March 23, 2016 - 8:53 AM EDT
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GLORI ENERGY INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 15 to Part IV of this Annual Report on Form 10-K. Our discussion and analysis includes forward-looking information that involves risks and uncertainties and should be read in conjunction with Risk Factors under Item 1A of this Annual Report on Form 10-K, along with Forward-Looking Information under Item 7A of this Annual Report on Form 10-K for information on the risks and uncertainties that could cause our actual results to be materially different from our forward-looking statements.

Management's Overview

The significant decline in oil and gas prices over the past 19 months has
adversely affected our revenues and cash flows from operations. The impact of
the lower oil and gas prices was partially offset by having approximately 59% of
our oil production in 2015 hedged at higher oil prices. However, we also
experienced a decrease in our AERO Services third party revenues in 2015 as the
E&P industry significantly reduced its investment in new projects. As a result,
we continue to generate negative cash flows from operations.
In these challenging market conditions we are carefully managing our costs,
reducing expenses and minimize capital spending. We have reduced costs in 2015,
and in February of 2016, we reduced our administrative and professional staff by
39%, are consolidating office space and have reduced the size of our Board to
better fit a company of our size. Additionally, we have taken steps to reduce
lease operating expenses at the Coke Field.
To enhance our production profile and build a larger asset base, we are
continuing to seek and evaluate additional oil field acquisition opportunities
that would generate current cash flow and serve as suitable candidates for
future AERO deployment. The rapid drop in oil prices has made it difficult to
execute on our acquisition strategy due to potential sellers' reluctance to sell
at depressed prices and the industry's reduced access to capital. The
significant decrease in our stock price also impacts our ability to raise new
equity capital. We have retained an investment banking firm with experience in
the energy industry to assist us in exploring M&A alternatives with several
potential partners, investors and asset sellers with the goal of bolstering our
balance sheet and increasing shareholder value.
In March of 2016, we completed installation of phase II of our AERO
implementation at our Coke oil field. Phase I field implementation, which
consists on one nutrient injection well, began in August 2015. Phase II
incorporates the addition of two AERO injection wells to increase the proportion
of the field that is impacted by AERO technology. Phase II implementation
commenced after data from our Phase I limited trial demonstrated encouraging
indication of AERO performance. Phase II implementation consists of two existing
inactive, shut-in wells that were recompleted and used as nutrient injection
wells. The wells are located on the periphery of the Coke field and are designed
to stimulate production from more of the field than was impacted by the first
injector. Phase II AERO injection commenced on March 4, 2016.
In the fourth quarter of 2015 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. (the "Project"). The objective is to develop economic oil production
in fields that have been left behind by the industry, and doing so with minimal
environmental impact. Several candidate reservoirs have been identified by Glori
scientists and engineers as potential project sites. Based on LPO's evaluation
of Part I of our application, on March 1, 2016, LPO invited Glori to submit Part
II of its application. We cannot, however, predict the ultimate outcome of the
application or whether a term sheet, conditional commitment, or loan guarantee
eventually will be issued for the Project.
Finally, we continue to report results from client projects and continue to
further develop the AERO technology to expand its market. An article in the
March 2015 issue of the Journal of Petroleum Technology, a magazine of the
Society of Petroleum Engineers, featured a successful AERO client project in
Canada
. Glori's AERO technology and associated water treatment technology was
also featured in the February 2016 issue of the Journal of Petroleum Technology,
which showcased a successful project in 
California
 where production was shown to
significantly increase over the duration of the project. Rigzone, a leading
online energy resource, also recently featured Glori's AERO technology and its
joint industry project with 
Canada's
 Alberta Innovates, which is funding the
project to assess and test the potential of AERO technology to boost heavy oil
production.



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Critical Accounting Policies and Estimates

The discussion of Glori's financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with

United States
generally accepted accounting principles. The preparation of these financial statements requires Glori to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses. On an ongoing basis, Glori evaluates its estimates and assumptions, including those related to revenues, bad debts, long-lived assets, income taxes, asset retirement obligation, fair value of derivatives, asset impairment and stock-based compensation. These estimates are based on historical experience and on various other assumptions that Glori believes are reasonable under the circumstances. The results of Glori's analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates, and the impact of such differences may be material to Glori's consolidated financial statements.

Critical accounting policies are those policies that, in management's view, are most important in the portrayal of Glori's financial condition and results of operations. The notes to Glori's consolidated financial statements also include disclosure of significant accounting policies. The methods, estimates and judgments that Glori uses in applying its accounting policies have a significant impact on the results that Glori reports in its financial statements. These critical accounting policies require Glori to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Those critical accounting policies and estimates that require the most significant judgment are discussed below.

