduce or terminate our research and development and commercialization efforts.
Since our inception, most of our resources have been dedicated toward research and development, as well as demonstrating the effectiveness of the AERO System in our labs and in the field and the acquisition of our oil properties. We also intend to expend substantial resources for the foreseeable future on further developing the AERO System and also we intend to expend significant resources on the acquisition and operation of additional mature oil fields to continue to test and demonstrate the AERO System in reservoirs with a variety of characteristics. We cannot assure you that debt or equity financing will be available or sufficient to meet our requirements. Our inability to access sufficient amounts of capital on acceptable terms, or at all, for our operations could materially harm our business, financial condition, results of operations and our ability to prepay or refinance the term note issued by GEP.
Our quarterly operating results may fluctuate in the future.
Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations are described elsewhere in this Annual Report on Form 10-K. Accordingly, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.
Our industry is highly competitive, and if we do not compete successfully, our business, financial condition and results of operations will be harmed.
The enhanced oil recovery industry is large and intensely competitive. Our competition comes mainly from other methods of enhanced oil recovery, such as thermal injection (for example, steam), gas injection (for example, carbon dioxide) and chemical injection into producing properties. There are also other companies developing or planning to commercialize microbial technology that is similar to the AERO System or other emerging enhanced oil recovery technologies, including Dupont, Geo Fossil Fuels, LLC, and Titan Oil Recovery, Inc. Some of our competitors have longer operating histories, greater recognition in the industry and substantially greater financial and other resources for developing new technologies as well as for recruiting and retaining qualified personnel than we do. Their greater financial resources may also make them better able to withstand downturns in the market, expand into new areas more aggressively or operate in developing markets without immediate financial returns. Strong competition and significant investments by competitors to develop new and better technology may make it difficult for us to maintain and expand our customer base, force us to reduce our prices or increase our costs to develop new technology. Our success will depend on our ability to adapt to these competitive forces, to adapt to technological advances and to educate potential customers about the benefits of using our technology rather than our competitors’ technology. Our failure to respond successfully to these competitive challenges could harm our business, financial condition and results of operations.
Our industry is characterized by technological change, and if we fail to keep up with these changes, our business, financial condition and results of operations will be harmed.
The enhanced oil recovery industry is characterized by changes in technology, evolving methods of oil recovery and emerging competition. Our future business prospects largely depend on our ability to anticipate and respond to technological changes and to develop competitive products. If other enhanced oil recovery methods yield better results or are less expensive than our method, our business will suffer. We may not be able to respond successfully to new technological developments and challenges or identify and respond to new market opportunities, services or products offered by competitors. In addition, our efforts to respond to new methods of oil recovery and competition may require significant capital investments and resources, and we may not have the necessary resources to respond to these challenges. Failure to keep up with future technological changes could harm our business, financial condition and results of operations.
Our acquisition of oil fields will cause us to incur a variety of costs and could face numerous risks that would adversely affect our business and operations.
If appropriate opportunities become available, we may acquire businesses, assets, technologies or products to enhance our business in the future. In connection with any future acquisitions, we could:
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issue additional equity securities which would dilute our current stockholders;
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incur substantial debt to fund the acquisitions which increases our risk of non-compliance with loan agreements; or
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assume significant liabilities.
Acquisitions involve numerous risks, including problems integrating the purchased operations, technologies or products, unanticipated costs and other liabilities, diversion of management’s attention from our core business, adverse effects on existing business relationships with current and/or prospective partners, customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees.
We may not be able to successfully integrate any businesses, assets, products, technologies or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, if at all. The integration process could divert management time from focusing on operating our business, result in a decline in employee morale and cause retention issues to arise from changes in compensation, reporting relationships, future prospects or the direction of the business. Acquisitions may also require us to record goodwill (a non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges) incur amortization expenses related to certain intangible assets and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our operating results and financial condition. In addition, we may acquire companies that have insufficient internal financial controls, which could impair our ability to integrate the acquired company and adversely impact our financial reporting. If we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business, financial condition and results of operations may be materially harmed.
Some of our contracts will be governed by non-U.S. law, which may make them more difficult or expensive to enforce than contracts governed by United States law.
We expect that some of our customer contracts will be governed by non-U.S. law, which may create both legal and practical difficulties in case of a dispute or conflict. We plan to establish operations in regions where the ability to protect contractual and other legal rights may be limited compared to regions with better-established legal systems. In addition, having to pursue litigation in a non-U.S. country may be more difficult or expensive than pursuing litigation in the United States.
Our business operations in countries outside the United States are subject to a number of United States federal laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act as well as trade sanctions administered by the Office of Foreign Assets Control of the United States Department of Treasury and the United States Department of Commerce, which could adversely affect our operations if violated.
We must comply with all applicable export control laws and regulations of the United States and other countries. We cannot provide services to certain countries subject to United States trade sanctions administered by the Office of Foreign Asset Control of the United States Department of the Treasury or the United States Department of Commerce unless we first obtain the necessary authorizations. In addition, we are subject to the Foreign Corrupt Practices Act, which generally prohibits bribes or unreasonable gifts to non-U.S. governments or officials. Violations of these laws or regulations could result in significant additional sanctions including fines, more onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of our international business. In certain countries, we may engage third party agents or intermediaries to act on our behalf in dealings with government officials, such as customs agents, and if these third party agents or intermediaries violate applicable laws, their actions may result in penalties or sanctions being assessed against us.
Our international operations are subject to additional or different risks than our United States operations.
We intend to expand our AERO System services and operations into a number of countries outside the United States. There are many risks inherent in conducting business internationally that are in addition to or different than those affecting our United States operations, including:
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sometimes vague and confusing regulatory requirements that can be subject to unexpected changes or interpretations;
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import and export restrictions;
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tariffs and other trade barriers;
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difficulty in staffing and managing geographically dispersed operations and culturally diverse work forces and increased travel, infrastructure and legal compliance costs associated with multiple international locations;
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differences in employment laws and practices among different countries, including restrictions on terminating employees;
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differing technology standards;
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fluctuations in currency exchange rates;
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imposition of currency exchange controls;
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potential political and economic instability in some regions;
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legal and cultural differences in the conduct of business;
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less due process and sometimes arbitrary application of laws and sanctions, including criminal charges and arrests;
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difficulties in raising awareness of applicable United States laws to our agents and third party intermediaries;
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potentially adverse tax consequences;
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difficulties in enforcing contracts and collecting receivables;
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difficulties and expense of maintaining international sales distribution channels; and
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difficulties in maintaining and protecting our intellectual property.
Operating internationally exposes our business to increased regulatory and political risks in some non-U.S. jurisdictions where it operates. In addition to different laws and regulations, changes in governments or changes in governmental policies in these jurisdictions may alter current interpretation of laws and regulations affecting our business. We also face increased risk of incidents such as war or other international conflict and nationalization.
Many of the countries in which we plan to operate have legal systems that are less developed and less predictable than legal systems in the United States. It may be difficult for us to obtain effective legal redress in the courts of some jurisdictions, whether in respect of a breach of law or regulation, or in an ownership dispute because of: (i) a high degree of discretion on the part of governmental authorities, which results in less predictability; (ii) a lack of judicial or administrative guidance on interpreting applicable rules and regulations; (iii) inconsistencies or conflicts between or within various laws, regulations, decrees, orders and resolutions; (iv) the relative inexperience of the judiciary and courts in such matters or (v) a predisposition in favor of local claimants against United States companies.
In certain jurisdictions, the commitment of local business people, government officials and agencies and the judicial system to abide by legal requirements and negotiated agreements may be unreliable. In particular, agreements may be susceptible to revision or cancellation and legal redress may be uncertain or time-consuming. Actions of governmental authorities or officers may adversely affect joint ventures, licenses, license applications or other legal arrangements, and such arrangements in these jurisdictions may not be effective or enforced.
The authorities in the countries where we operate, or plan to operate, may introduce additional regulations for the oil industry with respect to, but not limited to, various laws governing prospecting, development, production, taxes, price controls, export controls, currency remittance, expropriation of property, foreign investment, maintenance of claims, environmental legislation, land use, land claims of local people, water use, labor standards, occupational health network access and other matters. New rules and regulations may be enacted or existing rules and regulations may be applied or interpreted in a manner which could limit our ability to provide our technology. Amendments to current laws and regulations governing operations and activities in the oil and gas industry could harm our operations and financial results.
Compliance with and changes in tax laws or adverse positions taken by taxing authorities could be costly and could affect our operating results. Compliance related tax issues could also limit our ability to do business in certain countries. Changes in tax laws or tax rates, the resolution of tax assessments or audits by various taxing authorities, disagreements with taxing authorities over our tax positions and the ability to fully utilize our tax loss carry-forwards and tax credits could have a significant financial impact on our future operations and the way it conducts, or if it conducts, business in the affected countries.
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
As of December 31, 2015, we had operating loss carryforwards, or NOLs, of approximately $64.5 million after consideration of the Section 382 Limitation. In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We believe that our issuance of series B preferred stock on October 15, 2009 resulted in a Section 382 ownership change limitation. We estimate that approximately $5.4 million of our NOLs will expire earlier than the statutory 20 year carryforward period due to Section 382 ownership change limitations. In addition, if we undergo an additional ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Internal Revenue Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations.
Our subsidiary, Glori Energy Production Inc. ("GEP"), has a loan agreement which places financial restrictions and operating restrictions on its business, which may limit its flexibility to respond to opportunities and may harm our business, financial condition and results of operations.
The operating and financial restrictions and covenants in its loan agreements restricts GEP's future financing agreements and could restrict our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, these loan agreements restrict our ability to:
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change the nature of our business;
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enter into a merger, consolidate or make an investment in other entities;
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incur additional indebtedness;
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incur liens on the property secured by the loan agreements and our intellectual property;
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pay cash dividends; and
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sell or dispose of our assets (including sale and leaseback arrangements), including our oil properties.
GEP's compliance with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures, finance acquisitions or withstand a future downturn in our business.
GEP's ability to comply with the covenants and restrictions contained in these loan agreements may be affected by events beyond our control. If we violate any of the restrictions or covenants in our loan agreements, the indebtedness under the loan agreements may become immediately due and payable. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Even if we could obtain alternative financing, that financing may not be on terms that are favorable or acceptable to us.
Our estimated proved reserves are based on many assumptions that may turn out to be inaccurate. The actual quantities and present value of our proved reserves may prove to be materially lower than it has estimated.
The process of estimating oil reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to current and future economic conditions and commodity prices. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in our financial statements provided as part of this Annual Report on Form 10-K.
In order to prepare our estimates, we must project production rates and the timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil prices, operating expenses, capital expenditures, taxes and availability of funds. Although the reserve information contained herein is reviewed by our independent reserve engineers, William M. Cobb & Associates, Inc. estimates of oil and natural gas reserves are inherently imprecise. Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same available data.
Actual future production, oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil reserves will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of reserves shown in our financial statements provided as part of this Annual Report on Form 10-K. In addition, we may adjust estimates of proved reserves to reflect production history, prevailing oil prices and other factors, many of which are beyond our control.
The decline in oil price may result in impairment charges.
Declines, as well as anticipated declines, in oil and gas prices has resulted in impairments and declines in the value of our oil properties. The price of oil declined 30% during 2015 based on the Cushing, Oklahoma - West Texas Intermediate daily average spot prices of $53.45 per barrel on December 31, 2014 and $37.13 on December 31, 2015. Subsequent to December 2015, average oil prices decreased further to a price per barrel of $31.68 for January 2016. The 2015 decline resulted in an impairment charge of $22.6 million.
Risks Related to our Intellectual Property
We may not be able to protect our proprietary information or technology adequately.
Our success depends on our proprietary information and technology. We have adopted an intellectual property strategy, relying on a combination of patents and trade secret laws, as well as on confidentiality and non-compete agreements, in order to establish and protect our proprietary rights. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us with any meaningful protection or any competitive advantage. Existing or future patents may be challenged, including with respect to the development and ownership thereof, or narrowed, invalidated or circumvented, which could limit our ability to stop competitors from developing and marketing similar technology or limit the length of terms of patent protection we may have for our technology. In addition, any such challenge could be costly and become a significant diversion of our management’s time and resources. Further, other companies may design around technology we have patented, licensed or developed and, therefore, diminish any competitive advantage we may have from our technology. Also, changes in patent laws or their interpretation in the United States and other countries could diminish the value of our intellectual property or narrow the scope of our patent protection.
These concerns apply equally to patents we have licensed or may in the future license, which may likewise be challenged, invalidated or circumvented. In addition, we generally do not control the patent prosecution and maintenance of subject matter that we license from others. Generally, the licensors are primarily or wholly responsible for the patent prosecution and maintenance activities pertaining to the patent applications and patents we license, while we may only be afforded opportunities to comment on such activities. Accordingly, we are unable to exercise the same degree of control over licensed intellectual property as we exercise over our own intellectual property, and we face the risk that our licensors will not prosecute or maintain it as effectively as we would like.
Third parties may infringe or misappropriate our patents or other intellectual property rights, which could adversely affect our business, financial condition and results of operations. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. In order to protect or enforce our intellectual property rights, we may initiate litigation against third parties, such as infringement suits or interference proceedings. Such litigation may be costly and may not be successful. Litigation may be necessary to:
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assert claims of infringement;
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enforce our patents;
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enforce our licenses;
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protect our trade secrets or know-how; or
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determine the enforceability, scope and validity of the proprietary rights of others.
The steps we have taken to deter misappropriation of our proprietary information and technology may be insufficient to protect us, and we may be unable to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive in the future from our proprietary rights. In addition, if we operate in foreign jurisdictions in the future, we may not be able to protect our intellectual property in the foreign jurisdictions in which we operate. The legal systems of certain countries do not favor the aggressive enforcement of intellectual property and the laws of certain foreign countries may not protect our rights to the same extent as the laws of the United States. Any actions taken in those countries may have results that are different than if such actions were taken under the laws of the United States. Patent litigation and other challenges to our patents are costly and unpredictable and represent a significant diversion of our management’s time and resources. Our intellectual property may also fall into the public domain. If we are unable to protect our proprietary rights, we may be at a disadvantage to others who did not incur the substantial time and expense we have incurred to create our technology.
Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.
We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that know-how and inventions conceived by the individual in the course of rendering services to us are our exclusive property. Nevertheless, these agreements may be breached or may not be enforceable, our proprietary information may be disclosed, and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, and we may not have adequate remedies for any resulting losses. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Our technology may infringe upon the intellectual property rights of others. Intellectual property infringement claims would be time consuming and expensive to defend and may result in limitations on our ability to use the intellectual property subject to these claims.
Claims asserting that we have violated or infringed upon third party intellectual property rights may be brought against us in the future. We may be unaware of intellectual property rights of others that may cover some of our technology or third parties may have or eventually be issued patents on which our current and future technology may infringe. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Any claims and any resulting litigation could subject us to significant liability for damages, cause us to incur significant expenses and divert management time. A court could enter orders temporarily, preliminarily or permanently enjoining us from making, using, selling or importing any current and future technology or could enter an order mandating that we undertake certain remedial activities.
An adverse determination in any litigation of this type could require us to design around a third party’s patent or license alternative technology from another third party, which may not be available on acceptable terms or at all. If we cannot do these things on a timely and cost-effective basis, our revenues may decrease substantially, and we could be exposed to significant liability. In addition, litigation is time-consuming and expensive to defend and could result in limitations on our ability to use the intellectual property subject to these claims.
Environmental and Regulatory Risks
We are subject to complex laws and regulations, including environmental regulations, which can adversely affect the cost, manner or feasibility of our business.
Our operations are subject to federal, state and local laws and regulations, including environmental and health and safety laws and regulations governing, among other things, the generation, storage, handling, emission, use, transportation and discharge of hazardous substances and other materials into the environment, the integrity of groundwater aquifers and the health and safety of our employees. These laws and regulations can adversely affect the cost, manner or feasibility of doing business.
We incur, and expect to continue to incur, capital and operating costs to comply with environmental laws and regulations. Many laws and regulations require permits for the operation of various facilities, and these permits are subject to revocation, modification and renewal. Governmental authorities have the power to enforce compliance with their regulations, and violations could subject us to fines, injunctions or both.
We could be held liable for contamination at or from our current or former properties and any sites we acquire in the future, as well as for contamination at or from third party sites where we have operated or have disposed of waste, regardless of fault. We could also be subject to claims from landowners alleging property damage as a result of our operations. Further, we could be held liable for any and all consequences arising out of human exposure to hazardous substances or other environmental damage. In addition, if we are named in an environmental lawsuit alleging contamination at any such site, even if we are not at fault, any such lawsuit could harm our reputation and be costly and become a significant diversion of our management’s time and resources.
Environmental laws are complex, change frequently and have tended to become more stringent over time. Changes in, or additions to, environmental and health and safety laws and regulations could lead to increased operating and compliance costs. Therefore, no assurance can be given that our cost of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances or other materials will not materially harm our business, financial condition and results of operations.
We rely on oil producers to obtain the appropriate permits to operate their wells and waterflood systems, and if they fail to obtain proper permits they could be subject to fines or penalties, and that could harm our business.
In the typical application of the AERO System to a reservoir, the well operator (which may include us) will be responsible for having all applicable permits for operating its wells and waterflood systems. If the well operator fails to have such permits, it could be subject to fines or penalties, which could, in turn, harm our business. In addition, because our technology is new, regulatory agencies may not be sure how to apply existing rules to the AERO System or may have concerns that could delay or restrict use of the AERO System in some wells. Any such delays or restrictions could harm our business.
Climate change legislation and regulatory initiatives could result in increased operating costs and decreased demand for our products and services.
Changes in environmental requirements may negatively impact demand for our services. For example, oil exploration and production may decline as a result of environmental requirements (including land use policies responsive to environmental concerns). State, national, and international governments and agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil industry, existing or future laws, regulations, treaties or international agreements related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws, regulations, treaties, or international agreements reduce the worldwide demand for oil or oil prices. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture and use of greenhouse gases such as carbon dioxide that could adversely affect our business, financial condition and results of operations.
The adoption of any future federal or state laws or implementing regulations imposing restrictions on hydraulic fracturing, if extended to oil recovery operations, could materially harm our business, financial condition and results of operations.
The Environmental Protection Agency, or EPA, has recently focused on concerns about the risk of water contamination and public health problems from drilling and hydraulic fracturing activities. The EPA is conducting a comprehensive research study on the potential adverse effects that hydraulic fracturing may have on water quality and public health. While our technology is unrelated to hydraulic fracturing, it is possible that any federal, state and local laws and regulations that might be imposed on fracturing activities could also apply to oil recovery operations.
Although it is not possible to predict the outcome of EPA’s study or whether any new legislation or regulations would impact our business, such future laws and regulations could result in increased compliance costs or additional operating restrictions, which, in turn, could materially harm our financial position, results of operations and cash flows.
Our producing properties are located in the East Texas Basin and South Texas, which makes us vulnerable to risks associated with operating in two major geographic areas.
All of our current producing properties are geographically concentrated in the East Texas Basin and South Texas. At December 31, 2015, all of Glori’s total estimated proved reserves were attributable to properties located in these areas.
As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in these areas caused by governmental regulation, processing or transportation capacity constraints, market limitations, availability of equipment and personnel, water shortages or other drought related conditions or interruption of the processing or transportation of oil, natural gas or NGLs.
We are susceptible to the potential difficulties associated with rapid growth and expansion and have a limited operating history.
Recently, with the closing of the Coke Field Acquisition and the Merger, we have grown rapidly, and we continue to pursue opportunities for additional future acquisition growth. Our management believes that our future success depends on our ability to manage additional rapid growth that we may experience and the demands from increased responsibility on management personnel. The following factors could present difficulties:
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increased responsibilities for our executive level personnel;
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increased administrative burden;
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increased capital requirements; and
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increased organizational challenges common to large, expansive operations.
Our operating results could be adversely affected if we do not successfully manage these potential difficulties. The historical financial information incorporated herein is not necessarily indicative of the results that may be realized in the future. In addition, our operating history is limited and the results from our current producing wells are not necessarily indicative of future operations.
We may be subject to risks in connection with acquisitions of properties.
The successful acquisition of producing properties requires an assessment of several factors, including:
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recoverable reserves;
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future oil and natural gas prices and their applicable differentials;
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operating costs;
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potential environmental and other liabilities; and
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financial risk resulting from any borrowings
The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems.
We may incur losses as a result of title defects in the properties in which we invest.
The existence of a material title deficiency can render a lease worthless and can adversely affect our results of operations and financial condition. While we conduct customary due diligence prior to acquiring a property, the failure of title may not be discovered until after we acquire the property, in which case we may lose the lease and the right to produce all or a portion of the minerals under the property.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Information regarding the Company's properties called for by this item is included in Item 1, Business - Glori's Properties. We also have various operating leases for rental of office, laboratory, and warehouse space. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and NOTE 14, Commitments and Contingencies, in the Consolidated Financial Statements in Item 15 to Part IV of this Annual Report on Form 10-K for the future minimum rental payments. Such information is incorporated herein by reference.
Item 3.
Item 3. Legal Proceedings
Legal Proceedings
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. We are subject to various legal proceedings, claims, and governmental inspections, audits or investigations arising out of our business which cover matters such as general commercial, governmental regulations, environmental, employment and other actions. Although the outcomes of these routine claims cannot be predicted with certainty, in the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on our financial position or results of operations.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock
Our common stock has been listed on the NASDAQ since April 14, 2014. Prior to that time, the trading prices are not available since there was no public market for our stock. The following table sets forth for the indicated periods the high and low intra-day sales prices per share for our common stock for 2014 beginning with our initial trading date and for 2015.
Holders of Record
As of December 31, 2015, there were approximately 200 stockholders of record of our common stock, and the closing price of our common stock was $0.35 per share as reported on the NASDAQ. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
To date, we have not declared or paid any cash dividend on our common stock. Any future payments of cash dividends on our common stock will be at the discretion of our board of directors and dependent upon our revenues and earnings, financial strategy, capital requirements and overall financial condition and subject to our covenants in our loan agreements. For the foreseeable future we presently intend to retain any earnings for use in our business operations.
Unregistered Sales of Securities
We have not sold any of our equity securities during the period covered by this Report that were not registered under the Securities Act.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the fourth quarter of the fiscal year covered by this report, no purchases were made by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares or other units of any class of the Company’s equity securities.
Share-Based Compensation
The table stating our equity compensation plans at December 31, 2015 under item 12 of this annual report is incorporated herein by reference.
Glori Oil Limited 2006 Stock Option and Grant Plan - The Company’s pre-Merger long term incentive plan the Glori Oil Limited 2006 Stock Option and Grant Plan allowed for the issuance of stock options. These options were 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. As of April 14, 2014 the plan was amended such that no further options would be issued.
Glori Energy Inc. 2014 Long Term Incentive Plan - The plan was adopted by the Company’s Board in December 2014 and approved by the shareholders. Under the plan, the Board of Directors may grant options, incentive stock options, stock appreciation rights and performance based awards. Awards made under the plan are subject to such terms and conditions, without limitation as may be determined by the board.
For a further detail of the options, exercise prices and number of securities to be issued upon option exercise see NOTE 15 included in the Notes to Consolidated Financial Statements in Item 15 to Part IV of this Annual Report on Form 10-K.
Item 6.
Item 6. Selected Financial Data
The following table (in thousands, except per share data) presents selected historical financial data for the periods indicated. The selected consolidated financial data are derived from our audited consolidated financial statements (taking into account the Merger). The following selected historical financial data should be read in connection with Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 15 to Part IV of this Annual Report on Form 10-K. Our discussion and analysis includes forward-looking information that involves risks and uncertainties and should be read in conjunction with Risk Factors under Item 1A of this Annual Report on Form 10-K, along with Forward-Looking Information under Item 7A
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodities Risk
Our major commodity price risk exposure is to the prices received for our oil production. Our results of operations and operating cash flows are affected by changes in market prices. Realized commodity prices received for our production are the spot prices applicable to oil in the region produced. Prices received for oil, condensate, and natural gas are volatile and unpredictable and are beyond our control. To mitigate a portion of the exposure to adverse market changes, we have entered into derivative instruments. For the year ended December 31, 2015, a 10% change in the prices received for oil, condensate, and natural gas production would have had an approximate $740 thousand impact on our revenues prior to commodity derivatives which mitigate our commodity pricing risk. See NOTE 9 in the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this report for additional information regarding our commodity derivative activities. Subsequent to December 31, 2015 oil prices decreased to $30 per barrel in February. For the year ended December 31, 2015, using a consistent price of $30 per barrel, would have had an approximate $2.6 million negative impact on our revenues prior to commodity derivatives, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for further discussion on commodity price volatility.
Interest Rate Risk
Our floating rate loan facilities expose us to interest rate risk. GEP's major credit facility is based on interest at floating rates that are subject to increase based upon certain increases in the prime rate or LIBOR. Therefore upward fluctuations in interest rates expose us to additional interest payments. As of December 31, 2015, our total long-term debt was $10.5 million. An increase of 100 basis points in both the prime and LIBOR interest rate would have exposed us to an additional $160,000 of interest during 2015. Subsequent to December 31, 2015, the interest rate increased to 13% on our long-term debt. For the year ended December 31, 2015, using the increased interest rate of 13%, would have resulted in an approximate $320 thousand additional interest expense incurred in 2015.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include, but are not limited to, statements:
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containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items;
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of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of Glori;
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of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”);
•
of the assumptions underlying or relating to any statement described above; or
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containing a projection or estimate of such other items as may be specified by rule or regulation of the SEC.
Forward-looking statements may also include any report issued by an outside reviewer retained by Glori, to the extent that the report assesses a forward-looking statement made by Glori. Forward-looking statements may include statements about our expectations, strategy, beliefs, plans, objectives, intentions, assumptions, prospects, estimates, projections, the future of our industry, our future profitability, estimates and projections of future activity and trends in the oil and natural gas industry, and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.
These forward-looking statements are neither historical facts nor are they guarantees of future performance. These statements are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, most of which are difficult to predict and many of which are beyond our control, including the factors described under “Risk Factors”, that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things:
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our ability to obtain financing to continue operations and pay off or refinance our $10.5 million term note facility issued by GEP which matures in March 2017;
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the potential delisting of our common stock from NASDAQ;
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the sustained or an increased decline of oil and gas commodity prices;
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our ability to comply with debt covenants, service our debt, and make future required prepayments;
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the increase in oil production rate and ultimate quantity of oil recovered using our AERO System;
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the percentage of the world’s reservoirs that are suitable for our AERO System;
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our ability to prove our technology and develop and maintain positive relationships with our customers and prospective customers;
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competition and competitive factors in the markets in which we operate;
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demand for our AERO System and our expectations regarding future projects;
•
adaptability of our AERO System and our development of additional capabilities that will expand the types of oil fields to which we can apply our technology;
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our plans and ability to acquire and develop additional currently producing mature oil fields and the AERO System’s impact on these fields;
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our plans to develop some abandoned and low producing mature oil fields;
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the expected cost of recovering oil using our AERO System in our projects;
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potential environmental or other liabilities associated with our acquired properties;
•
any projections, including earnings, revenues, expenses or any other financial items;
•
the impact of legislation and regulations on our operations;
•
our ability to compete with other enhanced oil recovery methods;
•
our ability to generate positive cash flows, including from the acquisition of oil producing properties, increases in oil prices, and improvement in our AERO System revenues;
•
our cash needs and expectations regarding cash flow from operations;
•
our ability to manage and grow our business and execution of our business strategy;
•
our financial performance;
•
our estimates of oil reserves; and
•
the costs associated with being a public company.
We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except to the extent law requires.
