UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-55261
GLORI ENERGY INC.
(Exact name of registrant as specified in its charter)
Delaware
 
46-4527741
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
4315 South Drive
 
 
Houston, Texas
 
77053
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (713) 237-8880
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o
 
Accelerated filer   o
 
Non-accelerated filer  o
 
Smaller reporting company   þ
 
 
 
 
(Do not check if a smaller reporting company.)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act). o Yes þ No
There were 32,369,611 common shares outstanding on November 9, 2016 .  



INDEX TO FINANCIAL STATEMENTS
 
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 statements:

containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items;
of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of Glori;
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
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,” “encouraging,” “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. Examples of forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding our disclosure concerning Glori's proposed operations, cash flows, and financial position.

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:

our ability to continue as a going concern;
our ability to secure additional capital to fund operations;
our ability to service our debt and make future required payments;
the sustained or an increased decline of oil and gas commodity prices;
the potential ownership dilution to shareholders from raising equity-linked capital;
our ability to generate positive cash flows, including from the acquisition of oil properties and increases in oil prices;
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;
increase in oil production rate and ultimate quantity of oil recovered using our AERO System;
the percentage of the world’s reservoirs that are suitable for our AERO System;
our ability to prove our technology;
competition and competitive factors in the markets in which we operate;
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;
our plans and ability to acquire and develop additional currently producing mature oil fields and the AERO System’s impact on these fields;
our plans to develop some abandoned and low producing mature oil fields;
the expected cost of recovering oil using our AERO System in our projects;
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;

2


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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by Glori.


3


PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

GLORI ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
December 31, 2015
 
September 30, 2016
 
 
 
(Unaudited)
ASSETS
 

 
 

 
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
8,380

 
$
1,715

Accounts receivable
1,456

 
724

Commodity derivatives
3,411

 
638

Prepaid expenses and other current assets
314

 
275

Total current assets
13,561

 
3,352

 
 
 
 
Property and equipment:
 
 
 
 Proved oil and gas properties - successful efforts
48,454

 
49,805

 Other property and equipment
6,439

 
6,393

 
54,893

 
56,198

 
 
 
 
 Less: accumulated depreciation, depletion and amortization
(47,578
)
 
(48,797
)
Total property and equipment, net
7,315

 
7,401

 
 
 
 
Deferred charges

 
340

Deferred tax asset
1,161

 

Total assets
$
22,037

 
$
11,093

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
1,430

 
$
723

Accrued expenses
1,180

 
1,145

Current portion of long-term debt shown net of unamortized deferred loan costs of $191 and $101 as of December 31, 2015 and September 30, 2016, respectively
289

 
9,925

Current deferred tax liability
1,161

 

Total current liabilities
4,060

 
11,793

 
 
 
 
Long-term liabilities:
 

 
 

Long-term debt, less current portion shown net of unamortized deferred loan costs of $36 as of December 31, 2015
10,009

 
35

Asset retirement obligation
1,457

 
1,470

Total long-term liabilities
11,466

 
1,505

Total liabilities
15,526

 
13,298

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Stockholders' equity:
 

 
 

Preferred stock, $.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding as of December 31, 2015 and September 30, 2016

 

Common stock, $.0001 par value, 100,000,000 shares authorized, 31,861,357 and 32,115,998 shares issued and outstanding as of December 31, 2015 and September 30, 2016, respectively
3

 
3

Additional paid-in capital
106,934

 
107,343

Accumulated deficit
(100,426
)
 
(109,551
)
Total stockholders' equity
6,511

 
(2,205
)
Total liabilities and stockholders' equity
$
22,037

 
$
11,093


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


GLORI ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2016
 
2015
 
2016
 
(Unaudited)
 
(Unaudited)
Revenues:
 

 
 

 
 
 
 
Oil and gas revenues
$
1,738

 
$
1,119

 
$
5,874

 
$
3,306

Service revenues
281

 

 
1,344

 
246

Total revenues
2,019

 
1,119

 
7,218

 
3,552

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Oil and gas operations
2,539

 
1,462

 
7,431

 
4,593

Service operations
395

 
316

 
1,450

 
802

Science and technology
425

 
268

 
1,528

 
911

Selling, general and administrative
1,297

 
812

 
4,549

 
3,633

Depreciation, depletion and amortization
1,230

 
479

 
3,337

 
1,481

Total operating expenses
5,886

 
3,337

 
18,295

 
11,420

 
 
 
 
 
 
 
 
Loss from operations
(3,867
)
 
(2,218
)
 
(11,077
)
 
(7,868
)
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(483
)
 
(390
)
 
(1,728
)
 
(1,125
)
Gain (loss) on commodity derivatives
2,628

 
132

 
3,017

 
(150
)
Other income (expense)
422

 
(1
)
 
417

 
12

Total other income (expense), net
2,567

 
(259
)
 
1,706

 
(1,263
)
 
 
 
 
 
 
 
 
Net loss before taxes on income
(1,300
)
 
(2,477
)
 
(9,371
)
 
(9,131
)
 
 
 
 
 
 
 
 
Income tax expense (benefit)
3

 

 
(168
)
 
(6
)
 
 
 
 
 
 
 
 
Net loss
(1,303
)
 
(2,477
)
 
$
(9,203
)
 
$
(9,125
)
 
 
 
 
 
 
 
 
Net loss per common share, basic and diluted
$
(0.04
)
 
$
(0.08
)
 
$
(0.29
)
 
$
(0.28
)

 
 
 
 
 
 
 
Weighted average common shares outstanding,
basic and diluted
31,845

 
32,116

 
31,738

 
32,056



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


GLORI ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
 
 
 
Stockholders' equity
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Total
 
 
Common stock
 
paid-in
 
Accumulated
 
stockholders'
 
 
Shares
 
Par value
 
capital
 
deficit
 
equity
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2015
 
31,861,357

 
$
3

 
$
106,934

 
$
(100,426
)
 
$
6,511

 
 
 
 
 
 
 
 
 
 
 
Stock based compensation
 
254,641

 

 
409

 

 
409

 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 
(9,125
)
 
(9,125
)
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2016
 
32,115,998

 
$
3

 
$
107,343

 
$
(109,551
)
 
$
(2,205
)



The accompanying notes are an integral part of these consolidated financial statements.
6


GLORI ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended September 30,
 
2015
 
2016
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net loss
$
(9,203
)
 
$
(9,125
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation, depletion and amortization of property and equipment
3,337

 
1,481

Loss on disposal of property and equipment
71

 
138

Exploration expenses
102

 

Stock-based compensation
1,105

 
409

Bad debt expense
36

 
66

Amortization of deferred loan costs
248

 
166

Non-cash gain on the sale of Etzold
(347
)
 

Accretion of end-of-term charge
40

 

Unrealized (gain) loss on change in fair value of commodity derivatives
(368
)
 
2,773

Settlement of asset retirement obligations

 
(27
)
Non-cash increase in debt (paid-in-kind interest)

 
103

Accretion of discount on long-term debt
28

 

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
107

 
665

Prepaid expenses and other current assets
(32
)
 
39

Accounts payable
(1,555
)
 
(707
)
Deferred revenues
(653
)
 