AERO Services Related Accounting Policies and Estimates

Revenue Recognition. Service revenues are recognized when all services are concluded in accordance with the contract. The Company's service contracts typically include a single contract for each phase of service. During the initial phase known as Reservoir Analysis and Treatment Design (the "Analysis Phase"), the Company samples the target field and evaluates project feasibility and nutrient formulation by assessing field characteristics such as geology, microbial environment and geochemistry of the oil and water. The completion of the Analysis Phase contract typically coincides with the delivery of a report of findings to the customer at which point the Analysis Phase revenues are recognized. Once the viability of the AERO System is demonstrated in the Analysis Phase, a new contract is executed for the Field Deployment Phase. During the Field Deployment Phase the AERO System is initiated in the oil field to stimulate the indigenous microbes in the oil bearing reservoir. The Field Deployment Phase revenues are recognized ratably over the Field Deployment Phase injection work timeline.

Previous to 2014, the majority of the Company's revenues for AERO services were executed under a single contract which covered both Analysis Phase and Field Deployment Phase work. The single contract for both services resulted in lack of commercial evidence that the Analysis Phase services provided value on a stand-alone basis and thus both services were viewed as a single unit-of-accounting under ASC 605, Revenue Recognition: Multiple-Element Arrangements. In accordance with this guidance, the Company deferred revenue received in the Analysis Phase and recognized this revenue and the Field Deployment Phase revenue uniformly over the Field Deployment Phase injection timeline. Any termination of the project after the completion of the Analysis Phase would result in the immediate recognition of that portion of the revenues outlined in the contract.

Oil and Gas Extraction Specific Policies and Estimates

Successful Efforts Method. Glori uses the successful efforts method of accounting for oil producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized.

Revenue Recognition. Glori follows the sales method of accounting for crude oil revenues. Under this method, Glori recognizes revenues on production as it is taken and delivered to its purchasers, net of royalties. Revenues from natural gas production are recorded using the sales method.

Depletion. The estimates of proved crude oil reserves utilized in the calculation of depletion are estimated in accordance with guidelines established by the Society of Petroleum Engineers, the SEC and the Financial Accounting Standards Board, which require that reserve estimates be prepared under existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements. Glori emphasizes that reserve estimates are inherently imprecise. Accordingly, the estimates are expected to change as more current information becomes available. Glori's policy is to amortize capitalized costs on the unit of production method, based upon these reserve estimates.


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Glori assesses its proved properties for possible impairment on an annual basis at a minimum, or as circumstances warrant, based on geological trend analysis, changes in proved reserves or relinquishment of acreage. When impairment occurs, the adjustment is recorded to accumulated depletion, depreciation and amortization.

Asset Retirement Obligation. Glori accounts for its plugging and abandonment liability for permanently shutting in wells, or asset retirement obligation ("ARO") in accordance with ASC 410, Asset Retirement and Environmental Obligations. The fair value of a liability for an ARO is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and the associated retirement costs are capitalized as part of the carrying amount of the long-lived asset. Glori determines its ARO by calculating the present value of the estimated cash flows related to the liability based upon estimates derived from management and external consultants familiar with the requirements of the retirement and Glori's ARO is reflected in the accompanying consolidated balance sheets as a noncurrent liability. Glori has not funded nor dedicated any assets to this retirement obligation. The liability is periodically adjusted to reflect (1) new liabilities incurred; (2) liabilities settled during the period; (3) accretion expense; and (4) revisions to estimated future plugging and abandonment costs.

Impairment of Oil and Natural Gas Properties. Glori reviews its proved oil and natural gas properties for impairment whenever events and circumstances indicate a potential decline in the recoverability of their carrying value. We compare expected undiscounted future net cash flows from each field to the carrying amount of the asset. If the future undiscounted net cash flows, based on the our estimate of future oil and natural gas prices and operating costs and anticipated production from proved reserves, are lower than the asset's carrying amount, then the capitalized cost is reduced to fair value. The factors used to determine fair value include, but are not limited to, estimates of reserves, future commodity pricing, future production estimates, and anticipated capital expenditures. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. Drilling activities in an area by other companies may also effectively condemn leasehold positions. Given the complexities associated with oil and natural gas estimates and the history of price volatility in the oil and natural gas markets, events may arise that will require the Company to record an impairment of its oil and natural gas properties and there can be no assurance that such impairments will not be required in the future nor that they will not be material.

Derivative Instruments. At the end of each reporting period we record on our balance sheet the mark-to-market valuation of our commodity derivative instruments. The unrealized estimated change in fair value of the derivatives is reported in other income (expense) as gain (loss) on commodity derivative instruments.