MARKET, INDUSTRY AND OTHER DATA
Unless otherwise indicated, information contained in this Annual Report on Form 10-K concerning Glori’s industry and the markets in which Glori operates, including its general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that it has made that are based on that information and other similar sources and on Glori’s knowledge of the markets for its services. That information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While Glori believes that information from third-party sources used in this Annual Report on Form 10-K is generally reliable, it has not independently verified the accuracy or completeness of this information. In addition, projections, assumptions and estimates of Glori’s future performance and the future performance of the industry in which Glori operates are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by Glori.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary financial information required to be filed under this Item 8 are presented in Part IV, Item 15 of this Annual Report on Form 10-K and are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.
Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Even those systems determined to be effective can provide only reasonable assurance with respect to financial statement presentation and preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
As of December 31, 2015, our management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management determined that we maintained effective internal control over financial reporting as of December 31, 2015, based on those criteria.
This Annual Report on Form 10-K does not include an audit report on the effectiveness of our internal controls over financial reporting as of December 31, 2015 by our registered public accounting firm as permitted due to our status as an emerging growth company under the Jumpstart Our Business Startups of 2012.
Limitations of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, internal control over financial reporting may not detect or prevent misstatements. Projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
*
This date indicates the year in which this director began to serve on the board of directors of GETI (formerly known as Glori Energy Inc. and Glori Oil Limited). Each of these directors began to serve on the Company’s board upon the Merger.
(1)
Prior to the Merger, Mr. Chess served as a director of Infinity since its inception in 2011 and became a director of Glori Energy in connection with the Merger in April 2014.
(2)
As of March 7, 2016, Mr. Gibbs and Mr. Musselman are no longer directors.
Biographies of Directors
Mark Chess structured Infinity Cross Border Acquisition Corporation (Nasdaq: INXB) in 2012 and orchestrated the merger with GETI in April of 2014. Mr. Chess is a managing director of Infinity Equity. He was part of the founding team that established the FBR Infinity II Fund in 2001 and the world's first foreign currency fund in China in 2005 (Infinity-CSVC). Mr. Chess helped lead the strategy and development of the Infinity I-China fund in 2007. Mr. Chess manages Infinity's strategic relationships with institutions in the United States including the Infinity-NSF portfolio. Mr. Chess co-led investments and exits in Native Networks (Alcatel - NYSE: ALU), Identify Software (BMC Software) and Cosmocom (Enghouse Systems TSX: ESL). Since 2010, Mr. Chess has focused on investments in the sustainable agriculture and energy sector. He led Infinity's investments and board representation in Futuaragene (AIM: FGN -acquired by Suzano for $90m), Kaiima Bio-Agritech, and Glori Energy (Nasdaq: GLRI). Prior to Infinity, Mr. Chess was a director with Partners500, leading the company's international business development. Mr. Chess graduated with a degree in Business Honors from the University of Texas at Austin. Mr. Chess brings investment experience in technology companies to Glori’s board.
Rocky Duckworth has served as a member of Glori’s board of directors since August 2014. Rocky Duckworth retired from KPMG LLP in 2010 after more than 38 years including more than 29 years as a partner. He joined KPMG in 1972 after graduation with honors from Oklahoma State University. He was also commissioned a 2nd lieutenant in the U.S. Army Reserve upon graduation from OSU. Mr. Duckworth became a KPMG partner in 1981, partner in-charge of the audit practice in Oklahoma City in 1984, and he was the Managing Partner of the Oklahoma City office from 1987 to 2000 when he relocated to the Houston office to serve global energy clients and as the energy industry leader of the audit practice. Since 2013, Mr. Duckworth has served as a member of the Board of Directors of Northern Tier Energy GP LLC, the general partner of Northern Tier Energy LP, a publicly-traded (NYSE:NTI), independent downstream energy company with refining, retail, and pipeline operations. He is a member of the audit committee of NTI and also chairs the conflicts committee. From October 2013 to May 2015, Mr. Duckworth served on the Board of Directors of Magnum Hunter Resources Corporation, a publicly-traded (NYSE:MHR) independent oil and gas company engaged in the exploration for and the exploitation, acquisition, development, and production of crude oil, natural gas, and NGL’s in the U.S. He chaired the audit committee of Magnum Hunter from 2014 until his resignation in 2015. Mr. Duckworth is a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. He was also a member of the working committee that wrote and edited the 2010 edition of the AICPA Audit and Accounting Guide, Entities with Oil and Gas Producing Activities. He holds his CPA license in Texas and is also a member of the Texas State Board of Public Accountancy being appointed in 2011 by Texas Governor Rick Perry. He serves as a member of the Executive Committee, the Rules Committee, the Peer Review Committee, and chairs the Technical Standards Review Committee. The Board selected Mr. Duckworth to serve as a director because it believes he possesses valuable financial expertise and because of his experience as a director on several energy company boards.
Eric C. Neuman joined the board of Glori Energy in November of 2015. Mr. Neuman replaced Thomas O. Hicks, who retired from the board effective November 11, 2015. Mr. Neuman has been a partner and managing director of Hicks Equity Partners LLP ("HEP) since he joined that firm in 2005. Previously, Mr. Neuman was a partner of Hicks, Muse, Tate & Furst ("HMTF"), which he joined as a vice president in 1993 and became a partner in 2000. At HMTF and now HEP, Mr. Neuman has or has had senior responsibility for analyzing, negotiating, financing, and exiting numerous investments in the energy and other industries. As an important part of his responsibilities with both firms, he provides or provided strategic and financial advice to the companies with which he was involved. Mr. Neuman currently serves on the board of Hemisphere Media (a publicly traded company listed on NASDAQ) and he also serves as chairman of the audit committee. He also serves on the boards of Drilling Tools International, Inc., Just Brakes, DirecPath, LLC, Crossings, LLC, and Intercable. Mr. Neuman received a Bachelor of Arts degree from the University of South Florida and a Masters of Business Administration, with distinction, from the Kellogg School of Management at Northwestern University. Mr. Neuman brings extensive knowledge of the energy industry as well as financial and investment experience to Glori’s board of directors.
Dr. Ganesh Kishore served as a member of GETI’s board of directors from October 2009 until the Merger and has served on Glori’s board of directors since the Merger in April 2014. Since April 2007, he has served as Chief Executive Officer of Malaysian Life Sciences Capital Fund Ltd., where he oversees fund management, investment portfolio management and governance of companies in which Malaysian Life Sciences Capital Fund Ltd. has made investments. Since January 2009, he has also served as President and Chief Executive Officer of K Life Sciences, LLC where he provides advisory services to life science businesses. Between April 2007 and December 2008, Dr. Kishore served as a Managing Director of Burrill & Company, where his responsibilities included fund management, fund raising and governance of companies in which Burrill & Company invested. Prior to joining Burrill &Company, Dr. Kishore served as Chief Biotechnology Officer at E. I. du Pont de Nemours and Company from March 2005 to April 2007, where he was responsible for overall biotechnology leadership for DuPont’s life science businesses. Dr. Kishore holds a Ph.D. in biochemistry from the Indian Institute of Science, an M.S. in biochemistry from the University of Mysore and a B.S. in physics and chemistry from the University of Mysore. Dr. Kishore serves on the board of directors of Gevo, Inc. and previously served on the board of Embrex, Inc. (January 2002 to January 2007). Dr. Kishore brings extensive knowledge of the biotechnology industry and experience in advising and managing early stage companies to Glori’s board of directors.
Stuart Page served as GETI’s Chief Executive Officer and a director from March 2007 until the Merger and has served as CEO and director of Glori Energy since the Merger in April 2014. In June 2011, he assumed the additional title of President. Prior to joining GETI, Mr. Page was Vice President of IHS Energy, Inc., an information delivery services company, from February 2005 to March 2007 where he was responsible for the company’s mergers and acquisitions activity. A native of the U.K., Mr. Page is a member of the Society of Petroleum Engineers (SPE) and the Institute of Electrical and Electronics Engineers (IEEE). In 2014, he was named Acquisition International’s Oil & Gas Sector CEO of the Year. He holds a bachelor’s and master’s degree in engineering science from Oxford University, England, and an M.B.A. from Harvard Business School. Mr. Page brings an intimate knowledge of Glori’s business and its industry to its board.
Mark Puckett served as a member of GETI’s board of directors from April 2011 until the Merger and has served on Glori’s board of directors since the Merger in April 2014. Mr. Puckett began his career at Chevron Corporation, a company engaging in petroleum, chemicals, mining, power generation, and energy operations worldwide, in 1973 and retired in May 2008. During his tenure at Chevron, Mr. Puckett held a variety of positions of increasing responsibility in Chevron’s upstream operations before ultimately retiring as the President of Chevron’s Energy Technology Company, where he was responsible for managing the company’s technology resources across all business segments. In addition, Mr. Puckett served on Chevron’s management committee from 1997 until his retirement and served on Chevron’s upstream and gas leadership team from 2001 until his retirement. Since his retirement, Mr. Puckett has been involved in private investments. He is a member of the Society of Petroleum Engineers and the Dean’s Advisory Council, College of Engineering at Texas A&M University. Mr. Puckett holds a bachelor’s degree in civil engineering from Texas A&M University. Mr. Puckett serves on the board of directors of Concho Resources Inc. Mr. Puckett brings extensive knowledge of the energy industry to Glori’s board of directors, including in the areas of primary, secondary and enhanced oil recovery.
Damon L. Rawie served on GETI’s board of directors from January 2012 until the Merger and has served on Glori’s board of directors since the Merger in April 2014. Mr. Rawie is a managing director with Advantage Capital Partners (“ACP”), an investment firm that specializes in providing capital to companies based in areas underserved by traditional capital providers. Founded in 1992, ACP is a multi-stage investor that has raised over $1.9 billion in capital and makes investments in companies representing a wide variety of industries. Based in Austin and a member of the ACP team since 1999, Mr. Rawie is an active multi-stage investor for the firm. His investment experience covers a variety of industries including energy technology, business services, software and new media. Mr. Rawie serves as a member of the board of directors for a number of ACP’s portfolio companies and is also a board member of the Texas Coalition for Capital, a non-profit statewide organization that supports various economic development initiatives including job creation and access to capital for emerging businesses. Prior to joining ACP, Mr. Rawie worked in investment banking and operational consulting. Mr. Rawie was a Manager at China International Capital Corporation (“CICC”), a Morgan Stanley/China Construction Bank joint venture investment bank in Beijing. Before working with CICC, Mr. Rawie was a management consultant at PricewaterhouseCoopers and an investment banking analyst at J.P. Morgan Securities. Mr. Rawie holds an M.B.A. from the University of Chicago Graduate School of Business and a bachelor’s degree from Wesleyan University. Mr. Rawie brings extensive investment experience to Glori’s board of directors.
Jonathan Schulhof served as a member of GETI’s board of directors from its inception in November 2005 until the Merger and was Chairman of GETI’s board of directors through January 1, 2012. Mr. Schulhof has served on Glori’s board of directors since the Merger in April 2014. Mr. Schulhof is a founder and managing partner of GTI Capital Group, a New York and India based firm formed in 2010 that specializes in private equity investments, as well as advisory services in the aerospace, healthcare, energy and media sectors. Mr. Schulhof maintains oversight over day to day operations of GTI Capital Group and has led the purchase and sale of several U.S. and Indian companies and has supervised the launch of several startup businesses. Prior to joining GTI Capital Group in 2010, Mr. Schulhof had been a managing partner of GTI Companies since 2002. Prior to joining GTI Companies, Mr. Schulhof was a Director of Business Development at Tellme Networks, Inc., where he developed company strategy and business plans, and executed strategic sales. Prior to joining Tellme Networks, Inc., Mr. Schulhof was a corporate associate at Schulte Roth & Zabel LLP, a law firm specializing in mergers and acquisitions, bankruptcy, securities, structured finance, and investment management services. Mr. Schulhof holds a B.A. from Dartmouth College and a J.D. from Stanford Law School, and is a member of the New York State Bar. Mr. Schulhof brings a wealth of knowledge in advising and managing early stage companies to Glori’s board of directors.
Kevin Guilbeau joined the board of Glori Energy in October 2015. Mr. Guilbeau has over 34 years of oil and gas exploration and production experience. Most recently he was President and Chief Executive Officer of Gulf Coast Energy Resources, which he founded in 2010 and led it from a private equity start-up through growth via acquisitions and exploration until it merged with Talos Energy in March 2015. Prior to founding Gulf Coast Energy Resources, Mr. Guilbeau was Executive Vice President and Chief Operating Officer for LLOG Exploration Company from 2006 until 2009, with responsibility for leading offshore E&P operations in the Gulf of Mexico and onshore operations along the Gulf Coast. Earlier in his career, he was Senior Vice President and General Manager of the Gulf of Mexico/Gulf Coast Business Unit for Dominion Exploration and Production, which during his 10-year tenure, he grew into a $4.7 billion business that was sold to ENI in 2007. Mr. Guilbeau began his career as a geologist at Shell Oil Company in 1981, where he held a variety of technical and leadership positions. Mr. Guilbeau holds a B.S. degree in Earth Sciences from the University of New Orleans and an M.S. degree in Geology from the University of New Mexico. Mr. Guilbeau brings extensive knowledge of, and company leadership in, the exploration and production business to Glori’s board of directors.
Executive Officers
The following table sets forth information regarding our executive officers as of March 1, 2016, except Mr. Page, whose biography is listed above.
Victor M. Perez has served as GETI’s Chief Financial Officer from August 2011 until the Merger and has served as Glori’s Chief Financial Officer since the Merger in April 2014. Prior to joining Glori, Mr. Perez was Chief Financial Officer of Allis-Chalmers Energy Inc., an oilfield services company, from August 2004 to July 2011. From July 2003 to July 2004, Mr. Perez was a private consultant engaged in corporate and international finance advisory. From February 1995 to June 2003, Mr. Perez was Vice President and Chief Financial Officer of Trico Marine Services, Inc., a marine transportation company serving the offshore energy industry. Mr. Perez was Vice President of Corporate Finance with Offshore Pipelines, Inc., an oilfield marine construction company, from October 1990 to January 1995. Mr. Perez also has 15 years of international and energy banking experience. Mr. Perez has an M.B.A. from University of Texas at Arlington and a bachelor’s degree in economics from Virginia Tech.