Accrued expenses
(619
)
 
(169
)
Net cash used in operating activities
(7,703
)
 
(4,188
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of and additions to proved oil and gas property
(4,983
)
 
(1,301
)
Purchase of other property and equipment
(560
)
 
(240
)
Proceeds from the sale of property and equipment

 
11

Net cash used in investing activities
(5,543
)
 
(1,530
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of long-term debt
52

 

Proceeds from the exercise of stock options
139

 

Payments on long-term debt
(4,335
)
 
(567
)
Payments for deferred loan costs and deferred charges
(63
)
 
(380
)
Net cash used in financing activities
(4,207
)
 
(947
)
 
 
 
 
Net decrease in cash and cash equivalents
(17,453
)
 
(6,665
)
 
 
 
 
Cash and cash equivalents, beginning of period
29,751

 
8,380

 
 
 
 
Cash and cash equivalents, end of period
$
12,298

 
$
1,715

 
 
 
 
Non-cash financing and investing activities:
 
 
 
Asset retirement obligation assumed
432

 
51

    Non-cash increase in debt (paid-in-kind interest)

 
103

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
1,812

 
$
1,091


The accompanying notes are an integral part of these consolidated financial statements.
7


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

NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
 
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.
 
Glori Energy Inc., GETI, Glori Canada Ltd., Glori Holdings Inc., Glori California Inc., OOO Glori Energy and Glori Energy Production Inc. ("GEP") are collectively referred to as the “Company” in the condensed consolidated financial statements. On August 12, 2016, Glori California, Inc. was dissolved and on September 2, 2016 Glori Canada Ltd. was dissolved.
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. In the opinion of management, these condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s condensed consolidated balance sheets as of December 31, 2015 and September 30, 2016 (unaudited), condensed consolidated statements of operations for the three and nine months ending September 30, 2015 and September 30, 2016 (unaudited), condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2016 (unaudited) and condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and September 30, 2016 (unaudited). All such adjustments represent normal recurring items. The financial information contained in this report for the three and nine months ended September 30, 2015 and September 30, 2016 , and as of September 30, 2016 , is unaudited. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2015 and the notes thereto.
 
Principles of Consolidation
 
The accompanying condensed 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 condensed 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.

Recently Adopted Accounting Pronouncements

In the first quarter of 2016, ASU No. 2015-03, "Interest--Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" became effective for the Company. The standard moved the presentation of the Company's deferred loan costs from an asset to a contra-liability account thus reducing the liability balance of loans by the amount of the deferred loan costs. The deferred loan costs are amortized to interest expense over the life of the loan. The standard was applied retrospectively and accordingly the December 31, 2015 previously reported total current and non-current loan principal balance of $10,525,000 is now shown net of total deferred loan costs of $227,000 and the September 30, 2016 total current and non-current loan principal balance of $10,061,000 is now shown net of total deferred loan costs of $101,000 . The change did not have an impact to net income.

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 conditions or events that are

8


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. Glori adopted this standard during the second quarter of 2016. Early adoption did not have an impact on the financial statements. See NOTE 3 of this report for a discussion about liquidity considerations and Glori's ability to continue as a going concern.

NOTE 3 - LIQUIDITY CONSIDERATIONS AND ABILITY TO CONTINUE AS A GOING CONCERN

The significant risks, uncertainties, significant working capital deficit, historical operating losses and resulting cash used in operations raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements have been prepared on the going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments, in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty.

As a small company with an emerging technology, the Company has generated negative cash flows from operations since inception. The downturn in the oil market over the past two years has resulted in a decrease in oil revenues from Company-owned oil properties, and a decrease in AERO services revenues as the exploration & production ("E&P") industry significantly reduced its expenditures. As a result of these factors, the Company continues to generate negative cash flows from operations resulting in a decrease in its cash balances. The significant decrease in oil prices has made it difficult for the Company to acquire producing properties, which would have contributed to its revenues and cash flows, due to potential sellers' reluctance to sell at distressed prices. Additionally, the oil price environment has negatively affected the availability of capital to Glori and the E&P industry in general. These factors have resulted in a dramatic decrease in the Company's share price, which also impacts the ability to raise new capital.

Cash has decreased from $8.4 million at December 31, 2015 to $1.7 million at September 30, 2016 due to the net cash used in operating activities of $4.2 million , the repayment of debt of $0.6 million , capital expenditures of $1.5 million and other uses of $0.4 million . As of November 8, 2016, the Company does not have lines of credit available to it. As a result of the negative operating cash flows and resulting decrease in cash, the Company believes it is essential it raise capital during the fourth quarter to fund its operations. 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.

In order to address its difficult financial situation, the Company has made, and continues to make, significant cost reductions, both in its administrative and professional staff, consultants, third party services, and lease operating expenses. The Company has reduced spending to critical repairs and maintenance and any essential replacements of field equipment. In the first quarter of 2016, the Company completed the implementation of the AERO technology at the Coke field. The Company is actively pursuing alternatives to raise capital in order to fund its operations and position itself to take advantage of an identified opportunity to acquire its first Phoenix project - an abandoned field which the Company believes has significant economic quantities of oil remaining and is compatible with its AERO technology. The Company has been in active discussions with existing investors for a modest capital raise at the Glori corporate level in order to improve its liquidity and fund certain up-front costs necessary to lease and complete the development planning of this project.

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. In May 2016, the Company submitted Part II of the application. It is currently anticipated that the loan guarantee, if issued, will fund up to 75% of project costs. The balance would need to be raised and contributed by the Company. As described below, the Company is also seeking alternative financing to enable it to acquire and redevelop its first Phoenix project because it cannot predict if the loan guarantee will ultimately be issued by the LPO, or if the final terms of the loan guarantee will be advantageous to the Company.

In addition to its efforts with the Department of Energy's LPO, in October 2016 the Company engaged an investment banking firm specializing in energy mergers and acquisitions and private placements to assist in raising capital to fund its Phoenix project, which the Company believes has excellent reservoir qualities and a significant amount of remaining oil in place. This project may provide the catalyst for a financing at both the corporate level and the project level. At this point, however, the Company cannot give any assurances it will be successful in raising any capital, nor whether it will be able to negotiate

9


acceptable terms. Due to the considerable decrease in our stock price and resulting equity market value, such capital raise will likely result in significant dilution to existing shareholders.

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 redeterminations until maturity in March 2017 (see NOTE 7 ).

Effective June 8, 2016, Stuart Page resigned as Chief Executive Officer of the Company and as a member of its Board of Directors. Kevin Guilbeau, the Company's Executive Chairman, was appointed as Interim Chief Executive Officer. Pursuant to GEP's credit agreement, it is deemed to be a change of control if Stuart Page or Victor Perez cease to serve as officers of the Company, unless such person's replacement is approved by the lender within 90 days after such person's resignation or removal. The lender has not granted its approval of Mr. Page's replacement and therefore a change of control, which is an event of default under the credit agreement, occurred. As of November 9, 2016 a waiver of such event of default had not been granted by the lender and therefore, pursuant to the terms of the credit agreement, the Required Holders, as defined, may at any time at their option exercise remedies, including declaring the debt to be immediately due and payable.

