Attached files
| file | filename |
|---|---|
| EX-31.2 - EX-31.2 - GreenHunter Resources, Inc. | d81119exv31w2.htm |
| EX-32.1 - EX-32.1 - GreenHunter Resources, Inc. | d81119exv32w1.htm |
| EX-32.2 - EX-32.2 - GreenHunter Resources, Inc. | d81119exv32w2.htm |
| EX-31.1 - EX-31.1 - GreenHunter Resources, Inc. | d81119exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
| þ | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2010
| o | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File No. 001-33893
GREENHUNTER ENERGY, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 20-4864036 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1048 Texan Trail, Grapevine, Texas 76051
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (972) 410-1044
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock ($.001 par value) | NYSE Amex |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15 (d) of the Act. Yes o No o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or
non-accelerated filer (as defined in Rule 12b-2 of the Act).
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
| (Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act) Yes o No o
As of June 30, 2010, the aggregate market value of voting stock held by non-affiliates was
$6,697,893 as computed by reference to the closing price on that date.
The number of shares outstanding of the registrant’s common stock at March 30, 2011 was 22,116,464.
Table of Contents
Table of Contents
Item 1. Business
Some of the information contained in this Description of Business may contain forward-looking
statements. Such statements can be identified by the use of forward-looking words such as “may,”
“will,” “anticipate,” “expect,” “estimate,” “continue” or other such words. These types of
statements discuss future expectations or contain projections or estimates. When considering such
forward-looking statements, investors should consider the risk factors set forth in the “Risk
Factors” section of this report. These risk factors and other unidentified factors could cause
actual results to differ materially from those contained in any forward-looking statement.
Website Access to Reports
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports pursuant to section 13(a) or 15(d) of the Securities
Exchange Act of 1934, available free of charge on or through our internet website,
www.greenhunterenergy.com , as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
Incorporation and Organization
GreenHunter Energy, Inc. (“GreenHunter”) was incorporated under the laws of the Delaware
General Corporation Law (“DCGL”) in the State of Delaware on June 7, 2005 under the name BTHC IV,
Inc. We were formed for the purpose of reincorporating BTHC IV, LLC, a Texas limited liability
company, in the State of Delaware. BTHC IV, LLC was reincorporated in Delaware by means of a merger
into GreenHunter on April 11, 2006.
On December 6, 2006, GreenHunter Wind Energy, LLC (“Wind Energy”), a Wyoming limited liability
company, completed a “reverse acquisition” with us. In exchange for all of the membership interest
of Wind Energy, we issued 14,560,000 shares of Common Stock to the sole shareholder of Wind Energy,
or 97.1% of all of the issued and outstanding stock of GreenHunter. Simultaneous with the closing
of the transaction with Wind Energy, we changed our name to GreenHunter Energy, Inc. and increased
the number of authorized shares of Common Stock to 100,000,000, consisting of 90,000,000 shares of
Common Stock, having a par value of $.001 per share and 10,000,000 shares of preferred stock,
having a par value of $.001 per share.
GreenHunter was formed to be the first publicly traded renewable energy company based in the
U.S. that provides to investors a portfolio of diversified assets in the alternative energy sector.
Our corporate headquarters are located at 1048 Texan Trail, Grapevine, Texas 76051, and our phone
number is (972) 410-1044.
Business
GreenHunter’s business plan
has been to acquire businesses, develop projects and operate
assets involved within the renewable energy sectors of biomass, wind, solar, geothermal and clean water. We
structured our business to become a leading provider of clean energy products offering residential, business and
industrial customers the opportunity to purchase and utilize clean energy generated from renewable
sources. Headquartered in Grapevine, Texas, we were formed with the aim of offering an alternative to fossil fuels for power
and transportation. Our goal is to be more innovative and
efficient and therefore provide better economic returns for our shareholders.
We are currently focused on the renewable energy sectors of biomass
and clean water, predominate associated with the oil and gas industry. Our
assets consist of a biomass power plant located in El Centro, California. It is our intention in
the future to expand our renewable portfolio to possibly include clean water, wind, solar
and geothermal. We believe a unique opportunity
exists at our El Centro, California holdings to possibly build a “renewable energy campus” that
could include several of these alternative energy businesses, including biomass solar and geothermal.
The following is a description of renewable energy assets currently owned and recently
acquired by GreenHunter, including management’s discussion of the competitive strengths of the
assets.
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Biomass
Biomass power, is the use of biomass to generate electricity. Biomass is any organic matter
which is available on a renewable or recurring basis, including trees, plants and associated
residues; plant fiber; animal wastes; industrial waste; and the paper component of municipal solid
waste.
Biomass is considered to be a replenishable resource because it can be replaced fairly quickly
without permanently depleting the Earth’s natural resources. By comparison, fossil fuels such as
crude oil, natural gas and coal require millions of years of natural processes to be productive.
Therefore, mining coal and producing crude oil and natural gas depletes the Earth’s resources for
thousands of generations. Alternatively, biomass can easily be grown or collected, utilized and
replaced.
Energy crops involve a “closed-loop process” in that they are grown specifically for their
ability to generate energy. Crops such as switch grass, cottonwood and sugar cane are attractive
for fuel. Additionally, these crops are short rotation crops; they regrow after each harvest,
allowing multiple harvests without having to replant. Manure from cattle feedlots and dairies can
also be put to practical use as a renewable energy source and a biomass plant feedstock for certain
biomass facilities.
The use of biomass to create energy also has positive environmental implications. Carbon
dioxide is a naturally-occurring gas. Plants collect and store carbon dioxide to aid in the
photosynthesis process. As plants or other matter decompose, or natural fires occur, CO2 is
released. In the past 150 years, the period since the industrial revolution, carbon dioxide levels
in the atmosphere have risen from around 150 ppm to 330 ppm, and are expected to double again
before 2050.
GreenHunter Mesquite Lake, LLC
GreenHunter Mesquite Lake,
LLC, which we refer to as GreenHunter Mesquite Lake, was formed on
August 21, 2009 as the result of the conversion of GreenHunter Mesquite Lake, Inc., a Delaware
corporation, to GreenHunter Mesquite Lake. As a result of the conversion, the sole shareholder of
GreenHunter Mesquite Lake, Inc., which is the Company, became the sole member of GreenHunter
Mesquite Lake.
GreenHunter Mesquite
Lake’s primary business objective is to retrofit and re-power the Mesquite Lake Resource Recovery
Plant, which we refer to as the facility, using existing biomass processing technology into a
profitable electricity power plant.
The facility
The facility is the Mesquite Lake Resource Recovery Plant, an 18 MW (gross) waste-to-energy
facility located in unincorporated Imperial County of southern California. This plant is owned 100% by GreenHunter
Mesquite Lake. The facility was originally built in 1989 at a cost of approximately $68 million to
process cow manure into electricity and operated periodically until December 1994, when its existing power purchase
agreement was repurchased by Southern California Edison. Several modifications were implemented
during its operating life to improve plant performance leading to a 95% on-line capacity factor
during its last year of operation. The plant has not operated since 1994 and is currently not
generating electricity and is in a dormant state.
GreenHunter Mesquite Lake’s primary business objective consists of retrofitting and
re-powering the facility using existing biomass processing technology into a profitable electricity
power plant in two phases. Phase I of the facility consists of the construction, refurbishment,
installation and equipping of the facility to generate (on a net basis) a total of 15.6 MW of
electric power. Phase II of the facility consists of the construction, refurbishment, installation
and equipping of the facility to generate (on an aggregate net basis) a total of 23.4 MW of
electric power. California has an abundance of wood waste to be disposed of on an annual basis.
Wood waste haulers typically dispose of wood waste in landfills if not prohibited, or the waste is taken to other
sources such as a biomass facility.
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During 2008, GreenHunter Mesquite Lake began refurbishing the facility. During the course of
its air permit review, GreenHunter Mesquite Lake determined that the existing air permit was not
sufficient to support its operations. GreenHunter Mesquite Lake put the project on hold during the
fourth quarter of 2008 while it was implementing the re-permitting process. During this process,
GreenHunter Mesquite Lake has been able to incorporate a planned expansion of up to 10 MW and has
executed a new power purchase agreement with significantly higher pricing than the one acquired when
the facility was originally purchased.
There are no patents or other intellectual property rights associated with the facility. The
business of producing electricity from biomass is not a seasonal business.
Attributes of the facility
The facility has a number of key project attributes:
| • | GreenHunter Mesquite Lake has entered into the power purchase agreement with the Imperial Irrigation District, which we refer to as the district, to provide up to 27 MWs of net output; | |
| • | the project will provide base load renewable power as opposed to intermittent power provided by other forms of renewable power projects; | |
| • | GreenHunter Mesquite Lake has entered into an interconnection agreement with the district with respect to Phase I of the facility; | |
| • | the project qualifies for the Production Tax Credit under the American Recovery and Reinvestment Act of 2009, which we refer to as the Recovery Act, but in lieu of the tax credit, the Company anticipates applying for the 1603 Program Grant under the Recovery Act as described more fully below; | |
| • | the project has acquired the necessary permits for its construction; | |
| • | GreenHunter Mesquite Lake has entered into three construction contracts for construction of the project. These include the boiler contract, the fuel yard contract and a portion of the general construction contract which include a fixed price for the work to be performed and the equipment to be provided thereunder; and | |
| • | the facility has been designed to use multiple biomass fuel sources at a large variance of heat rates. |
Objective and Strategy
GreenHunter Mesquite Lake’s primary business objective is to retrofit and re-power the
facility using existing biomass processing technology into a profitable electricity power plant.
GreenHunter Mesquite Lake intends to accomplish this by executing the following business
strategies:
| • | find an optimal biomass fuel mix that will maximize profitability of the facility; and | |
| • | execute long term supply contracts with local biomass producers. |
The facility acquired all necessary permits required for operations of Phase I and is
expanding the existing interconnection agreement for Phase II. Biomass consisting of wood and
agricultural waste will be placed and burned in an open-bottom bubbling bed boiler connected to the
existing waste heat boilers. The facility is expected to process approximately 824 tons per day
(280,000 tons per year) of wood and agricultural waste. The fuel supply for the facility will be a
blend of dry wood and green wood which will produce approximately 5,000 Btu per pound on average.
The steam generated by the boilers will expand across the two steam turbine-generators that will
produce up to 28 MW of renewable electricity. Approximately 3.5 MWs of renewable electricity will
be used to power the facility, and up to 27 MWs will be sold to the district under the existing power
purchase agreement. Any excess electricity may be sold to third parties.
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The facility’s location in Southern California is strategic, not only because population
density is driving electricity demand, but also because of the excellent fuel supply and
transportation access. The power purchase agreement with the district is for renewable power, to
meet the needs of California’s renewable power standard. Biomass power, unlike wind and solar
power, is base-load generation, and has been used reliably in California for over 30 years. The
design of the retrofitted facility is similar to several dozen comparable biomass-fired power
plants throughout the State, and has benefitted from their experience. The facility is also
located in an area of California that has experienced significant economic contraction during the
last few years and this area will benefit from the jobs to be created by the facility.
The renewable
power incentives instituted over the past several years have resulted in a situation which
makes the refurbishment of the facility economic. GreenHunter Mesquite Lake estimates the total
costs of construction and refurbishment to be approximately $54 million for a total investment by
it in the facility (a significant portion of which has previously been made) of approximately $74 million. Current costs
to build a biomass facility of the same size would be in excess of $100 million, thereby making it
much more cost effective to refurbish the existing facility than build a new facility. In addition,
the physical characteristics of the facility are significant existing assets, the electrical infrastructure of
the facility is in excellent operational shape, the power generation and distribution
infrastructure of the facility is in very good condition with a limited amount of overhaul needed,
and the time required to permit an greenfield project could take up to three years.
The power purchase agreement between GreenHunter Mesquite Lake and the district is to provide
up to a maximum of 27 MW of net output for a 20 year period. GreenHunter Mesquite Lake has also received
interest from the power market for additional generation capacity.
Rehabilitation and Build-Out of Facility
Subject to changes based on total available funding, GreenHunter Mesquite Lake plans to
execute the rehabilitation and build out of the existing plant in Phase I and Phase II of the
facility from 18MW to 28MW as described below.
Preconstruction Asset Maintenance
GreenHunter Mesquite Lake is currently performing limited work for safety reasons, to avoid
weather or other degradation of key equipment and to allow for a readily managed launch of
construction. This work includes the commissioning of service water and fire water systems,
recirculation of water around the cooling tower, refilling the raw water supply pond and replacement
of the battery charger and air-conditioning units to protect controls equipment.
Rehabilitation Work
During 2008, GreenHunter Mesquite Lake
employed various contractors and equipment specialists to
inspect and overhaul the existing 18 MW steam turbine generator and its supporting pumps.
Inspection and rebuild reports for this equipment are on file with GreenHunter Mesquite Lake.
Piping, valves, motors and fans were rebuilt as required. The original distributed control system
was removed and replaced with a new distributed control system. Some of the original equipment has
not yet been overhauled, including the switchyard transformers and the boiler feed pumps, and the
expected costs for this additional rehabilitation work is included in the ongoing budget for the
project.
Reconfigure Boiler Trains for Biomass
Based on our assessment, GreenHunter Mesquite Lake sent out requests for proposal to qualified
suppliers for the design and supply of equipment to convert the existing Lurgi hybrid manure fluid
beds at the facility to conventional biomass fluid beds in compliance with the new authority to
construct permit, which we refer to as an ATC permit. As a result, a boiler supplier has been
selected to provide a conventional bubbling fluid bed boiler complete with an “open bottom” design
suited to the biomass fuel available in Southern California, integrated with the two existing waste
heat boilers and baghouse, with new economizers and a new SCR and alkali injection system.
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New boiler fans are included, and the existing ID fan will be upgraded. This reconfiguration
is designed to handle 360 MM/btu/hr, and is expected to guarantee a stream flow to support 28 MW
gross. The resulting configuration is very similar to many existing biomass units and is based
upon their operational experience. The work will be completed in parallel with the remaining
rehabilitation work described above, by the equipment suppliers, with interconnecting piping and
wiring by the Company’s power engineering design contractor.
Build-Out to 28MW
GreenHunter Mesquite Lake plans to design and construct an additional 10 MW turbine generator
island using a new or reconditioned steam turbine, new or reconditioned cooling tower, condenser
and pumps. This build-out is expected to take longer than the remaining rehabilitation and
conversion work described above, and cannot start until turbine selection and plan design work have
been completed. GreenHunter Mesquite Lake reasonably expects to enter into a firm price
construction contract. GreenHunter Mesquite Lake is currently planning for a completion by June 30, 2012.
IID 92 KV Switchyard
GreenHunter Mesquite Lake’s generator interconnection agreement with the district provides for
a new 92 KV switchyard to be constructed on the Company’s property to support the current design
standards for the 92 KV line which connects the facility to two separate district substations.
This work will be performed by the district to support the net output of the 28 MW facility plus an
allowance for further growth using a standard size utility circuit breaker, in parallel with the
conversion work described above.
Construction of the Facility
Construction Contracts. To construct Phase I and Phase II of the facility, GreenHunter
Mesquite Lake has entered into three separate construction contracts. Those construction contracts
include the following:
(a) the Balance of Plant Procurement and Construction Contract, dated as of October 8, 2010,
by and between the Company and Lexicon, Inc.;
(b) the Fluidized Bubbling Bed Boiler and Accessories Engineering, Supply and Erection
Contract, dated as of October 11, 2010, by and between the Company and Factory Sales and
Engineering Inc.; and
(c) the Equipment Supply Agreement, dated as of October 8, 2010, by and between the Company
and Stock Equipment Company, Inc.
Permits and Approvals
Air Permit
In general, the state and federal air quality regulations require that an air permit be
obtained prior to commencing construction of a new major source or the major modification of an
existing source. A modification of an existing source is defined as any physical change or change
in the method of operation of that source. The changes required to accommodate the biomass firing
are considered a modification to the facility under state and federal regulations. Whether the
modification is a major or minor source, permit action is dependent upon the magnitude of the
change in emissions on a pre-project versus post-project basis. The GreenHunter power plant
originally obtained an ATC on July 1985 and a permit to operate on March 1989. This power plant
ceased operations by 1995 and its permit was placed on inactive status. Since last account of
actual emissions is documented to be pre-1995, historical actual emissions are considered zero.
Consequently, for all practical purposes, the proposed project would be treated as a new source.
GreenHunter Mesquite Lake submitted an ATC permit application for the use of non-manure woody
biomass as a fuel on November 25, 2009. The final ATC was issued by the Environmental Protection Agency on July 21, 2010.
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Water rights
GreenHunter Mesquite Lake holds water rights dating from the 1980’s from the IID and valid
through at least May 2015 for an average of 0.535 million gallons per day (MGD) of water. However,
preliminary design plans for Phase II of the GreenHunter Mesquite Lake project requires about 0.82
MGD of water. GreenHunter Mesquite Lake received a letter from the district on August 19, 2010
indicating an intention of the district to provide the needed quantity of raw Colorado River water
for GreenHunter Mesquite Lake from a water supply set aside in an interim water supply policy for
new industrial uses.
With respect to wastewater, a permit was issued for the previous project by the California
Regional Water Quality Control Board that allows for the discharge of process wastewater, this permit remains valid
through June 2012. The permit allows the discharge of a maximum of 100,000 gallons per day and has
fairly restrictive terms for the concentration of copper and zinc in the water. GreenHunter
Mesquite Lake intends to modify and renew the existing permit to allow for a discharge of a higher
flow rate of process wastewater from the facility.
Conditional use permit
GreenHunter Mesquite Lake submitted a conditional use permit application, which we refer to as
a CUP, to Imperial County on August 10, 2010. The application is for a modification of the original
facility 1985 CUP and a 2001 CUP amendment.
Under county rules in California, a CUP from the Imperial County Planning Department must be
obtained to allow conversion of the existing/former energy facility to a biomass facility. Typical
needs are a County Resolution granting the approval of the CUP application, and a finding that the
facility is categorically exempt from CEQA.
Typical conditions of a CUP include the following:
| • | the property owner must continuously comply with the requirements of the Air Pollution Control District. | ||
| • | the facility must be 100 percent reliant on woody biomass as a fuel source. | ||
| • | the applicant is required to obtain and submit documentation of : |
| o | the method of water supply and sewage disposal required and approved by the County; | ||
| o | fire flows and fire protection facilities, as required and approved by the County; | ||
| o | drainage water disposal plan; | ||
| o | a survey by qualified biologist of any special status plant and wildlife species to ensure that no special status wildlife and/or plant species have occupied the property; | ||
| o | work stop order in the event archaeological, cultural, or paleontological resources are discovered until a qualified archaeologist has been contacted to evaluate the find and mitigate impacts, if necessary, prior to resumption of work; and | ||
| o | a stormwater plan, after which a building or grading permit for the biomass facility may be issued. |
A number of expected requirements must be complied with prior to construction and operation of
the biomass facility. Approval of the overall CUP was granted on December 2, 2010.