Stock-Based Compensation. Glori issues options and restricted shares as compensation for service. Glori has recorded all share based payment expenses to employees in accordance with the provisions of ASC 718, Compensation- Stock Compensation. Glori recognizes expense for stock-based compensation using the calculated fair value of options and restricted shares on the grant date of the awards. Glori's policy is to recognize compensation expense for service-based awards on a straight-line basis over the requisite service period for the entire award. Stock-based compensation expense is based on awards ultimately expected to vest. Restricted shares are measured at the grant date by using the value of the closing share price on the day prior to the grant date. The fair value of each option award was estimated on the grant date using a Black-Scholes option valuation model, which uses certain assumptions as of the date of grant:

Risk-free interest rate - risk-free rate, for periods within the contractual terms of the options, is based on the

U.S.
Treasury yield curve in effect at the time of grant;

Expected volatility - based on peer group price volatility for periods equivalent to the expected term of the options;

Expected dividend yield - expected dividends based on Glori's expected dividend rate at the date of grant;

Expected life (in years) - expected life adjusted based on management's best estimate for the effects of non-transferability, exercise restriction and behavioral considerations; and

Expected forfeiture rate - expected forfeiture rate based on historical and expected employee turnover.

Glori does not issue fractional shares nor pay cash in lieu of fractional shares and currently does not have any awards accounted for as a liability.


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Taxes. Glori accounts for income taxes using the asset and liability method wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to net operating loss carry forwards, measured by enacted tax rates for years in which taxes are expected to be paid, recovered or settled. A valuation allowance is established to reduce deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2015, Glori has a total valuation allowance of $31.8 million.

Glori follows ASC 740, Income Taxes (ASC 740), which creates a single model to address accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the consolidated financial statements. As of December 31, 2013, the Company had an uncertain tax position related to not filing Form 926 Return by a

U.S.
Transferor of Property to a Foreign Corporation in the amount of approximately $31,000, for the tax years 2010 and 2011. This form would have reported cash transfers to support the operations of its subsidiary Glori Oil S.R.L. The Company has amended these returns and believes any liability will be abated and no longer has an uncertain tax position; accordingly, the Company has not recognized any liability in the accompanying consolidated financial statements. The Company does not expect a material change to the consolidated financial statements related to uncertain tax positions in the next 12 months. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.

Glori's ability to use its net operating loss carryforwards to offset future taxable income may be subject to certain limitations. In general, under Section 382 of the

U.S.
Internal Revenue Code of 1986, as amended, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards, or NOLs, to offset future taxable income. Glori believes that its issuance of series B preferred stock on October 15, 2009 resulted in a Section 382 ownership change limitation. Glori estimates that approximately $5.4 million of Glori's $69.9 million NOLs as of December 31, 2015 will will expire earlier than the statutory 20 year carryforward period due to the section 382 limitation. Future changes in Glori's stock ownership, some of which are outside of its control, could result in an ownership change under Section 382 of the Internal Revenue Code. Furthermore, Glori's ability to utilize NOLs of companies that it may acquire in the future may be subject to limitations.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a comprehensive new revenue recognition standard that will supersede existing revenue recognition guidance under

United States
generally accepted accounting principles (
U.S.
GAAP) and International Financial Reporting Standards (IFRS). The issuance of this guidance completes the joint effort by the FASB and the IASB to improve financial reporting by creating common revenue recognition guidance for
U.S.
GAAP and IFRS.

The core principle of the new guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard creates a five-step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. The standard allows for several transition methods: (a) a full retrospective adoption in which the standard is applied to all of the periods presented, or (b) a modified retrospective adoption in which the standard is applied only to the most current period presented in the financial statements, including additional disclosures of the standard's application impact to individual financial statement line items.This standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating this standard and the impact it will have on our future revenue recognition policies.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15: Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 asserts that management should evaluate whether there are relevant condition or events that are known and reasonably knowable that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued or are available to be issued when applicable. If conditions or events at the date the financial statements are issued raise substantial doubt about an entity's ability to continue as a going concern, disclosures are required which will enable users of the financial statements to understand the conditions or events as well as management's evaluation and plan. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter; early application is permitted. We are currently evaluating this standard and the impact it will have on our consolidated financial statements.


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In April 2015, the FASB issued ASU No. 2015-03, "Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). ASU 2015-03 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 and early adoption is permitted. Prior GAAP guidance mandates recognizing debt issuance costs as a deferred charge. Such treatment is different from the guidance in International Financial Reporting Standards (IFRS), which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. Additionally, the requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. Concepts Statement 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. We are currently evaluating this standard and the impact it will have on our consolidated financial statements.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17: Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 is part of an initiative to reduce complexity in accounting standards. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. However, this classification does not generally align with the time period in which the recognized deferred tax amounts are expected to be recovered or settled. To simplify the presentation of the deferred income taxes, ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of an entity be offset and presented as a single amount is not affected by the amendments of ASU 2015-17. For public entities, ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years; early application is permitted. The provisions of this accounting update are not anticipated to have a material impact on the Company's financial position or results of operations.