On October 23, 2015, the Company received a notice from the Listing Qualifications Department of the NASDAQ Stock Market LLC indicating that, for the previous 30 consecutive business days, the bid price for its common stock had closed below the minimum $1.00 per share required for continued inclusion on The NASDAQ Capital Market under NASDAQ Listing Rule 5550(a)(2). The Company was afforded 180 calendar days, or until April 20, 2016, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of the Company’s common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of ten consecutive business days, subject to NASDAQ's discretion to increase such ten-day period. On April 25, 2016, the Company received a letter from NASDAQ granting the Company an additional 180 days to regain compliance with the minimum bid price requirement. The Company had until October 17, 2016 to regain compliance with the bid price requirement. In addition, the Company must continue to meet the continued listing criteria, including maintaining stockholders' equity of at least $2.5 million . As a result of its net losses, including the impairment of oil and gas properties incurred in 2014 and 2015 as a result of the decrease in oil prices, the Company's stockholders' equity was below the required $2.5 million as of June 30, 2016. In order to maintain its NASDAQ listing, the Company would need to raise equity in the near-term in amounts sufficient to satisfy the $2.5 million stockholders' equity requirement. Additionally, based on the Company's recent share price, in order to meet the minimum $1.00 bid price per share requirement, the Company would most likely have to implement a reverse stock split which requires the approval of shareholders at a shareholder meeting. After considering a number of factors, including the likely expenses and uncertainty associated with seeking to regain compliance with or raise capital while subject to NASDAQ's Listing Rules and the ongoing costs of maintaining such compliance, on September 8, 2016, the Company's Board of Directors unanimously determined to (i) voluntarily delist from the NASDAQ, (ii) deregister the Company's common stock under Section 12 (b) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), and (iii) take the actions necessary for the Company to be traded on the OTC Market Group trading systems. On September 9, 2016, the Company submitted a notice to the NASDAQ of its intention to voluntarily withdraw the Company's common stock from listing on NASDAQ and to voluntarily terminate the registration of common stock under Section 12 (b) of the Exchange Act and publicly announced its intent to delist. The Company voluntarily filed Form 25, Notification of Removal from Listing and/or Registration under Section 12 (b) of the Securities Exchange Act of 1934 on September 20, 2016 and Glori's common stock suspended trading on the NASDAQ effective on September 29, 2016. The Company's common stock began trading on the OTCQB Venture Market on September 30, 2016 under the Company's trading symbol "GLRI". The Company may determine to re-apply to re-establish its NASDAQ listing at such later date as the Company is able to meet the initial listing requirements. Such NASDAQ delisting or further declines in our stock price could impair our ability to raise additional capital to finance our operations and additional capital expenditures and could significantly increase the ownership dilution to shareholders caused by our issuing equity or other transactions. Glori's listing does not affect the Company’s business operations and does not cause a default under any material agreement.




10


NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following ( in thousands ):
 
December 31, 2015
 
September 30, 2016
 
 
 
(Unaudited)
 
 
 
 
Proved oil and gas properties - successful efforts
$
48,454

 
$
49,805

Unproved oil and gas properties
443

 
684

Construction in progress (1)
594

 
508

Laboratory and warehouse facility (2)
648

 
599

Laboratory and field service equipment (1)
3,355

 
3,247

Office equipment, computer equipment, vehicles and other (2)
1,399

 
1,355

 
54,893

 
56,198

 
 
 
 
Less:  accumulated depreciation, depletion and amortization (1)(2)(3)
(47,578
)
 
(48,797
)
 
 
 
 
 Total property and equipment, net
$
7,315

 
$
7,401

(1) In conjunction with quarter-end procedures, the Company identified certain AERO technology-related field equipment and other assets which will not be compatible with anticipated near-term future AERO projects and removed their book values and accumulated depreciation from the balance sheet, with the net difference of $120,000 recorded as a non-cash expense in Service Operations on the condensed consolidated statements of operations.
(2) The Company concluded its lease in Houston's Westchase District on September 30, 2016 and removed related leasehold improvements, which were fully depreciated, from the balance sheet. Office furniture at this location was sold for $11,000 .
(3) Excludes accretion of asset retirement obligation.
  
Depreciation, depletion, amortization and impairment consists of the following ( in thousands ):
 
 
 
 
 
Three Months Ended September 30,
 
2015
 
2016
Depreciation and amortization expense
$
158

 
137

Depletion expense
1,032

 
301

Accretion of asset retirement obligation
40

 
41

Total depreciation, depletion and amortization of property and equipment
$
1,230

 
$
479

 
Nine Months Ended September 30,
 
2015
 
2016
 
(Unaudited)
 
 
 
 
Depreciation and amortization expense
$
472

 
$
432

Depletion expense
2,749

 
925

Accretion of asset retirement obligation
116

 
124

Total depreciation, depletion and amortization of property and equipment
$
3,337

 
$
1,481


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 13 ). 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 . For nine months ended September 30, 2015, the Company had revenues of $57 thousand and a net loss of $130 thousand associated with the Etzold Field.

11



On June 1, 2015, 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 assets is also increased by an asset retirement obligation associated with plugging and abandoning the Bonnie View Field assets of $432,000 . The effective date of the purchase was May 1, 2015. The Bonnie View Field does not meet the definition of a significant acquisition which would require pro forma financial information.

NOTE 5 – FAIR VALUE MEASUREMENTS

FASB standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
 
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The following table summarizes the financial assets measured at fair value, on a recurring basis as of December 31, 2015 and September 30, 2016 (in thousands)

 
Fair value measurements using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
     Short-term commodity derivatives, asset
$

 
$
3,411

 
$

 
$
3,411


 
Fair value measurements using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Unaudited)
 
 
 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
 
     Short-term commodity derivatives, asset
$

 
$
638

 
$

 
$
638


The Level 2 instruments presented in the table above consists of derivative instruments made up of commodity price swaps at December 31, 2015 and commodity swaps and put and call options at September 30, 2016. The fair values of the Company's commodity derivative instruments are based upon the NYMEX futures prices of oil compared to the contracted per barrel rate to be received or paid. For the swaps, 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. For the oil put and call options (collars), the Company generally records a liability when the futures price of oil is greater than the contracted ceiling price to be received and an asset when the futures prices of oil is lower than the contracted floor to be received.

NOTE 6 - DERIVATIVE INSTRUMENTS

The Company utilizes derivative financial instruments to manage risks related to changes in oil prices. The Company is currently engaged in oil commodity price swaps where a fixed price is received from the counterparty for a portion of the Company's oil production. In return the Company pays a floating price based upon NYMEX oil prices. In June 2016, Glori

12


executed option contracts including oil call agreements as well as oil put agreements covering certain portions of our anticipated 2017 oil production. No net premiums were paid as a result of these option agreements. 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 endeavors to manage the default risk of counterparties by engaging in these agreements with only high credit quality companies and through the continuous monitoring of their performance.