Environmental and Regulatory Factors
As a result of the risks relating to changes to environmental regulations, GreenHunter
Mesquite Lake has obtained its new ATC permit for the expanded facility from the Imperial County
Air Pollution Control District, which we refer to as ICAPCD, which agency employs air permit
requirements based upon the practices of California’s South Coast Air Quality Management District, which are among the most demanding
in the United
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States. GreenHunter Mesquite Lake expects to obtain an amendment to its ATC permit
with respect to number of startups and shutdowns of the facility, and it expects to amend and renew
its existing permit for the discharge of process wastewater to allow for a discharge of a higher flow rate
of process wastewater from the facility. GreenHunter Mesquite Lake has reviewed the known
potential changes to environmental regulations potentially applicable to the facility, including,
without limitation, the boiler maximum achievable control technology rules currently under debate,
and has determined that only minor modifications would be required to the completed facility if
such rules are imposed in their current form.
Fuel Supply and Sources
Biomass
The project will use 100% biomass as its fuel source. Biomass is any organic matter which is
available on a renewable or recurring basis, including trees, plants and associated residues; plant
fiber; animal wastes; industrial wood waste; and the paper component of municipal solid waste. The
project will use waste wood as its fuel source.
Biomass is considered to be a renewable resource because it is replaced by the action of
photosynthesis upon atmospheric carbon dioxide, such that the carbon dioxide so removed from the
atmosphere is re-emitted when the biomass is converted to power. In the case of the waste wood
used by the facility, such wood either decays naturally, releasing the same amount of carbon
dioxide as if it were burned in the facility, or the waste wood is sent to a landfill where it
decomposes to a mixture of methane and carbon dioxide with a significantly greater “greenhouse
effect” than if the waste wood were burned.
The State encourages the use of renewable power produced from biomass, and has enacted rules
to encourage the diversion of waste wood from landfills for use in renewable energy, both biomass
power and biomass-based liquid fuels.
Biofuel Supply Agreements
GreenHunter Mesquite Lake expects to acquire a portion of its biomass fuel pursuant to biofuel
supply agreements with various suppliers. GreenHunter Mesquite Lake has entered into one biofuel
supply agreement with a supplier to acquire 21,500 tons per year of wood fuel. GreenHunter
Mesquite Lake will be required to obtain additional biomass fuel to operate the facility at full
capacity in Phase I or Phase II of the project. GreenHunter Mesquite Lake expects to enter into
additional biofuel supply agreements with suppliers such that up to 85% of the fuel required to
operate the facility in Phase I would be obtained, and upon completion of Phase II, approximately
55% of the required fuel would be obtained. GreenHunter Mesquite Lake expects to obtain the
remainder of the biomass fuel necessary to operate the facility on the spot market once operations
have begun and suppliers become accustomed to GreenHunter Mesquite Lake as a new purchaser in the
market. GreenHunter Mesquite Lake has also received proposals and letters of intent from biomass suppliers for all of the
fuel required to operate the facility in Phase I and Phase II.
Interconnection Agreement
GreenHunter Mesquite Lake has entered into the standard generator interconnection agreement,
dated as of August 4, 2009, with the district. Pursuant to this interconnection agreement, the
facility will be permitted to connect to the district’s transmission system and be eligible to
deliver the facility’s output onto the system on an “as available” basis. The interconnection
agreement has a term of ten years that renews automatically on an annual basis for additional
one-year periods, unless earlier terminated by 90 days prior written notice. The interconnection
agreement may be terminated by either party at any time with 90 days prior written notice (or
earlier in the event of default of the non-terminating party as specified therein). The
interconnection agreement may also be suspended by GreenHunter Mesquite Lake; provided, that the
suspension of the district work associated with the development of interconnection facilities will
be left in a safe and reliable condition.
1603 Program Grant
The Section 1603 Treasury cash grant program, so named because it was codified in Section 1603
of the Recovery Act, enables qualifying renewable power projects that are eligible for either the
federal production tax
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credit or investment tax credit to instead elect a 30% cash grant
administered by the U.S. Department of the Treasury.
By allowing renewable projects to elect cash grants in lieu of tax credits, the Section 1603
Program aimed to provide sources of financing to the renewable power sector during the last couple
of critical financial years, thereby supporting the broader Recovery Act goals of retaining and
creating jobs while also expanding the use of renewable energy.
The project would be eligible to apply for a 30% reimbursement of the cost of certain
“specified energy property” used in the facility. Generally, in order to qualify for the 1603
Grant Program, property must be (a) placed in service by December 31, 2011, or (b) placed in
service after 2011 and before the applicable termination date for a closed-loop biomass facility of
January 1, 2014, if construction begins before a certain date. In determining whether construction
has begun, detailed guidance issued by the Treasury provides a safe harbor for applicants such that
construction is treated as beginning when the applicant incurs or pays more than 5% of the total
cost of the property.
GreenHunter Mesquite Lake has engaged one of the top accounting firms with respect to its
expertise and knowledge of the 1603 Grant Program to provide pre-advisory application services and
to provide the required certifications and verifications of expenditures and operations required
during the application process. GreenHunter Mesquite Lake expects to apply using the “begun
construction” form for Phase I on or before December 31, 2011 and to expend sufficient funds by the
end of 2011 to qualify for the safe harbor for Phase II. Once each Phase of the facility has been
“placed in service,” the 1603 Grant Program provides that the Treasury will pay the cash grant to
GreenHunter Mesquite Lake within sixty (60) days from the date each of the completed applications
is received.
If (a) GreenHunter Mesquite Lake disposes of the facility to a “disqualified person” (as
defined in the 1603 Grant Program), or (b) the use of the facility changes such that it ceases to
qualify as a “specified energy property” (as defined in the 1603 Grant Program) within five (5)
years from the date the facility is placed in service, then the Company must repay a portion of the
1603 Grant Program proceeds to the Treasury based on the number of years the Facility was used for
its qualifying purpose before such disposal or change in use.
The district
The following information for the district has been obtained by GreenHunter Mesquite Lake from
public sources believed by GreenHunter Mesquite Lake to be reliable, but it is not guaranteed as to
accuracy or completeness by GreenHunter Mesquite Lake.
The district, an irrigation district organized and existing under the laws of the State of California, is a
public entity organized in 1911 pursuant to the Irrigation District Law (California Water Code
sections 20500 et. seq.). The petition was submitted in 1911 for the formation of the district as
an irrigation district to serve an area situated in the County. The district has the powers under
the Law to, among other things, provide irrigation and electric service within its geographic
boundaries (an area of 1,658 square miles for irrigation and 6,471 square miles for electric). In
connection therewith, the district has the powers of eminent domain, to contract, to construct
works, to fix rates and charges for commodities or services furnished and to incur indebtedness.
The district entered the power business in 1936 to utilize the hydroelectric generation
potential on the All-American Canal. In 1943, the district acquired the electric system and certain
properties of the California Electric Company in Imperial County and parts of Riverside County. As
a consequence, the district became the source of electric energy for a 6,471 square-mile service
area, including substantially all of the Imperial Valley and Coachella Valley in Riverside County
and a small portion of San Diego County. These areas comprise one of the major agricultural areas
in the State. To provide electric service within its service area, the district owns and operates
an electric system, which includes generation, transmission and distribution facilities. The
district also purchases capacity and energy from others and participates in other utility
arrangements.
The district is also the irrigation and domestic supplier of water for cities and towns and
approximately 521,800 acres (approximately 815 square miles) presently receive irrigation water
within its water service area. The District annually diverts approximately 2.95 million acre-feet
of water from the Colorado River at Imperial Dam, which is
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transported by gravity through the
80-mile-long All-American Canal and a district owned 1,587-mile canal system. The district also
provides, operates and maintains a 1,456-mile network of drainage canals and facilities.
Wind
Wind energy, the world’s fastest growing energy source, is a clean and renewable source of
energy that has been in use for centuries throughout Europe and, more recently, in the United
States and other nations, becoming an increasingly popular choice for new electricity generation
around the world. Wind turbines, both large and small, produce electricity for utilities and
homeowners and remote towns.
North America is expected to continue as the second largest regional market in terms of total
installed capacity, with anticipated average annual growth of approximately 25%.
Wind Energy Basics
We have been harnessing the wind’s energy for hundreds of years. From old Holland to farms in
the United States, windmills have been used for pumping water or grinding grain. Today, the
windmill’s modern equivalent—a wind turbine —can use the wind’s energy to generate electricity.
Wind turbines, like windmills, are mounted on a tower to capture the most energy. At 197 feet
(60 meters) or more above ground, they can take advantage of the faster and less turbulent wind.
Turbines catch the wind’s energy with their propeller-like blades. Usually, two or three blades are
mounted on a shaft to form a rotor .
A blade acts much like an airplane wing. When the wind blows, a pocket of low-pressure air
forms on the downwind side of the blade. The low-pressure air pocket then pulls the blade toward
it, causing the rotor to turn. This is called lift . The force of the lift is actually much
stronger than the wind’s force against the front side of the blade, which is called drag . The
combination of lift and drag causes the rotor to spin like a propeller, and the turning shaft spins
a generator to make electricity.
Wind turbines can be used as stand-alone applications, or they can be connected to a utility
power grid or even combined with a photovoltaic (solar cell) system. For utility-scale sources of
wind energy, a large number of wind turbines are usually built close together to form a wind plant
or wind farm . Several electricity providers today use wind plants to supply power to their
customers.
Stand-alone wind turbines are typically used for water pumping or communications. However,
homeowners, farmers, and ranchers in windy areas can also use wind turbines as a way to cut their
electric bills.
Small wind systems also have potential as distributed energy resources. Distributed energy
resources refer to a variety of small, modular power-generating technologies that can be combined
to improve the operation of the electricity delivery system.
Current GreenHunter Energy Wind Projects
We currently do not have a wind project in which we are active. We have in the past developed
early stage projects in Texas, California, Wyoming and Montana. In light of today’s difficult credit markets and low natural gas prices,
it is management’s current intention to discontinue to explore new projects. Management
developed a wind project in Imperial County, California, known as the Ocotillo wind project. We
previously controlled 6,280 acres under lease with the Bureau of Land Management with the potential for 150 MW of wind power generation.
The Company sold the Ocotillo wind power development project to Ocotillo Express, LLC, a
wholly-owned subsidiary of Pattern Renewables, LP, for an initial cash payment plus additional
required cash milestone payments that will be determined in the future based on the amount of
installed megawatts of power generation ultimately constructed at the project site. Ocotillo
Express, LLC has notified the Company that it is their intent to begin construction on this project
in 2011. The Company has received $500,000 to date from the sale of the project and it is
anticipated that the Company will receive approximately $4.8 million in additional consideration
during 2011 based upon Ocotillo Express, LLC’s public announcement of it’s intention to begin construction on this project
in 2011.
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Competition
Solar Energy
Solar energy, provided by the sun, is constantly replenished and will not produce harmful
pollution like fossil fuels. Solar energy may be used passively, such as to heat and light
buildings, or technology may be used to harness the sun’s energy by collecting it and transforming
it to generate electricity. Current technologies include photovoltaics, concentrating solar, solar
hot water, and more.
The basic economic difference between solar and conventional power is that a solar system’s
cost is almost entirely fixed and paid for upfront, whereas conventional power is driven by
variable costs over time which could include coal, natural gas, etc.
GreenHunter’s current plan is to focus on utility scale solar prospects when a decision is
made by the management team to expand into the solar energy industry on a specific project. We are exploring possible
investments in photovoltaic (“PV”) solar power technologies. Commerciality of solar power is
currently constrained by average prices that are considerably higher than that of conventional
power.
GreenHunter will also evaluate distributed generation components of solar power. Currently,
solar power is attractive due to the opportunity to invest in emerging technologies in the
distributed nature of PV. Distributed generation systems can provide savings through increased
reliability, reduced needs for distribution infrastructure upgrades and reduced line losses. While
we have no concrete plans for develolping our solar energy business, we have received approval at
our Mesquite Lake facility to develop 12-15 acres of land for solar power. Certain third parties have also made
inquiries to possibly jointly develop this acreage for solar power.
Geothermal Energy
Geothermal energy is a form of renewable energy derived from heat deep in the earth’s crust.
This heat is brought to the near-surface by thermal conduction and by intrusion into the earth’s
crust of molten magma originating from great depth. As groundwater is heated, geothermal energy is
produced in the form of hot water and steam. The heated groundwater can be used for direct heating
of homes and greenhouses, for vegetable drying, and for a number of other uses. These are known as
direct uses of geothermal energy.
Geothermal energy is also used for electricity production. Geothermal power generation is used
today throughout the world where good geothermal resources exist, including many locations in the
western United States. The U.S. continues to be the world leader in capacity and a wave of new
development is underway that could double capacity within the next few years, helped by federal
production tax credits.
Three types of power plants are used to generate power from geothermal energy: dry steam,
flash, and binary. Dry steam plants take steam out of fractures in the ground and use it to
directly drive a turbine that spins a generator. Flash plants take hot water, usually at
temperatures over 200°C, out of the ground, and allows it to boil as it rises to the surface, then
separates the steam phase in steam/water separators, and then runs the steam through a turbine. In
binary plants, the hot water flows through heat exchangers, boiling an organic fluid that spins the
turbine. The condensed steam and remaining geothermal fluid from all three types of plants are
injected back into the hot rock to pick up more heat. This is why geothermal energy is viewed as
sustainable. The heat of the earth is so vast that there is no way to remove more than a small
fraction even if most of the world’s energy needs came from geothermal sources.
The area surrounding our Mesquite Lake facility is conducive to the development of geothermal
energy. There may be opportunities in the future for the development of
geothermal energy in the Imperial Valley region.
Clean water technology
Recent improvements in drilling and completion technologies have unlocked large reserves of
hydrocarbons in multiple unconventional resources plays in North America. These new drilling
methods often involve a procedure called hydraulic fracturing or hydrofracking. This process
involves the injection of large amounts of water, sand and
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chemicals under high pressures into rock
formations to stimulate production. Unconventional wells can require more than four million
gallons of water to complete a hydrofracking procedure. Some portion of the water used in
production process will return to the surface as a by-product or waste stream; this water is
commonly referred to by operators in the oil and gas industry as frack-flowback. In addition to
fack-flowback, oil and natural gas wells also generate produced salt
water or brine which is water from
underground formations that is brought to the surface during the normal course of oil or gas
production. Because the water has been in contact with hydrocarbon-bearing formations, it contains
some of the chemical characteristics of the formations and the hydrocarbons. The physical and
chemical properties of produced water vary considerably depending on the geographic location of the
field, the geologic formation, and the type of hydrocarbon product being produced. Produced water
properties and volume also vary through the lifetime of a reservoir.
Produced water is the largest volume by-product or waste stream associated with oil and gas
exploration and production. Although the details on generation and management of produced water
are not well understood on a national scale, the U.S. Department of Energy’s National Energy
Technology Laboratory (NETL) estimates that the total volume of produced water generated by U.S.
onshore and offshore oil and gas production activities in 2007 was nearly 21 billion barrels or 882
billion gallons (1 barrel equals 42 U.S. gallons).
While produced water (also known as oil field brine or brine due to its high salinity content)
can be reused if certain water quality conditions are met, approximately 95 percent of U.S. onshore
produced water generated by the oil and gas industry is disposed of by using high-pressure pumps to
inject the water into under-ground geologic formations or is discharged under National Pollutant
Discharge Elimination System (NPDES) permits. The remaining 5 percent is managed through
beneficial reuse or disposed through other methods including
evaporation, percolation pits, and
publicly owned treatment works.
Federal and state legislation and regulatory initiatives relating to hydraulic fracturing are
expected to result in increased costs and additional operating restrictions for oil and gas
explorers and producers. Congress is currently considering legislation to amend the federal Safe
Drinking Water Act to require the disclosure of chemicals used by the oil and natural gas industry
in the hydraulic fracturing process. Sponsors of two companion bills, which are currently pending
in the House Energy and Commerce Committee and the Senate Committee on Environment and Public Works
Committee have asserted that chemicals used in the fracturing process could adversely affect
drinking water supplies. The proposed legislation would require the reporting and public disclosure
of chemicals used in the fracturing process, which could make it easier for third parties opposing
the hydraulic fracturing process to initiate legal proceedings based on allegations that specific
chemicals used in the fracturing process could adversely affect groundwater. In addition, this
legislation, if adopted, could establish an additional level of regulation at the federal level
that could lead to operational delays or increased operating costs and could result in additional
regulatory burdens for oil and natural gas operators. Several states are also considering
implementing, or in some instances, have implemented, new regulations pertaining to hydraulic
fracturing, including the disclosure of chemicals used in connection therewith. The adoption of any
future federal or state laws or implementing regulations imposing reporting obligations on, or
otherwise limiting, the hydraulic fracturing process would make it more difficult and more
expensive to complete new wells in the unconventional shale resource formations and increase costs of
compliance and doing business for oil and natural gas operators.
Management,
which has a significant background in the oil and gas industry, has
identified water reuse and water management opportunities in the
energy industry
as a significant growth opportunity and is exploring various ways to reposition the Company to
serve this growing segment through joint ventures, targeted acquisitions and development of water
management technologies including underground injection for disposal, evaporation, pre-treatment of
water for underground injection for increasing oil recovery, offsite commercial disposal, onsite
remediation and beneficial reuse.
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Biofuels
We
completed and began commissioning our Houston biodiesel refinery during the third quarter of 2008.
The refinery construction was financed by using our existing capital,
our non-resource credit facility with one
major bank lender, and our redeemable debenture offerings. Shortly after we had begun production,
we were forced to shut down our facility as a result of damages caused by a direct hit from
Hurricane Ike. We completed the major repairs to our refinery during September, October and
November of 2008 and were able to resume biodiesel production during the last week of November
2008. As a result of poor biodiesel economics due to high feedstock prices and low finished
product prices, which has a direct correlation to the price of crude oil, we limited operations at
the refinery during calendar 2009 to terminal storage, toll processing and toll distillation
services. This limited operation continued into calendar 2010. On June 4, 2010, the lender
appointed a receiver to take over physical operations of the facility.
On November 26, 2010, the Company transferred 100% of its common stock ownership interest in
GreenHunter BioFuels, Inc. (“BioFuels”) to an irrevocable trust for the benefit of the holders of
the Series A Debentures and their respective successors, assigns, heirs and devisees in full and
final satisfaction of any obligation the Company might have to the holders of the Series A
Debentures, based on the terms and conditions of the debenture agreements. In late 2007 and early
2008, GreenHunter Energy, Inc. had issued to certain accredited investors nonrecourse 10% Series A
Secured Redeemable Debentures due 2012 that were secured solely by all of the Company’s common
stock in its wholly owned Texas subsidiary, BioFuels. The trustee of the trust is Jack C. Myers,
Esq.
The
Company currently has no operating business in the biofuels industry
and does not anticipate reentering this business segment.
Research and Development
We
do not spend any funds on research and development at any of our
current business segments.