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Historical Results of Operations for Glori

The following table sets forth selected financial data for the periods indicated
(in thousands):
                                            Year ended December 31,
                                              2014            2015

Revenues:
Oil and gas revenues                     $     11,724      $   7,397
Service revenues                                4,135          1,605
Total revenues                                 15,859          9,002

Operating expenses:
Oil and gas operations                         10,777          9,974
Service operations                              3,528          1,771
Science and technology                          1,868          1,940
Selling, general and administrative             5,920          5,884
Impairment of oil and gas properties           13,160         22,600
Depreciation, depletion and amortization        4,624          5,507
Total operating expenses                       39,877         47,676

Loss from operations                          (24,018 )      (38,674 )

Other income (expense):
Interest expense                               (3,023 )       (2,169 )
Gain on change in fair value of warrants        2,454              -
Gain on commodity derivatives                   6,023          3,961
Other income                                       17            445
Total other income, net                         5,471          2,237

Net loss before taxes on income               (18,547 )      (36,437 )

Income tax expense (benefit)                      209           (182 )

Net loss                                 $    (18,756 )    $ (36,255 )



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The following table sets forth selected production data for the periods
indicated:
                                                         Year Ended December 31,
                                                         2014                2015
Revenues (in thousands):
 Oil revenues                                      $        11,549     $        7,297
 Natural gas revenues                                          175                100
   Total revenues                                  $        11,724     $        7,397

Sales Volumes:
 Oil Volumes (MBbls)                                           133                155
 Gas Volumes (MMcf)                                             72                 70
 Gas Volumes (MBoe)                                             12                 12
   Total Sales Volumes (MBoe)                                  145                167

Price:

 Average oil price received per Bbl                $         86.83     $        46.95
 Average oil price per Bbl including price swap
settlements                                        $         88.65     $        70.25
 Average gas price per Mcf                         $          2.43     $         1.42



The following table details oil and gas operations expense for the periods
indicated (in thousands):
                                    Year Ended December 31,
                                        2014               2015
Lease operating expense        $       6,631             $ 6,588
Ad valorem taxes                         438                 420
Severance taxes                          547                 343
Acquisition expenses                     503                 108
Exploration expense                        -                 102
Oil and gas overhead expense           2,658               2,413
Oil and gas operations expense $      10,777             $ 9,974



Years ended December 31, 2014 and 2015

Oil and gas revenues. Oil and gas revenues decreased by $4.3 million from $11.7 million in 2014 to $7.4 million in 2015. The decrease was attributable to a 46% decline in average realized oil prices which more than offset the addition of 11,091 BOE of sales production through the purchase of the Bonnie View Field and the benefit of a full year of production from the Coke Field, which produced 13,919 BOE more than in 2014.

Service revenues. Service revenues decreased by $2.5 million, or 61%, from $4.1 million in 2014 to $1.6 million in 2015. The decrease in revenues was attributable to decreases of $1.0 million and $1.5 million in Analysis Phase and Field Deployment Phase services, respectively. The decrease in Analysis Phase revenues was due to fewer new projects in the 2015 period. The decrease in Field Deployment Phase revenues was due to a decrease of $1.9 million in Canadian revenues primarily due to the conclusion of a large AERO field project in June 2014. This decrease was partially offset by an increase in revenues in

Brazil
due to a project in field deployment phase ongoing throughout 2015. Service revenues during 2015 were adversely impacted by the decrease in oil prices which resulted in significant decreases in spending by our exploration and production customers and prospects.

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Oil and gas operations. Oil and gas operating expenses decreased by $803 thousand from $10.8 million in 2014 to $10.0 million in 2015. Acquisition expenses decreased $395 thousand due to due diligence and acquisition sourcing fees incurred in the prior period for a significant acquisition target. Lease operating expenses decreased by a net $43 thousand primarily due to a $449 thousand decrease in Coke Field expenses due to cost reduction efforts including the shutting in of uneconomic wells in the lower price oil environment. Lease operating expenses also decreased by $75 thousand due to the sale of the Etzold Field in July 2015. These decreases were partially offset by the addition of $481 thousand in expenses for the Bonnie View Field, which was purchased in June 2015. The overall decrease in oil and gas operating expenses also included a $204 thousand in severance tax reduction due to sustained lower oil prices and revenues, a decrease of $245 thousand in overhead expenses due to decreases in third party consulting fees, and a decrease of $18 thousand in ad valorem tax expense due to a revised tax assessment. These decreases were partially offset by an increase in exploration expense for $102 thousand resulting from an unsuccessful radial jetting project.

Service operations. Service operations expense decreased by $1.8 million, or 50%, from $3.5 million in 2014 to $1.8 million in 2015. Approximately $863 thousand of the decrease is attributable to reduced project costs such as trucking and nutrient solution related to a large Canadian field project which concluded during June 2014 and another Canadian project which concluded during July 2015. The remaining decrease is primarily attributable to reduced project costs related to two domestic field projects, which concluded during February and July 2015, and a decrease in service operations headcount due to the decreased number of projects.