As of September 30, 2016 , the Company had the following open positions on outstanding commodity derivative contracts:

Period
 
Notional Amount (Bbl)
 
Swap ($/Bbl)
 
Floor ($/Bbl)
 
Ceiling ($/Bbl)
 
 
 
 
 
 
 
 
 
 
October 2016 - December 2016
 
19,650

 
$
82.46

 
 
 
 
January 2017 - June 2017
 
18,100

 
 
 
$
42.50

 
$
55.60


The derivative contracts are carried at fair value on the condensed consolidated balance sheet as assets or liabilities. Derivatives for oil are netted on the Consolidated Balance Sheets as they are all contracts with the same counterparty. The following table presents the fair value and balance sheet location of each classification of commodity derivative contracts on a gross basis without regard to same-counterparty netting:

 
 
Fair value as of
 
 
December 31, 2015

 
September 30, 2016

Asset commodity derivatives:
 
 
 
 
Current assets
 
3,411

 
693

Current liabilities
 

 
(55
)
Total commodity derivatives
 
3,411

 
638



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 condensed consolidated statements of operations. The settlements of the closed derivative contracts result in realized gains and losses recorded on the Company's condensed consolidated statements of operations. The unrealized and realized gains and losses on derivative instruments are recognized in the gain (loss) on commodity derivatives line item located in other income (expense).

The following tables summarize the unrealized and realized gain (loss) on commodity derivatives (in thousands) :
 
 
 
 
 
Three Months Ended September 30,
 
2015
 
2016
 
(Unaudited)
 
 
 
 
Unrealized gain (loss) on commodity derivatives
$
1,750


$
(605
)
Realized gain on commodity derivatives
878


737

 
$
2,628


$
132


13


 
Nine Months Ended September 30,
 
2015
 
2016
 
(Unaudited)
 
 
 
 
Unrealized gain (loss) on commodity derivatives
$
368

 
$
(2,773
)
Realized gain on commodity derivatives
2,649

 
2,623

 
$
3,017

 
$
(150
)

NOTE 7 - LONG-TERM DEBT

On June 11, 2012, the Company entered into a secured term promissory note in the amount of $8.0 million . The note contained a 10.0% annual interest rate subject to increase based upon an increase in the prime rate. The loan was secured by substantially all assets of the Company with the exception of the Coke Field Assets. The lender also received a warrant to purchase shares of the Company’s stock which was exchanged for 18,208 common shares upon consummation of the Merger. Equal monthly principal payments were due over 27 months beginning in April 2013 through June 2015 plus an end of term charge of $280,000 . The loan agreement contained covenants which place restrictions on the incurrence of debt, liens and capital expenditures. On March 2, 2015 the Company elected to prepay the entire remaining indebtedness. The payment included remaining principal of $888,000 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, the Company entered into a financing agreement of $18.0 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 of GEP and is secured by the Coke Field and shares of common stock 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 required quarterly principal payments equal to 50% of the excess cash flows, as defined, from GEP's oil properties 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 shown on the condensed consolidated balance sheets as a reduction of proceeds and 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.

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 previously required financial ratio covenants and 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% . The additional 2.0% may be “paid in kind”, and added to the principal amount, or paid in cash at the election of the Company. 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. For the three months ending September 30, 2016, the Company elected the additional 2.0% interest to be paid in kind and debt increased by $51,000 and debt increased by $103,000 for the nine months ending September 30, 2016. As of December 31, 2015 and September 30, 2016 the outstanding loan balance was $10.5 million and $10.0 million , respectively.

Effective June 8, 2016, Stuart Page resigned as Chief Executive Officer of the Company and as a member of its Board of Directors. Kevin Guilbeau, the Company's Executive Chairman, was appointed as Interim Chief Executive Officer. Pursuant to GEP's credit agreement, it is deemed to be a change of control if Stuart Page or Victor Perez cease to serve as officers of the Company, unless such person's replacement is approved by the lender within 90 days after such person's resignation or removal. The lender has not granted its approval of Mr. Page's replacement and therefore a change of control, which is an event of default under the credit agreement, occurred. As of November 9, 2016 a waiver of such event of default had not been granted by the lender and therefore, pursuant to the terms of the credit agreement, the Required Holders, as defined, may at any time at their option exercise remedies, including declaring the debt to be immediately due and payable.

Maturities on long-term debt during the next five years are as follows (in thousands).

14



Year ending September 30,
 
Amount
 
 
(Unaudited)
 
 
 
2017
 
10,026

2018
 
9

2019
 
9

2020
 
9

2021
 
8

Thereafter
 

 
 
$
10,061

The maturities above are presented on the September 30, 2016 condensed consolidated balance sheet net of debt issuance costs of $101 thousand .

 
NOTE 8 - ASSET RETIREMENT OBLIGATION

The Company records an asset retirement obligation (ARO) on oil and natural gas properties when it can reasonably estimate the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon costs. The Company records the ARO liability on the unaudited condensed consolidated balance sheets and capitalizes a portion of the cost in " Proved oil and gas properties - successful efforts " during the period in which the obligation is incurred. The Company records the accretion of its ARO liabilities in "Depreciation, depletion and amortization" expense in the unaudited condensed consolidated statements of operations. The additional capitalized costs are depreciated on a unit-of-production basis.
During three months ended September 30, 2016 , $27,000 of ARO was settled and as of September 30, 2016, $200,000 of current ARO was included in "Accrued expenses" on the unaudited condensed consolidated balance sheets.
The Company recorded the following activity related to its ARO liability for the nine months ended September 30, 2016 (in thousands, inclusive of the current portion):
Liability for asset retirement obligations as of December 31, 2015
$
1,522

Liabilities settled
(27
)
Additions
14

Revisions due to change in estimates
37

Accretion expense
124

Liability for asset retirement obligations as of September 30, 2016
1,670



NOTE 9 - 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 ):
 

15


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2016
 
2015
 
2016
 
(Unaudited)
 
(Unaudited)
Numerator:
 

 
 

 
 
 
 
Net loss
$
(1,303
)
 
$
(2,477
)
 
$
(9,203
)
 
$
(9,125
)
 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 
 
 
Weighted-average common shares outstanding - basic
31,845

 
32,116

 
31,738

 
32,056

Effect of dilutive securities

 

 

 

Weighted-average common shares - diluted
31,845

 
32,116

 
31,738

 
32,056

 
 
 
 
 
 
 
 
Net loss per common share - basic and diluted
$
(0.04
)
 
$
(0.08
)
 
$
(0.29
)
 
$
(0.28
)

The following weighted average securities outstanding during the three and nine months ended September 30, 2015 and September 30, 2016 were not included in the calculation of diluted shares outstanding as they would have been anti-dilutive ( in thousands ):
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2015
 
2016
2015
 
2016
 
(Unaudited)
(Unaudited)
 
 
 
 
 
 
 
Common stock warrants ($10 strike price)
5,321

 
5,321

5,321

 
5,321

Common stock options
1,646

 
2,469

2,122

 
2,661

Restricted shares
200

 
253

105

 
460


NOTE 10 - INCOME TAXES
 
At December 31, 2015 and September 30, 2016 , the Company has net operating loss carryforwards for federal income tax reporting purposes of approximately $64.3 million and $74.4 million , respectively, which will begin to expire in the year 2025, and tax credits of approximately $504,000 , which will begin to expire in 2027 . The NOL carry forward has been reduced by approximately $5.4 million of loss carryforwards that management estimates will expire due to limitations from changes in control.