Employees
As
of March 30, 2011, we had 8 employees working on behalf of the
Company located at the corporate office in
Grapevine, Texas.
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Item 1A. Risk Factors
An investment in our securities involves many risks. You should carefully consider the following
risks and all of the other information contained in this Form 10-K before making an investment
decision. Additional risks related to us and our securities may be included in our other filings with the SEC pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, which we
refer to as the Exchange Act. In evaluating our company, the factors described below should be
considered carefully. The occurrence of one or more of these events could significantly and
adversely affect our business, prospects, financial condition, results of operations and cash
flows.
Risks Associated with our Business
We have a limited operating history, and our business may not be as successful as we envision.
We are currently in an early stage of our current business plan. Our
limited operating history makes it difficult for potential investors to evaluate our business.
Therefore, our proposed operations are subject to all of the risks inherent in the initial
expenses, challenges, complications and delays frequently encountered in connection with the
formation of any new business, as well as those risks that are
specific to the renewable industry
in general. Investors should evaluate an investment in our company in light of the problems and
uncertainties frequently encountered by companies attempting to develop markets for new products,
services and technologies. Despite best efforts, we may never overcome these obstacles to achieve
financial success.
Our business is speculative and dependent upon the implementation of our business plan, as
well as our ability to enter into agreements with third parties for necessary financing, the
provision of necessary feedstock sources, engineering, procurement and construction services and
the sale and distribution of our products on terms that will be commercially viable for us.
There can be no assurance that our efforts will be successful or result in revenue or profit. There
is no assurance that we will earn significant revenues or that our investors will not lose their
entire investment.
We have yet to attain profitable operations and we will need additional financing to fund our activities.
We are dependent upon our ability to obtain sufficient financing to continue our development
and operational activities. The ability to achieve profitable operations is in direct correlation
to our ability to raise sufficient financing. It is important to note that even if the appropriate
financing is received, there is no guarantee that we will ever be able to operate profitably or
derive any significant revenues from our operation. We will be required to raise additional
financing to fully implement our entire business plan.
Our lack of diversification beyond the renewable energy industry may increase our risk.
We expect our primary source of revenue will come from renewable energy assets that generate
cash flow from the sale of
biomass-created energy and water handling services associated with
the oil and gas industry. Any diminution in
the value of our assets or decrease in operating revenues could negatively affect our ability to
become profitable. Further, the illiquid nature of the assets we own and intend to purchase could
jeopardize our ability to satisfy our working capital needs or impair our ability to meet any debt
obligations that may become due.
We may not be able to effectively manage our acquisition and construction costs.
We may suffer from increasing costs in retrofitting current acquisitions. For example, while
we have completed the acquisition of a biomass plant located in Mesquite Lake, California,
substantial costs will be incurred in retrofitting and repairing this plant in a manner that will
allow commercial operations. While we have attempted to project such costs, changes in engineering
scope, increases in construction, labor, or capital expenses could impair our ability to
successfully achieve our investment objectives.
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We have significant debt that could adversely affect our financial health and prevent us from fulfilling our obligations.
We have a
relatively high amount of indebtedness. As of December 31, 2010, we had total
indebtedness of approximately 9.1 million. Because we must dedicate a substantial portion of our cash flow
from operations to the payment of interest on our debt, that portion of our cash flow is not
available for other purposes. In addition, our ability to obtain additional financing in the future
may be impaired by our leverage and existing debt covenants. Our indebtedness could:
| • | make it more difficult for us to satisfy our obligations; | ||
| • | increase our vulnerability to general adverse economic and industry conditions; | ||
| • | require us to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate expenditures; | ||
| • | force us to sell assets or seek additional capital to service our indebtedness, which we may be unable to do at all or on terms favorable to us; | ||
| • | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; | ||
| • | place us at a disadvantage compared to our competitors that have less debt; | ||
| • | and limit our ability to borrow additional funds. |
We are dependent upon our key personnel.
Our operations and financial success will significantly depend on our managerial personnel.
Our managerial personnel have the right to make all decisions with respect to management and
operation of our business and affairs. We are dependent on the executive officers and key personnel
of GreenHunter and our ability to attract and retain qualified personnel. Our profitability could
be adversely affected if we lose members of our management team. We have not entered into any
employment agreements with any of our management personnel nor have we obtained “key man” life
insurance on any of their lives. Further, our officers’ and directors’ allocation of their time to
other business interests could have a negative impact on our ability to achieve our business
objectives. All of our officers are required to commit their full work hour time to our business
affairs, with the exception of Gary C. Evans, our Chief Executive Officer, and David S. Krueger,
our Chief Financial Officer, who maintain officer and director positions and relationships with
other public companies. For a discussion regarding the potential conflicts of interest that you should be
aware of, see the risk factor below regarding conflicts of interest of our officers and directors.
We may not be able to meet our capital requirements.
Capital
expenditures to build and operate our biomass plant and potential
water handling facilities, hiring
qualified management and key employees, complying with licensing, registration and other
requirements, maintaining compliance with applicable laws, production and marketing activities,
administrative requirements, such as salaries, insurance expenses and general overhead expenses,
legal compliance costs and accounting expenses, will all require a substantial amount of additional
capital and cash flow.
We will be required to pursue sources of additional capital through various means, including
joint venture projects, which may include a profit sharing component, debt financing, equity
financing or other means. There is no assurance that we will be successful in locating a suitable
financing or strategic business combination transaction in a timely fashion or at all. In addition,
there is no assurance that we will be successful in obtaining the capital we require by any other
means. Future financings through equity investments are likely, and
they may be dilutive
to the existing shareholders as we issue additional shares of common stock to investors in future
financing transactions and as these financings trigger anti-dilution adjustments in existing
equity-linked securities. Also, the terms of securities we issue in future capital transactions may
be more favorable for our new investors. Newly issued securities may include preferences, superior
voting rights, the issuance of warrants or other derivative securities, and the issuances of
incentive awards under employee equity incentive plans, all of which may have additional dilutive effects.
Further, we may incur substantial costs in pursuing future capital or financing, including
investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and
distribution expenses and other costs. We
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may also be required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible notes and warrants, which may adversely affect our financial
results.
Our ability to obtain needed financing may be impaired by such factors as the capital markets,
both generally and specifically in the renewable energy industry and the fact that we are a new
enterprise without a proven operating history. Some of the contractual arrangements governing
our operations may require us to maintain minimum capital, and we may lose our contract rights if
we do not have the required minimum capital. If the amount of capital we are able to raise from
financing activities, together with our revenues from operations, are not sufficient to satisfy our
capital needs, even to the extent that we reduce our operations accordingly, we may be required to
cease operations.
Risks Related to the Renewable Energy Industry
We have not currently identified specific future investments or acquisitions within the renewable
energy industry and thus cannot evaluate their associated merits or risks.
Since we are not limited to any particular target business in the renewable energy industry
within which to operate or complete an acquisition or business combination, we are unable to
currently ascertain the merits or risks of any future business we may operate. We may complete a
business combination in the future with a company in any business we choose in the renewable energy
industry (e.g., wind, solar, geothermal, biomass and clean water), and we are not limited to any particular type of business. While our
recent transactions are described in our filings with the SEC, there is minimal current information
for you to evaluate the possible merits or risks of any other target businesses which we may
acquire. To the extent we complete a business combination with a financially unstable company, a
company with unknown or non-quantifiable risks or an entity in its development stage, we may be
affected by numerous risks inherent in the business operations of such entity. Further acquisitions
or business combinations with an entity in the renewable energy industry would be characterized by
a high level of risk, and we may be adversely affected by currently unascertainable risks of that
business. Although our management team will endeavor to evaluate the risks inherent in a particular
target business, we cannot assure you that we will properly ascertain or assess all of the
significant risk factors.
The abundant competition and rapidly changing technology in the renewable energy industry may
impair our success.
The renewable energy marketplace is highly fragmented, competitive and subject to rapid
technological change, and we may be unable to successfully compete. Evolving industry standards,
rapid price changes and rapid product obsolescence also impact the market. We currently compete in
the market for renewable energy products and services and against companies that are better
capitalized than us. Our competitors include many domestic and foreign companies, many of which
have substantially greater financial, marketing, personnel and other resources than we do. Our
current competitors or new market entrants could introduce new or enhanced technologies, products
or services with features that could render our technologies, products or services obsolete or less
marketable. Our success will be dependent upon our ability to develop superior energy products in a
cost effective manner. In addition, we may be required to continually enhance any products that are
developed as well as introduce new products that keep pace with technological change and address
the increasingly sophisticated needs of the marketplace. There can be no assurance that we will be
able to keep pace with the technological demands of the marketplace or successfully develop
products that will succeed in the marketplace.
Changes to the currently favorable regulations and legislation within the renewable energy industry
may adversely impact our future revenues.
The favorable legislative and regulatory climate for the renewable energy industry may not
continue. The viability of our renewable energy projects will be in large part dependent upon the
continuation of a favorable legislative and regulatory climate with respect to the continuing
operations and the future growth and development of the renewable energy industry. Government
regulations, subsidies, incentives and the market design have a favorable impact on the
construction of renewable energy facilities. If the current government regulations, subsidy and
incentive programs or the design of the market are significantly modified or delayed, our projects
may be
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adversely affected, which may have a material adverse effect on the Company.
The Internal Revenue Code currently provides for income tax credits for
electricity produced and sold from qualified biomass and wind energy projects. These credits,
which were to expire for biodiesel fuels after December 31, 2008, and for qualified wind energy
projects placed in service on or after December 31, 2008, have been extended for one year as part
of the Emergency Economic Stabilization Act of 2008 (Public Law 110-343). The credits available for
biomass and wind energy are discussed below. The elimination or significant
reduction in these tax credits could harm our business, financial condition and results of
operations.
The pricing of renewable energy may fluctuate due to the level of production of renewable energy.
We believe that the production of renewable energy fuels is expanding rapidly, especially in
the United States. There are a number of new plants under construction and planned for
construction. We expect existing renewable energy fuel and biopower plants to expand by increasing
production capacity and actual production. Increases in the demand for renewable energy fuels and
biopower may not be commensurate with increasing supplies of renewable energy fuels or power. Thus,
increased production of renewable energy fuels or power may lead to lower renewable energy fuel
prices. The increased production of renewable energy fuels and power could also have other adverse
effects. For example, increased renewable energy fuels production could lead to increased supplies
of co-products from the production of renewable energy fuels. Those increased supplies could lead
to lower prices for those co-products. Also, the increased production of renewable energy fuels
could result in increased demand for renewable energy fuel supplies. This could result in higher
prices for such supplies and cause higher renewable energy fuels production costs, which would
result in lower profits. We cannot predict the future price of renewable energy fuels or biopower.
Any material decline in the price of renewable energy fuels or power will adversely affect our
sales and profitability.
Construction and development delays or cost over-runs may adversely affect our business.
Absent
a successful business combination or acquisition, the ability of GreenHunter to generate revenues will
depend upon the successful completion of the restoration or development, construction and
operations of our biomass plant. Such development requires capital equipment being manufactured,
shipped to our project sites, installed and tested. In addition, we will be required to build or
purchase and install interconnection facilities and other infrastructure. There is a risk that the
construction phase may not be completed, that construction may be substantially delayed, or that
material cost over-runs may be incurred, which may result in GreenHunter being unable to meet
profit expectations.
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We would be liable for violations of environmental laws related to our ownership or operation of
our facilities.
Federal, state and local laws impose liability on a landowner for releases or the otherwise
improper presence on the premises of hazardous substances. This liability is without regard to fault for, or
knowledge of, the presence of such substances. A landowner may be held liable for hazardous
materials brought onto the property before it acquired title and for hazardous materials that are
not discovered until after it sells the property. Similar liability may occur under applicable
state law. In addition, we could face environmental liability for violations on or related to
facilities we lease or otherwise use unrelated to ownership. If any hazardous materials are found
within the operations of GreenHunter and are in violation of the law at any time, we may be liable
for all cleanup costs, fines, penalties and other costs. This potential liability will continue
after we sell or cease operations on any subject properties and may apply to hazardous materials
present within the properties before we acquired or commence use of them. If significant losses
arise from hazardous substance contamination, our financial viability may be substantially and
adversely affected.
Risks Relating to the Biomass Industry
The inherent volatility in the market price of electricity could impact our profitability.
Our potential revenues, income and cash flow are subject to volatility in the market price for
electricity. Our ability to generate revenue has exposure to movements in the market price of
electricity, as sales to the power market are likely to be made at prevailing market prices. The
market price of electricity is sensitive to cyclical changes in demand and capacity supply, and in
the economy, as well as to regulatory trends and developments impacting electricity market rules
and pricing, transmission development and investment within the United States and to the power
markets in other jurisdictions via interconnects and other external factors outside of our control.
Energy from biomass facilities must be taken “as delivered” which necessitates the use of other
system resources to keep the demand and supply of electric energy in balance. Accordingly, the
potential revenue, income and cash flow may be volatile and adversely affect our value.
Any inability or delay in updating or obtaining required licenses and permits could hinder
development and adversely affect profitability.
We may be unable to obtain all necessary licenses and permits to operate our business.
GreenHunter may not necessarily hold all of the licenses and permits required in connection with
the construction and operation of our biomass plant and potential
clean water
projects. The failure to obtain all necessary licenses or permits, including renewals or
modifications, could result in construction delays of any of our projects or could otherwise have a
material adverse effect on GreenHunter.
Our inability to enter interconnection agreements would restrict our ability to sell electricity.
We may be unable to enter into necessary interconnection agreements. GreenHunter will be
required to enter into certain interconnection agreements with electric utilities prior to selling
electricity. The failure to enter into such interconnection agreements on terms that are acceptable
to us could have a material adverse effect on GreenHunter.
Fixed payments under the power purchase agreement
The payments made by the district to GreenHunter Mesquite Lake under the power purchase
agreement for energy are at an energy rate that is specified and fixed for each contract year.
Other than the different rates that are specified with respect to different contract years, such
payments are not subject to any other adjustment for increases in operating or fuel costs or other
customary factors, as may be provided for in other output contracts. Certain costs relating to
operations, fuel or other expenses may increase at a faster rate than anticipated by GreenHunter
Mesquite Lake, in which case the payments received by GreenHunter Mesquite Lake for capacity and
energy in accordance with the terms of the power purchase agreement could be insufficient to pay
the operating costs attributable to providing such capacity and energy.
Reliance on the district as GreenHunter Mesquite Lake’s primary revenue source
The district, pursuant to its obligations to make payments for the electric power delivered to
it by GreenHunter Mesquite Lake under the power purchase agreement, is the primary source of
projected revenues for GreenHunter Mesquite Lake. Financial or other changes in the district’s
circumstances could adversely impact its ability to make payments. Some possible changes of this
nature include any adverse financial results, any changes in reimbursement of production tax
credits or industry consolidation or restructuring. In the event the district is unable to honor
its obligations to purchase power from GreenHunter Mesquite Lake pursuant to the power purchase
agreement, GreenHunter Mesquite Lake would be required to locate purchasers of the power produced
at the facility
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and there can be no assurance that it would have the ability to do so, or that it would be
able to do so at favorable prices.
Transmission capability limitations
The facility will deliver its electric output to the district, at a point of transfer on the
facility site. The district will be responsible for transmission of the delivered energy from the
point of transfer to its own system. The district has performed studies which demonstrate that
there are no constraints on the transmission system which would require curtailment of power
production by the facility, but to the extent there are such curtailments, this could adversely
affect production and revenues of the facility.
Failure by GreenHunter Mesquite Lake to perform its obligations under the power purchase agreement
The economic feasibility of the project and the facility depends upon the ability of
GreenHunter Mesquite Lake to perform its obligations to deliver electric power to the district
under the power purchase agreement and receive payments from the sale of power pursuant thereto.
If GreenHunter Mesquite Lake fails to perform its obligations under the power purchase agreement in
accordance with its terms, GreenHunter Mesquite Lake would likely be unable to receive such payment
and generate revenues.
GreenHunter Mesquite Lake may not be able to effectively manage its construction costs
GreenHunter Mesquite Lake may suffer from increasing costs in retrofitting and constructing
the project. While GreenHunter Mesquite Lake has completed the acquisition of the facility,
substantial costs will be incurred in retrofitting and repairing the facility in a manner that will
allow commercial operations as contemplated by the project. While GreenHunter Mesquite Lake has
secured fixed-price contracts for approximately 50% of the cost of retrofitting and repair of the
facility, changes in engineering scope, increases in construction, labor, or capital expenses could
impair GreenHunter Mesquite Lake’s ability to successfully complete the project.
Risks relating to anticipated 1603 Program Grant under the American Recovery and Reinvestment Act
The project qualifies for the renewable energy production tax credit under the Recovery Act.
In lieu of the tax credit, GreenHunter Mesquite Lake expects to apply for a renewable energy tax
grant under the Recovery Act. If GreenHunter Mesquite Lake is not successful in obtaining the 1603
Program Grant, or if the amount of such grant is less than anticipated GreenHunter Mesquite Lake’s
business, financial condition and results of operations may be harmed.
Regulatory risks and other matters affecting the electric power industry
Changes to the currently favorable regulations and legislation within the renewable energy
industry may adversely impact GreenHunter Mesquite Lake’s future revenues. The favorable
legislative and regulatory climate for the renewable energy industry may not continue. The
viability of the facility and the project will be in large part dependent upon the continuation of
a favorable legislative and regulatory climate with respect to the continuing operations and the
future growth and development of the renewable energy industry. Government regulations, subsidies,
incentives and the market design have a favorable impact on the construction of renewable energy
facilities. If the current government regulations, subsidy and incentive programs or the design of
the market are significantly modified or delayed, the facility or project may be adversely
affected, which may have a material adverse effect on GreenHunter Mesquite Lake.
During 2008 GreenHunter Mesquite Lake began refurbishing the facility. During the course of
its air permit review, GreenHunter Mesquite Lake determined that the existing air permit was not
sufficient to support its operations. GreenHunter Mesquite Lake put the project on hold during the
fourth quarter of 2008 while it was implementing the re-permitting process. GreenHunter Mesquite
Lake obtained the authority to construct (“ATC”) permit necessary for construction in June of 2010
and will convert the ATC permit to an operating permit to operate the facility upon satisfying the
emissions compliance tests required. GreenHunter Mesquite Lake expects to amend its ATC permit for
the number of start-ups of the facility allowed per year, but the can be no assurance that it will
be successful in obtaining such amendment.
GreenHunter Mesquite Lake has a permit for the discharge of process wastewater for the
facility that remains valid through June 2012. GreenHunter Mesquite Lake expects to modify and
renew the existing permit to allow for a discharge of a higher flow rate of process wastewater from
the facility, but there can be no assurance that it will be successful in obtaining such
modification and renewal.
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Environmental risks
Electric utilities and electric power plants such as the facility and GreenHunter Mesquite
Lake are subject to continuing environmental regulation. Federal, state and local standards and
procedures which regulate the environmental impact of electric utilities are subject to change.
