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
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
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.
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.
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
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
|
|
|
|
|
|
|
|
|
|
|
|
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).
|
|
|
|
|
|
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
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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
|
—
|
|
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
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|