Dr. Michael Pavia has served as GETI’s Chief Technology Officer from May 2013 until the Merger and has served as Glori’s Chief Technology Officer since the Merger in April 2014. Prior to joining Glori, Dr. Pavia was Entrepreneur-in-Residence with the venture capital firm Oxford Bioscience Partners from 2002 to 2010. Before joining Oxford, Dr. Pavia was Chief Technology Officer at Millennium Pharmaceuticals, where his major focus was to improve the productivity of the drug discovery and development process through the appropriate use of new technologies. Dr. Pavia has over 20 years of experience in pharmaceutical research and discovery. He was formerly Vice President-Cambridge Research at Sphinx Pharmaceuticals, a division of Eli Lilly & Co., focusing on the development of combinatorial chemistry technologies. Prior to Sphinx, Dr. Pavia held senior scientific positions in the Department of Chemistry at the Parke-Davis Pharmaceutical Research Division of Warner-Lambert with a focus on drugs of the central nervous system. He serves on the board of Azevan Pharmaceuticals Inc. Dr. Pavia holds a bachelor’s degree in chemistry from Lehigh University and a doctorate in organic chemistry from the University of Pennsylvania.
Thomas Holland has served as GETI’s Senior Vice President of Acquisitions and Production from December 2013 until the Merger and served in those same roles for Glori after the Merger in April 2014. Prior to joining Glori, Mr. Holland was involved in two E&P startup companies following a 25-year career with ARCO (1975 to 2000). At ARCO, Mr. Holland held a number of responsible positions in the company’s land organization including U.S. Land Operations Manager. In 1990 he was named Vice President, Commercial for ARCO Permian, responsible for Land, Acquisitions & Divestitures, Crude Oil Marketing and Regulatory & Compliance for the Western U.S. He oversaw the divestiture of over $600 million of low-performing assets, and led or played a key role in the IPO of Vastar, early stage work on the successful acquisition of Union Texas Petroleum, and several company-level acquisition evaluations. He also led the acquisition of the company’s significant position in the Sprayberry/Wolfcamp play in the Permian Basin. After BP’s acquisition of ARCO in 2000, Mr. Holland, along with other members of the ARCO Permian management team, formed Westwin Energy, LLC, raising private equity capital to acquire and exploit oil in the Permian Basin. The team built the company to about 2,000 barrels of oil production per day before the company was sold in 2004. In 2005, he formed Petrus Exploration to focus on using 3D seismic to generate and sell prospects along the Gulf Coast of Texas and Louisiana. The company’s production was sold to an independent oil company in 2011. Mr. Holland holds a BBA (Petroleum Land Management) from the University of Oklahoma and completed the Seminar for Senior Executives in the Oil & Gas Industry from Southern Methodist University.
Kenneth E. Nimitz has served as GETI’s Senior Vice President of Operations from January 2012 until the Merger and served in this same role for Glori after the Merger in April 2014. Prior to joining Glori, Mr. Nimitz served as a Regional Vice President Americas at Neptune Marine Services Limited, a provider of engineered solutions to the oil and gas, marine and renewable energy industries that is traded on the Australian Securities Exchange, from May 2009 to January 2012. Prior to that, Mr. Nimitz spent 18 years with Schlumberger Limited, a supplier of technology, integrated project management and information solutions to the oil and gas industry, where he held various operational, engineering and management positions, including his most recent Schlumberger position as GeoMarket Operations Manager. Mr. Nimitz holds a bachelor’s of science degree in mechanical engineering from the Massachusetts Institute of Technology and a M.B.A. from Duke University’s Fuqua School of Business.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors and beneficial owners of more than 10% of our common shares to file reports of ownership and changes in ownership with the SEC. These persons are required by SEC regulations to furnish us with copies of all Section 16(a) reports that they file. To our knowledge, based on our review of the copies of such reports and written representations that no other reports were required, we believe that all such filing requirements were complied with during the fiscal year ended December 31, 2015.
Governance Practices
Code of Ethics On the our website (glorienergy.com) in the corporate governance section of our investor relations page we maintain our code of ethics and business conduct, a policy governing related person transactions, insider trading policy and corporate governance guidelines.
Audit Committee The Board has designated a standing Audit Committee. The Audit Committee currently consists of Rocky Duckworth (Chairman), Eric Neuman, Mark Puckett, and Johnathan Schulhof, each of whom the Board has determined to be independent under the rules of the NASDAQ and Section 10A (“Audit Requirements”) of the Exchange Act. The Board has determined that each member of the Audit Committee is financially literate and Mr. Duckworth is an “audit committee financial expert,” within the meaning proscribed by the rules and regulations promulgated by the SEC. Mr. Duckworth is a retired partner with KPMG LLP, whose career at the firm spanned almost 40 years. In accordance with its charter, the Audit Committee examines and reviews, on behalf of the Board, internal financial controls, financial and accounting policies and practices, the form and content of financial reports and statements and the work of the external auditors. The Audit Committee is responsible for hiring, overseeing and terminating the independent registered public accounting firm and determining the compensation of such accountants. The audit committee has reviewed the financial statements with management and recommended to the board of directors that the audited financial statements be included in the Company's annual report on Form 10-K for the 2015 fiscal year. The Chief Financial Officer attends the meetings of the Audit Committee by invitation. The Audit Committee’s responsibilities are more fully described in its charter. Our management is responsible for preparing our financial statements, and the independent auditors are responsible for auditing those financial statements. The Audit Committee does not provide any expert or special assurance as to our financial statements or any professional certification as to the independent auditors’ work. A copy of the charter for the Audit Committee is available free of charge on our website at glorienergy.com in the corporate governance section of our investor relations page.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information regarding the compensation awarded to, earned by, or paid to the principal executive officer and the two other most highly compensated executive officers of the Company during the year ended December 31, 2015. These three officers are referred to as our “named executive officers.” As an emerging growth company (as such term is defined in the Jumpstart Our Business Startups Act) and a "smaller reporting company" we have opted to comply with the executive compensation disclosure rules in Item 402 of Regulation S-K applicable to “smaller reporting companies” (as such term is defined in Item 10(f) of Regulation S-K), which require compensation disclosure for our principal executive officer and the two most highly compensated executive officers other than our principal executive officer.
The compensation reported in the Summary Compensation Table below is not necessarily indicative of how we will compensate our named executive officers in the future. We will continue to review, evaluate and modify our compensation framework to maintain a competitive total compensation package. As such, and as a result of our becoming a publicly-traded company, the compensation program could vary from our historical practices.
Summary Compensation Table
As of December 31, 2015, the following table sets forth information regarding compensation earned during the last two fiscal years by the Named Executive Officers.
Employment Agreements
During 2015, the Company was party to employment agreements with its named executive officers, Stuart Page, Victor M. Perez and Dr. Michael Pavia, each of which provide for various indemnity obligations by the Company. The Employment Agreements for Mr. Page and Mr. Perez are incorporated by reference on the Company's Form 8-K filed with the Securities and Exchange Commission as Exhibits 10.2 and 10.3 respectively, to the Company’s Current Report on Form 8-K/A dated May 2, 2014. Dr. Pavia's employment agreement is filed as an exhibit on this form 10-K.
Under their respective employment agreements, Messrs. Page, Perez and Dr. Pavia have an initial base salary set at $400,000, $260,000 and $250,000, respectively. The base salaries increased to $275,000 and $260,000 for Mr. Perez and Dr. Pavia, respectively. Effective July 1, 2015, these salaries were voluntarily and temporarily reduced to $320,000, $247,500 and $234,000, respectively. Each employment agreement also provides for periodic equity grants under the terms of our long-term incentive plan.
Under the employment agreements, Messrs. Page and Perez and Dr. Pavia may each participate in our annual bonus program, and their target bonus potential for an annual bonus period may not be less than 50%, 45% and 40% of their annual base salary, respectively. Mr. Page is eligible for equity grants ranging from zero to 200% of his annual base salary and Mr. Perez and Dr. Pavia are eligible for equity grants ranging from zero to 100% of their annual base salaries.
If we terminate Mr. Page’s employment without “cause” or he terminates his employment with us for “good reason”, he is entitled to payment of a cash severance amount equal to one year of his annual base salary, which is $400,000, paid ratably on regular payroll dates during the twelve months immediately following the termination, and an amount equal to the executive’s bonuses and other incentive compensation for past periods that have not yet been paid and are contingent on continued employment.
If we terminate the employment of Mr. Perez without “cause” or Mr. Perez terminates his employment with us for “good reason”, that executive is entitled to payment of a cash severance amount equal to six months of his annual base salary, which is $137,500, paid ratably on regular payroll dates during the six months immediately following the termination, and an amount equal to the executive’s bonuses and other incentive compensation for past periods that have not yet been paid and are contingent on continued employment.
If we terminate the employment of Dr. Pavia without “cause” or Dr. Pavia terminates his employment with us for “good reason”, that executive is entitled to payment of a cash severance amount equal to six months of his annual base salary, which is $130,000, paid ratably on regular payroll dates during the six months immediately following the termination, and an amount equal to the executive’s bonuses and other incentive compensation for past periods that have not yet been paid and are contingent on continued employment.
The termination provisions described below are identical in each of Messrs. Page and Perez’s and Dr. Pavia's employment agreements:
Under each agreement, if we terminate that executive’s employment without “cause” or the executive terminates his employment with us for “good reason”, he is entitled to (i) continued base salary payments as discussed above, and (ii) reimbursement for continued medical benefits for twelve months. If we terminate the executive’s employment for “cause” or if the executive terminates his employment with us without “good reason”, he will not be entitled to receive any payment from us other than the portion of his base salary that is earned but unpaid.
For this purpose, “cause” is defined as: (A) the executive’s plea of guilty or nolo contendere to, or conviction of a felony or a misdemeanor involving moral turpitude; (B) any act of fraud or dishonesty with respect to any aspect of the business of the Company, its subsidiaries or a parent company (collectively, the “Company Group”), including, but not limited to, falsification of any Company Group records; (C) any intentional and continued failure to perform his duties that is materially injurious to the Company Group, unless due to illness or disability or his good faith efforts to comply with applicable law; (D) intentional engagement in misconduct that is materially injurious to the Company Group (monetarily or otherwise); (E) breach of confidentiality, non-compete, or non-solicitation provisions described in his employment agreement; (F) commencement of employment with an unrelated employer without our consent; (G) material violation of any applicable written harassment and/or non-discrimination policies; (H) material violation of any applicable written Company Group policies of which the executive has been apprised that is materially injurious to the Company Group (monetarily or otherwise); (I) gross negligence in the performance of his duties that is materially injurious to the Company Group (monetarily or otherwise). Except in the case of a plea of guilty or nolo contendere to, or conviction of a felony or a misdemeanor involving moral turpitude, the executive shall not be deemed to have been terminated for cause unless the determination of whether cause exists is made by a resolution finding that, in the good faith opinion of our board of directors, the executive is guilty of conduct constituting cause and specifying the particulars thereof in detail. The resolution must be duly adopted by the affirmative vote of not less than two-thirds of the entire membership of our board of directors, excluding the executive, at a meeting of our board of directors called for the purpose of considering such termination. The executive must be given reasonable notice and an opportunity, together with his counsel, to be heard before our board of directors and, if reasonably possible, to cure the breach that is the alleged basis for cause.
For this purpose, “good reason” is defined as: (A) a material adverse reduction or diminution in the executive’s position, authority, duties or responsibilities, but not a change in reporting relationships; (B) a material reduction in his base salary; (C) any intentional material diminution of his annual bonus opportunities, periodic long-term incentive awards or benefits that he is eligible to earn (regardless of amounts actually earned or paid); (D) the relocation of our principal executive offices by more than 50 miles from where such offices are located as of April 14, 2014, or the executive being based at any office other than our principal executive offices, except for travel reasonably required in the performance of his duties and reasonably consistent with his travel prior to April 14, 2014; (E) our material breach of his employment agreement; or (F) the failure of any successor of ours to assume the executive’s employment agreement. The executive shall provide written notice of any such reduction, failure, change or breach upon which he intends to rely as the basis for a “good reason” resignation within 45 days of the occurrence of such reduction, failure, change or breach. We shall have 45 days following the receipt of such notice to remedy the condition constituting such reduction, change or breach and, if so remedied, any termination of the executive’s employment hereunder on the basis of the circumstances described in such notice shall not be considered a “good reason” resignation.
If Messrs. Page or Perez’s or Dr. Pavia's employment is terminated for any reason, the terminated executive is subject to: ongoing confidentiality and non-disclosure obligations; restrictive covenants of non-solicitation of employees for a period of two years from his termination date and non-solicitation of customers for a period of one year from his termination date; and restrictive covenants of non-competition for a period of one year from his termination date.
Potential Payments upon Termination or Change in Control
Our employment agreements with our named executive officers provide for certain payments to be made in connection with their termination of employment in certain circumstances. Upon a change in control, as defined in the employment agreement (subject to any restrictions in certain agreements noted in the employment agreements), 50% of executive’s then-unvested restricted shares of stock of Glori Energy will accelerate and vest in full and 50% of the executive’s then-unvested options for purchase of shares of stock of Glori Energy will accelerate, vest in full and become fully exercisable. The remainder of the executive’s (i) restricted shares of stock of Glori Energy, (ii) options for purchase of shares of stock of Glori Energy, and (iii) all replacement grants (which are incentive grants in an acquiring company with similar value and terms to the then-remaining unvested shares of restricted stock and unvested and options for purchase of shares of stock of Glori Energy), if applicable, will accelerate and immediately vest in full:
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If the employment agreement of the executive is not assumed by the acquiring company, and executive’s employment is not continued by the acquiring company, and the then-remaining unvested shares of restricted stock and unvested and options for purchase of shares of stock of Glori Energy are not replaced with incentive grants with similar value and terms in the acquiring company (“Replacement Grants”), or
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If Executive is terminated without Cause or resigns for Good Reason within 12 months of such Change in Control.