The Company has recorded a valuation allowance against the Company's deferred tax assets. The effective tax rate for the three and nine months ended September 30, 2015 and 2016 varies from the statutory rate primarily due to the effect of the valuation allowance. For the three months ended September 30, 2015 the Company had an income tax expense of $3,000 and for the nine months ended September 30, 2015 the Company had an income tax benefit of $168,000 due to a reduction in taxes paid on foreign income as the Company revised its methodology for service fee applications charged to foreign subsidiaries. For the three months ended September 30, 2016 the Company had no income tax expense and for the nine months ended September 30, 2016 the Company had an income tax benefit of $6,000 due to the utilization of net operating losses to recover previously paid foreign income taxes.
 
NOTE 11 - 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 currently a party to any material litigation or proceedings and is not aware of any material litigation or proceedings, pending or threatened against it.
 
Commitments
 

16


The Company leased 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 2014, for 7,805 square feet of office space in Houston's Westchase District for approximately $18,000 per month. The Westchase District office lease expired in September 2016 and the Company did not renew this lease. 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 C $1,000 per month and was canceled in August 2016.
 
Approximate minimum future rental payments under these noncancelable operating leases as of September 30, 2016 are as follows (in thousands) :
 
 
Year Ending September 30,
 
 
(Unaudited)
 
 
 
2017
 
$
85

 
 
$
85


Total rent expense was approximately $90,000 and $305,000 for the three and nine months ended September 30, 2015 and $88,000 and $268,000 for the three and nine months ended and September 30, 2016 , respectively.



NOTE 12 - STOCK-BASED COMPENSATION
 
Stock Incentive Plan
 
In December 2014, the Company shareholders 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 consultants 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 1 year , and thereafter ratably each month over the following 36 months , and may be exercised for a period of 10 years subject to vesting. 

Stock-based compensation expense, included primarily in selling, general and administrative expense, was $267 thousand and $136 thousand for the three months ended September 30, 2015 and September 30, 2016 and $1.1 million and $409 thousand for the nine months ended September 30, 2015 and September 30, 2016 , respectively. The Company has future unrecognized compensation expense for nonvested shares at September 30, 2016 of $941 thousand with a weighted average vesting period of 2.3 years .

Stock Option Awards:

The Company has computed the fair value of all options granted during the year ended December 31, 2015 , using the Black-Scholes option pricing model using the following assumptions:
 
 
Year ended
December 31,
 
2015
 
 
 
 
Risk-free interest rate
1.55
%
Expected volatility
66
%
Expected dividend yield

Expected life (in years)
6.00

Expected forfeiture rate

 

17


The following table summarizes the activity of the Company’s plan related to stock options:
 
 
Number
of options
 
Weighted
average
exercise
price per share
 
Weighted
average
remaining
contractual
term (years)
 
Aggregate intrinsic value
Outstanding as of December 31, 2015
2,834,635

 
$
1.01

 
6.9
 
$
89,000

Awarded (unaudited)
35,000

 
0.32

 
 
 
 
Exercised (unaudited)

 


 
 
 
 
Forfeited or Expired (unaudited)
(1,050,120
)
 
0.80

 
 
 
 
Outstanding as of September 30, 2016 (unaudited)
1,819,515

 
$
1.11

 
7.2
 
$

Exercisable as of December 31, 2015
1,934,605

 
$
0.84

 
5.7
 
$
89,000

Exercisable as of September 30, 2016 (unaudited)
1,069,261

 
$
1.18

 
5.9
 
$

 
The weighted-average grant date fair value for equity options granted during the nine months ended September 30, 2015 and September 30, 2016 was $2.00 and $0.32 , respectively. There were no option awards issued in the three months ended September 30, 2015 and 35,000 option awards issued in the three months ended September 30, 2016 . The total fair value of options vested during the three months ended September 30, 2015 and September 30, 2016 was $54,000 and $27,000 , respectively. The total fair value of options vested during both the nine months ended September 30, 2015 and September 30, 2016 was $207,000 and $187,000 , respectively.

Restricted Share Awards:

In addition to options, the Company has 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 nine months ended September 30, 2016 :

 
Shares
 
Weighted-average grant date fair value
Non-vested awards outstanding, December 31, 2015
844,592

 
$
2.67

Vested
(297,182
)
 
2.49

Forfeited
(293,797
)
 
2.55

Non-vested awards outstanding, September 30, 2016
253,613

 
$
3.03



NOTE 13 – SEGMENT INFORMATION
 
The Company generates revenues through the production and sale of oil and natural gas (the “Oil and Gas Segment”) and through the Company’s AERO services provided to third party oil companies (the “AERO Services Segment”). The Oil and Gas Segment produces and develops the Company’s acquired oil and natural gas interests. The revenues derived from the segment are from sales to the first purchaser. The Company uses two such arrangements for oil sales, one for the Coke and Quitman fields located in Wood County, Texas and one for the Bonnie View Field in Refugio County, Texas.
 
The AERO Services Segment derives revenues from external customers by providing the Company’s biotechnology solution of enhanced oil recovery through a two -step process consisting of (1) the Analysis Phase and (2) the Field Deployment Phase.
 
The Analysis Phase work is a reservoir screening process whereby the Company obtains field samples and evaluates the Company’s potential for AERO Services Segment success. This process is performed at the Company’s Houston laboratory facility. The science and technology expenses shown on the Company’s condensed consolidated statements of operations are the expenses that are directly attributable to the Analysis Phase and expenses associated with the Company’s on-going research and development of its technology 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

18


in the Company’s own oil fields. The service operations expense shown on the Company’s condensed consolidated statements of operations are the expenses that are directly attributable to the Field Deployment Phase and 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. 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 expenses associated with injection equipment are viewed as part of the AERO Services Segment.
 
The following table sets forth the operating segments of the Company and the associated revenues and expenses (in thousands) :
 
 
 
 
 
 
 
 
 
Oil and Gas
 
AERO Services
 
Corporate
 
Total
 
(Unaudited)
 
 
 
 
 
 
 
 
Three months ended September 30, 2015
 

 
 

 
 

 
 

Revenues
$
1,738

 
$
281

 
$

 
$
2,019

Total operating expenses
2,539

 
395

 
1,722

 
4,656

Depreciation, depletion and amortization
1,096

 
69

 
65

 
1,230

Loss from operations
(1,897
)
 
(183
)
 
(1,787
)
 
(3,867
)
 
 
 
 
 
 
 
 
Other expense, net
3,050

 

 
(483
)
 
2,567

 
 
 
 
 
 
 
 
Income tax benefit

 

 
3

 
3

 
 
 
 
 
 
 
 
Net loss
$
1,153

 
$
(183
)
 
$
(2,273
)
 
$
(1,303
)
 
 
 
 
 
 
 
 
 
Oil and Gas
 
AERO Services
 
Corporate
 
Total
 
(Unaudited)
 
 
 
 
 
 
 
 
Three months ended September 30, 2016
 

 
 

 
 

 
 