These changes may arise from continuing legislative, regulatory and judicial action regarding such
standards and procedures. Consequently, there is no assurance that the facility, GreenHunter
Mesquite Lake or the district will remain subject to the regulations currently in effect, will
always be in compliance with future regulations or will always be able to obtain all required
operating permits. An inability to comply with environmental standards could result in additional
capital expenditures to comply, reduced operating levels or the complete shutdown of individual
electric generating units not in compliance.
There is concern by the public, the scientific community, President Obama’s Administration and
Congress regarding environmental damage resulting from the use of fossil fuels. Congressional
support for the increased regulation of air, water and soil contaminants is building, and there are
a number of pending or recently enacted legislative proposals which may affect the electric utility
industry. There has also been an increased level of environmental enforcement by the United States
Environmental Protection Agency (the “EPA”) and state and local authorities. Increased
environmental regulations under the provisions of the federal Clean Air Act have created certain
barriers to new facility development and modification of existing facilities. The additional
costs, including time, human resources, uncertainty and delay, and the risk of fines and penalties
for noncompliance, could affect the rate of return relating to investment in power project
development. As such, there may be additional costs for purchased power from affected resources.
Moreover, these additional costs may upset existing cost assumptions for utilities.
GreenHunter Mesquite Lake cannot predict at this time whether any additional legislation or
rules will be enacted which will affect the Project or the operations of the facility, and if such
laws or rules are enacted, what the costs to GreenHunter Mesquite Lake might be in the future
because of such action.
GreenHunter Mesquite Lake believes that it is and will be in material compliance with
applicable environmental laws for the facility and the project. However, costs of owning and
operating the facility may, in the future, be adversely affected by legislative, regulatory,
administrative and enforcement actions involving environmental controls.
Seismic risks and earthquake insurance
The facility, is located in a seismically active region and subject to seismic events,
including, ground shaking, liquefaction and landslides. Located within the County is the Imperial
Valley portion of the Salton Trough. The Salton Trough encompasses the Coachella, Imperial and
Mexicali valleys and extends north from the Gulf of California. The geologic structure of the
Salton Trough is a result of an evolving “rift” in the earth’s crustal plates. Nonmarine and
alluvium sediments cover large portions of the area. The most noteworthy of the numerous active
faults traversing the Salton Trough is the San Andreas Fault. The other two major
northwest-trending fault zones bounding the Salton Trough are the San Jacinto Fault on the
northwest and the Elsinore Fault on the southwest.
According to the 2007 Uniform California Earthquake Rupture Forecast (“UCERF”), California has
a 99.7% chance of having a magnitude 6.7 or larger earthquake during the next 30 years. The UCERF
was organized by the Southern California Earthquake Center and was prepared by the 2007 Working
Group on California Earthquake Probabilities, a multi-disciplinary collaboration of scientists and
engineers. The UCERF indicates that the likelihood of an earthquake of magnitude 7.5 or greater in
the next 30 years is 46%. According to the UCERF, such an earthquake is more likely to occur in
the southern half of the State (37% chance in 30 years) than in the northern half (15% chance in 30
years).
The obligation of GreenHunter Mesquite Lake to provide electric power under the power purchase
agreement may be abated in the event of earthquake or other event of force majeure. The
construction contracts contain standard force majeure provisions that relieve the parties of their
obligations to the extent they are prevented from performing due to an event of force majeure
(which could include earthquakes). Under the boiler contract, the guaranteed mechanical completion
date can be extended due to force majeure, and the deadline to complete performance testing and to
deliver the equipment under the fuel yard contract can also be extended due to force majeure.
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Damage from an earthquake can range from total destruction of the facility, to destabilization
or liquefaction of the soils, to little or no damage at all. The extent of damage and the
long-term effects from an earthquake, particularly ongoing earthquake activity, may be difficult to
determine immediately.
GreenHunter Mesquite Lake has acquired earthquake insurance on the facility during the
construction period of the Contract as part of the builder’s risk policy, which insurance is
expected to be maintained after construction is completed. The insurance provides coverage for up
to $50,000,000 in losses. There can be no assurance that such earthquake insurance will continue
to be maintained by GreenHunter Mesquite Lake or that it will continue to be available at
commercially reasonable rates.
Other events of force majeure
Construction and operation of the facility are also at risk from other events of force
majeure, such as damaging storms, winds and floods, fires and explosions, strikes and lockouts,
sabotage, terrorist acts, wars, blockages, riots and spills of hazardous substances, among other
events. Construction and operations may also be stopped or delayed from non-casualty events such
as changes in law, revocation or revision of permits and litigation, among other things.
Reliance on supply contracts
The ability of GreenHunter Mesquite Lake to produce electricity at the facility will depend,
in large part, on the availability and affordability of biomass fuel to operate the facility.
While GreenHunter Mesquite Lake has entered into one biofuel supply agreement to acquire 21,500
tons per year of wood fuel, and has received letters of intent for all of the fuel required to
operate the facility in Phase I and approximately 86% of the fuel required to operate the facility
in Phase II, GreenHunter Mesquite Lake will be required to enter into additional biofuel supply
agreements or purchase biomass fuel on the spot market in order to operate the facility at full
capacity in either Phase I or Phase II of the project. GreenHunter Mesquite Lake expects to enter
into additional biofuel supply agreements and to obtain the remainder of the biomass fuel on the
spot market or by contract once operations have begun and suppliers become accustomed to
GreenHunter Mesquite Lake as a new purchaser in the market. Any significant disruption of supply
arrangements or significant increases in raw material or transportation costs could have a
materially adverse effect on GreenHunter Mesquite Lake’s operations.
Other operating risks
Future revenues and expenses of GreenHunter Mesquite Lake will generally be subject to, among
other things, general economic conditions, availability of alternatives products, the capabilities
of management in managing the project and other conditions which are unpredictable.
Competition
The abundant competition and rapidly changing technology in the renewable energy industry may
impair GreenHunter Mesquite Lake’s success. The renewable energy marketplace is highly fragmented,
competitive and subject to rapid technological change, and GreenHunter Mesquite Lake may be unable
to successfully compete. Evolving industry standards, rapid price changes and rapid product
obsolescence also impact the market. GreenHunter Mesquite Lake currently competes in the market
for renewable energy products and services and against companies that are better capitalized than
GreenHunter Mesquite Lake. GreenHunter Mesquite Lake’s competitors include many domestic and
foreign companies, many of which have substantially greater financial, marketing, personnel and
other resources than GreenHunter Mesquite Lake. GreenHunter Mesquite Lake’s current competitors or
new market entrants could introduce new or enhanced technologies, products or services with
features that could render the technologies, products or services of GreenHunter Mesquite Lake
obsolete or less marketable. GreenHunter Mesquite Lake’s success will be dependent upon its
ability to develop superior energy products in a cost-effective manner. In addition, GreenHunter
Mesquite Lake may be required to continually enhance any products that are developed as well as
introduce new products that keep pace with technological change and address the increasingly
sophisticated needs of the marketplace. There can be no assurance that GreenHunter Mesquite Lake
will be able to keep pace with the technological demands of the marketplace or successfully develop
products that will succeed in the marketplace.
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General economic conditions
The
United States economy experienced a significant downturn that started in 2008. Although there were
some indications in early 2010 that the downturn may be slowing or reversing, it is unclear at this
time whether the downturn has ended, if it may return or worsen, or what the speed of any recovery
in the economy will be. General economic conditions may also be affected by other events including
the prospect of increased hostilities abroad and higher overall
energy sources. Certain such events may have other effects, the
impact of which are difficult to project.
Construction risks
GreenHunter Mesquite Lake’s plan of finance is dependent upon completion of the project by a
specified time and within budget. There are many potential risks that could affect the schedule
for and/or the cost of construction of the project, including, among other things, interfaces among
multiple contractors; shortages of materials and labor; work stoppages; labor disputes; bad
weather; unforeseen engineering, environmental or geological problems; differing site conditions;
unidentified utilities; unidentified hazardous materials; earthquakes, floods and other casualties;
changes in law; third-party litigation; difficulty in obtaining permits and approvals from local
agencies, utility owners, applicable federal or state agencies; delays and lack of cooperation by
federal or state agencies, or other third parties in performance of work necessary for the project;
traffic constraints and other constraints affecting construction staging; the need to change the
basic configuration of the project or the final design in order to construct the project; changes
in project requirements including changes in federal, state and local agency standards as well as
changes desired by GreenHunter Mesquite Lake and delays and increased cost in obtaining any
property needed for the project. Any of these events, or others, could result in increased cost to
GreenHunter Mesquite Lake or delay in completion of the project or failure to complete the project
and could materially adversely affect the timely receipt of revenues from the district under the
power purchase agreement. Pursuant to the power purchase agreement, GreenHunter Mesquite Lake is
required to use commercially reasonable efforts to achieve the commercial operation date on or
before September 30, 2011 (currently in negotiations to extend this date), and the district may
terminate the power purchase agreement if, among other things, the Facility has not produced and
delivered to the district at least 13.0 MW for a continuous 24-hour period in the preceding 18
months.
GreenHunter Mesquite Lake previously entered into the three construction contracts with the
applicable contractor who will construct the project and will manage and direct any subcontractors
of the three construction contracts, the boiler contract, the fuel yard contract and a portion of
the general construction contract include a fixed price and generally require completion by a
specified deadline, but there can be no assurance that the contracts will be completed on schedule
or within GreenHunter Mesquite Lake’s budget.
Although the construction contracts may give GreenHunter Mesquite Lake the contractual right
to direct the contractor or any subcontractors engaged by it to perform work, including
acceleration of work efforts to make up for schedule delays, it is not always possible or
cost-effective to accelerate construction work to meet the originally scheduled completion
deadlines. There is no assurance that the cost of the project will not be substantially higher
than GreenHunter Mesquite Lake’s estimates or that GreenHunter Mesquite Lake will have sufficient
resources to pay for, or to finance, any costs that are significantly higher than those estimated.
Delay or unavailability of project funding
GreenHunter Mesquite Lake needs to raise financing to cover all of the costs of retrofitting
and re-powering the Facility using existing biomass processing technology into a profitable
electricity power plant. There can be no assurance that sufficient funds can or will be obtained
or that such funds could be obtained at rates that would allow the project to be completed. There
also can be no assurance that the amount estimated to be required and available for total project
costs will be sufficient to provide for payment of all costs and expenses necessary for the
completion of the project.
Unavailability of biomass
GreenHunter Mesquite Lake believes, based on its research and investigations, that there will
be adequate supplies of biomass available at GreenHunter Mesquite
Lake’s projected costs to meet the biomass fuel requirements throughout the term of the power purchase agreement and produce
sufficient revenues. However, it is possible that, in the future, fire, disease or other natural disaster, or
increases in transportation expense or competition for renewable energy resources, could result in
unavailability of sufficient biomass fuel or in increased costs of obtaining such fuel, which could
have a material adverse effect on GreenHunter Mesquite Lake’s ability to produce
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revenues.
The inherent volatility in the market price of electricity could impact revenue
GreenHunter Mesquite Lake expects that all of the electric power to be generated by the
facility will be sold to the district pursuant to the existing power purchase agreement, which is a fixed
price contract. However, to the extent that the power purchase agreement is terminated, or if the
facility generates additional electric power that is sold to someone other than the district
pursuant to the power purchase agreement subject to the restrictions set forth therein, GreenHunter
Mesquite Lake’s potential revenues, income and cash flow are subject to volatility in the market
price for electricity to the extent that the facility will deliver electric power that is not
subject to a fixed price contract. In such circumstance, GreenHunter Mesquite Lake’s ability to
generate revenue has exposure to movements in the market price of electricity, as sales to the
power market are likely to be made at prevailing market prices. The market price of electricity is
sensitive to cyclical changes in demand and capacity supply, and in the economy, as well as to
regulatory trends and developments impacting electricity market rules and pricing, transmission
development and investment within the United States and to the power markets in other jurisdictions
via interconnects and other external factors outside of its control. Energy from biomass
facilities must be taken “as delivered” which necessitates the use of other system resources to
keep the demand and supply of electric energy in balance. Accordingly, the potential revenue,
income and cash flow may be volatile to the extent GreenHunter Mesquite Lake delivers power other
than pursuant to a fixed price contract in the circumstances described above.
Other risks relating to the district
The electric utility industry in general has been, or in the future may be, affected by a
number of other factors which could impact the financial condition and competitiveness of many
electric utilities, including the district, and the level of utilization of generating and
transmission facilities. In addition to the factors discussed herein, such factors include, among
others:
| • | effects of compliance with rapidly changing environmental, safety, licensing, regulatory and legislative requirements; | ||
| • | changes resulting from conservation and demand side management programs on the timing and use of electric energy; | ||
| • | effects on reliability of the power supply with the increased usage of renewables; | ||
| • | changes resulting from a national energy policy; | ||
| • | effects of competition from other electric utilities (including increased competition resulting from mergers, acquisitions and strategic alliances of competing electric and natural gas utilities and from competitive transmitting of less expensive electricity from much greater distances over an interconnected system) and new methods of, and new facilities for, producing low-cost electricity; | ||
| • | the repeal of certain federal statutes that would have the effect of increasing the competitiveness of many investor-owned utilities; | ||
| • | increased competition from independent power producers and marketers, brokers and federal power marketing agencies; | ||
| • | “self-generation” or “distributed generation” (such as microturbines and fuel cells) by industrial and commercial customers and others; | ||
| • | issues relating to the ability to issue tax-exempt obligations, including restrictions on the ability to sell to nongovernmental entities electricity from generation projects and transmission line service from transmission projects financed with outstanding tax-exempt obligations; | ||
| • | effects of inflation on the operating and maintenance costs of an electric utility and its facilities; | ||
| • | changes from projected future load requirements; | ||
| • | increases in costs and uncertain availability of capital; | ||
| • | shifts in the availability and relative costs of different fuels (including the cost of natural gas); | ||
| • | sudden and dramatic increases in the price of energy purchased on the open market that may occur in times |
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| of high peak demand in an area of the country experiencing such high peak demand, such as has occurred in California; | |||
| • | inadequate risk management procedures and practices with respect to, among other things, the purchase and sale of energy and transmission capacity; | ||
| • | other legislative changes, voter initiatives, referenda and statewide propositions; | ||
| • | effects of changes in the economy, population and demand of customers in the District’s service area; | ||
| • | effects of possible manipulation of the electric markets; and | ||
| • | natural disasters or other physical calamities, including but not limited to, earthquakes |
Any of these factors (as well as other factors) could have an adverse effect on the financial
condition of any given electric utility, including the district, and likely will affect individual
utilities in different ways.
Interconnection Agreements
The Company previously entered into the interconnection agreement with the district, which
agreement provides for the interconnection of the net output of the project’s Phase I. In January
2010, GreenHunter Mesquite Lake applied to the district to extend the existing interconnection
agreement to provide for the interconnection of the project’s Phase II, and in addition to provide
for further solar output to be added subsequent to the completion of Phase II. The district has
completed its feasibility study for the requested increase in the project’s output, and has
confirmed that there are no load flow or short circuit limitations to the requested
interconnection, and has provided an estimate of the cost and schedule of the required facilities
that is supported by the project’s schedule and budget. The district has informed GreenHunter
Mesquite Lake that it will proceed with confirmation of these findings via an impact study and
facility study in accordance with its published tariff before entering into a revised
interconnection agreement for the increased output of the project and expects to complete these
within the project’s schedule for Phase II. GreenHunter Mesquite Lake plans to authorize the
district to proceed with design and construction of the Phase I interconnection facilities upon
receipt of funding for the project.
Risks Relating to the Wind Energy Industry
One of our business segments depends on the availability of wind, which may not meet our
expectations if weather patterns vary greatly.
A portion of our business is dependent on the availability of the wind resource. The strength
and consistency of the wind resource at any of our wind projects will vary. Weather patterns are
unpredictable could change or the historical data could prove to be an inaccurate reflection of the
strength and consistency of the wind in the future. If there is insufficient wind resource, the
assumptions underlying the economic feasibility as to the amount of electricity to be generated by
any of our proposed wind projects will not be met and income and cash flows will be adversely
impacted. The future evaluation of our wind projects will be based on assumptions about certain
conditions that may exist and events that may occur in the future. A number of additional factors
may cause the wind resource and energy capture at any of our wind projects to differ, possibly
materially, from those initially assumed by management, including:
| • | the limited time period over which the site-specific wind data were collected; | ||
| • | the potential lack of close correlation between site-specific wind data and the longer-term regional wind data; | ||
| • | inaccurate assumptions related to wake losses and wind shear; | ||
| • | the limitations in the accuracy with which anemometers measure wind speed; | ||
| • | the inherent variability of wind speeds; | ||
| • | the lack of independent verification of the turbine power curve provided by the manufacturer; | ||
| • | the potential impact of climatic factors, including icing and soiling of wind turbines; |
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| • | the potential impact of topographical variations, turbine placement and local conditions, including vegetation; | ||
| • | the power delivery schedule being subject to uncertainty; | ||
| • | the inherent uncertainty associated with the use of models, in particular future-oriented models; and | ||
| • | the potential for electricity losses to occur before delivery. |
Further, the wind resources may be insufficient for our wholly owned subsidiary, GreenHunter
Wind Energy, LLC, to become and remain profitable. Wind is naturally variable. The level of
electricity production at any of our wind projects, therefore, will also be variable. If there is
insufficient wind resource at a project site due to variability, the assumptions underlying
management’s belief as to the amount of electricity to be generated by any of our wind projects
will not be met. Accordingly, there is no assurance that the wind resource will be sufficient for
GreenHunter Wind Energy to become or remain profitable.
The inherent volatility in the market price of electricity could impact our profitability.
Our potential revenues, income and cash flow are subject to volatility in the market price for
electricity. Our ability to generate revenue has exposure to movements in the market price of
electricity, as sales to the power market are likely to be made at prevailing market prices. The
market price of electricity is sensitive to cyclical changes in demand and capacity supply, and in
the economy, as well as to regulatory trends and developments impacting electricity market rules
and pricing, transmission development and investment within the United States and to the power
markets in other jurisdictions via interconnects and other external factors outside of our control.
Energy from wind generating facilities must be taken “as delivered” which necessitates the use of
other system resources to keep the demand and supply of electric energy in balance. Accordingly,
the potential revenue, income and cash flow may be volatile and adversely affect our value.
Any inability or delay in updating or obtaining required licenses and permits could hinder
development and adversely affect profitability.
We may be unable to obtain all necessary licenses and permits to operate our business.
GreenHunter may not necessarily hold all of the licenses and permits required in connection with
the construction and operation of most of our biodiesel refinery, biomass plants, and wind
projects. The failure to obtain all necessary licenses or permits, including renewals or
modifications, could result in construction delays of any of our projects or could otherwise have a
material adverse effect on GreenHunter.
Our inability to enter interconnection agreements would restrict our ability to sell electricity.