Director Compensation
Glori Energy compensates its directors who are both independent and are not affiliated with an entity that is a principal stockholder or who serve as committee chairs. Accordingly, in 2015 Glori Energy compensated only Messrs. Guilbeau, Clarke, Puckett, Kishore, Musselman, Gibbs, Neuman,and Duckworth. Each of these directors other than Mr. Guilbeau received the equivalent of $75,000 in the form of restricted stock awards with a vesting period of one year, which amounts were prorated based on the time the individual director joined the Company’s board of directors or served as a committee chair. In 2015, each Director who served in this capacity in 2014 also received an additional restricted stock award. For 2016, these directors will also receive quarterly fees for their service in the following amounts: Mr. Puckett will receive $11,250 per quarter, Mr. Kishore will receive $12,938 per quarter, Mr. Musselman will receive $11,250 per quarter pro rata through the date of his resignation, Mr. Duckworth will receive $14,625 per quarter, and Mr. Neuman will receive $11,250 per quarter. All directors are entitled to reimbursement for reasonable travel and other business expenses incurred in connection with attending meetings of the board of directors or committees of the board of directors. Mr. Guilbeau's Compensation as a director is discussed in footnote (1) below.
The following table sets forth the total cash and equity compensation paid to Glori Energy’s non-employee directors for their service on the Glori Energy board of directors and committees of the Glori Energy board of directors during fiscal 2015:
Director Compensation for the Year Ended December 31, 2015
EQUITY COMPENSATION PLAN INFORMATION
Glori Energy Inc. 2014 Long Term Incentive Plan
On December 5, 2014, our stockholders approved of the adoption of the Glori Energy Inc. 2014 Long Term Incentive Plan authorizing the issuance under the 2014 LTIP of up to 2,000,000 shares of our common stock. The board approved 2014 Long Term Incentive Plan (the "2014 LTIP") on August 13, 2014. The 2014 LTIP enhances the ability of Glori Energy and its subsidiaries to attract and retain officers, employees, directors and consultants of outstanding ability and to provide selected participants with an interest in Glori Energy parallel to that of our stockholders.
The 2014 LTIP is a broad-based incentive plan that provides for the granting of awards to our employees, our non-employee directors, and consultants in the future. The 2014 LTIP contains key features, including:
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2,000,000 shares of our common stock reserved for issuance under the 2014 LTIP;
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for any type of award granted under the 2014 LTIP, shares will be counted against the plan share limit as one share for every one share issued under the award; and
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provisions relating to recoupment of compensation awarded to executives in the event we are required to prepare certain accounting restatements and pursuant to any of our policies established (now or in the future) in compliance with SEC rules regarding Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The 2014 LTIP is intended to enable us to provide a means to continue to attract able directors, employees, and consultants and to encourage successful administration and management by those individuals whose present and potential contributions are of importance through our common stock ownership, thereby strengthening their concern for our welfare. A further purpose of the 2014 LTIP is to provide such individuals with additional incentive and reward opportunities designed to enhance our profitable growth and thereby maximize stockholder value. Accordingly, the 2014 LTIP provides for the following types of grants (collectively referred to as “Awards”):
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discretionary grants to our (or our affiliates, as defined in the 2014 LTIP) employees, consultants and directors of (a) stock options that do not constitute Incentive Stock Options (“Nonqualified Stock Options”), (b) stock appreciation rights (“Stock Appreciation Rights” or “SARs”), (c) shares of our common stock that are subject to restrictions on disposition and forfeiture to us under certain circumstances (“Restricted Stock Awards”), (d) restricted stock unit awards payable in cash or in shares of our common stock (“RSU Awards”), (e) shares of our common stock that may be earned based on the achievement of specified performance goals (“Performance Share Awards”), or (f) performance unit awards payable in cash or in shares of our common stock, or a combination thereof, that may be earned based upon the achievement of specified performance goals (“Performance Unit Awards”); and
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discretionary grants to our employees or the employees of our subsidiaries of stock options that constitute incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended (“Code”) (“Incentive Stock Options”).
As of December 31, 2015, there were a total of 2,000,000 shares authorized under the 2014 LTIP, of which 1,935,139 were outstanding including 963,933 unvested stock options, and 971,206 unvested shares of restricted stock.
2006 Stock Option and Grant Plan
The Glori Oil Limited Amended and Restated 2006 Stock Option and Grant Plan (“2006 Plan”) was adopted, and subsequently amended, in connection with the closing of the merger with Infinity. We amended the 2006 Plan such that there will be no new
awards made thereunder. No awards have been issued under the 2006 Plan other than options to purchase our common stock and restricted stock.
Outstanding Equity Awards at 2015 Fiscal Year-End
The following table shows the number of shares of our common stock covered by stock options and restricted stock units held by our named executive officers as of December 31, 2015.
*As a result of the Merger, consummated on April 14, 2014, the issued and outstanding stock options were assumed by us and substituted as stock options to purchase our common stock, at a conversion ratio of 2.9 pre merged entity stock options to 1 post merged entity stock option. The exercise price of these stock options also increased by the same factor of 2.9. The numbers and dollar figures shown in this table are as of December 31, 2015 but show converted amounts. As of December 31, 2015, all options were exercisable.
(1) The options vested 2,776 on the last day of each of the first 35 calendar months, and 2,784 on the last day of the 36th calendar month.
(2) These options vested over a three year period with 1/36th of the shares having vested on the last day of each of the 36 calendar months after the grant date.
(3) The options vested immediately upon grant.
(4) The options vested 25% on August 22, 2012, and the remainder vested ratably at month end for 36 months.
(5) 25% of the options vested one year from the grant date and the remainder vested ratably at month end for 36 months.
(6) These restricted shares vest 25% on the anniversary of the grant date and 25% each December 31 thereafter. The market value is based upon the value of the common shares at date of grant.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The table below sets forth securities issued and available under the Company's Equity compensation plans as of December 31, 2015.
(1) All shares remaining available for issuance are under the 2014 LTIP.
(2) Of the total securities issued under the plan, 844,592 of the number of securities to be issued upon exercise relate to unvested restricted share awards and the remaining 2,834,635 are unexercised options.
The following table and footnotes set forth information with respect to the beneficial ownership of our common stock along with the percentage of outstanding common stock that such ownership represents as of March 1, 2016 by:
•
each stockholder, or group of affiliated stockholders, who we know beneficially owns more than 5% of the outstanding shares of our common stock;
•
each of our named executive officers;
•
each of our directors as of March 1, 2016; and
•
all of our directors and executive officers as a group as of March 1, 2016.
Beneficial ownership of shares is determined under the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power; either held in the beneficial owner’s name or jointly with others, or in the name of a bank, nominee or trustee for the beneficial owner’s account. Unless otherwise indicated and subject to applicable community property laws, to our knowledge, each stockholder named in the table possesses sole voting and investment power over the shares listed, except for those jointly owned with that person’s spouse, which are indicated by footnote. None of these shares are pledged as security for any debt or other obligation, other than those set forth in footnote 17 to the table. Each stockholder’s percentage ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and is based on 31,861,357 shares of common stock outstanding as of March 1, 2016. Shares of common stock granted pursuant to restricted stock awards that may be voted and shares of common stock subject to options currently exercisable or exercisable within 60 days of March 1, 2016 are deemed to be outstanding for calculating the number and percentage of outstanding shares of the person holding such options, but are not deemed to be outstanding for calculating the percentage ownership of any other person. The following table sets forth information about stockholders whom we know to be the beneficial owners of more than 5% of our issued and outstanding common stock. This information is based solely on our review of the Schedules 13D and 13G currently on file with the SEC, where available, and on correspondence with the Company’s transfer agent where Schedules 13G and 13D were unavailable.
*
Represents less than 1% of the shares of common stock outstanding.
^
Unless otherwise noted below, the address of each person listed on the table is c/o Glori Energy, Inc., 10350 Richmond Avenue, Suite 850, Houston, TX 77042.
(1)
Beneficial ownership of common stock has been determined for this purpose in accordance with Rule 13d-3 under the Exchange Act, under which a person is deemed to be the beneficial owner of securities if such person has or shares voting power or investment power with respect to such securities, has the right to acquire beneficial ownership within 60 days, or acquires such securities with the purpose or effect of changing or influencing the control of Glori Energy. The percentage beneficially owned was calculated based on 32,655,949 shares of Common Stock outstanding as of March 1, 2016, which includes 649,705 unvested restricted shares.
(2)
The business address of this stockholder is c/o Waleed Omer Abdul-Monem Al-Zawawi, Ocean Center, Montagu Foreshhore, East Bay Street, P.O. Box SS- 19084, Nassau, New Providence, The Bahamas. RAWOZ Technology Company Ltd. directly owns 4,186,475 shares of common stock. Mr. Zawawi is the sole director of RAWOZ with authority to vote and dispose of the shares of the Issuer, and thus may be deemed to have shared voting and investment power over the shares of the Issuer held directly by RAWOZ. The information regarding beneficial ownership is included in reliance on a Schedule 13G filed with the SEC on February 20, 2015.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Prior to the closing of the Merger, certain of Infinity’s directors and officers had financial or other interests in the Merger that were different from, or in addition to, the interests of its shareholders, including:
•
If the proposed Merger was not completed by the April 25, 2014 (the “Merger Deadline”), Infinity would have been required to liquidate. In such event, the 1,437,500 Founder Shares (meaning those shares of Infinity held by Infinity I-China Fund (Cayman), L.P., Infinity I-China Fund (Israel), L.P., Infinity I-China Fund (Israel 2), L.P. and Infinity I-China Fund (Israel 3), L.P., (collectively the “Infinity Funds”) and HH Energy Group, LP (collectively, with the Infinity Funds, the “Sponsors”), and the Infinity shares held by Infinity’s officers and directors that were issued prior to the initial public offering of Infinity) and the 4,381,818 Infinity warrants collectively owned by the Infinity Funds would have expired worthless. The warrants were warrants to purchase an aggregate of 4,381,818 Infinity shares, each exercisable for one Infinity share at $7.00 per share, issued to the Sponsors (or their permitted transferees) in private placements that occurred simultaneous with the consummation of Infinity’s initial public offering, and warrants of Glori Acquisition Corp. after the Merger (collectively, the “Sponsors Warrants”). Such Founder Shares had an aggregate market value of $11.5 million based on the closing price of the Ordinary Shares of $8.00 on Nasdaq as of April 7, 2014. Such Sponsors Warrants had an aggregate market value of approximately $3.2 million based on the closing price of the Infinity warrants of $0.72 on Nasdaq as of April 7, 2014. The Sponsors, officers and directors who were initially issued the Founder Share and their permitted transferees (the “Initial Shareholders”) purchased the 1,437,500 Founder Shares for an aggregate purchase price of $25,000, or approximately $0.022 per share, and the 4,381,818 Sponsors Warrants for an aggregate purchase price of approximately $2.2 million, or $0.50 per Sponsors Warrant.
•
Unless Infinity consummated the Merger, its officers, directors and Sponsors would not have received reimbursement for any out-of-pocket expenses incurred by them. As of the date of the Prospectus associated with the Registration Statement on Form S-4 dated April 9, 2014 (the “Final Prospectus”), Infinity’s officers, directors and Sponsors were entitled to $75,000 in reimbursable expenses. As a result, the financial interest of Infinity’s officers, directors and Sponsors or their affiliates could have influenced its officers’ and directors’ motivation in pursuing GETI as a target and therefore there may have been a conflict of interest when the directors and officers determined that the Merger was in Infinity shareholders’ best interests.
•
As of the date of the Final Prospectus, the Sponsors had made loans to Infinity in the aggregate amount of $500,000. In the event of liquidation, Infinity would not have been able to repay the loans to its Sponsors.
•
Infinity’s Sponsors had agreed that, if Infinity liquidated prior to the consummation of a business combination, they would be liable to ensure that the proceeds in Infinity’s trust account were not reduced below $8.00 per share by the claims of target businesses or claims of vendors or other entities that are owed money by Infinity for services rendered or contracted for or products sold to it, subject to certain limitations.
•
Upon the completion of the Merger with GETI, Mark Chess and Thomas O. Hicks, affiliates of Infinity, were entitled to serve as directors of the Company.
•
Upon the completion of the Merger, Infinity’s officers, directors or consultants were entitled to receive up to an aggregate of $400,000 as determined by Infinity’s board of directors. In the event of liquidation, Infinity’s officers and directors would not have received any such fees.
•
The exercise of Infinity’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the transaction may have resulted in a conflict of interest when determining whether such changes or waivers were appropriate and in the best interests of Infinity’s shareholders.
Infinity’s officers and directors had further agreed, pursuant to a written agreement with Infinity, that until the earliest of Infinity’s initial business combination, liquidation or such time as such officer or director ceased to be an officer or director, to present to Infinity for consideration, prior to presentation to any other entity, any business opportunity, where the total consideration to be paid (either in ordinary shares, cash or otherwise) was expected to be at least $32,000,000 or more, subject to any pre-existing fiduciary or contractual obligations such officer or director might have.
As referenced above, in connection with the closing of the Merger, Infinity borrowed, pursuant to certain non-interest bearing unsecured convertible promissory notes (the “Sponsor Notes”), an aggregate of $500,000 from Infinity C.S.V.C. Management Ltd. and HH Energy Group, LP (collectively, the “Note Sponsors”). On April 11, 2014, each of the Note Sponsors executed and delivered a Notice of Exercise of Optional Conversion to Infinity, pursuant to which, in accordance with the terms of the Sponsor Notes, each Note Sponsor exercised its right to convert the principal balance of its Sponsor Note into 500,000 warrants of Infinity (the “New Warrants”). On June 12, 2014, Glori Energy, as successor to Infinity, issued New Warrants to purchase an aggregate of 1,000,000 shares of our common stock to the Note Sponsors and their affiliates in exchange for the Sponsor Notes. On June 12, 2014, pursuant to the terms of the Warrant Agreement governing the terms of the New Warrants, we exercised our mandatory right to convert the New Warrants into shares of our common stock (such issued shares of common stock, the “Warrant Shares”). We received no additional proceeds from the issuance of the New Warrants and the Warrant Shares.