Revenues
$
1,119

 
$

 
$

 
$
1,119

Total operating expenses
1,462

 
316

 
1,080

 
2,858

Depreciation, depletion and amortization
361

 
88

 
30

 
479

Loss from operations
(704
)
 
(404
)
 
(1,110
)
 
(2,218
)
 
 
 
 
 
 
 
 
Other expense, net
132

 

 
(391
)
 
(259
)
 
 
 
 
 
 
 
 
Income tax benefit

 

 

 

 
 
 
 
 
 
 
 
Net loss
$
(572
)
 
$
(404
)
 
$
(1,501
)
 
$
(2,477
)

19


 
Oil and Gas
 
AERO Services
 
Corporate
 
Total
 
(Unaudited)
Nine Months Ended September 30, 2015
 

 
 

 
 

 
 

Revenues
$
5,874

 
$
1,344

 
$

 
$
7,218

Total operating expenses
7,431

 
1,450

 
6,077

 
14,958

Depreciation, depletion and amortization
2,961

 
278

 
98

 
3,337

Loss from operations
(4,518
)
 
(384
)
 
(6,175
)
 
(11,077
)
 
 
 
 
 
 
 
 
Other income (expense), net
3,439

 

 
(1,733
)
 
1,706

 
 
 
 
 
 
 
 
Income tax benefit

 

 
(168
)
 
(168
)
 
 
 
 
 
 
 
 
Net loss
(1,079
)
 
(384
)
 
(7,740
)
 
(9,203
)

 
Oil and Gas
 
AERO Services
 
Corporate
 
Total
 
(Unaudited)
Nine Months Ended September 30, 2016
 

 
 

 
 

 
 

Revenues
$
3,306

 
$
246

 
$

 
$
3,552

Total operating expenses
4,593

 
802

 
4,544

 
9,939

Depreciation, depletion and amortization
1,108

 
276

 
97

 
1,481

Loss from operations
(2,395
)
 
(832
)
 
(4,641
)
 
(7,868
)
 
 
 
 
 
 
 
 
Other expense, net
(151
)
 

 
(1,112
)
 
(1,263
)
 
 
 
 
 
 
 
 
Income tax benefit

 

 
(6
)
 
(6
)
 
 
 
 
 
 
 
 
Net loss
(2,546
)
 
(832
)
 
(5,747
)
 
(9,125
)

20


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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 included elsewhere herein, and with our annual report on Form 10-K for the year ended December 31, 2015. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our annual report and elsewhere in this quarterly report. See “Cautionary Note Regarding Forward-Looking Statements” above.

Overview

We are a Houston-based oil production company that deploys its proprietary AERO technology to increase the amount of oil that can be produced from conventional fields at a substantially lower cost than traditional enhanced oil recovery methods ("AERO System"). Only about one-third of the oil discovered in a typical reservoir is recoverable using conventional oil production technology, leaving the remaining two-thirds trapped in the reservoir rock. Our AERO System technology stimulates the native microorganisms that reside in the reservoir to improve the recoverability of this trapped oil. We believe the AERO System can reverse production declines and significantly increase ultimate reserve recovery at a low incremental cost per barrel. Glori owns and operates oil fields onshore in the U.S. where we deploy our technology.
Glori's goal is also to acquire fields which may have no current production but have excellent reservoir qualities, are compatible with our AERO technology, and have significant original oil in place remaining. We believe there are significant opportunities onshore U.S. to acquire and reconstitute such previously abandoned fields and capture significant economic quantities of oil which have been left behind by the industry. Our focus is on sandstone reservoirs with good permeability and clear potential for waterflooding, which are therefore are good candidates to benefit from our AERO technology. We believe by introducing AERO at the initiation of a waterflood, we can improve oil recovery and reduce water use over the life of a field. Additionally, since these inactive fields may not have produced any oil for many years, they can be acquired or leased at low prices, when compared to producing assets. We refer to this strategy as our "Phoenix" initiative.

We also seek to acquire and redevelop mature oil fields with historically long-lived, predictable production profiles that fit our criteria for the AERO System. We believe this strategy can enhance the revenues, cash flows and returns from such oil fields through waterflood optimization and implementation of our AERO System of enhanced oil recovery. The decrease in oil prices over the past two years has made it difficult to acquire producing oil assets as potential sellers are hesitant to sell at depressed prices. Additionally, lenders and investors have tended to limit new financings for the exploration and production ("E&P") industry. Therefore, Glori's ability to execute on acquisitions of producing oil properties depends on relative stability in oil prices and on our ability to raise capital.

In the first quarter of 2016, we completed the implementation of the AERO technology at the company-owned Coke field and continue to monitor the field's response. We are continuing to closely monitor the impact of the three AERO system injection wells on the Coke field, but we believe more time is needed to be able to reach definitive conclusions. We will continue to closely evaluate field production while carefully managing field expenses.

We are actively pursuing alternatives to raise capital in order to fund our operations and enable us to take advantage of an identified opportunity to acquire our first Phoenix project - an abandoned field which we believe has significant economic quantities of oil remaining and is compatible with our AERO technology. We are in active discussions with existing investors for a modest capital raise at the Glori corporate level in order to improve liquidity and fund certain up-front costs necessary to lease and complete the development planning of this project. Due to the considerable decrease in our stock price and resulting equity market value, such a capital raise will likely result in significant dilution to existing shareholders.

We 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 Glori to submit Part II of its application. In May 2016, we submitted Part II of the application. It is currently anticipated that the loan guarantee, if issued, will fund up to 75% of project costs. The balance would need to be raised and contributed by the Company. As described below, we are also seeking alternative financing to enable us to acquire and redevelop our first Phoenix project because we cannot predict if the loan guarantee will ultimately be issued by the LPO, or if the final terms of the loan guarantee will be advantageous to us.


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In addition to our efforts with the Department of Energy's LPO, in October 2016, we engaged an investment banking firm specializing in energy mergers and acquisitions and private placements to assist us in raising capital to fund our Phoenix project. This project may provide the catalyst for a financing at both the corporate level and the project level. At this point, however, we cannot give any assurances that we will be successful in raising any capital, nor whether we will be able to negotiate acceptable terms.


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.

On January 8, 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., as INXB Representative (such transaction, the "Merger"). On April 14, 2014, the Merger was consummated. We obtained effective control of INXB subsequent to the Merger and thus the Merger was accounted for as a reverse acquisition and recapitalization of the Company . Subsequent to the Merger, our shareholders retained a substantial majority of voting interest and positions on the Board of Directors. Additionally our management was retained and our operations comprise the ongoing operations post-Merger. In connection with the Merger, we received approximately $24.7 million , net of certain expenses and fees, and approximately $13.7 million in cash from the private placement of common stock for total proceeds of $38.4 million.

On March 14, 2014, a subsidiary of the Company, Glori Energy Production Inc. ("GEP"), acquired the Coke Field from Petro-Hunt for (i) $38.0 million in cash and a $2.0 million convertible note payable to Petro-Hunt, and (ii) the assumption of the asset retirement obligation related to plugging and abandoning the Coke Field. Subsequent to the Merger the note payable to Petro-Hunt was converted into common stock.

On June 1, 2015, 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 $2.6 million. The carrying value of the Bonnie View Field assets is also increased by an asset retirement obligation associated with plugging and abandoning the Bonnie View Field assets of $432 thousand .