We may be unable to enter into necessary interconnection agreements. GreenHunter will be
required to enter into certain interconnection agreements with electric utilities prior to selling
electricity. The failure to enter into such interconnection agreements on terms that are acceptable
to us could have a material adverse effect on GreenHunter.
The wind energy industry is highly dependent on tax incentives.
Section 45 of the Internal Revenue Code provides for a production tax credit of 1.5 cents
(adjusted annually for inflation) per kilowatt hours of electricity produced by the taxpayer from a
qualified facility during the 10-year period beginning on the date it was originally placed in
service, and sold to an unrelated person. The production tax credit is reduced under a formula for
any year in which the national average price of electricity produced from wind for the immediately
succeeding year, or the “reference price,” exceeds 8 cents a kilowatt hour adjusted for inflation
and is completely eliminated when the reference price exceeds 11 cents (adjusted for inflation) per
kilowatt hour. The reference price for 2009 was 2.1 cents.
The production tax credit which was scheduled to expire for qualified facilities placed in
service after December 31, 2008, was extended by the Emergency Economic Stabilization Act of 2008
(Public Law 110-343) to qualified facilities placed in service before January 1, 2010. Under the
American Recovery and Reinvestment Tax Act of 2009, the placed in service deadline for wind
facilities has been extended to December 31, 2012. The elimination or significant reduction in the
production tax credit described above could harm our business, financial condition and results of
operations.
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Risks Relating to the Ownership of our Securities
Our common stock only has been publicly traded since January 2, 2008, and the price of our common
stock has fluctuated substantially since then and may fluctuate substantially in the future.
Our common stock has been publicly traded only since January 2008. The price of our common
stock has fluctuated significantly since then. From January 2, 2008, to March 30, 2011, the trading
price of our common stock ranged from a low of $0.51 per share to a high of $25.45 per share and
the closing trading price on March 29, 2011 was $0.92 per share. We expect our stock to continue to
be subject to fluctuations as a result of a variety of factors, including factors beyond our
control. These factors include:
| • | changing conditions in fuel markets; | ||
| • | changes in financial estimates by securities analysts; | ||
| • | changes in market valuations of comparable companies; | ||
| • | additions or departures of key personnel; | ||
| • | future sales of our stock; | ||
| • | tax and other regulatory developments; | ||
| • | our ability to develop and complete facilities, and to introduce and market the energy created by such facilities to economically viable production volumes in a timely manner; and | ||
| • | other factors discussed in the “Risk Factors” section and elsewhere in this prospectus and in any prospectus supplement. |
We may fail to meet expectations of our stockholders or of securities analysts at some time in
the future, and our stock price could decline as a result.
If we issue additional shares in the future, it will result in dilution to our existing
stockholders.
Our amended and restated certificate of incorporation denies the holders of our common stock
the right to subscribe for additional shares of capital stock upon any issuance or increase
thereof. As a result, if we choose to issue additional shares of common stock or securities
convertible into common stock, our stockholders may be unable to maintain their pro rata ownership
of common stock. The issuance of additional securities will result in a reduction of the book value
and market price of the outstanding shares of our common stock. If we issue any such additional
shares or securities convertible into or exercisable for shares, such issuance will cause a
reduction in the proportionate ownership and voting power of all current stockholders who do not
purchase such shares. Further, such issuance may result in a change of control of our company.
There is no assurance that further dilution will not occur in the future.
We may issue shares of our capital stock or debt securities to complete a business combination or
acquire assets, which would dilute the equity interest of our stockholders and could cause a change
in control of our ownership.
Our certificate of incorporation authorizes the issuance of up to 90,000,000 shares of common
stock and 10,000,000 shares of preferred stock. As of March 30, 2011, there were 67,883,536
authorized but unissued shares of our common stock available for issuance and 9,982,675 shares of
preferred stock available for issuance. As of December 31, 2010, the number of shares of our common
stock subject to outstanding options, warrants, GreenHunter’s Series A convertible preferred stock
and GreenHunter’s Series B convertible preferred stock was 15,280,411. At March 30, 2011, we had no
commitments to issue additional shares of common stock and we will, in all likelihood, issue a
substantial number of additional shares of our common stock, preferred stock or convertible
securities, or a combination of common stock, preferred stock and convertible securities, to the
stockholders of a potential target or in connection with a related simultaneous financing to
complete a business combination or asset purchase. The issuance of additional common stock,
preferred stock or convertible securities may:
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| • | significantly dilute the equity interest of current stockholders in our Company; | ||
| • | subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded to holders of our common stock; | ||
| • | cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and possibly result in the resignation or removal of some or all of our present officers and directors; and | ||
| • | adversely affect prevailing market prices for our common stock. |
Similarly, our issuance of additional debt securities could result in:
| • | default and foreclosure on our assets if our operating revenues after a business combination or asset purchase are insufficient to pay our debt obligations; | ||
| • | acceleration of our obligations to repay the indebtedness, even if we have made all principal and interest payments when due, if the debt security contains covenants that require the maintenance of certain financial ratios or reserves, or change of control provisions, and any such covenant is breached without a waiver or renegotiation of that covenant; | ||
| • | our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; and | ||
| • | our inability to obtain additional financing, if necessary, if the debt security contains covenants restricting our ability to obtain additional financing while such security is outstanding. |
Our ability to successfully effect a business combination and to be successful afterwards will be
dependent upon the efforts of our key personnel, and others hired to manage the acquired business
and whom we would have only a limited ability to evaluate.
Our ability to successfully effect a business combination will be dependent upon the efforts
of our key personnel. However, we cannot presently ascertain the future role of our key personnel
in the target business. While we intend to closely scrutinize any individuals we engage in
connection with a business combination, we cannot assure you that our assessment of these
individuals will prove to be correct. These individuals may be unfamiliar with the requirements of
operating as part of a public company which could cause us to have to expend time and resources
familiarizing them with such requirements. This process could be expensive and time-consuming and
could lead to various regulatory issues which may adversely affect our operations.
Our officers’ and directors’ allocation of their time to other business interests could have a
negative impact.
All of our officers are required to commit their full work hour time to our business affairs,
with the exception of Mr. Evans and Mr. Krueger. Due to existing management and board of director
positions and other business interests that Mr. Evans maintains with other companies, Mr. Evans
cannot commit all of his work hours to GreenHunter. Mr. Krueger is also an officer with another
public company. However, subject to Board approval where appropriate, all material corporate,
strategic and financial decisions will be reviewed and ultimately decided by Mr. Evans.
Because of our limited resources and the significant competition for business combination
opportunities, we may not be able to consummate attractive business combinations.
We expect to encounter intense competition from other entities with business objectives
similar to ours, including venture capital funds, leveraged buyout funds and operating businesses
competing for acquisitions. Many of these entities are well-established and have extensive
experience in identifying and effecting business combinations directly or through affiliates. Many
of these competitors may possess greater technical, human and other resources than we do, and our
financial resources may be relatively limited when contrasted with those of many of these
competitors. While we believe that there are numerous potential target businesses that we could
acquire, our ability to compete in acquiring certain sizable target businesses will be limited by
our available financial resources. This inherent competitive limitation may give others an
advantage in pursuing the acquisition of
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certain target businesses. Any of these factors may place us at a competitive disadvantage in
successfully negotiating a business combination. If we are unable to successfully complete an
acquisition of a target business, our business plan will be thwarted and investors may lose their
entire investment.
We may be unable to obtain additional financing, if required, to complete a business combination,
asset purchase or to fund the operations and growth of the target business, which could compel us
to restructure the transaction or abandon a particular business combination or asset purchase.
We cannot ascertain the capital requirements for any particular transaction. If the net
proceeds of any specific capital raise prove to be insufficient, either because of the size of the
business combination or asset purchase, we may be required to seek additional financing. We cannot
assure you that such financing would be available on acceptable terms, if at all. To the extent
that additional financing proves to be unavailable when needed to consummate a particular business
combination or asset purchase, we would be compelled to restructure the transaction or abandon that
particular business combination or asset purchase and seek an alternative target. In addition, if
we consummate a business combination or asset purchase, we may require additional financing to fund
the operations or growth of the target. The failure to secure additional financing could have a
material adverse effect on the continued development or growth of the target. None of our officers,
directors or stockholders is required to provide any financing to us in connection with or after a
business combination.
In the event we cannot comply with the requirements of the Sarbanes-Oxley Act of 2002 or we acquire
a business that is unable to satisfy regulatory requirements relating to internal controls, or if
our internal controls over financial reporting are not effective, our business and our stock price
could suffer.
As a reporting public company, we are currently subject to the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002. In addition, such statute also requires an evaluation of any target
business acquired by us. Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to do a
comprehensive evaluation of their internal controls, including an evaluation of any target
businesses acquired by a company. In the event the internal controls over financial reporting of a
target business cannot satisfy the regulatory requirements relating to internal controls or if
these internal controls over financial reporting are not effective, we may not be able to complete
a business combination with the target business without substantial cost or significant risks to
our company or our management may be unable to certify as to the effectiveness of the internal
controls following the completion of a business combination. Our efforts to comply with Section 404
and related regulations regarding our management’s required assessment of internal controls over
financial reporting may require the commitment of significant financial and managerial resources or
may prevent a business combination with certain target businesses. If we fail to timely complete
our evaluation, if our management is unable to certify the effectiveness of the internal controls
of our company or the acquired business, we could be subject to regulatory scrutiny and loss of
public confidence, which could have an adverse effect on our business and our stock price.
Our outstanding options, warrants and convertible preferred stock may have an adverse effect on the
market price of common stock and make it more difficult to effect a business combination.
We have issued options to purchase 7,076,500 shares of common stock, warrants to purchase
5,443,911 shares of common stock, and preferred stock convertible into 2,760,000 shares of common
stock, as of December 31, 2010. To the extent we issue shares of common stock to effect a business
combination, the potential for the issuance of substantial numbers of additional shares upon
exercise of these options and warrants or conversion of the preferred stock could make us a less
attractive acquisition vehicle in the eyes of a target business as such securities, when exercised
or converted, will increase the number of issued and outstanding shares of our common stock and
reduce the value of the shares issued to complete the business combination. Accordingly, our
options, warrants and preferred stock may make it more difficult to effectuate a business
combination or increase the cost of the target business. Additionally, the sale, or even the
possibility of sale, of the shares underlying the options, warrants and preferred stock could have
an adverse effect on the market price for our securities or on our ability to obtain future public
financing. If, and to the extent, these options, warrants and preferred stock are exercised or
converted, respectively, you may experience dilution to your holdings.
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We do not intend to pay dividends on our common stock and thus stockholders must look solely to
appreciation of our common stock to realize a gain on their investments.
Although we have paid cash dividends on our Series A Preferred Stock, we have never declared
or paid any cash dividends on our common stock. We currently intend to retain any future earnings
for funding growth and, therefore, do not expect to pay any dividends on our common stock in the
foreseeable future. Our future dividend policy is within the discretion of our board of directors
and will depend upon various factors, including our business, financial condition, results of
operations, capital requirements, and investment opportunities. Accordingly, stockholders must look
solely to appreciation of our common stock to realize a gain on their investment. This appreciation
may not occur.
Item 2. Properties
Our Mesquite Lake Resource Recovery Plant is an 18.5 MW waste-to-energy facility located near
El Centro, California. This plant is owned by GreenHunter Mesquite Lake, Inc., a wholly-owned
subsidiary of GreenHunter. This Imperial County facility was originally built in 1989 to process
cow manure into electricity and operated until December 1994. Several modifications were
implemented during its operating life to improve plant performance leading to a 95% on-line
capacity factor during its last year of operation. Currently, Mesquite Lake is not generating
electricity and is in a dormant state. Our primary business objective is to re-power the facility
using existing biomass processing technology into a profitable electricity power plant.
On November 30, 2007, we purchased real estate including two office buildings comprising
approximately 20,200 usable square feet of space located in Grapevine, Texas for use as our
corporate headquarters. A portion of our existing office space is subleased.
Item 3. Legal Proceedings
Bioversel, Inc. f/k/a
Bioversel Trading, Inc., Plaintiff, vs. GreenHunter BioFuels, Inc. and
GreenHunter Energy, Inc., Defendants, in the District Court of Harris County, Texas,
55th Judicial District.
Plaintiff brought suit against the defendants on September 24,
2008 alleging that the defendants have repudiated a biodiesel tolling agreement, as amended, with
the plaintiff. The plaintiff has alleged breach of contract, fraud and conversion regarding
defendants’ ability to process feedstock into biodiesel under the contract.
Defendants has been
served with this lawsuit and has answered the lawsuit. Defendants
vigorously deny the allegations in the lawsuit and believes the lawsuit is completely without
merit. Defendants have filed a countersuit against plaintiff for failure to make payments to
defendants under the contract. Trial is presently set for April 5, 2011.
Arbitration Case No. 70 198 Y 1024 10; Timothy Aden, et al. v. GreenHunter Energy, Inc., et
al. pending before the American Arbitration Association
On or about June 29,
2007, GreenHunter issued a Private Placement Memorandum to potential
investors for 10% Series A Secured Redeemable Debentures. The plaintiffs allege that the
defendants fraudulently made representations to the plaintiffs that the debentures were
collaterally backed by the biodiesel refinery, when in fact the only collateral for the Debentures
was security in GreenHunter. Plaintiffs allege that such misrepresentations violate Alabama state
securities laws.
Plaintiffs subsequently filed an arbitration case for this matter to be heard in Houston, Texas. No date
has been set for arbitration at this time.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock trades on the NYSE Amex under the symbol “GRH.” The following table
summarizes the high and low reported sales prices on days in which there were trades of our common
stock on the NSYE Amex for each quarterly period for the last two
fiscal years. On March 29, 2011,
the last reported sale price of our common stock, as reported on the NYSE Amex, was $0.92 per
share.
| Average | ||||||||||||
| Daily | ||||||||||||
| Trading | ||||||||||||
| Volume | ||||||||||||
| High | Low | (Shares) | ||||||||||
2010 |
||||||||||||
First Quarter |
$ | 1.69 | $ | 1.10 | 84,219 | |||||||
Second Quarter |
$ | 1.47 | $ | .90 | 40,209 | |||||||
Third Quarter |
$ | .96 | $ | .51 | 24,089 | |||||||
Fourth Quarter |
$ | 1.47 | $ | .65 | 43,417 | |||||||
2009 |
||||||||||||
First Quarter |
$ | 5.25 | $ | 1.16 | 30,429 | |||||||
Second Quarter |
$ | 4.32 | $ | 0.91 | 292,592 | |||||||
Third Quarter |
$ | 3.18 | $ | 1.40 | 295,976 | |||||||
Fourth Quarter |
$ | 2.08 | $ | 0.99 | 108,000 | |||||||
Our
registrar and transfer agent is Securities Transfer Corporation,
located at 2591 Dallas Parkway,
Suite 102, Frisco, Texas 75034. As of March 28, 2011, there were 567 record holders of our common
stock.
We have not previously paid any cash dividends on our common stock and do not anticipate
paying dividends on our common stock in the foreseeable future. It is the present intention of
management to utilize all available funds for the development and growth of our business
activities.
| Equity Compensation Plan Information | ||||||||||||
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| future issuance under | ||||||||||||
| Number of securities to | Weighted-average | equity | ||||||||||
| be issued upon exercise | exercise price of | compensation plans | ||||||||||
| of outstanding options, | outstanding options, | (excluding securities | ||||||||||
| Plan Category | warrants and rights | warrants and rights | reflected in column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
Equity
compensation plans
approved by
security holders |
3,621,334 | $7.75 | 3,378,666 | |||||||||
Equity compensation
plans not approved
by security holders |
3,455,166 | $5.28 | — | |||||||||
Total |
7,076,500 | $5.95 | 3,378,666 | |||||||||
Item 6. Selected Financial Data
Not applicable.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which management believes is
relevant to an assessment and understanding of our financial condition and results of operations.
The discussion contains forward-looking statements that involve risks and uncertainties (see
“Forward-Looking Statements” above). Actual events or results may differ materially from those
indicated in such forward-looking statements. The discussion should be read in conjunction with the
financial statements and accompanying notes included herewith. The discussion should not be
construed to imply that the results contained herein will necessarily continue into the future or
that any conclusion reached herein will necessarily be indicative of actual operating results in
the future. Such discussion represents only the best present assessment by our management. The
discussion contains forward-looking statements that involve risks and uncertainties (see
“Forward-Looking Statements” above). Actual events or results may differ materially from those
indicated in such forward-looking statements.
Overview
Prior to April 13, 2007, we were a startup company in the development stage and we have
reentered the development stage effective July 1, 2010. Our plan is to acquire and operate assets
in the renewable energy sectors of biomass, biofuels, geothermal, solar, wind, and water
management. We currently have ongoing business initiatives at GreenHunter in biomass through
GreenHunter Mesquite Lake, LLC, (“Mesquite Lake”). It is our goal to become a leading provider of
clean energy products and water management solutions.
We believe that our ability to successfully compete in the renewable energy and clean water
industries depends on many factors, including the location and low cost construction of our planned
facilities, execution of our acquisition strategy, development of strategic relationships,
achievement of our anticipated low cost production model, access to adequate debt and equity
capital, proper and meaningful governmental support including tax incentives and credit
enhancements, and recruitment and retention of experienced management.
Current Plan of Operations and Ability to Operate as a Going Concern
Our financial position has been adversely affected by our lack of working capital and the
overall deterioration across all capital markets, particularly those for renewable energy
companies. A substantial drop in market prices of all energy products including the price of
biodiesel and our feedstock inventories adversely impacted our inventory values and resulting
working capital positions. The lack of consistent and meaningful governmental support with tax
incentives and other credit enhancements has had a serious detrimental effect on our planned
business operations. We also were unable to make the interest payments due on our Series A
Redeemable Debentures for the periods of April 2009 through September 30, 2010. On November 26,
2010, the Company transferred all of its common stock in BioFuels to an irrevocable trust for the
benefit of the holders of the Series A Debentures and their respective successors, assigns, heirs
and devisees in full and final satisfaction of any obligation the Company might have to the holders
of the Series A Debentures, based on the terms of the debenture agreements. The trustee of the
trust is Jack C. Myers, Esq. These debentures were secured by GreenHunter Energy’s ownership
interest in GreenHunter BioFuels common stock and are otherwise non-recourse to GreenHunter Energy.
As of December 31, 2010, we had a working capital deficit of $7.3 million which includes $4.2
million related to construction at our Mesquite Lake Biomass Plant.
We have continued to experience losses from ongoing operations. These factors raise doubt
about our ability to continue as a going concern. On September 29, 2010 and December 30, 2010 the Chairman and
Chief Executive Officer loaned the Company $600 thousand and $260 thousand, respectively, to fund
short-term liquidity needs in exchange for promissory notes due October 31, 2010 and January 1,
2011, respectively, which have been extended to April 30, 2011. On March 30, 2011, we received a letter of guarantee from the Chairman and Chief Executive Officer of the Company for up to an additional $1.5 million of credit support if needed to fund operations. In September 2010, we closed on
$29.9 million in RZFB bonds issued through the California Enterprise Development Authority (CEDA).