On January 7, 2014, Infinity and its wholly-owned subsidiary, Glori Acquisition Corp., entered into a share purchase agreement with the Sponsors and other investors (the “PIPE Purchase Agreement”) pursuant to which the Sponsors and the other investors collectively (i) agreed to purchase the number of shares of Infinity common stock necessary to ensure that Infinity met the $25.0 million minimum balance requirement of the Merger and (ii) were granted an option to purchase an additional $8.0 million of shares of common stock (above and beyond the Minimum Commitment) to increase their total investment to a maximum of $25.0 million, with such additional investment to be used to provide additional working capital to Glori Acquisition Corp. The purchase price for the shares to be issued pursuant to the PIPE Purchase Agreement was $8.00 per share. There were two closings under the PIPE Purchase Agreement, one of which occurred simultaneously with the closing of the Merger for 1,062,500 shares of common stock and a subsequent closing on approximately May 1, 2014, for 909,982 shares of common stock.
The Board of Directors has adopted a policy requiring that all transactions between the Company and its officers, directors, principal stockholders and their affiliates be on terms that are fair to the Company and its subsidiaries and that any such transactions be approved by Audit Committee. The Company’s Audit Committee is responsible for the review and assessment of all related party transactions. Other than those transactions disclosed above, the Audit Committee has determined that no related party transactions existed during fiscal years 2014 and 2015.
Director Independence
Our board of directors has determined that each of its current members, and all persons who served as directors during any part of the 2015 fiscal year, except Mr. Guilbeau and Mr. Page, is an “independent director” for purposes of the Nasdaq Listing Rules and the SEC’s rules and regulations promulgated under the Exchange Act as the term relates to membership on the board of directors. The table in Item 10 stating which directors are independent is incorporated here by reference.
The definition of independence under the Nasdaq Listing Rules includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his or her family members, has engaged in various types of business dealings with us. In addition, as further required by the Nasdaq Listing Rules, our board has made a subjective determination as to each independent director that no material relationships exist that, in the opinion of our board, would interfere with his exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our board reviewed and discussed information provided by the directors in
questionnaires with questions tailored to the Nasdaq Listing Rules with regard to each director’s business and personal activities as they may relate to us and our management.
Our bylaws permit stockholders to nominate directors for consideration at an annual meeting. The nominating and governance committee will consider director candidates validly recommended by stockholders. The date and process for nominations from shareholders is set forth in our by-laws. It is currently anticipated that the annual meeting will be held more than 60 days after the date of last year's meeting. Accordingly, the date for shareholder nominations will be announced at a later time with the announcement of the date of the annual meeting. According to our by-laws, the stockholder's nominations must be received not later than the close of business on the 10th day following the day on which the public announcement of the date of the meeting is made by the Company.
Item 14.
Item 14. Principal Accounting Fees and Services
Audit Fees
The Audit Committee has appointed Grant Thornton LLP as Glori Energy’s independent registered public accounting firm for the fiscal year ending December 31, 2015. Grant Thornton LLP served as Glori Energy’s independent registered public accounting firm for the audit of the Company’s financial statements for the fiscal years ended December 31, 2015, and December 31, 2014, and reviews of the Company’s financial statements included in its Quarterly Reports on Form 10-Q for those fiscal years. Information about their fees and services in those fiscal years is provided below.
The following table shows the fees paid or accrued by Glori Energy for the audit and other services provided by Grant Thornton LLP for fiscal year 2015 and 2014.
As defined by the SEC, (i) “audit fees” are fees for professional services rendered by the Company’s principal accountant for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s Forms 10-K and 10-Q, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years; (ii) “audit-related fees” are fees for assurance and related services by the Company’s principal accountant that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “audit fees;” (iii) “tax fees” are fees for professional services rendered by the Company’s principal accountant for tax compliance, tax advice, and tax planning; and (iv) ”all other fees” are fees for products and services provided by the Company’s principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees.”
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee's policy is to pre-approve, and in 2015 it did pre-approve, all audit and non-audit related services provided by our independent registered public accounting firm prior to its engagement with respect to such services . In addition to separately approved services, the Audit Committee’s pre-approval policy provides for pre-approval of certain audit and non-audit services provided by our independent registered public accounting firm.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
GLORI ENERGY INC.
By:
/s/ Stuart Page
Stuart Page, President, Chief Executive Officer, and Director
By:
/s/ Victor M. Perez
Victor M. Perez, Chief Financial Officer and Principal Financial Officer
By:
/s/ Ryan H. McHugh
Ryan H. McHugh, Controller and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on our behalf on March 23, 2016 by the following Directors:
/s/ Kevin Guilbeau
/s/ Mark Chess
/s/ Rocky Duckworth
Kevin Guilbeau
Mark Chess
Rocky Duckworth
/s/ Eric C. Neuman
/s/ Ganesh Kishore
/s/ Mark B. Puckett
Eric C. Neuman
Ganesh Kishore
Mark B. Puckett
/s/ Damon L. Rawie
/s/ Jonathan Schulhof
Damon L. Rawie
Jonathan Schulhof
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Glori Energy Inc.
We have audited the accompanying consolidated balance sheets of Glori Energy Inc. (a Delaware corporation) and Subsidiaries (the “Company”) as of December 31, 2014 and 2015, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Glori Energy Inc. and Subsidiaries as of December 31, 2014 and 2015, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Houston, Texas
March 23, 2016
GLORI ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
GLORI ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
GLORI ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
GLORI ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
GLORI ENERGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
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 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 (collectively referred to herein as the "Merger"), 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. ("GEP"), a wholly-owned subsidiary of Glori Holdings Inc., to purchase the Coke Field Assets (see NOTE 5) and incur the associated acquisition debt.
The dissolution of Glori Oil S.R.L and Glori Oil (Argentina) Limited were effective on August 24, 2015. During the year ended December 31, 2014 and 2015 there were no revenues and no assets associated with Glori Oil S.R.L and Glori Oil (Argentina) Limited.
Glori Energy Inc., GETI, Glori Canada Ltd., Glori Holdings Inc., Glori California Inc., OOO Glori Energy and Glori Energy Production Inc. are collectively referred to as the “Company” in the consolidated financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Concentrations of Credit Risk
The Company maintains its cash in bank deposits with financial institutions. These bank deposits, at times, exceed Federal Deposit Insurance Corporation limits of $250,000 per depositor. The Company monitors the financial condition of the financial institutions and has not experienced any losses on such accounts. The Company is not party to any financial instruments which would have off-balance sheet credit or interest rate risk.
The Company derived service revenues from fifteen customers during 2014, and four customers during 2015. The following is a reconciliation of the customers that exceeded 10% of total service revenues in each of those periods:
Management does not believe that these customers constitute a significant credit risk.
The Company had outstanding receivables related to service revenues from four customers as of December 31, 2014 and one customer as of December 31, 2015. The following is a reconciliation of the customers that exceeded 10% of total accounts receivable from service revenues as of each of these dates:
Oil and natural gas sales are made on a monthly basis or under short-term contracts at the current area market price. The Company would not expect that the loss of any purchaser would have a material adverse effect upon its operations. Additionally, management does not believe any of our purchasers constitute a significant credit risk. For the year ended December 31, 2014 there were two purchasers that accounted for 57% and 39% of total oil revenue. For the year ended December 31, 2015 there was one purchaser that accounted for 93% of the total oil revenue. The Company sells its natural gas to a different purchaser than that of its oil sales. Natural gas sales did not exceeded 10% of total oil and gas revenues for the years ended year ended December 31, 2014 and 2015. As of December 31, 2014 and 2015, the Company had a $900,000 and $436,000 receivable, respectively, for December oil sales from a single oil purchaser.
The Company also engages in NYMEX swaps with a third party company (see NOTE 9).
Accounts Receivable
Accounts receivable consists of amounts due in the ordinary course of business, from companies engaged in the exploration of oil and gas and from third party purchasers of the Company's oil and natural gas production. The Company performs ongoing credit evaluation of its customers and generally does not require collateral. Allowances are maintained for potential credit issues as they arise through management’s analysis of factors such as amount of time outstanding, customer payment history and customer financial condition. The Company has incurred inconsequential credit losses since inception. As of December 31, 2014 and December 31, 2015 the Company had no allowance for doubtful accounts.
Oil and Natural Gas Properties
The Company follows the successful efforts method of accounting for oil and gas operations whereby the cost to acquire mineral investments in oil and gas properties, to drill successful exploratory wells, to drill and equip development wells and to install production facilities are capitalized. Certain exploration costs, including unsuccessful exploratory wells and geological and geophysical costs, are charged to operations as incurred. The Company’s acquisition and development costs of proved oil and gas properties are amortized using the units-of-production method, at the field level, based on total proved reserves and proved developed reserves as estimated by independent petroleum engineers.
Other Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and depreciated over the remaining useful lives of the associated assets, and repairs and maintenance costs are charged to expense as incurred. When property and equipment are retired or otherwise disposed, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the results of operations for the respective period.
Depreciation and amortization for long-lived assets are recognized over the estimated useful lives of the respective assets by the straight-line method as follows:
Laboratory and manufacturing facility
5 years or the remaining term of the lease, whichever is shorter
Laboratory and field service equipment, office equipment and trucks
5 years
Computer equipment
3 years
Impairment of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets, such as property, equipment and oil and gas properties, periodically and when events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable. The initial assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted) of the related operations. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, generally on a field-by-field basis for oil and gas properties. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value.
The Company impaired its proved-oil and gas properties for the fiscal years ended December 31, 2014 and 2015. To determine the remaining value of the net assets, the Company typically uses a discounted future cash flow approach based on the proved and probable reserves at estimated future commodities prices less regional discounts to calculate the value of the reserves at fiscal year-end. At December 31, 2015 there was no economic value assigned to any proved undeveloped reserves. The Company believes this estimate to approximate fair value. The impairments in 2014 and 2015 were a result of a sharp decline in oil prices. The reduction in asset value of proved oil and gas properties of $13,160,000 and $22,600,000 represents the impairment amounts incurred in 2014 and 2015, respectively, which are shown as impairment of oil and gas properties on the consolidated statement of operations.
Derivatives
The Company uses derivative instruments in the form of commodity price swaps to manage price risks resulting from fluctuations in commodity prices of oil associated with future production. These derivative instruments are recorded on the balance sheet at fair value as assets or liabilities and the changes in the fair value of derivatives are recorded each period in current earnings. Fair value is assessed, measured and estimated by obtaining the NYMEX futures oil commodity pricing. Gains and losses on the valuation of derivatives and settlement of matured commodity derivatives contracts are included in gain (loss) on commodity derivatives in other income within the period in which they occur.
Asset Retirement Obligation
The Company recognizes the present value of the estimated future abandonment costs of its oil and gas properties in both assets and liabilities. If a reasonable estimate of the fair value can be made, the Company will record a liability for legal obligations associated with the future retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of the assets. The fair value of a liability for an asset retirement obligation is recognized in the period in which the liability is incurred. The fair value is measured using expected future cash outflows (estimated using current prices that are escalated by an assumed inflation rate) discounted at the Company’s credit-adjusted risk-free interest rate. The liability is then accreted each period until it is settled or the asset is sold, at which time the liability is reversed and any gain or loss resulting from the settlement of the obligation is recorded. The initial fair value of the asset retirement obligation is capitalized and subsequently depreciated or amortized as part of the carrying amount of the related asset. The Company has recorded asset retirement obligations related to its oil and gas properties. There are no assets legally restricted for the purpose of settling asset retirement obligations.
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payables, long-term debt, derivatives, and warrants. The carrying values of cash and cash equivalents and accounts receivable and payables approximate fair value due to their short-term nature. Derivatives are recorded at fair value (see NOTE 8 and NOTE 9).
Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the period. In periods that have income, basic net earnings per common share is computed under the two-class method per guidance in Accounting Standards Codification (ASC) 260, Earnings per Share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic earnings per common share is computed by dividing net earnings attributable to common shares after allocation of earnings to participating securities by the weighted-average number of common shares outstanding during the year. 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 no contractual obligation for owners of these securities to share in the Company’s losses, and the effect of their inclusion would be anti-dilutive. Diluted earnings (loss) per common share is computed using the two-class method or the if-converted method, whichever is more dilutive (see NOTE 11).
Diluted net loss per share is the same as basic net loss per share for all periods presented because any potentially dilutive common shares were anti-dilutive. Such potentially dilutive shares are excluded from the computation of diluted net loss per share when the effect would be to reduce net loss per share. Therefore, in periods when a loss is reported, the calculation of basic and diluted loss per share results in the same value.
Revenue Recognition
Oil and natural gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectibility of the revenue is probable. Revenues from natural gas production are recorded using the sales method.
Service revenues are recognized when all services are concluded in accordance with the contract. The Company’s service contracts typically include a single contract for each phase of service. During the initial phase known as Reservoir Analysis and Treatment Design (the “Analysis Phase”), the Company samples the target field and evaluates project feasibility and nutrient formulation by assessing field characteristics such as geology, microbial environment and geochemistry of the oil and water. The completion of the Analysis Phase contract typically coincides with the delivery of a report of findings to the customer at which point the Analysis Phase revenues are recognized. Once the viability of the AERO System is demonstrated in the Analysis Phase, a new contract is executed for the Field Deployment Phase. During the Field Deployment Phase the AERO System is initiated in the oil field to stimulate the indigenous microbes in the oil bearing reservoir. The Field Deployment Phase revenues are recognized ratably over the Field Deployment Phase injection work timeline.
Previous to 2014, the majority of the Company’s revenues for AERO services were executed under a single contract which covered both Analysis Phase and Field Deployment Phase work. The single contract for both services resulted in lack of commercial evidence that the Analysis Phase services provided value on a stand-alone basis and thus both services were viewed as a single unit-of-accounting under ASC 605, Revenue Recognition: Multiple-Element Arrangements. In accordance with this guidance, the Company deferred revenue received in the Analysis Phase and recognize this revenue and the Field Deployment Phase revenue uniformly over the Field Deployment Phase injection timeline. Any termination of the project after the completion of the Analysis Phase would result in the immediate recognition of that portion of the revenues outlined in the contract.