Science and technology. Science and technology expenses increased by $72 thousand in 2015 compared to 2014. Cost reductions of $267 thousand in compensation and benefits expenses, lab supplies and travel were offset by an increase of $195 thousand in third party research fees, including those for core flood research assisted by a major

U.S.
research university, and an increase in stock compensation expense of $147 thousand. The decrease in expenses for lab supplies and travel was primarily due to a decrease in Analysis Phase services projects.

Selling, general and administrative. SG&A expenses decreased by $36 thousand from 2014. Excluding stock compensation expense, the decrease would have been $846 thousand, or 14%, due to cost cutting measures in salaries, benefits, professional fees and travel. This decrease in expenses was partially offset by an increase in stock compensation expense for our employees and Directors of $810 thousand in 2015.

Impairment of oil and gas properties. During 2014, due to a significant decline in oil prices, we recognized an estimated $12.7 million impairment loss on our Coke Field Assets. As of year-end 2014, we had not yet implemented our AERO technology at the Coke Field. In 2014, we also recognized a full impairment charge of approximately $450 thousand for our Etzold Field property, which was sold in July 2015. During the fourth quarter of 2015, due to a further decline in oil prices, we recognized an estimated $20.2 million impairment loss on our Coke Field Assets, acquired March 2014. As of year-end 2015, we had only implemented the first phase of our AERO technology at the Coke Field, and we were awaiting definitive results. We also recognized a $2.4 million impairment charge for the Bonnie View Field, which was purchased in June 2015.

Depreciation, depletion and amortization. DD&A increased by $883 thousand from $4.6 million in 2014 to $5.5 million in 2015. The increase was principally due to an increase in depletion expense of $763 thousand, which was driven by the acquisition of the Bonnie View Field in June 2015, the high fourth quarter depletion due to lower reserves value received from the January 1, 2016 reserve report and the addition to the depletable cost pool of our Phase 1 AERO project, which was placed in service in the third quarter of 2015.

Total other (expense) income, net. Total other income (expense), net decreased by $3.2 million from income of $5.5 million in 2014 to income of $2.2 million in 2015. Our commodity price swaps that were entered into in connection with the acquisition of the Coke Field Assets in 2014 resulted in a net gain of $4.0 million in 2015 compared to a gain of $6.0 million in 2014. In 2015, the commodity derivative gain consisted of a $6.3 million realized gain on price swap settlements, including $2.7 million received for the sale of our 2017-2018 swaps, which was used to pay down debt, and due to an unrealized gain on commodity derivatives of $340 thousand due to the increase in in fair value of the commodity price swaps. These gains were partially offset by a $2.7 million termination of long-term commodity swaps as the Company sold its long-term commodity swap positions. In 2014, the commodity derivative gain consisted of a $227 thousand realized gain on price swap settlements and a $5.8 million unrealized gain on the change in fair value of future settlements. Additionally, during 2014 there was a gain on change in the fair value of warrant liabilities in conjunction with the Merger which resulted in the recognition of a $2.5 million gain on the change in fair value of warrant liabilities. Interest expense in 2015 decreased $854 thousand from the 2014 period due to the repayment of debt, including debt used to partially fund the Coke Field acquisition and the $8.0 million secured term promissory note which was prepaid in March 2015. The Company recognized a gain of $422 thousand on the sale of mineral interests in the Etzold Field in July 2015.



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Liquidity and Capital Resources

Our primary sources of liquidity and capital since our formation have been proceeds from equity issuances and borrowings. To date, our primary use of capital has been to fund acquisitions, principally the purchase of the Coke Field, to fund our operations and for payments on debt.

At December 31, 2015, we had working capital of $9.3 million, made up of current assets of $13.6 million and current liabilities of $4.3 million. The current asset balance is comprised of cash and cash equivalents of $8.4 million, accounts receivable of $1.5 million, prepaid expenses and other current assets of $314 thousand, and commodity derivative contracts receivable of $3.4 million. Included in current liabilities is $1.4 million in accounts payable, $1.2 million in accrued expenses, $480 thousand in current portion of long-term debt, and a deferred tax liability of $1.2 million. On November 5, 2015 we made a prepayment of $1.6 million on the senior secured term loan facility in connection with an amendment to our Note Purchase Agreement for our senior secured term loan facility. In December of 2015, we prepaid an additional $2.7 million on the senior secured term loan facility using the proceeds from settlement of our long term commodity derivatives. (See NOTE 9 - Derivative Instruments and 10 - Long Term Debt).