We did not extend the mandatory redemption date of January 20, 2011, and we are no longer pursuing
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the bonds as an exclusive method of financing the Mesquite Lake project due to the lack
of market to sell the bonds. We believe the unrestricted cash, proceeds from our private placement
offering, the $500 thousand in proceeds from the sale of our Ocotillo project to be received in
September 2011, and the letter of guarantee and credit support will be sufficient to fund
operations for the next twelve months.
Execution of our business plan for the next twelve months requires the ability to generate
cash to satisfy planned operating requirements. With the anticipated funds available from the
proceeds from our private placement offering, the $500 thousand in proceeds from the sale of our
Ocotillo project to be received in September 2011, and the letter of guarantee and credit support,
we anticipate having sufficient cash reserves to meet all of our anticipated operating obligations
for the next twelve months. Planned capital expenditures are wholly dependent on the Company’s
ability to secure additional capital. As a result, we are in the process of seeking additional
capital through a number of different alternatives, and particularly with respect to procuring
working capital sufficient for the development of our Mesquite Lake biomass plant in order that we
have a business segment that can generate positive cash flow to sustain operations.
BioMass
In May 2007, we acquired Mesquite Lake, an inactive 18.5 megawatt (nameplate capacity) biomass
waste-to-energy electricity facility located on a 40-acre site in unincorporated Imperial County,
California. We began refurbishing the plant during 2008. During 2008, we found that the existing
air permit for the plant was not sufficient to support our planned operations, and we put this
project on hold during the fourth quarter of 2008 while we went through the re-permitting process.
We executed a new power purchase agreement for this facility in October 2009 and we obtained the
air permit in July 2010. We plan to resume construction on the facility, including an expansion of
up to 10 Megawatts (“MW”), sometime during the second quarter of 2011, assuming additional sources
of funding are obtained.
Phase I of the project is anticipated to be operational by mid 2012. When Phase II of the
project is completed and in operation, which is anticipated by the second half of 2012, the
Mesquite Lake biomass facility will burn annually more than 280,000 tons of waste woody biomass
which will be converted into green electricity to serve residential and industrial users in
California’s Imperial Valley through our power purchase agreement with Imperial Irrigation District
(IID).
Mesquite Lake is located in a region that the U.S. Bureau of Labor Statistics registers as
having the highest unemployment rate in the United States of 27.3 percent, and the Imperial Valley
Economic Development Corporation estimates that approximately 642 jobs will be directly or
indirectly created as a result of the project development.
Wind Energy
Until April 2007, our primary business was the investment in and development of wind energy
farms. We continue to own rights to a potential wind energy farm located in California. We also
continue to seek additional potential development sites, particularly those that would be near our
other renewable energy projects. The nature of these wind energy projects necessitates a longer
term horizon than our other projects before they become operational, if ever. The significant
decrease in natural gas prices over the past several years has in turn caused a significant decline
in wholesale electric prices which has caused our ability to develop wind projects to be
commercially uneconomical.
Solar Energy
According to the National Renewable Energy Laboratory (NREL), average annual irradiance per
square meter in the Imperial County is 6.23 kilowatt hours per day. Our Mesquite Lake biomass
facility is located on a 40-acre parcel of which 30 acres will be utilized for the biomass
operation leaving 10 to 15 acres for the development of additional renewable energy projects.
During the first quarter of 2010, we formed a new subsidiary to explore the development of a solar
energy farm on our Mesquite Lake project site and completed a generator interconnection request
with the Imperial Irrigation District (IID). On March 16, 2010 we were notified that IID had
preserved
an
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interconnection queue position for our solar project. Subject to regulatory and
permitting approvals, we believe there are unique economic and operational advantages to building a
solar farm on this site most significant being the ability to share existing interconnection
infrastructure with the biomass facility.
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009:
Wind Energy Project Costs
We recorded a credit of $11 thousand in project costs associated with our wind energy projects
in 2010 compared to expense of $67 thousand expense in 2009. The decrease is the result of
decreased wind project activity in the 2010 period.
Biomass Project Costs
We incurred no project costs associated with our biomass projects in 2010 compared to $38
thousand in the 2009 period. The decrease is the result of capitalizing all biomass project costs
beginning in 2010.
Hurricane repairs and losses
In 2010, we recorded no hurricane repairs and losses compared to a credit of $449 thousand in
2009. The credit in 2009 was due to insurance proceeds received for equipment damaged by Hurricane
Ike during September of 2008.
Depreciation Expense
Depreciation expense was $190 thousand in 2010 compared to $229 thousand in 2009. The
decrease was due to the impairment of the wind energy project assets booked in December 2009, which
decreased the depreciable assets.
Loss on Asset Impairments
Our loss on asset impairment was $161 thousand during the 2010 period, compared to $1.9
million during the prior year period. For the 2010 period, the impairment was the result of the
expiration of Wind projects. In 2009, an impairment of $1.5 million was related to a lease option
which expired during April 2009, $170 thousand was related to a decline in the value of equipment,
and $218 thousand impairment was related to expired wind project leases.
General and Administrative Expense
General and administrative expense (“G&A”) was $5.1 million during the 2010 period versus $6.6
million during the 2009 period, a decrease of $1.5 million.
Unallocated corporate SG&A decreased approximately $369 thousand between the two periods,
decreasing from $4.8 million down to $4.5 million. The decrease is due to decreases in corporate
salaries expense and business insurance.
BioMass SG&A decreased approximately $543 thousand between the two periods, decreasing from
$1.1 million down to $597 thousand. The decrease is mainly due to $686 thousand of cancelled
consulting fees related to a consulting agreement and decreased insurance and state and local taxes
in 2010 of $109 thousand partially
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offset by increased consulting and legal fees to obtain government grants for the Mesquite Lake
biomass plant.
Wind Energy SG&A decreased approximately $622 thousand, down to $17 thousand from $639
thousand resulting from decreased personnel and office related costs compared to 2009.
Operating Loss
Our operating loss was $5.4 million in the 2010 period versus $8.4 million in the 2009 period.
The reduction was due to impairment charges recorded in 2009 as well as lower G&A expenses in 2010
and expiration of wind projects in 2009.
Our Wind Energy segment generated an operating loss of $167 thousand during 2010 as compared
to an operating loss of $970 thousand during 2009 due to decreased project related costs as a
result of fewer active projects in 2010.
Our BioMass segment generated operating losses of $597 thousand during 2010 and $1.2 million
during 2009; the decrease was primarily due to decreased SG&A costs during the 2010 period.
Our unallocated corporate operating loss was $4.7 million for the 2010 period, compared to an
operating loss of $6.2 million for the 2009 period. The decrease was primarily due to decreases in
our office related costs, travel and marketing, professional fees, and taxes and permits, all as a
result of management’s efforts to reduce operating costs and a decrease in asset impairments.
Interest and Other Revenues
Interest and other revenues were $3.0 million during the 2010 period and $2.1 million during
the 2009 period. The increase of $900 thousand was primarily due to an increase in forgiveness of
indebtedness on trade payables during the 2010 period and $250 thousand in contingent consideration
received in September of 2010 resulting from the sale of Ocotillo Wind project in June of 2009.
Interest, Accretion and Other Expense
Interest, accretion and other expense decreased from $769 thousand during the 2009 period to
$57 thousand during the 2010 period. The decrease is mainly due to reduced expense incurred on the
Series A debentures and capitalized interest on our Mesquite Lake project of $626 thousand.
Unrealized loss on convertible securities
Unrealized loss on convertible securities was $1.0 million in the 2010 period, which related
to the change in fair value of our outstanding warrants, convertible Series A Preferred Stock, and
convertible Series B Preferred Stock.
Discontinued Operations
In 2010 we recorded a gain of $33.1 million on the sale of discontinued operations resulting
from our transfer of 100% of our interests in GreenHunter BioFuels, Inc. as satisfaction of our
obligation on the Series A Debentures. For the 2009 year, we recorded a loss of $563 thousand from
the sale of discontinued operations resulting from the abandonment of our Haining City wind farm
interests, and the discontinuance of the Wheatland Wind Project net of the sale of our Telogia
plant which was sold during the first quarter of 2009.
Preferred Stock Dividends
Dividends on our preferred stock were $656 thousand for 2010 versus $776 thousand in the 2009
period. The decrease was the result of the conversion of 5,750 shares of Series A Preferred Stock
into 1,150,000 shares of common stock between March and September of 2009.
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Net Income (Loss) to Common Shareholders
We realized net income of $20.0 million in 2010 compared to a net loss of $16.2 million in the
2009 period. The increase in net income to common shareholders resulted from the gain on
discontinued operations from disposition of the BioFuels plant in Houston partially offset by the
loss from continuing operations of $3.5 million and the loss from discontinued operations of $8.9
million during the 2010 period.
Liquidity and Capital Resources
Cash Flow and Working Capital
As of December 31, 2010, we had cash and cash equivalents of approximately $181 thousand and a
working capital deficit of $7.3 million as compared to cash and cash equivalents of $6.9 million
and working capital deficit of $45.4 million in the prior period. These decreases in cash and
working capital were due to the activities described below.
Operating Activities
During 2010, operating activities used $6.0 million versus provided $334 thousand during 2009.
A significant component of our working capital deficit at December 31, 2010 was $4.2 million
related to construction at our Mesquite Lake Biomass Plant. Changes in our cash and working
capital during the quarter ended December 31, 2010 are described below.
We continue to have no operating sources of income with which to pay our operating costs. As
a consequence, we are required to use cash provided by financing or investing activities to fund a
significant portion of our operating activities.
Financing Activities
During the year ended December 31, 2010, financing activities provided $470 thousand. These
activities included $1.0 million in borrowing on notes payable, payment of $276 thousand in
deferred financing costs related to these debentures, and $275 thousand in repayment of notes
payable. Details of these activities are described below:
Notes Payable
During March 2009, we determined we were not in compliance with certain covenants of our
non-recourse construction loan and non-recourse working capital line of credit at BioFuels.
Accordingly, we classified the entire amounts due under both of these agreements as current
liabilities associated with assets held in receivership at September 30, 2010. On December 16,
2009, the Credit Agreement for the non-recourse construction and working capital loans was amended.
Pursuant to the terms and conditions of the amendment, the lender agreed to waive any claims of
“Events of Default” until March 31, 2010. The agreement was further amended on March 30, 2010 to
extend until April 30, 2010. Since we did not close on a sale or other transaction to repay the
note by April 30, 2010, on June 3, 2010, BioFuels received a written notice from the lender that
BioFuels has been placed into receivership. This credit agreement documented BioFuels’ existing
project financing term loan and working capital line of credit with the Lender. On November 26,
2010, the Company transferred all of its common stock in BioFuels to an irrevocable trust for the
benefit of the holders of the Series A Debentures and their respective successors, assigns, heirs
and devisees in full and final satisfaction of any obligation the Company might have to the holders
of the Series A Debentures, based on the terms of the debenture agreements. The loan facilities
were secured by BioFuels’ existing biodiesel refinery and associated assets located in Houston,
Texas and are non-recourse to the parent company.
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Nonrecourse10% Series A Senior Secured Redeemable Debentures
On November 26, 2010, the Company transferred all of its common stock in BioFuels to an
irrevocable trust for the benefit of the holders of the Series A Debentures and their respective
successors, assigns, heirs and devisees in full and final satisfaction of any obligation the
Company might have to the holders of the Series A Debentures, based on the terms of the debenture
agreements. The trustee of the trust is Jack C. Myers, Esq. These debentures were secured by
GreenHunter Energy’s ownership interest in GreenHunter BioFuels common stock and are otherwise
non-recourse to GreenHunter Energy.
Note Payable to Related Party
On September 29, 2010 and December 30, 2010, the Company entered into a promissory note with
our Chairman and Chief Executive Officer for $600,000 and $260,000, respectively, due on October
31, 2010 and January 1, 2011, respectively, at an interest rate of 10%. The promissory note was
offset against related party receivable balance of $93,043. Therefore, the remaining promissory
note balance is $766,957. The promissory notes were extended to April 30, 2011.
Investing Activities and Future Requirements
Capital Expenditures
During 2010, we invested approximately $2.1 million in capital expenditures, which primarily
comprised capital expenditures at our Mesquite Lake BioMass facility.
Forecast
For 2011, we have not adopted a formal corporate capital expenditure budget due to our current
lack of capital resources. We have formulated specific project budgets and will adopt a formal
corporate capital expenditure budget upon securing necessary financing commitments.
BioMass
BioMass is seeking financing for a minimum of $24 million and a maximum of $54 million in
capital expenditures in 2011 for refurbishment and expansion costs at the Mesquite Lake biomass
facility in El Centro, California.
Wind Energy
Wind Energy is not currently planning on any capital expenditures in 2011 due to adverse
economic conditions for wind projects.
Obligations Under Material Contracts
Below is a brief summary of the payment obligations under material contracts to which we are a
party, other than the debt and convertible debt obligations described above.
During 2007, we entered into an agreement which granted the entity from whom we purchased the
Mesquite Lake plant the non-exclusive right to represent us in the location and development of
renewable energy projects. On May 4, 2010, we received a release from all consulting fee
obligations pertaining to the agreement to purchase the Mesquite Lake facility. We reduced selling,
general, and administrative expenses by $686 thousand for the year ended December 31, 2010 as a
result of reversing liabilities previously accrued pursuant to the agreement. We are no longer
obligated for the remaining $784 thousand in fees that would be due under this agreement.
During the year ended December 31, 2010, we recorded $1.1 million in additional contingent
fees to a third party for their assistance in obtaining the Mesquite Lake Power Purchase Agreement.
The future obligation is contingent upon us finding acceptable financing for capital improvements
and completing the required development of the plant for it to become operational.
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We have an outstanding employment agreement with an executive officer through September 30,
2011. Our maximum commitment under the employment agreement, which would apply if the employee
covered by the agreement was involuntarily terminated during a change in control, was $500 thousand
at December 31, 2010.
Critical Accounting Policies and Other
The accompanying financial statements include the accounts of GreenHunter Energy, Inc.
(“GreenHunter”) and our wholly-owned subsidiaries, GreenHunter Wind Energy, LLC (“Wind Energy”),
and GreenHunter Mesquite Lake, LLC (“Mesquite Lake”). All significant intercompany transactions
and balances have been eliminated.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
period. Our estimates and assumptions are based on historical experience, industry conditions and
various other factors which we believe are appropriate. The reported financial results and
disclosures were determined using the significant accounting policies, practices and estimates
described below. We believe the reported financial results are reliable and that the ultimate
actual results will not differ significantly from those reported.
Property, Plant and Equipment
Property plant and equipment are stated at cost. Depreciation is computed using the
straight-line method based on the following useful lives:
Automobiles
|
5 years | |
Computer and office equipment
|
5 to 7 years | |
Plant equipment
|
7 to 30 years | |
Land improvements
|
15 years | |
Buildings
|
31 years |
Deferred Financing Costs
Costs incurred in connection with issuing debt are capitalized and amortized as an adjustment
to interest expense over the term of the debt instrument using the interest method.
Impairments
We periodically evaluate whether events and circumstances have occurred that may warrant
revision of the estimated useful life of long-term assets or whether the remaining balance of
long-term assets should be evaluated for possible impairment. We compare the estimate of the
related undiscounted cash flows over the remaining useful lives of the applicable assets to the
assets’ carrying values in measuring their recoverability. When the future cash flows are not
sufficient to recover an asset’s carrying value, an impairment charge is recorded for the
difference between the asset’s fair value and its carrying value.
During 2010 we recorded impairments of $161 thousand related to certain wind projects that
were cancelled. During 2009 we recorded impairments of $1.5 million related to our inability to
pay the final lease option extension for our Port Sutton lease, $170 thousand related to a decline
in the value of equipment, and $218 thousand related to a deposit on a wind project that was
cancelled.
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Stock-Based Compensation
The Company accounts for share-based compensation in accordance with the provisions of the ASC
standards which require companies to estimate the fair value of share-based payment awards made to
employees and directors, including stock options, restricted stock and employee stock purchases
related to employee stock purchase plans, on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense
ratably over the requisite service periods. We estimate the fair value of each share-based award
using the Black-Scholes option pricing model. Certain of our grants have performance-based vesting
terms. We amortize the fair value of these awards over their estimated vesting terms which are
based on both the probability and estimated timing of the achievement of these performance goals.
See Note 11 to the financial statements for additional information on our stock-based compensation.
Income Taxes
We account for income taxes under the liability method. Deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. We measure and record income tax contingency accruals in
accordance with ASC 740, Income Taxes.
We recognize liabilities for uncertain income tax positions based on a two-step process. The
first step is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and subjective to
estimate such amounts, as we must determine the probability of various possible outcomes. We
reevaluate these uncertain tax positions on a quarterly basis or when new information becomes
available to management. These reevaluations are based on factors including, but not limited to,
changes in facts or circumstances, changes in tax law, successfully settled issues under audit,
expirations due to statutes, and new audit activity. Such a change in recognition or measurement
could result in the recognition of a tax benefit or an increase to the tax accrual.
We classify interest related to income tax liabilities as income tax expense, and if
applicable, penalties are recognized as a component of income tax expense. The income tax
liabilities and accrued interest and penalties that are anticipated to be due within one year of
the balance sheet date are presented as current liabilities in our consolidated balance sheets.
Income or Loss Per Common Share
Basic net income or loss per common share is computed by dividing the net income or loss
attributable to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income or loss per common share is calculated in the
same manner, but also considers the impact to net income and common shares for the potential
dilution from stock options, stock warrants and any other outstanding convertible securities.
We have issued potentially dilutive instruments in the form of our 8% Series A Preferred Stock,
Series B Preferred Stock, common stock warrants and common stock options granted to our employees.
There were 21,725,796 and 37,469,761 potentially dilutive securities outstanding at December 31,
2010 and 2009, respectively. We did not include any of these instruments in our calculation of
diluted loss per share during the period because to include them would be anti-dilutive due to our
net loss during the periods.
Recently Issued Accounting Standards
In January 2010, the FASB issued ASC 2010-06, Improving Disclosures about Fair Value Measurements
(ASC 820-10). These new disclosures require entities to separately disclose amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the
transfers. In addition, in the reconciliation for fair value measurements for Level 3, entities
should present separate information about purchases, sales, issuances,
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and settlements. This guidance is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales, issuances and
settlement in the roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010 and for interim periods within
those fiscal years. Our adoption of the disclosures did not have a material impact on our notes to
the consolidated condensed financial statements.