As of December 31, 2014 and 2015, the Company had deferred revenues of approximately $653,000 and $0 respectively, pursuant to contracts requiring substantial future performance.
Science and Technology
The Company expenses all science and technology costs as incurred. The science and technology work performed predominantly relates to the Analysis Phase and the expenses are primarily made up of employee compensation, lab supplies and materials, legal fees and corporate overhead allocations.
Income Taxes
The Company accounts for income taxes using the asset and liability method wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to net operating loss carry forwards, measured by enacted tax rates for years in which taxes are expected to be paid, recovered or settled. A valuation allowance is established to reduce deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company follows ASC 740, Income Taxes (“ASC 740”), which creates a single model to address accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the consolidated financial statements.
The Company’s tax years 2006 through 2015 remain open and subject to examination by the Internal Revenue Service (“IRS”) and are open for examination until the expiration of statute of limitations under the IRS Code.
Stock-Based Compensation
The Company has issued stock options, restricted shares, performance based options and market based options. The Company records share-based payment expense associated with option awards in accordance with ASC 718, Compensation - Stock Compensation. Accordingly, the Company selected the Black-Scholes option-pricing model as the most appropriate method to value option awards and recognizes compensation cost, as determined on the grant date, on a straight-line basis over the option awards’ vesting period. Stock-based compensation cost for restricted shares is estimated at the grant date based on the awards' fair value, which is equal to the prior day's closing stock price. Such fair value is recognized as expense over the requisite service period.
Fair Value of Financial Instruments
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.
Accounting for Sales Tax
The Company uses the net method for accounting for sales taxes charged to customers and accordingly does not include sales or similar taxes as revenues; the Company does include sales and similar taxes paid as part of the cost of goods or services acquired.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a comprehensive new revenue recognition standard that will supersede existing revenue recognition guidance under United States generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). The issuance of this guidance completes the joint effort by the FASB and the IASB to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS.
The core principle of the new guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. The standard allows for several transition methods: (a) a full retrospective adoption in which the standard is applied to all of the periods presented, or (b) a modified retrospective adoption in which the standard is applied only to the most current period presented in the financial statements, including additional disclosures of the standard’s application impact to individual financial statement line items.This standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating this standard and the impact it will have on our future revenue recognition policies.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15: Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 asserts that management should evaluate whether there are relevant condition or events that are known and reasonably knowable that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued or are available to be issued when applicable. If conditions or events at the date the financial statements are issued raise substantial doubt about an entity’s ability to continue as a going concern, disclosures are required which will enable users of the financial statements to understand the conditions or events as well as management’s evaluation and plan. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter; early application is permitted. We are currently evaluating this standard and the impact it will have on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). ASU 2015-03 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 and early adoption is permitted. Prior GAAP guidance mandates recognizing debt issuance costs as a deferred charge. Such treatment is different from the guidance in International Financial Reporting Standards (IFRS),
which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. Concepts Statement 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. We are currently evaluating this standard and the impact it will have on our consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17: Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 is part of an initiative to reduce complexity in accounting standards. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. However, this classification does not generally align with the time period in which the recognized deferred tax amounts are expected to be recovered or settled. To simplify the presentation of the deferred income taxes, ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of an entity be offset and presented as a single amount is not affected by the amendments of ASU 2015-17. For public entities, ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years; early application is permitted. The provisions of this accounting update are not anticipated to have a material impact on the Company’s financial position or results of operations.
Reclassifications
Certain 2014 amounts related to inventory and prepaid expenses and other current assets have been reclassified for comparative purposes.
NOTE 3 - RISKS AND UNCERTAINTIES
As a small company with an emerging technology the Company has generated negative cash flows since inception. The Company continues to generate negative cash flows and the downturn in the oil market has adversely affected its results from operations and cash flows. Cash has decreased from $29.8 million at December 31, 2014 to $8.4 million at December 31, 2015 due to the net cash used in operating activities of $9.7 million, the repayment of debt of $8.8 million net, and capital expenditures of $3.0 million, net of the proceeds from the sale of the long-term derivatives of $2.7 million. As of December 31, 2015 the Company has working capital of $9.3 million. Based on its cash balance and forecasted cash flows from operating activities, the Company expects to be able to fund planned capital expenditures, meet debt service requirements, and fund other commitments and obligations for 2016.
As of March 21, 2015, the Company does not have lines of credit available to it. As a result of the negative cash flows and the decrease in oil prices, the Company will likely need to raise capital over the next twelve months to fund its operations and to repay or refinance its term note of $10.5 million which matures March of 2017. The Company may have difficulty obtaining such additional financing as a result of the decrease in oil prices, its negative cash flows from operations and the significant decrease in its share price. Failure to obtain additional financing would have a material adverse effect on the Company’s business operations and financial condition.
On October 23, 2015, the Company received a deficiency letter (the “Notice Letter”) from The NASDAQ Stock Market LLC (“NASDAQ”) indicating that the Company’s common stock for the last 30 consecutive business days had closed below the minimum $1.00 per share requirement under NASDAQ Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The Notification Letter states that Glori has 180 calendar days, until April 20, 2016 (the “Initial Compliance Period”), to regain compliance with the Minimum Bid Price Requirement. In accordance with NASDAQ Listing Rule 5810(c)(3)(A), the Company can regain compliance if the closing bid price of its common stock is at least $1.00 for a minimum of 10 consecutive business days. If the Company does not achieve compliance with the Minimum Bid Price Requirement by the end of the Initial Compliance Period, it may be granted a second 180 day compliance period, as long as (a) on the last day of the Compliance Period the Company is in compliance with the market value requirement for continued listing as well as all other listing standards and (b) the Company provides written notice of its intention to cure the deficiency during a second compliance period.
The significant decrease in oil prices has made it difficult for the Company to execute on its strategy of acquiring producing properties which would contribute to its revenues and cash flows due to potential sellers’ reluctance to sell at depressed prices. Additionally, the current oil price environment has negatively affected the Company's cash flow and has affected the availability of capital to Glori and the E&P industry in general. These factors have also resulted in a dramatic decrease in the Company's stock price, which also impacts the ability to raise new equity capital.
In order to address this challenging environment, the Company has retained a financial advisory firm with experience in the energy industry to actively explore alternatives for mergers and acquisitions with potential partners, investors and asset sellers with the goal of bolstering its liquidity and enabling the Company to build a larger asset base. Additionally, the Company made significant cost reductions, both in its administrative and professional staff, and lease operating expenses. The cost reductions were implemented both in 2015 and in the first quarter of 2016. The Company also limited capital expenditures to those required to fully implement AERO technology at the Coke field. The Company believes demonstrated AERO technology results at the Coke field will enhance revenues and cash flows and will improve its ability to raise additional capital. In August 2015, the Company implemented the first phase of AERO at the Coke field. In March 2016 it completed installation of phase II of AERO implementation. Phase II incorporates the addition of two AERO injection wells to increase the proportion of the field that is impacted by AERO technology. The Company now has three injection wells running in total. Phase II implementation commenced after data from Phase I limited trial demonstrated encouraging indication of AERO performance. The wells are located on the periphery of the Coke field and are designed to stimulate production from more of the field than was impacted by the first injector.
Finally, the Company applied to the United States Department of Energy’s Loan Programs Office (“LPO”) for a $150 million loan guarantee in connection with a project applying AERO to previously abandoned reservoirs in the U. S. Based on LPO’s evaluation of Part I of the application, in March 2016, LPO invited the Company to submit Part II of its application. However, the ultimate outcome of the application and whether a loan guarantee will be issued cannot be predicted.
On March 18, 2016, GEP entered into an amendment to the credit agreement on the senior secured term loan facility with its lender, Stellus Capital Investment Corporation, which had the effect of removing the financial ratio covenants and the semi-annual collateral value redetermination until maturity in March 2017 (see NOTE 10). Without this amendment the Company likely would not have been able to meet all financial covenants in the future.
NOTE 4 - MERGER WITH INFINITY CROSS BORDER ACQUISITION CORPORATION
On January 8, 2014, GETI executed 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 consolidated financial statements, the number of shares of common stock attributable to the Company is reflected retroactive to January 1, 2014 to facilitate comparability to prior periods. Accordingly, the number of shares of common stock presented as outstanding as of January 1, 2014 totals 22,450,688 which represents the number of post-Merger common shares that were received for pre-Merger GETI preferred stock, common stock and warrants outstanding as of January 1, 2014.
The following table (in thousands, except share amounts) presents the consolidated statements of temporary equity and stockholders' equity as if the Merger had occurred on January 1, 2014. The beginning balances as of January 1, 2014, shown in the table below, represent the Company's pre-Merger temporary equity and stockholders' equity previously stated as of January 1, 2014. The balances as of January 1, 2014, as converted, represent the post-Merger stockholders' equity received in exchange for the pre-Merger temporary equity and stockholders' equity at January 1, 2014.
Not shown in the above table is the pre-Merger issuance by GETI of common shares, preferred shares and warrants. During 2013, there were 229,108 common shares issued which were exchanged for 79,003 shares of common stock in the Merger. On March 13, 2014, GETI issued 1,842,028 C-2 preferred shares and 1,640,924 C-2 preferred warrants. These shares and warrants were exchanged for 1,133,869 shares of common stock in the Merger.
The following table shows the number of common stock of the Company issued and outstanding related to the consummation of the Merger:
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 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 L.L.C. ("Petro-Hunt") exercised its 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 10).
In addition to the common stock issued in the Merger, the Company has 5,321,700 warrants outstanding at December 31, 2014 and December 31, 2015 to purchase common stock of the Company at a per share price of $10 which expire on July 19, 2017.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
(1) Includes impairment and excludes accretion of asset retirement obligation.
Depreciation, depletion and amortization consists of the following (in thousands):
On March 14, 2014, a subsidiary of the Company, GEP, acquired certain oil, gas and mineral leases in Wood County Texas (the “Coke Field”) 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 10) 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.
Of the total $39.2 million total purchase price of the Coke Field, the Company recognized, at approximate fair market value, assets such as office equipment and trucks included in property and equipment on the Company’s consolidated balance sheet of approximately $310,000 and items such as tubular stock of $327,000 classified in other property and equipment on the Company’s consolidated balance sheet. The remaining purchase price balance was allocated to proved oil and gas properties in property and equipment on the Company’s 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 consolidated balance sheet.
In September 2014, the Company purchased additional oil, gas and mineral leases adjacent to the Coke Field (the "Southwest Operating Field"). The Company purchased the Southwest Operating Field for $2,000,000 and assumed an asset retirement obligation of an estimated $138,000.
The Company has included revenues and expenses related to the Coke Field for the period from March 14 through December 31, 2014 in the consolidated statement of operations for the year ended December 31, 2014 and for the acquisition of the Southwest Operating Field September 1 through December 31, 2014. For this period, the revenues and net loss attributable to the Coke Field and Southwest Operating Field were $11,398,000 and $7,061,000, respectively. The net loss includes a $6,023,000 gain on commodity derivatives related to the Company's volume based production swaps (see NOTE 9) and loss on impairment of oil and gas properties of $12,707,000.
The following summary presents unaudited pro forma information for the Company for the year ended December 31, 2014, as if the Coke Field acquisition had been consummated at January 1, 2014 (in thousands, except per share amounts):
On July 1, 2015 the Company sold its mineral interests in the "Etzold Field" located in Seward County, Kansas. The Etzold Field was originally purchased in 2010 as a greenfield lab to advance the development of the Company's AERO technology, and the operations have historically been included in the Company's Oil and Gas Segment (see NOTE 16). With the purchase of the larger Coke Field and with the Company's future acquisition plans, the Company made the strategic decision to divest the Etzold Field. Prior to the sale, the Company had associated net assets of $89,000, which were composed primarily of the purchase and development charges less accumulated depreciation and depletion and associated liabilities of $435,000 related to the plugging and abandonment obligation associated with the Etzold Field. In exchange for the leasehold interest in the field, the Company received $75,000 and the purchaser's assumption of the related asset retirement obligation. The Company recognized a gain on the sale of $422,000.
The following table is a summarized operational history of the Etzold Field (in thousands):
On June 1, 2015, a subsidiary of the Company, GEP, executed a purchase and sale agreement to acquire certain proved oil and gas mineral leases in Refugio County, Texas (the “Bonnie View Field”) from a third party seller for $2,644,000. The carrying value of the Bonnie View Field is also increased by an asset retirement obligation associated with plugging and abandoning the Bonnie View Field of $432,000. The effective date of the purchase was May 1, 2015. The Company included revenues and expenses related to the Bonnie View Field from June 1, 2015 to December 31, 2015 on our consolidated income statement. For this period, the revenues and net loss attributable to the Bonnie View Field was $447,000 and $3,208,000, respectively. The net loss includes a loss on impairment of oil and gas properties of $2,400,000. The Bonnie View Field does not meet the definition of a significant acquisition which would require pro forma financial information.
NOTE 6 - ASSET RETIREMENT OBLIGATION
The Company accounts for its asset retirement obligation (“ARO”) in accordance with ASC 410, Asset Retirement and Environmental Obligations. The ARO liability reflects the estimated present value of the amount of dismantlement, removal, site
reclamation, and similar activities associated with our oil and gas properties. The fair value of a liability for an ARO is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made and the associated retirement costs can be capitalized as part of the carrying amount of the long-lived asset. The Company determined its ARO by calculating the present value of the estimated cash flows related to the liability based upon estimates derived from management and external consultants familiar with the requirements of the retirement. The Company has not funded nor dedicated any assets to the retirement obligation.
The liability is periodically adjusted to reflect (1) new liabilities incurred; (2) liabilities settled during the period; (3) accretion expense; and (4) revisions to estimated future plugging and abandonment costs.
The following is a reconciliation of the liability for the years ended December 31, 2014 and 2015 (in thousands):
The increase in liabilities acquired during the year ended December 31, 2014, was due to the acquisition of the Coke Field and the Southwest Operating Assets.