On October 23, 2015, we 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 our 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. If we do not regain compliance by that date, we may be eligible for an additional 180 day grace period as long as we meet certain listing requirements and provide written notice of our intention to cure the deficiency during this additional compliance period. The notification letter has no immediate effect on Glori's listing or trading of common stock, does not affect the Company's business operations or its SEC reporting requirements and does not cause a default under any material agreement.

The Company will continue to execute its business strategy and, if necessary, will consider implementing available options to attempt to regain compliance with the minimum bid price requirement of NASDAQ Listing Rule 5810(c)(3)(A), including a reverse stock split. If our common stock is delisted, it would likely trade in the over-the-counter market. Such NASDAQ delisting or further declines in our stock price could greatly impair our ability to raise additional capital to finance additional capital expenditures and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.

Contingent on our ability to obtain financing, we intend to pursue additional acquisitions of producing oil assets in which to deploy the AERO System. Planned capital expenditures for the next twelve months consist of approximately $1.0 million primarily for the recompletion and conversion of two previously inactive shut-in wells to nutrient injectors and related surface equipment for expansion of our AERO System technology on the Coke Field. We will adjust the amount and timing of our capital spending dependent upon our cash on hand, our cash flow from operations and the availability of capital. As of December 31, 2015, we did not have any commitments for the acquisition of oil properties or any other significant capital commitments.

The price of oil decreased 17% during the fourth quarter of 2015 based on the

Cushing, Oklahoma
- West Texas Intermediate spot prices of $44.75 per barrel on October 1, 2015 and $37.13 on December 31, 2015. Subsequent to December 2015, the oil price fell to approximately $30 per barrel in February 2016. A sustained lower oil price through March 2016 will negatively impact first quarter oil revenues and profitability from our oil producing assets, which will be partially offset by other income realized from oil price swap settlements. Using an estimated average oil price of $30 per barrel and assuming fourth quarter volumes, oil and gas revenues would have decreased from $1.5 million as reported in the fourth quarter to $1.2 million, and the realized gain on monthly oil swap settlements, excluding proceeds on the sale of long-term derivative assets, would have increased from $971 thousand in the fourth quarter to $1.2 million. See ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk for further discussion on the potential impact of an oil price decline.

Revenues and cash flows from our existing oil properties represent the majority of our cash from operating activities until we complete other acquisitions of oil producing assets or experience significant growth in our services revenues. Operating cash flow from our existing oil properties, after direct operating expenses and related overhead costs, are principally dedicated to servicing the $10.5 million term note and related capital expenditures. We currently have hedges in place totaling 7,300 barrels per month through March 31, 2016 at $86.50 per barrel, and hedges for 6,550 barrels per month at $82.46 per barrel for the

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remainder of 2016. While we have entered into hedges for a portion of our oil production during 2016, revenues and cash flows from our oil properties and AERO services have been adversely affected by the depressed oil prices. As a small company with an emerging technology we have not historically generated positive cash flows and we do not currently generate positive cash flows from operations

The rapid drop in oil prices has made it difficult to execute on our strategy of acquiring producing properties which would contribute to our revenues and cash flows due to potential sellers' reluctance to sell at depressed prices. Additionally, the current oil price environment has negatively affected the availability of capital to Glori and the E&P industry in general, and has also resulted in a dramatic decrease in our stock price, which also impacts our ability to raise new equity capital.

In order to address this challenging environment, we have retained a financial advisory firm with experience in the energy industry to actively explore alternatives for mergers and acquisitions with potential partners, investors and asset sellers with the goal of bolstering our liquidity and enabling us to build a larger asset base. Additionally, we have made significant cost reductions, both in our administrative and professional staff, and our lease operating expenses. The cost reductions were implemented both in 2015 and in the first quarter of 2016. We have also limited our capital expenditures to those required to fully implement our AERO technology at our Coke field.

We believe demonstrated AERO technology results at the Coke field will enhance revenues and cash flows and will improve our ability to raise additional capital. In August 2015, we implemented the first phase of AERO at the Coke field. In March 2016 we completed installation of phase II of our AERO implementation. Phase II incorporates the addition of two AERO injection wells to increase the proportion of the field that is impacted by AERO technology. Glori now has three injection wells running in total. Phase II implementation commenced after data from Phase I limited trial demonstrated encouraging indication of AERO performance. The wells are located on the periphery of the Coke field and are designed to stimulate production from more of the field than was impacted by the first injector.

Finally, we applied to the United States Department of Energy's Loan Programs Office ("LPO") for a $150MM 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 our application, in March 2016, LPO invited Glori to submit Part II of its application. However, we cannot predict the ultimate outcome of our application and whether a loan guarantee will be issued.

We will likely need to raise financing over the next twelve months to fund our operations and to repay or refinance the term note issued by GEP of $10.5 million which matures in March 2017. We have taken steps which, if successful, we believe will facilitate raising additional financing. However, we may have difficulty obtaining such financing as a result of the decrease in oil prices, our negative cash flows from operations and the significant decrease in our share price. Failure to obtain additional financing would have a material adverse effect on our business operations and financial condition.