Contractual Obligations and Commercial Commitments
We have the following contractual obligations as of December 31, 2010.
| Payments Due by Period (in thousands) | ||||||||||||||||||||
| Less than | After | |||||||||||||||||||
| Total | 1 year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Fixed-rate long-term debt(a) |
$ | 2,983,046 | $ | 92,322 | $ | 319,290 | $ | 245,634 | $ | 2,325,800 | ||||||||||
Fixed-rate interest payments(a) |
1,058,967 | 170,047 | 475,529 | 284,245 | 129,145 | |||||||||||||||
Note due to related party |
766,957 | 766,957 | — | — | — | |||||||||||||||
9% Series B Secured Redeemable Debentures(b) |
6,685,879 | 477,163 | 6,208,717 | — | — | |||||||||||||||
Total Contractual Obligations |
$ | 11,494,849 | $ | 1,506,489 | $ | 7,003,536 | $ | 529,879 | $ | 2,454,945 | ||||||||||
| (a) | Assumes 5.7% interest over the life of the note with principal payments, amortized on 25 year schedule, beginning January 20, 2009 and the remainder of the balance of the loan ballooning November 30, 2017. | |
| (b) | Assumes 9% interest payments over their 5 year term. |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, unconsolidated variable interest entities,
or financing partnerships.
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Item 8. Financial Statements and Supplementary Data
See Item 15.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Management, under the general direction of the principal executive officer and the principal
financial officer, has performed an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934) as
of the end of the period covered by this report. This evaluation included consideration of the
controls and procedures that are designed to ensure that information required to be disclosed by us
in reports that we file or submit under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms, and that information required to be disclosed in reports filed by us under the
Securities Exchange Act is accumulated and communicated to management, including the principal
executive officer and the principal financial officer, in such a manner as to allow timely
decisions regarding the required disclosure. Based on this evaluation, the principal executive
officer and the principal financial officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this annual report.
Changes in Internal Control over Financial Reporting.
There have been no significant changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control over financial reporting is designed, under the supervision of our chief executive
and chief financial officers, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America (GAAP). Our internal
control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2010. This evaluation was based on the framework in “Internal Control
— Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP.
Based on our evaluation under the framework in Internal Control — Integrated Framework, our
Chief Executive Officer and Chief Financial Officer concluded that internal control over financial
reporting was effective as of
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December 31, 2010.
This annual report does not include an attestation report of the company’s registered public
accounting firm due to a transition period established by rules of the Securities and Exchange
Commission for newly public companies.
Item 9B. Other Information
None.
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Item 10. Directors, Executive Officers and Corporate Governance
GreenHunter Energy’s directors and executive officers, including their ages and current
positions with us and/or certain additional information, are set forth below.
| Name | Age | Positions and Offices Held | ||||
Gary C. Evans
|
53 | Chairman and Chief Executive Officer | ||||
Ronald D. Ormand
|
52 | Director | ||||
Ronald H. Walker
|
73 | Director | ||||
Jonathan D. Hoopes
|
43 | Director, President and Chief Operating Officer | ||||
Morgan F. Johnston
|
50 | Senior Vice President, General Counsel, and Secretary | ||||
David S. Krueger
|
61 | Vice President and Chief Financial Officer | ||||
Gary C. Evans — Chairman and Chief Executive Officer
Gary C. Evans is the chairman
and chief executive officer and founder of GreenHunter Energy.
He has served as the Company’s chairman and chief executive officer since December 2006. He served
as the Company’s President from inception until October 1, 2009. Mr. Evans is also the chairman of
the board and chief executive officer of Magnum Hunter Resources Corporation, a NYSE listed
company. Mr. Evans previously founded and served as the chairman and chief executive officer of
Magnum Hunter Resources, Inc. (MHRI) a NYSE listed company, for twenty years before selling MHRI
to Cimarex Energy for approximately $2.2 billion in June 2005. Mr. Evans serves as an Individual
Trustee of TEL Offshore Trust, a NASDAQ listed oil and gas trust, and is the lead director of
Novavax Inc., a NASDAQ listed clinical-stage vaccine biotechnology company. Mr. Evans was
recognized by Ernst and Young as the Southwest Area 2004 Entrepreneur of the Year for the Energy
Sector and was subsequently inducted into the World Hall of Fame for Ernst & Young Entrepreneurs.
In nominating Mr. Evans, the board concluded the Company would benefit from Mr. Evans’ extensive
expertise as a chief executive officer with publicly held energy companies and his industry,
investment banking and commercial lending contacts and experience.
Ronald D. Ormand — Director
Mr. Ormand has been a director of the Company since June 5, 2009. Mr. Ormand currently serves
as a director, chief financial officer and executive vice president of Magnum Hunter Resources
Corporation since May of 2009. Mr. Ormand has over twenty-five years of investment and commercial
banking experience in the energy industry. From April 2005 to October 2007, he served as a
managing director with West LB, where he served as head of the Oil and Gas Investment Banking Group
for the Americas. From 1988 until December 2004, Mr. Ormand was with CIBC World Markets and
Oppenheimer & Co., which CIBC acquired in 1997. From 1997 to 2004, Mr. Ormand served as managing
director and head of CIBC World Markets’ U.S. Oil and Gas Investment Banking Group and a member of
the firm’s Investment Banking Management Committee. Prior to joining CIBC World Markets in 1988,
Mr. Ormand worked in various investment banking positions. Mr. Ormand also served as president and
chief financial officer and director of Tremisis Energy Acquisition Corporation II, a NYSE-listed
company, from November 2007 to March 2009 and currently serves on the board of directors of
GreenHunter Energy, Inc. Mr. Ormand received a B.A. and an M.B.A. from the University of
California at Los Angeles and attended Cambridge University in Cambridge, England where he studied
economics. In nominating Mr. Ormand, the the board took into account Mr. Ormand’s extensive
investment banking and commercial banking experience and related industry contacts, which the board
believes will facilitate the Company’s acquisition and financing activities.
Ronald H. Walker — Director
Ronald H. Walker has been a director of the company since November 1, 2007. Mr. Walker
currently serves as the President of the Richard Nixon Foundation. Prior to his retirement in 2001,
Mr. Walker was a senior partner with Korn/Ferry International, the world’s largest executive search
firm, for over 20 years. At Korn/Ferry, Mr. Walker’s client base included the Fortune 100
companies. Mr. Walker’s extensive record of government services includes Special Assistant to the
President of the United States from 1969 to 1972 where he was the founder and first director of the
White House Advance Office. In this position, he was responsible for planning and coordinating all
Presidential travel both domestic and international. Those visits included all 50 states and 25
countries. He personally directed the preparations for the President’s historic trips to the
People’s Republic of China and Russia.
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President Nixon appointed Mr. Walker the 8th Director of the National Park Service in December
1972 where he served until 1975. In this position, he was charged with the preservation and care of
the country’s 300 National Park System areas encompassing 300 million acres of land. He
administered a budget of $350 million and managed 15,000 employees who served the 230 million
people that visit America’s parklands annually.
Mr. Walker previously served as a consultant to the White House Personnel Office. He has also
served as a senior advisor to four Presidents and on Special Diplomatic assignments abroad. In
addition, he has served as a senior advisor to nine Republican Conventions, highlighted by his
Chairmanship and position of CEO of the 1984 Republican National Convention held in Dallas, Texas.
At the request of President Ronald Reagan, he also chaired the 50th Presidential Inauguration.
Mr. Walker has served on numerous Boards, both public and private, including being a public
sector member of the United States Olympic Committee (USOC), the National Collegiate Athletic
Association (NCAA), Kennedy Center, Vice Chair of the President’s Council on Physical Fitness and
Sports, past chairman of the Freedom’s Foundation at Valley Forge, the National Park Foundation,
Grand Teton National Park Foundation, Ford’s Theatre, and Vice Chairman of the Bicentennial of the
U.S. Constitution.
Mr. Walker is a distinguished graduate from the University of Arizona with a BA in Government
and American History. He also served in the US Army reaching the rank of captain.
Jonathan D. Hoopes — Director, President and Chief Operating Officer
Mr Hoopes has served as a Director, President and Chief Operating Officer of the Company since
October 1, 2009. Mr. Hoopes is a fifteen-year veteran of Wall Street who has spent most of his
professional career in the investment banking and financial services industry with a focus on the
traditional and renewable energy sectors as well as the information technology sector. He has
served in various capital markets, investment banking, and equity research roles at Goldman Sachs,
Deutsche Bank, and UBS in London, Hong Kong and New York. Most recently, Mr. Hoopes served as
Managing Director at Think Equity, LLC where he led two teams of research analysts in the
alternative energy and technology sectors. Mr. Hoopes has also provided cross-border strategic
advisory services to clients in the energy technology and renewable energy sectors. He holds an MBA
in International Finance from the Wharton School and an MA in East Asian Studies from the
University of Pennsylvania.
Morgan F. Johnston — Senior Vice President, General Counsel, and Secretary
Morgan F. Johnston has served as Senior Vice President, General Counsel and Secretary of the
company since March 1, 2007. From June 2005 until March 1, 2007, Mr. Johnston was a sole
practitioner representing clients in corporate and securities law. He previously served as the
Senior Vice President, General Counsel and Secretary of Magnum Hunter Resources, Inc. (MHR), a NYSE
listed company, from January 1, 2003 to June of 2005. He served as MHR’s Vice President and General
Counsel since April 1997 and also served as MHR’s Secretary since May 1996. Magnum Hunter
Resources, Inc. was in the business of exploration and production of crude oil and natural gas.
Mr. Johnston was in private practice as a sole practitioner from May 1996 to April 1997,
specializing in corporate and securities law. From February 1994 to May 1996, Mr. Johnston served
as general counsel for Millennia, Inc. and Digital Communications Technology Corporation, two AMEX
listed companies. He also previously served as securities counsel for Motel 6 L.P., a NYSE listed
company. Mr. Johnston graduated cum laude from Texas Tech Law School in May 1986 and was also a
member of the Texas Tech Law Review. He is licensed to practice law in the State of Texas.
David S. Krueger — Vice President and Chief Financial Officer
David S. Krueger has served as Vice President and Chief Financial Officer of GreenHunter since
May 2006. Mr. Krueger has served as Chief Accounting Officer of Magnum Hunter Resources Corporation
since October 2009. From June 2005 to May 2006, Mr. Krueger was Vice President and Chief Financial
Officer for Sulphur River Exploration, Inc. in Dallas, Texas. Sulphur River Exploration, Inc. is an
independent oil and gas exploration, production, and operating company.
Mr. Krueger served as Vice President and Chief Accounting Officer of Magnum Hunter Resources,
Inc. from January 1997 to June 2005. Magnum Hunter Resources, Inc. was in the business of
exploration and production of
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crude oil and natural gas. Mr. Krueger acted as Vice President-Finance of Cimarron Gas Holding Co.,
a gas processing and natural gas liquids marketing company in Tulsa, Oklahoma, from April 1992
until January 1997. Mr. Krueger served as Vice President/Controller of American Central Gas
Companies, Inc., a gas gathering, processing and marketing company from May 1988 until April 1992.
From 1974 to 1986, Mr. Krueger served in various managerial capacities for Southland Energy
Corporation. Mr. Krueger, a certified public accountant, graduated from the University of Arkansas
with a B.S. degree in Business Administration and earned his M.B.A. from the University of Tulsa.
Corporate Governance.
The business, property and affairs of the Company are managed by the Chief Executive Officer
under the direction of the Board of Directors. The Board has responsibility for establishing broad
corporate policies and for overall performance and direction of the Company, but is not involved in
the day-to-day operations. Members of the Board keep informed of the company’s business by
participating in Board and committee meetings, by reviewing analyses and reports sent to them
regularly, and through discussions with the Chief Executive Officer and other officers.
The Board has adopted corporate governance guidelines that addresses significant issues of
corporate governance and set forth the procedures by which the Board carries out its
responsibilities. Among the areas addressed by the guidelines are director qualifications and
responsibilities, Board committee responsibilities, selection and election of directors, director
compensation and tenure, director orientation and continuing education, access to management and
independent advisors, succession planning and management development, board meetings and board and
committee performance evaluations. The Board’s Nominating/Corporate Governance committee is
responsible for assessing and periodically reviewing the adequacy of these guidelines.
The guidelines provide that at least a majority of the members of the Board must be
independent as required by NYSE Amex corporate governance listing standards. The Board has
affirmatively determined that all directors, with the exception of Mr. Gary C. Evans, Chairman and
CEO, and Mr. Jonathan D. Hoopes, President and COO, qualify as independent directors under these
standards based on its review of all relevant facts and circumstances.
The company also has an audit committee established in accordance with the requirements of the
NYSE Amex and the Securities Exchange Act of 1934, as amended. As the Company qualifies as a
smaller reporting company, the audit committee is currently comprised of two independent directors:
Mr. Ronald D. Ormand, Chairman, and Mr. Ronald H. Walker.
Code of Conduct and Ethics
We have a code of conduct and ethics that applies to its officers, employees and directors.
This code assists employees in resolving ethical issues that may arise in complying with our
policies. Our senior financial officers are also subject to the code of ethics for senior financial
officers. The purpose of these codes is to promote, among other things:
| • | ethical handling of actual or apparent conflicts of interest; | ||
| • | full fair and accurate and timely disclosure in filings with the Securities and Exchange Commission and other public disclosures; | ||
| • | compliance with the law and other regulations; | ||
| • | protection of the Company’s assets; | ||
| • | insider trading policies; and | ||
| • | prompt internal reporting of violations of the codes. |
Both of these codes are available on our website at www.greenhunterenergy.com. We will provide
these codes free of charge to stockholders who request them. Any waiver of these codes with respect
to officers and directors of the company may be made only by the Board of Directors and will be
disclosed to stockholders on our website, along with any amendments to these codes.
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Item 11. Executive Compensation
Summary Compensation Table.
The following table sets forth all compensation for the fiscal years ended 2010 and 2009
awarded to, earned by or paid to executive officers of GreenHunter.
| All Other | ||||||||||||||||||||||||||||
| Name and Principal | Salary | Bonus | Stock Awards | Option Awards | Compensation | Total | ||||||||||||||||||||||
| Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
Gary C. Evans — |
2010 | 145,361 | — | — | — | 9,000 | 154,361 | |||||||||||||||||||||
Chairman and CEO* |
2009 | 200,000 | — | — | 125,028 | ** | 12,000 | 337,028 | ||||||||||||||||||||
Jonathan D. Hoopes — |
2010 | 173,076 | — | — | — | — | 173,076 | |||||||||||||||||||||
President and COO |
2009 | 59,615 | — | 38,309 | *** | 25,872 | ** | 50,000 | 173,796 | |||||||||||||||||||
David S. Krueger — |
2010 | 138,462 | — | — | — | 6,230 | 144,692 | |||||||||||||||||||||
Vice President and CFO |
2009 | 200,000 | — | — | 37,508 | ** | 9,000 | 246,508 | ||||||||||||||||||||
Morgan F. Johnston — |
2010 | 138,462 | — | — | — | 6,230 | 144,692 | |||||||||||||||||||||
Sr. VP,
General Counsel and Secretary |
2009 | 200,000 | — | — | 37,508 | ** | 9,000 | 246,508 | ||||||||||||||||||||
| * | Mr. Evans acted as the Company’s President and CEO during the first nine months of 2009. On October 1, 2009, Mr. Jonathan D. Hoopes was hired as the Company’s President and COO. Mr. Hoopes received $50,000 as a relocation expense. | |
| ** | Mr. Evans received a stock option grant for 1,000,000 shares, vesting over a three year period at an exercise price of $1.96 on August 26, 2009. Mr. Hoopes received a stock option grant for 500,000 shares, vesting both over time and achieving specific performance goals at an exercise price of $1.41 on December 11, 2009. Mr. Krueger received a stock option grant for 300,000 shares, vesting over a three year period at an exercise price of $1.96 on August 26, 2009. Mr. Johnston received a stock option grant for 300,000 shares, vesting over a three year period at an exercise price of $1.96 on August 26, 2009. | |
| *** | Mr. Hoopes received a restricted stock grant for 100,000 shares, vesting both over time and achieving specific performance goals on October 1, 2009. |
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Outstanding Equity Awards at Fiscal Year-End.
The following non-incentive stock options were outstanding to the below named executives at
December 31, 2010:
| Number of Securities | Number of Securities | |||||||||||||
| underlying unexercised | underlying unexercised | Exercise | ||||||||||||
| Name | options exercisable | options unexercisable | Price ($/sh) | Expiration Date | ||||||||||
Gary C. Evans, CEO |
333,333 | 666,667 | 1.96 | August 26, 2019 | ||||||||||
| 352,000 | — | 18.91 | February 13, 2018 | |||||||||||
Jonathan D. Hoopes, President and COO |
100,000 | 400,000 | 1.41 | December 11, 2019 | ||||||||||
David S. Krueger , Vice President |
100,000 | 200,000 | 1.96 | August 26, 2019 | ||||||||||
and CFO |
110,000 | — | 18.91 | February 13, 2018 | ||||||||||
| 550,000 | — | 5.00 | * | May 5, 2017 | ||||||||||
Morgan F. Johnston, Sr. Vice |
100,000 | 200,000 | 1.96 | August 26, 2019 | ||||||||||
President, General Counsel and |
110,000 | — | 18.91 | February 13, 2018 | ||||||||||
Secretary |
500,000 | — | 5.00 | * | May 5, 2017 | |||||||||
| * | There was no public market for our common shares on the date of grant of the option. Accordingly, the amounts set out in this column are based upon the fair market value per common share as estimated by us as at the date of grant of the option, which was $5.00. |
Director Compensation
The following compensation was paid to our independent members of the board of directors for
the year ended December 31, 2010:
| Fees Earned or Paid | ||||||||||||||||
| in Cash | Stock Awards | Option Awards | Total | |||||||||||||
| Name | ($) | ($) | ($) | ($) | ||||||||||||
Ronald D. Ormand* |
— | 50,000 | — | 50,000 | ||||||||||||
Ronald H. Walker* |
— | 50,000 | — | 50,000 | ||||||||||||
| * | The Board of Directors has deferred any cash compensation payments for acting as a Board member until the Company’s performance has improved. However, Board members are receiving restricted stock payments in lieu of their annual retainer payment. |
For fiscal 2011, our directors (other than members of our management) will be
entitled to receive an annual retainer of $50,000, payable quarterly, plus $1,000 per meeting of
our board of directors, $500 per meeting of a committee of the board attended or $250 if such board
member attends a board or committee meeting by telephone. These directors will also be reimbursed
for all out-of-pocket expenses incurred in their capacities as members of the board. We will also
grant new independent directors 100,000 stock options at an exercise price equal to the then market
value vesting over a three year period. We currently maintain directors and officers liability
insurance coverage with an aggregate policy limit of $5,000,000.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following table sets forth information regarding beneficial ownership of GreenHunter’s
common stock as of March 29, 2011 held by (i) each of GreenHunter’s directors and named executive
officers; (ii) all directors and named executive officers as a group; and (iii) any person (or
group) who is known to GreenHunter to be the beneficial owner of more than 5% of any class of its
common stock.