Net loss for the third quarter of 2016 was $2.5 million , or $0.08 per share. This compares to a third quarter 2015 net loss of $1.3 million , or a loss of $0.04 per share.

Revenues for the third quarter of 2016 were $1.1 million , reflecting a decrease of $900 thousand from the third quarter of 2015. Oil and gas revenues decreased 36% to $1.1 million from $1.7 million in the third quarter of 2015 due to a 2% decrease in average oil prices received and a 34% decrease in oil volumes produced and sold in the third quarter of 2016 . Total oil production in the third quarter of 2016 decreased due primarily to shutting in certain uneconomic wells in the Coke Field in order to reduce lease operating expenses. There were no revenues from our AERO technology services segment for the third quarter of 2016 and $281 thousand for the third quarter of 2015. Although our AERO System is a low cost enhanced oil recovery solution, our 2016 service revenues have been adversely affected by continued low oil prices and decreased spending by the E&P industry. In this environment of reduced E&P spending, many AERO services clients and prospects have been hesitant to commence new projects involving new technology.

During the third quarter of 2016, we produced 27,688 net barrels of oil equivalents ("BOE") or approximately 301 net BOE per day, including 26,401 barrels of oil and 7,727 thousand cubic feet of natural gas, and received an average realized oil price of $41.77 per barrel. We utilize certain volumes of natural gas production in operations at the Bonnie View field each month. After the effect of oil price swap settlements, our oil price per barrel for the quarter was approximately $69.42 per barrel. Production from liquids (oil and condensate) represented approximately 95% of total production. Total production in the third quarter of 2016 decreased approximately 5% from the second quarter of 2016 production primarily due to production down-time due to
periodic field maintenance. Third quarter 2015 production was 483 net BOE per day with an average realized price of $42.44 per barrel and $1.48 per thousand cubic foot. Including the effect of oil price swap settlements, the average realized oil price per barrel was $64.18 in the third quarter of 2015.

We had price swap derivatives in place covering approximately 74% of our oil and condensate production for the third quarter of 2016. We continue to maintain price swaps covering a portion of our estimated future production through December 2016, and have added costless collars (a combination of put and call options to sell and buy oil) to cover a portion of our estimated future production in the first half of 2017. In the three months ended September 30, 2016 , we recorded a net gain on commodity derivatives of approximately $132 thousand , which was net of a $605 thousand unrealized loss on changes in fair

22


value of future swap receivables. In the previous year's third quarter, we recorded a net gain on commodity derivatives of approximately $2.6 million, due to a decrease in NYMEX oil futures prices from the beginning to the end of the quarter, including $878 thousand in realized cash settlements received. See NOTE 6 in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this report for additional information regarding our commodity derivative activities.


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

 
Three Months Ended September 30,
 
Nine months ended September 30,
 
2015
 
2016
 
2015
 
2016
Revenues:
 

 
 

 
 
 
 
Oil and gas revenues
$
1,738

 
$
1,119

 
$
5,874

 
$
3,306

Service revenues
281

 

 
1,344

 
246

Total revenues
2,019

 
1,119

 
7,218

 
3,552


 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Oil and gas operations
2,539

 
1,462

 
7,431

 
4,593

Service operations
395

 
316

 
1,450

 
802

Science and technology
425

 
268

 
1,528

 
911

Selling, general and administrative
1,297

 
812

 
4,549

 
3,633

Depreciation, depletion and amortization
1,230

 
479

 
3,337

 
1,481

Total operating expenses
5,886

 
3,337

 
18,295

 
11,420


 
 
 
 
 
 
 
Loss from operations
(3,867
)
 
(2,218
)
 
(11,077
)
 
(7,868
)

 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 
 
 
Interest expense
(483
)
 
(390
)
 
(1,728
)
 
(1,125
)
Gain (loss) on commodity derivatives
2,628

 
132

 
3,017

 
(150
)
Other income (expense)
422

 
(1
)
 
417

 
12

Total other income (expense), net
2,567

 
(259
)
 
1,706

 
(1,263
)
 
 
 
 
 
 
 
 
Income tax expense (benefit)
3

 

 
(168
)
 
(6
)
 
 
 
 
 
 
 
 
Net loss
$
(1,303
)
 
$
(2,477
)
 
$
(9,203
)
 
$
(9,125
)


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The following table sets forth selected production data for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2016
 
2015
 
2016
Revenues (in thousands):
 
 
 
 
 
 
 
Oil revenues
$
1,713

 
$
1,114

 
$
5,788

 
$
3,289

Natural gas revenues
25

 
5

 
86

 
17

Total oil and gas revenues
$
1,738

 
$
1,119

 
$
5,874

 
$
3,306

 
 
 
 
 
 
 
 
Sales volumes:
 
 
 
 
 
 
 
Oil volumes (MBbls)
40

 
27

 
117

 
87

Gas volumes (MMcf)
17

 
3

 
57

 
16

Gas volumes (MBoe)
3

 
1

 
9

 
3

Total volumes (MBoe)
43

 
28

 
126

 
90

 

 
 
 
 
 
 
Price:
 
 
 
 
 
 
 
Average oil price received per Bbl
$
42.44

 
$
41.77

 
$
49.56

 
$
37.82

Average oil price per Bbl including price swap settlements
$
64.18

 
$
69.42

 
$
72.24

 
$
67.99

Average gas price per Mcf
$
1.48

 
$
1.59

 
$
1.51

 
$
1.09



The following table details oil and gas operations expense for the periods indicated (in thousands) :
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2016
 
2015
 
2016
Lease operating expense
$
1,753

 
$
1,055

 
$
4,813

 
$
3,104

Ad valorem taxes
91

 
35

 
265

 
156

Severance taxes
81

 
52

 
273

 
153

Acquisition expenses
16

 
10

 
60

 
58

Exploration expense
102

 

 
102

 

Oil and gas overhead expense
496

 
310

 
1,918

 
1,122

Oil and gas operations expense
$
2,539

 
$
1,462

 
$
7,431

 
$
4,593


Three Months Ended September 30, 2015 and 2016
 
Oil and gas revenues. Oil and gas revenues decreased by $619 thousand , or 36% , from $1.7 million in the three months ended September 30, 2015 to $1.1 million in the three months ended September 30, 2016 . The decrease was primarily the result of a 2% decrease in average oil prices received and a 34% decrease in oil production sold. Production decreased primarily due to a cost reduction plan to improve field profitability at the Coke Field by shutting in uneconomic wells in the low price environment and by reducing overall field expenses.
 
Service revenues. There were no service revenues for the third quarter of 2016 and $281 thousand for the three months ended September 30, 2015 . The service revenues were attributable to two Field Deployment Phase projects which concluded in July 2015 and one project which concluded in February 2016. Service revenues have continued to be adversely impacted by the decrease in oil prices which resulted in significant decreases in spending by our exploration and production customers and prospects. As a result, in an effort to reduce administrative expenses, business development and related expenses in connection with providing AERO services to third parties were eliminated during the 2016 third quarter.