On March 18, 2016, GEP entered into an amendment (the "Amendment") to the note purchase agreement dated as of March 14, 2014 between GEP and Stellus Capital Investment Corporation, as administrative agent (as amended and in effect, the "NPA"), governing GEP's senior secured first lien notes due March 2017 (the "Notes"). Among other things, the Amendment deleted all financial covenants and collateral value redetermination requirements contained in the NPA. In connection with the Amendment, effective as of April 1, 2016, the interest rate payable on the Notes will increase by 200 bps to 13.0% per annum, with the additional increase to be "paid in kind" at GEP's election by increasing the outstanding principal amount of the Notes, and principal and interest payments will be payable monthly rather than quarterly. GEP also agreed to receive additional funds from the Company to meet its payment obligations, including monthly principal and interest payments on the Notes, but not the unpaid balance of the Notes on the final maturity date thereof or upon any acceleration thereof. Without this amendment we likely would not have been able to meet all of our financial covenants in the future.


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The following table sets forth the major sources and uses of cash for the periods presented (in thousands):

                                                       Years Ended December 31,
                                                         2014             2015
Net cash used in operating activities               $     (8,186 )     $  (9,711 )
Net cash used in investing activities                    (42,362 )        (3,008 )

Net cash provided by (used in) financing activities 59,432 (8,652 )

Operating Activities

During 2015, our operating activities used $9.7 million in cash. Our net loss for 2015 was $36.3 million. Non-cash items totaled an expense of $29.3 million, consisting of $5.5 million of depreciation, depletion and amortization, $22.6 million impairment of our oil and gas properties, $1.4 million for stock based compensation expense, $326 thousand for amortization of deferred loan costs and other non-cash expenses totaling $301 thousand. These non-cash expenses were partially offset by a $422 thousand gain on the sale of the Etzold Field, a $340 thousand unrealized gain on the change in fair value of the commodity price swap and a $44 thousand settlement of asset retirement obligations. For a more detailed description of the sale of the Etzold Field, please see NOTE 5 in Item 15 to Part IV of this Annual Report on Form 10-K. Changes in operating assets and liabilities reduced net cash by $2.8 million for the period. The cash decrease from changes in operating assets and liabilities was caused by a decrease in accounts payable of $1.1 million, a decrease in accrued expenses of $806 thousand, a decrease in deferred revenues of $653 thousand, an increase in accounts receivable of $141 thousand, and an increase in prepaid expenses and other current assets of $70 thousand. The decrease in accounts payable and accrued expenses was primarily due to the payments for compensation previously accrued at December 31, 2014, a decrease in ad valorem taxes payable at fiscal year end 2015 versus 2014, due to the decline in assessed value and the payments for Coke Field unitization fees which were included in accounts payable and accrued expenses at fiscal year end 2014. The decrease in deferred revenue is due to recognition of previously unearned revenues which was triggered as certain services projects progressed through the Field Deployment Phase.

During 2014, our operating activities used $8.2 million in cash. Our net loss for 2014 was $18.8 million. Non-cash items totaled an expense of $10.4 million, consisting of $4.6 million of depreciation, depletion and amortization, $13.2 million impairment of our oil and gas properties, $296 thousand for stock based compensation expense, $439 thousand for amortization of deferred loan costs and other non-cash expenses totaling $163 thousand. These non-cash expenses were partially offset by a $2.5 million gain on the change in fair value of the warrant liabilities and a $5.8 million gain on the change in fair value of the commodity price swap. Changes in operating assets and liabilities increased net cash by $138 thousand for the period. The cash increase from changes in operating assets and liabilities was caused by an increase in accounts payable of $1.3 million and an increase of accrued expenses of $1.1 million. These sources of cash were partially offset by uses of cash by an increase in accounts receivable of $1.1 million, an increase in prepaid expenses and other current assets of $149 thousand, and a decrease in deferred revenues of $1.1 million. The increases in accounts receivable is primarily due to a $900 thousand receivable from December oil production on the Coke Field and a $293 thousand receivable for the December commodity swap settlement. Accounts payable and accrued payables also increased over the prior year as a result of increased operating expenses due to the addition of the Coke Field and accrued compensation at year end 2014. Deferred revenues decreased in 2014 as we commenced the Field Deployment Phase of our project in

Brazil
.

Our future cash flow from operations will depend on many factors including our ability to acquire oil fields, successfully deploy our AERO System technology on such oil fields, oil prices and our ability to reduce . Other variables affecting our cash flow from operations are the adoption rate of our technology and the demand for our services, which is also impacted by the level of oil prices and the capital expenditure budgets of our customers and potential customers.