The increase in liabilities acquired during the year ended December 31, 2015, was due to the acquisition of the Bonnie View Field and drilling activity at the Coke Field. The decreases due to sold wells were due to the sale of the Etzold Field. Additionally, estimated plug date revisions and well plugging and abandonment during the year ended December 31, 2015 caused the changes in the revisions in estimates and liabilities settled during the period, respectively.
The asset retirement obligation is included in the consolidated balance sheets as follows (in thousands):
NOTE 7 - ACCRUED EXPENSES
As of December 31, 2014 and 2015, the significant components of accrued expenses reported in the accompanying consolidated balance sheets are as follows (in thousands):
NOTE 8 - FAIR VALUE MEASUREMENTS
The following table summarizes the financial assets measured at fair value, on a recurring basis as of December 31, 2014 and 2015 (in thousands):
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 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 9 - 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 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 December 31, 2015 the Company had the following open positions on its outstanding commodity derivative contracts:
The derivative contracts are carried at fair value on the consolidated balance sheet as assets or liabilities. The Company has not elected to designate any of these as derivative contracts for hedge accounting. Accordingly, 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 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 consolidated statements of operations. The unrealized and realized gains and losses on derivative instruments are recognized in the gain on commodity derivatives line item located in other (expense) income.
The Company settled its long-term commodity derivative assets on December 23, 2015 in exchange for $2,725,000. At the time of the sale the NYMEX value for the sold portion of the commodity swaps was $3,192,000. Accordingly the sale resulted in a $467,000 loss on commodity derivatives which is included in the gain on commodity derivatives line item on the Company's consolidated statements of operations. As of December 31, 2014 and 2015 the Company had a current asset for commodity derivatives of $2,905,000 and $3,411,000.
The following tables summarize the unrealized and realized gain on commodity derivatives (in thousands):
NOTE 10 - 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 contained 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 were exchanged for 18,208 common shares upon consummation of the Merger. Equal monthly principal payments were due over 27 months beginning in April 2013 through June 2015, plus an end of term charge of $280,000. As of December 31, 2014, the ratable liability for the end of term charge was $240,000 and it is included in other long-term liabilities and accrued expenses in current liabilities on the accompanying 2014 consolidated balance sheet. The loan agreement contains covenants which place restrictions on the incurrence of debt, liens and capital expenditures. As of December 31, 2014 the outstanding loan balance was $1,750,000. On March 2, 2015 the Company elected to prepay the entire remaining indebtedness. The payment included remaining principal of $888,888 and the end of term charge of $280,000.
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 GEP and is secured by the Coke Field and Bonnie View and shares of common stock of GEP. Glori Energy Inc does not guarantee the debt of GEP. 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 consolidated balance sheets and is being amortized over the loan term. The loan agreement contains covenants which place restrictions on GEP’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, GEP is also required to maintain certain financial ratios related to debt, working capital and proved reserves, all as defined in the loan agreement. In May and November of each year, in accordance with a procedure outlined in the loan agreement, the value of the collateral securing the note is redetermined based on engineering reserve reports submitted by GEP. As of December 31, 2014 and December 31, 2015, the outstanding loan balance was $17,428,000 and $10,452,000, respectively. GEP is in compliance with all covenants as of December 31, 2015. On March 18, 2016, GEP entered into an amendment to the credit agreement on the senior secured term loan facility with its lender, Stellus Capital Investment Corporation, which had the effect of removing the financial ratio covenants and the semi-annual collateral value redetermination until maturity in March 2017. In connection with the amendment, the interest rate on the loan increased to 13.0% per annum from 11.0% , with the additional 2.0% increase to be “paid in kind”, or added to the principal amount. In addition, principal of $37,500 plus interest is payable monthly compared to the minimum principal payments of $112,500 plus interest which was previously payable quarterly. Without this amendment we likely would not have been able to meet all of our financial covenants in the future.
The $4.0 million note had a two year term bearing interest at 12.0% per annum and is secured by the assets of the Company but was subordinated to existing Company debt. The loan was funded net of closing costs of 2%, or $80,000, which were initially included in deferred loan costs on the consolidated balance sheet. 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 related remaining deferred loan costs were expensed.
On March 14, 2014, in connection with the purchase of the Coke Field Assets, a subsidiary of the Company, GEP, 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 five years are as follows (in thousands):
NOTE 11 - 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):
The following weighted average securities outstanding during the periods below were not included in the calculation of diluted shares outstanding as they would have been anti-dilutive (in thousands):
NOTE 12 - INCOME TAXES
At December 31, 2014 and 2015, the Company had operating loss carryforwards for federal income tax reporting purposes of approximately $45.7 million and $64.5 million, respectively, which will begin to expire in the year 2025, net operating losses for state income tax reporting purposes of approximately $6.6 million and $6.7 million, respectively, which will begin to expire in 2021, and tax credits of approximately $508,000 which will begin to expire in 2027. The Net Operating Loss ("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.
Income tax benefit for the periods presented differs from the U.S. Federal benefit calculated at the statutory income tax rate due to the following (in thousands):
The tax effects of temporary differences that give rise to significant portions of the Company’s net deferred tax assets at December 31, 2014 and 2015 are as follows (in thousands):
The provision (benefit) for income taxes from continuing operations for the periods indicated are comprised of the following (in thousands):
The valuation allowance for deferred tax assets increased by $12.0 million in 2015. In determining the carrying value of a deferred tax asset, accounting standards provide for the weighing of evidence in estimating whether and how much of a deferred tax asset may be recoverable. As we have incurred net operating losses in 2015 and prior years, relevant accounting guidance suggests that cumulative losses in recent years constitute significant negative evidence, and that future expectations about income are insufficient to overcome a history of such losses. Therefore, with the before-mentioned adjustment of $12.0 million, we have reduced the carrying value of our net deferred tax asset to zero. The valuation allowance has no impact on our net operating loss position for tax purposes, and if we generate taxable income in future periods, we will be able to use our NOLs to offset taxes due at that time. We will continue to assess the valuation allowance against deferred tax assets considering all available evidence obtained in future reporting periods.
Internal Revenue Code Section 382 places a limitation (the “Section 382 Limitation”) on the amount of taxable income that can be offset by an NOL after a change in control (typically, a greater than 50% change in ownership) of a loss corporation. Generally, after a control change, loss corporations cannot deduct NOL carryforwards in excess of the Section 382 Limitation.
As of December 31, 2013, 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 and these forms 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 and no longer has an uncertain tax position; 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.
Management believes that the issuance of Series B Preferred Stock on October 15, 2009 has resulted in the Section 382 Limitation, and thereby the federal net operating loss carryovers have been reduced by the estimated effect.
The Company's $22.2 million deferred tax asset related to the NOL carryforwards is net of $87,000 of unrealized excess tax benefits related to stock based compensation. The impact of the excess tax benefit will be recognized in additional paid-in capital upon utilization of the Company's NOL and tax credit carryforwards.
NOTE 13 - EMPLOYEE RETIREMENT SAVINGS PLAN
The Company sponsors an employee retirement saving plan (the “401(k) Plan”) that is intended to qualify under Section 401(k) of the Internal Revenue Code. The 401(k) Plan is designed to provide eligible employees with an opportunity to make regular voluntary contributions into a long-term investment and saving program. There is no minimum age or service requirement to participate, and the Company may make discretionary matching contributions. For the years ended December 31, 2014 and 2015 the Company made matching contributions of $67,000 and $71,000, respectively.
NOTE 14 - 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 buildings in Houston, Texas and a warehouse facility in Gull Lake, Saskatchewan under operating leases. The Company entered into a two-year lease agreement in October of 2014 for 7,805 square feet of office space in Houston's Westchase District for $18,000 per month, with a one-year extension option at a 4% increase in rent and two one-year extension options at a to be mutually agreed upon market rate with the lessor. The Company does not intend to renew this lease upon expiration in 2016. The Company's original Houston building lease, which contains office space, warehouse space and a laboratory, expires in May 2017 and is leased for $11,000 per month. The Saskatchewan warehouse is a month-to-month lease which rents for $1,000 per month CDN and is cancelable with 30 days’ notice.
Approximate minimum future rental payments under these noncancelable operating leases as of December 31, 2015 are as follows (in thousands):
Total rent expense for the years ended December 31, 2014, and 2015, was $291,000 and $340,000, respectively.
NOTE 15 - 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 to 1.0 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 pre-Merger option disclosures in the note below are shown as converted using these factors. As of December 31, 2014, 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.
In December 2014, the Company approved the adoption of the 2014 Long Term Incentive Plan ("the 2014 Plan") which authorized 2,000,000 shares to be available for issuance to officers, directors, employees, and affiliates of the Company. 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 one year, and thereafter ratably by month over the following 36 months, and may be exercised for a period of 10 years subject to vesting. As of December 31, 2015, the total common stock available for issuance pursuant to the 2014 Plan was 40,667.
Stock-based compensation expense is included primarily in selling, general and administrative expense and was $296,000 and $1,412,000 for the years ended December 31, 2014, and 2015, respectively.
The Company has future unrecognized compensation expense for nonvested shares at December 31, 2015 of $2,228,000 which have a weighted average vesting period of 2.8 years.
Stock Option Awards:
The following table summarizes the activity of the Company’s plan related to stock options:
(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.
The weighted-average grant date fair value for option awards granted during the year was $0.66 and $0.96 for the year ended December 31, 2014 and 2015, respectively. The total fair value of equity awards vested during the year ended December 31, 2014 and 2015 was $303,000, and $249,000, respectively.
The Company has computed the fair value of all options granted during the years ended December 31, 2014 and 2015 using the Black-Scholes option pricing model using the following assumptions:
Restricted Share Awards:
In addition to options during the year ended December 31, 2015 the Company granted restricted share awards to certain executives and members of the board of directors. The following table shows a summary of restricted stock activity for the year ended December 31, 2015:
NOTE 16 - 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 Services Segment”). The Oil and Gas Segment produces and develops the Company’s acquired oil and natural gas interests and the revenues derived from this segment are from sales to the first purchaser. During 2015, the Company used three such arrangements for oil sales, one for the Etzold Field located in Seward County, Kansas and one for oil for the Coke Field located in Wood County, Texas and one for the Bonnie View Field located in Refugio 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) 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 facility. The Science and Technology expenses shown on the Company’s 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 and are included in the "Corporate Segment".
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 consolidated statements of operations are the expenses that are directly attributable to the Field Deployment Phase and are included in the AERO Services Segment.
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 for these services. 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 tables set forth summary financial data by operating segments (in thousands):
The following table shows the total revenue by geography (in thousands):
NOTE 17 - SUPPLEMENTAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (Unaudited)
Reserve Quantity Information
For all years presented, the estimate of proved reserves and related valuations were based on reports prepared by the Company’s independent petroleum engineers.
Proved reserve estimates included herein conform to the definitions prescribed by the U.S. Securities and Exchange Commission. The estimates of proved reserves are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development, price changes and other factors.
Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under economic and operating conditions existing as of the end of each respective year. Proved developed reserves are those that are expected to be recovered through existing wells with existing equipment and operating methods.
Presented below is a summary of the changes in estimated proved reserves of the Company, all of which are located in the United States, for the years ended December 31, 2014 and 2015:
Quantities of Proved Reserves:
(1)
Purchase of the Coke Field Assets on March 14, 2014 and the Southwest Operating Assets on September 1, 2014.
(2)
The reserves revision is due to an increase in costs over our prior year reserve report.
(3)
Purchase of the Bonnie View Field on June 1, 2015.
(4)
Sale of the Etzold Field on July 1, 2015,
(5)
The oil reserves revision is due to a decline in oil prices throughout 2015.
Proved Developed and Undeveloped Reserves:
Capitalized Costs Related to Oil and Gas Producing Activities
The following table presents the Company’s capitalized costs related to oil and gas producing activities at December 31, 2014 and 2015 (in thousands):
(1)
Accumulated depreciation, depletion and amortization includes the 2014 oil and gas property impairment of $13,160,000 and the 2015 impairment of $22,600,000.
Costs Incurred in Oil and Gas Producing Activities
The following table presents the net costs incurred in property acquisition, exploration and development activities for the years ended December 31, 2014 and 2015 (in thousands):
Results of Operations from Oil and Gas Producing Activities
The following table presents the Company’s results of operations from oil and gas producing activities for the years ended December 31, 2013, 2014 and 2015 (in thousands):
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted future net cash flows relating to proved oil and gas reserves and the changes in standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves were prepared in accordance with ASC 932, Extractive Activities - Oil and Gas. Future cash inflows as of December 31, 2014 and 2015, were computed by applying average fiscal-year prices (calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month periods ended December 31, 2014 and 2015) to estimated future production. Future production and development costs are computed by estimating the expenditures to be incurred in developing and producing the proved oil and natural gas reserves at year-end, based on year-end costs and assuming the continuation of existing economic conditions.
Future income tax expense is calculated by applying appropriate year-end tax rates to future pretax net cash flows relating to proved oil and natural gas reserves, less the tax basis of the properties involved. Future income tax expense gives effect to permanent differences, tax credits and loss carry forwards relating to the proved oil and natural gas reserves. Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows. This calculation does not necessarily result in an estimate of the fair value of the Company’s oil and gas properties.
Presented below is the standardized measure of discounted future net cash flows (in thousands):
The following reconciles the changes in the standardized measure of discounted future net cash flows (in thousands):
NOTE 18 - SELECTED QUARTERLY FINANCIAL RESULTS (Unaudited)
Unaudited quarterly operating results were as follows (in thousands; except per share data):
1) Quarterly loss per share is based on the weighted average number of shares outstanding during the quarter. Because of changes in the number of shares outstanding during the quarters, due to the exercise of stock options and issuance of common stock, the sum of quarterly losses per share may not equal loss per share for the year.
2) As a result of the Merger with Infinity Corp., which consummated on April 14, 2014, the issued and outstanding common stock was canceled and reissued as common stock in the newly merged entity at a conversion ratio of 2.9 pre-Merger common stock to 1 post-Merger common stock. For the periods prior to the Merger, the above table reflects the common stock as converted to post-Merger common stock using this ratio.