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Oil and gas operations. Oil and gas operating expenses decreased by $1.1 million , or 42% , from $2.5 million in the three months ended September 30, 2015 to $1.5 million in the three months ended September 30, 2016 . Overhead expenses decreased $186 thousand, or 38%, due to a reduction in compensation and benefits as a result of decreased headcount. Lease operating expenses ("LOE") decreased by a net $698 thousand due to a $695 thousand, or 43%, decrease in Coke Field expenses due to cost reduction efforts. Exploration expenses decreased $102 thousand as a result of an unsuccessful radial jetting project in the prior year period. Ad valorem tax expense decreased $56 thousand due to an adjustment to the annualized estimate of the 2016 period tax assessment. Severance taxes decreased $29 thousand due to lower oil prices and revenues.

Service operations. Service operations expense decreased by $79 thousand , or 20%, from $395 thousand in the third quarter of 2015 to $316 thousand in the third quarter 2016 . The net decrease is primarily due to a decrease of $96 thousand in project costs related to projects in Canada and Brazil, which concluded during July 2015 and first quarter 2016, respectively. Compensation and benefits decreased $71 thousand due to decreased headcount. Domestic project costs decreased $19 thousand. These decreases were partially offset by a non-cash expense of approximately $120 thousand related to the write down of certain AERO technology field assets which were deemed incompatible for anticipated future projects.
 
Science and technology. Science and technology expenses decreased by $157 thousand , or 37% , from $425 thousand in the three months ended September 30, 2015 to $268 thousand in the three months ended September 30, 2016 mostly due to a decrease of $69 thousand in compensation and benefits due to decreased headcount and a decrease of $35 thousand in legal fees incurred for patent protection. Supplies and travel expenses decreased $27 thousand due to a decline in the number of Analysis Phase services projects and cost reduction efforts. The remaining decrease is attributable to a reduction in fees for recurring third party research consulting.
 
Selling, general and administrative ("SG&A"). SG&A expenses decreased by $485 thousand , or 37% , from $1.3 million in the three months ended September 30, 2015 to $812 thousand in the three months ended September 30, 2016 . The decrease was primarily attributable to cost cutting measures in salaries, benefits, travel and certain other back office expenses, including a reduction in fees paid to the Board of Directors.

Depreciation, depletion and amortization ("DD&A"). DD&A decreased from $1.2 million in the three months ended September 30, 2015 to $479 thousand in the three months ended September 30, 2016 . The decrease was primarily due to a decrease in depletion expense of $732 thousand related to the December 2015 impairment of the Coke and Bonnie View Fields as a result of the oil price decline. Depletion expense for the third quarter of 2016 was calculated based on lower asset values as compared to the third quarter of 2015 as a result of impairment during the fourth quarter of 2015, and on lower production as a result of shutting in or reducing flow rates for certain uneconomic wells.
 
Total other income (expense), net . Total other income (expense), net , decreased $2.8 million from an income of $2.6 million in the three months ended September 30, 2015 to an expense of $259 thousand in the three months ended September 30, 2016 . Our commodity derivatives, which include price swaps that were entered into in connection with the acquisition of the Coke Field in March 2014 and 2017 costless collars that were entered into in June 2016, resulted in a net gain of $132 thousand in the three months ended September 30, 2016 compared to a gain of $2.6 million in the prior year period. In the 2016 period, the derivative gain consisted of a $737 thousand realized gain on price swap settlements, which was partially offset by a $605 thousand unrealized loss on the change in fair value of future settlements due to inter-month increases in NYMEX oil futures prices. In the 2015 period, the derivative gain consisted of an $878 thousand realized gain on price swap settlements and a $1.8 million unrealized gain on the change in fair value of future settlements due to a decrease in NYMEX oil futures prices from the beginning to the end of the quarter. Interest expense also decreased $93 thousand compared to the third quarter of 2015 due to the repayment of debt. Other income (expense) also decreased $423 thousand in the third quarter of 2016 compared to the same prior year period as a result of the gain on the sale of the Etzold property on July 1, 2015.

Nine Months Ended September 30,   2015 and 2016
Oil and gas revenues.  Oil and gas revenues  decreased  by  $2.6 million  from  $5.9 million  in the  nine months ended September 30, 2015  to  $3.3 million  in the  nine months ended September 30, 2016 . The decrease was attributable to a 24% decrease in average oil prices received and a 26% decrease in oil production sold. Production decreased due to a cost reduction plan to improve field profitability at the Coke Field shutting in certain uneconomic wells and due to the July 1, 2015 sale of the Etzold Field. The decrease in production from the Coke and Etzold Fields was partially offset by the purchase of the Bonnie View Field which closed on June 1, 2015 and resulted in the inclusion of an incremental $182 thousand of oil revenues in the 2016 period.

Service revenues.  Service revenues  decreased  by  $1.1 million , or 82%, from  $1.3 million  in the  nine months ended September 30, 2015  to  $246 thousand  in the  nine months ended September 30, 2016 . The decrease in revenues was attributable to a Field

25


Deployment Phase project which concluded in February 2015, two projects which concluded in July 2015, and one project which concluded in the first quarter 2016. Analysis Phase revenues decreased $8 thousand from the prior year period. Service revenues have continued to be adversely impacted by the decrease in oil prices which resulted in significant decreases in spending by our exploration and production customers and prospects. As a result, in an effort to reduce administrative expenses, business development and related expenses in connection with providing AERO services to third parties were eliminated during the 2016 third quarter.

Oil and gas operations.  Oil and gas operating expense decreased by  $2.8 million , or 38% , from $7.4 million in the  nine months ended September 30, 2015  to  $4.6 million  in the  nine months ended September 30, 2016 . Overhead expenses decreased by $796 thousand due to decreases in third party consulting fees and a reduction in compensation and benefits as a result of decreased headcount. LOE decreased by a net $1.7 million primarily due to a $1.8 million, or 41%, decrease in Coke Field expenses due to cost reduction efforts. LOE also decreased by $159 thousand due to the sale of the Etzold Field in July 2015. These decreases in LOE were partially offset by the addition of $295 thousand in expenses for the Bonnie View Field, which was purchased in June 2015. Exploration expenses decreased $102 thousand as a result of an unsuccessful radial jetting project in 2015. Severance taxes decreased $120 thousand due to lower oil prices and revenues. Ad valorem tax expense decreased $109 thousand due to an adjustment to the annualized estimate of the 2016 period tax assessment.

Service operations . Service operations expense decreased by  $648 thousand , or  45% , from  $1.5 million  in the  nine months ended September 30, 2015  to  $802 thousand  in the  nine months ended September 30, 2016 . Approximately $265 thousand of the decrease is attributable to reduced project costs such as trucking and nutrient solution related to two domestic field projects, which concluded during February and July 2015, and $130 thousand of the decrease resulted from the conclusion of a Canadian field project in July 2015. Compensation and benefits decreased $240 thousand due to a decrease in service operations headcount resulting from the decreased number of projects. $100 thousand of the decrease is attributable to the conclusion of a project in Brazil during the first quarter of 2016. Such decreases were partially offset by the non-cash expense of approximately $120 thousand related to the abandonment of certain AERO technology-related field equipment and other assets which were deemed incompatible for anticipated near-term future AERO projects.