Investing Activities

In 2015, net cash used in investing activities was $3.0 million. We settled our long-term commodity derivative assets on December 23, 2015 in exchange for proceeds of $2.7 million. Additionally proceeds of $75 thousand were received on the sale of our Etzold property. Our capital expenditures were $5.8 million in 2015 compared to $42.4 million in 2014. The $36.6 million decrease in capital expenditures is due to the purchase of the Coke Field in the prior year period. Capital expenditures for 2015 consisted primarily of the June 1, 2015 purchase of the Bonnie View Field. A majority of the remainder of the capital expenditures were associated with implementing our AERO System technology at the Coke Field, including unitization and the drilling of a water source well and an injection well. Capital expenditures for 2014 consisted primarily of the purchase of the Coke Field Assets in March of 2014 for $40.0 million and $1.0 million of capital expenditures related to the construction of skid mounted injection equipment used in the AERO Field Deployment Phase process.

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Financing Activities

During 2015, cash used by financing activities was $8.7 million consisting of $8.8 million in principal payments on long-term debt and $63 thousand in payments for deferred loan costs. These cash outflows were partially offset by proceeds of $139 thousand from stock option exercises and $52 thousand from the financing of vehicles for the field.

During 2014, cash provided by financing activities was $59.4 million consisting primarily of cash proceeds of $38.4 million received in the Merger and new credit facilities totaling $24.0 million which were used to fund a portion of the Coke Field acquisition. The new borrowings mainly consisted of an $18.0 million senior secured term loan facility, a $4.0 million subordinated debt and a $2.0 million convertible note to the seller, Petro-Hunt. Additionally $5.0 million was received from the issuance of C-2 preferred shares and warrants, which were exchanged for common stock in the Merger, and $4.2 million was received from the exercise of warrants and stock options. Cash generated from financing activities during 2014 was partially offset by principal payments on long-term debt of $8.1 million, payments for deferred offering costs of $3.3 million and payments for deferred loan costs of $767 thousand. The deferred offering costs represent primarily legal expense payments related to the Merger and the deferred loan costs payments represent financing fees and legal expenses associated with the $18.0 million senior secured term loan facility and the $4.0 million subordinated debt.

On January 8, 2014, we executed the merger and share exchange agreement with Infinity Corp. On April 14, 2014, the Merger was consummated. Pursuant to the terms of the Merger, in exchange for our outstanding shares and warrants, Infinity Corp. issued 23,584,557 shares of common stock on a pro rata basis to the stockholders and warrant holders of Glori Energy. We obtained effective control of Infinity Corp. subsequent to the Merger and thus the Merger was accounted as a reverse acquisition and recapitalization of the Company. Our shareholders retained a substantial majority of voting interest and positions on the Board of Directors, our management was retained and our operations continue to comprise the ongoing operations post-Merger. We received a total of $24.7 million in cash from the Merger and $13.7 million cash from the private placement in public equity, the "PIPE" investments for total proceeds of $38.4 million.

The $18 million note issued on March 14, 2014 is a three year senior secured term loan facility, issued by GEP. Glori Energy does not guarantee the debt of GEP, but it is secured by the Coke Field. The $4.0 million note principal and $400 thousand prepayment penalty plus accrued interest were paid in full on May 13, 2014.

In addition to the debt, effective March 13, 2014, we issued to certain of our current investors 1,842,028 Series C-2 Preferred Stock and 1,640,924 Series C-2 preferred share warrants for gross proceeds of $5.0 million. The proceeds were allocated $2.8 million to the preferred shares and $2.3 million to the preferred warrants, based upon our most recent company valuation at the time of issuance. On April 14, 2014, these preferred shares and warrants were exchanged for 1,133,869 shares of common stock in the Merger. On April 14, 2014, Petro-Hunt converted their $2.0 million convertible note from us to common shares at $8.00 per share or 250,000 shares of common stock, pursuant to certain rights arising in connection with the PIPE Investment.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, except for operating lease obligations presented in the table below.

Contractual Obligations and Commercial Commitments


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At December 31, 2015, we had contractual obligations and commercial commitments
as follows (in thousands):

                                                     Payments Due By Period
                                               Less                                      More
                                               Than                                      Than
Contractual Obligations            Total      1 Year     1-3 Years      3-5 Years      5 Years

Operating lease obligations(1) $ 348 $ 295 $ 53 $ - $ - Asset retirement obligation(2) 1,522 65

            235            654          568
Long-term debt(3)                  12,319      1,765         10,528             20            6
Total                            $ 14,189    $ 2,125    $    10,816    $       674    $     574


(1) Our commitments for operating leases primarily relate to the leases of office

and warehouse facilities in

Houston, Texas
and warehouse facilities in Gull

Lake,

Saskatchewan
.

(2) Relates to our oil properties, net of accretion.

(3) Includes expected future interest payments.

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Source: Equities.com News (March 23, 2016 - 8:53 AM EDT)

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