Unless otherwise specified, the address of each of the persons set forth is in care of
GreenHunter Energy, Inc., 1048 Texan Trail, Grapevine, Texas 76051.
| Name of Beneficial | Amount and Nature of | |||||||||||||
| Title of Class | Owner | Beneficial Ownership(1) | Percent of Class(11) | |||||||||||
Common Stock |
Gary C. Evans | 16,373,110 | (2) | 67.0 | ||||||||||
Common Stock |
Ronald D. Ormand | 33,333 | (3) | * | ||||||||||
Common Stock |
Ronald H. Walker | 133,333 | (4) | * | ||||||||||
Common Stock |
Jonathan D. Hoopes | 100,150 | (5) | * | ||||||||||
Common Stock |
Morgan F. Johnston | 714,393 | (6) | 3.1 | ||||||||||
Common Stock |
David S. Krueger | 764,869 | (7) | 3.2 | ||||||||||
Common Stock |
Investment Hunter, LLC | 15,675,401 | (8) | 66.0 | ||||||||||
Common Stock |
West Coast Opportunity Fund, LLC | 2,457,142 | (9) | 9.9 | ||||||||||
Common Stock |
Southern Ute Growth Fund | 1,875,000 | (10) | 8.4 | ||||||||||
Common Stock |
All officers and directors as a group (6 persons named above) |
18,119,188 | 69.0 | |||||||||||
| * | Less than 1%. | |
| (1) | Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed below has direct ownership of and sole voting power and investment power with respect to the shares of GreenHunter’s common stock. | |
| (2) | Includes 14,160,000 shares and 1,515,401 common stock purchase warrants held directly by Investment Hunter, LLC, and 352,000 common stock purchase options at an exercise price of $18.91 per share and 333,333 common stock purchase options at an exercise price of $1.96. Also includes 1,800 shares held by Mr. Evans as custodian for his children. Gary C. Evans owns 100% of the capital stock of Investment Hunter, LLC. | |
| (3) | Consists of 33,333 common stock purchase options at an exercise price of $0.97 per share. | |
| (4) | Consists of 100,000 common stock purchase options at an exercise price of $10.00 per share and 33,333 common stock purchase options at an exercise price of $1.96 per share. | |
| (5) | Includes 100,000 common stock purchase options at an exercise price of $1.41 per share. | |
| (6) | Includes 500,000 common stock purchase options at an exercise price of $5.00 per share, 110,000 common stock purchase options at an exercise price of $18.91 per share, 100,000 common stock purchase options at an exercise price of $1.96 per share and 399 common stock purchase warrants at an exercise price of $27.50 per share. | |
| (7) | Includes 550,000 common stock purchase options at an exercise price of $5.00 per share, 110,000 common stock purchase options at an exercise price of $18.91 per share, 100,000 common stock purchase options at an exercise price of $1.96 per share and 442 common stock purchase warrants at an exercise price of $27.50 per share. | |
| (8) | Includes 1,515,401 common stock purchase warrants at an exercise price of $27.50 per share. | |
| (9) | Consists of 6,750 shares of Series A Preferred Stock convertible into 1,350,000 shares of common stock and 10,575 shares of Series B Preferred Stock convertible into 1,410,000 shares of common stock and 1,823,500 shares of common stock exercisable pursuant to common stock purchase warrants. By agreement, West Coast Opportunity Fund, LLC cannot convert or exercise any securities that cause it to own 10% or more of the common stock of the Company. Paul J. Orfalea, Lance W. Helfert and R. Atticus Lowe have shared voting and investment control over the securities held by West Coast Opportunity Fund, LLC. The address for West Coast Opportunity Fund, LLC is 2151 Alessandro Drive, Suite 1000, Ventura, California 93001. | |
| (10) | Includes 625,000 common stock purchase warrants at an exercise price of $27.50 per share. The address for Southern Ute Growth Fund is 14933 Highway 172, Ignacio, CO 81137. | |
| (11) | A total of 22,116,464 shares of GreenHunter Energy’s Common Stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner below, any options exercisable or securities convertible into common within 60 days have been included in the denominator. |
46
Table of Contents
Item 13. Certain Relationships and Related Transactions, and Director Independence Transactions
with Related Persons
On
September 30, 2010, and December 30, 2010, the Chairman and Chief Executive Officer, loaned
the Company $600 thousand and $260 thousand, respectively, in exchange for the promissory notes
due October 31, 2010 and January 1, 2011, respectively, both of which have been extended to April
30, 2011.
The
loan described above was unanimously approved by our Board of
Directors, with Mr. Evans abstaining.
During 2010, GreenHunter rented an airplane for business use at various times from Pilatus
Hunter, LLC, an entity 100% owned by Mr. Evans. Airplane rental expenses totaled $12 thousand for
the 2010 year and $158 thousand for the 2009 year.
The Company currently does not have a written, stand-alone policy for evaluating related party
transactions. The Board’s review procedures include evaluating the following:
| • | the nature of the relationships among the parties; | ||
| • | the materiality of the transaction to the company; | ||
| • | the related person’s interest in the transaction; and | ||
| • | the benefit of the transaction to the related person and to the company. |
Additionally, in cases of transactions in which a director or executive officer may have an
interest, the Board also will evaluate the effect of the transaction on such individual’s
willingness or ability to properly perform his or her duties at the company
Item 14. Principal Accounting Fees and Services
| For the Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Audit (a) |
$ | 148,560 | $ | 121,190 | $ | 177,382 | ||||||
Tax preparation fees |
— | — | 26,133 | |||||||||
All other fees (b) |
— | 4,000 | 11,976 | |||||||||
TOTAL |
$ | 148,560 | $ | 125,190 | $ | 215,491 | ||||||
| (a) | Includes fees paid to Hein & Associates for our annual audit and quarterly reviews and services in connection with our filing of registration statements. | |
| (b) | Includes fees paid to Hein & Associates for the agreed upon procedures related to an EPA report for BioFuels. |
The Audit Committee generally makes recommendations to the Board regarding the selection of
the independent registered accounting firm, reviews the independence of such accountants, approves
the scope of the annual audit, approves the rendering of any material non-audit services by the
independent accountants, approves the fee payable to the independent accountants and reviews the
audit results. The Audit Committee approves all fees paid to our principal accountants.
47
Table of Contents
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) Index to Financial Statements
| Page | ||||
Audited Consolidated Financial Statements of GreenHunter Energy, Inc. |
||||
Independent Auditors’ Report |
F-2 | |||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
Notes to Financial Statements |
F-7 | |||
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
GreenHunter Energy, Inc.
GreenHunter Energy, Inc.
We have audited the accompanying consolidated balance sheets of GreenHunter Energy, Inc. and
subsidiaries (a development stage company) (collectively, the “Company”) as of December 31, 2010
and 2009 and the related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for the each of the years then ended and for the period from July 1, 2010 through
December 31, 2010. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of GreenHunter Energy, Inc. and subsidiaries as of
December 31, 2010 and 2009 and the results of their operations and their cash flows for each of the
years then ended, and for the period from July 1, 2010 through December 31, 2010 in conformity with
U.S. generally accepted accounting principles.
/s/ HEIN & ASSOCIATES LLP
Dallas, Texas
March 31, 2011
Dallas, Texas
March 31, 2011
F-2
Table of Contents
GREENHUNTER ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Development Stage Company)
| December 31, 2010 | December 31, 2009 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 181,471 | $ | 6,914,381 | ||||
Related party accounts receivable |
4,783 | 77,495 | ||||||
Deposits and other current assets |
88,014 | 53,686 | ||||||
Prepaid expenses and other current assets |
182,079 | 153,631 | ||||||
Assets held for sale — current |
— | 2,743,247 | ||||||
Total current assets |
456,347 | 9,942,440 | ||||||
FIXED ASSETS: |
||||||||
Land and improvements |
3,243,687 | 3,243,687 | ||||||
Buildings |
3,100,621 | 3,100,621 | ||||||
Plant and other equipment |
2,626,140 | 2,921,202 | ||||||
Accumulated depreciation |
(566,525 | ) | (516,837 | ) | ||||
Construction in progress |
12,846,608 | 10,750,089 | ||||||
Net fixed assets |
21,250,531 | 19,498,762 | ||||||
OTHER ASSETS: |
||||||||
Assets held for sale — long term |
— | 38,701,662 | ||||||
Deferred financing costs, net of amortization of $193,335 and $101,668,
Respectively |
264,998 | 375,415 | ||||||
Other noncurrent assets |
1,446,136 | 300,000 | ||||||
Total assets |
$ | 23,418,012 | $ | 68,818,279 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||
CURRENT LIABILITIES: |
||||||||
Current portion of notes payable |
$ | 943,560 | $ | 169,541 | ||||
Accounts payable |
2,098,328 | 1,710,503 | ||||||
Dividends payable |
172,056 | 156,060 | ||||||
Accrued liabilities |
3,498,207 | 7,379,973 | ||||||
Convertible securities |
1,001,622 | — | ||||||
Liabilities associated with assets held for sale |
— | 45,902,379 | ||||||
Total current liabilities |
7,713,773 | 55,318,456 | ||||||
NON-CURRENT LIABILITIES: |
||||||||
Notes payable, less current portion |
2,886,947 | 2,983,045 | ||||||
Redeemable debentures, net of discount of $29,558 and $40,069, respectively |
5,272,249 | 5,261,739 | ||||||
Debentures secured by assets of discontinued operations, net of discount of $0
and 1,007,039, respectively |
— | 20,027,109 | ||||||
Total long-term liabilities |
8,159,196 | 28,271,893 | ||||||
COMMITMENTS AND CONTINGENCIES (Notes 6 and 12) |
||||||||
STOCKHOLDERS’ EQUITY (DEFICIT): |
||||||||
Series A 8% convertible preferred stock, $.001 par value, $1,220 and $1,125
stated value, respectively, 6,750 issued and outstanding |
8,232,234 | 7,592,389 | ||||||
Series B convertible preferred stock, $.001 par value, $1,000 stated value,
10,575 issued and outstanding |
10,575,000 | 10,575,000 | ||||||
Common stock, $.001 par value, 90,000,000 authorized shares, 22,138,876
issued |
22,139 | 22,139 | ||||||
Additional paid-in capital |
88,968,889 | 87,273,376 | ||||||
Accumulated deficit prior to re-entering development stage |
(126,670,716 | ) | (119,672,776 | ) | ||||
Accumulated earnings during development stage |
26,979,695 | — | ||||||
Treasury stock, at cost, 22,412 shares |
(336,285 | ) | (336,285 | ) | ||||
Unearned common stock in KSOP, at cost, 15,200 shares |
(225,913 | ) | (225,913 | ) | ||||
Total stockholders’ equity (deficit) |
7,545,043 | (14,772,070 | ) | |||||
Total liabilities and stockholders’ equity (deficit) |
$ | 23,418,012 | $ | 68,818,279 | ||||
See accompanying notes to consolidated financial statements
F-3
Table of Contents
GREENHUNTER ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Development Stage Company)
| From Re-entering | ||||||||||||
| Development Stage | ||||||||||||
| July 1, 2010 through | ||||||||||||
| For the Year Ended December 31, | December 31, | |||||||||||
| 2010 | 2009 | 2010 | ||||||||||
COSTS AND EXPENSES: |
||||||||||||
Hurricane repairs and losses (insurance proceeds) |
$ | — | $ | (449,941 | ) | $ | — | |||||
Project costs |
(10,630 | ) | 105,445 | (14,695 | ) | |||||||
Depreciation expense |
189,758 | 228,696 | 95,253 | |||||||||
Selling, general and administrative |
5,080,768 | 6,614,154 | 3,267,330 | |||||||||
Loss on asset impairments |
160,824 | 1,868,911 | — | |||||||||
Total costs and expenses |
5,420,720 | 8,367,265 | 3,347,888 | |||||||||
OPERATING LOSS FROM CONTINUING OPERATIONS |
(5,420,720 | ) | (8,367,265 | ) | (3,347,888 | ) | ||||||
OTHER INCOME (EXPENSE): |
||||||||||||
Interest and other income |
2,994,283 | 2,083,911 | 858,505 | |||||||||
Interest, accretion and other expense |
(56,506 | ) | (768,932 | ) | 1,522,790 | |||||||
Unrealized loss on convertible securities |
(1,001,622 | ) | — | (1,001,622 | ) | |||||||
Total other income |
1,936,155 | 1,314,979 | 1,379,673 | |||||||||
Loss from continuing operations |
(3,484,565 | ) | (7,052,286 | ) | (1,968,215 | ) | ||||||
Gain (Loss) on sale or disposal of discontinued operations |
33,055,388 | (563,388 | ) | 33,055,388 | ||||||||
Loss from discontinued operations, net of taxes |
(8,933,227 | ) | (7,802,756 | ) | (3,771,559 | ) | ||||||
Net Income (Loss) |
20,637,596 | (15,418,430 | ) | 27,315,614 | ||||||||
Preferred stock dividends |
(655,841 | ) | (775,782 | ) | (335,919 | ) | ||||||
Net income (loss) to common stockholders |
$ | 19,981,755 | $ | (16,194,212 | ) | $ | 26,979,695 | |||||
Weighted average shares outstanding, basic and diluted |
22,428,950 | 21,612,172 | 22,516,928 | |||||||||
Net loss per share from continuing operations |
$ | (0.18 | ) | $ | (0.36 | ) | $ | (0.10 | ) | |||
Net earnings (loss) per share from discontinued operations |
$ | 1.08 | $ | (0.39 | ) | $ | 1.30 | |||||
Net earnings (loss) per share |
$ | 0.89 | $ | (0.75 | ) | $ | 1.20 | |||||
See accompanying notes to consolidated financial statements
F-4
Table of Contents
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE PERIOD FROM JANUARY 1, 2009 TO DECEMBER 31, 2010
(Development Stage Company)
| Additional | Accumulated Deficit | Accumulated Deficit During | Unearned | Total | ||||||||||||||||||||||||||||||||||||
| Series A | Series B | Common | Paid in | Noncontrolling | Prior to Re-entering | Development Stage July 1, | Treasury | Shares in | Stockholders’ | |||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Stock | Capital | Interest | Development Stage | 2010 - December 31, 2010 | Stock | KSOP | Equity (Deficit) | |||||||||||||||||||||||||||||||
BALANCE, January 1, 2009 |
$ | 12,500,000 | $ | 10,575,000 | $ | 20,989 | $ | 81,100,216 | $ | (107,290 | ) | $ | (103,478,564 | ) | $ | — | $ | (678,538 | ) | $ | (225,913 | ) | $ | (294,100 | ) | |||||||||||||||
Transfer accumulated preferred dividends
to stated value |
856,389 | — | — | — | — | — | — | — | — | 856,389 | ||||||||||||||||||||||||||||||
Issue 42,797 warrants on Series B
Debentures |
— | — | — | 942 | — | — | — | — | — | 942 | ||||||||||||||||||||||||||||||
Stock compensation |
— | — | — | 701,728 | — | — | — | — | — | 701,728 | ||||||||||||||||||||||||||||||
Conversion of 5,750 preferred shares into
1,150,000 common shares |
(5,764,000 | ) | — | 1,150 | 5,776,183 | — | — | — | — | — | 13,333 | |||||||||||||||||||||||||||||
Issue 22,024 treasury shares for services
provided |
— | — | — | (305,693 | ) | — | — | — | 342,253 | — | 36,560 | |||||||||||||||||||||||||||||
Dividends on preferred stock |
— | — | — | — | — | (775,782 | ) | — | — | — | (775,782 | ) | ||||||||||||||||||||||||||||
Abandonment of Haining City interests |
— | — | — | — | 31,635 | — | — | — | — | 31,635 | ||||||||||||||||||||||||||||||
Abandonment of Wheatland interests |
— | — | — | — | 75,655 | — | — | — | — | 75,655 | ||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | (15,418,430 | ) | — | — | — | (15,418,430 | ) | ||||||||||||||||||||||||||||
BALANCE, December 31, 2009 |
$ | 7,592,389 | $ | 10,575,000 | $ | 22,139 | $ | 87,273,376 | $ | — | $ | (119,672,776 | ) | $ | — | $ | (336,285 | ) | $ | (225,913 | ) | $ | (14,772,070 | ) | ||||||||||||||||
Transfer accumulated preferred dividends
to stated value |
639,845 | — | — | — | — | — | — | — | — | 639,845 | ||||||||||||||||||||||||||||||
Share based payments |
— | — | — | 1,626,402 | — | — | — | — | — | 1,626,402 | ||||||||||||||||||||||||||||||
Issued 100,000 warrants |
— | — | — | 69,111 | — | — | — | — | — | 69,111 | ||||||||||||||||||||||||||||||
Dividends on preferred stock |
— | — | — | — | — | (319,922 | ) | (335,919 | ) | — | — | (655,841 | ) | |||||||||||||||||||||||||||
Net income (loss) |
— | — | — | — | — | (6,678,018 | ) | 27,315,614 | — | — | 20,637,596 | |||||||||||||||||||||||||||||
BALANCE, December 31, 2010 |
$ | 8,232,234 | $ | 10,575,000 | $ | 22,139 | $ | 88,968,889 | $ | — | $ | (126,670,716 | ) | $ | 26,979,695 | $ | (336,285 | ) | $ | (225,913 | ) | $ | 7,545,043 | |||||||||||||||||
See accompanying notes to consolidated financial statements
F-5
Table of Contents
GREENHUNTER ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Development Stage Company)
| From Re-entering | ||||||||||||
| Development | ||||||||||||
| Stage July 1, | ||||||||||||
| 2010 through | ||||||||||||
| For the Year Ended December 31, | December 31, | |||||||||||
| 2010 | 2009 | 2010 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | 20,637,596 | $ | (15,418,430 | ) | $ | 27,315,614 | |||||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
||||||||||||
Depreciation expense |
1,769,740 | 4,270,444 | 95,253 | |||||||||
Noncash stock compensation |
1,626,402 | 701,728 | 925,851 | |||||||||
Issue warrants on letter of guarantee |
69,111 | — | — | |||||||||
Amortization of deferred financing costs |
1,777,818 | 1,279,284 | 551,541 | |||||||||
Non-cash asset impairment |
160,824 | 5,046,090 | — | |||||||||
Noncontrolling interest |
— | — | — | |||||||||
Gain on sale or disposal of assets |
(33,055,388 | ) | (1,267,564 | ) | (33,055,388 | ) | ||||||
Accretion of discount |
367,846 | 438,841 | 167,680 | |||||||||
Loss from change in fair value of convertible securities |
1,001,622 | — | 1,001,622 | |||||||||
Forgiveness of trade payable |
— | (2,757,311 | ) | — | ||||||||
Changes in certain assets and liabilities: |
||||||||||||
Accounts receivable |
29,547 | 4,348,297 | 908 | |||||||||
Inventory |
179,322 | 5,958,458 | — | |||||||||
Prepaid and other expense |
431,421 | 228,704 | (32,101 | ) | ||||||||
Accounts payable |
(5,707,290 | ) | (5,004,795 | ) | 1,803,031 | |||||||
Accrued liabilities |
4,730,591 | 2,509,081 | 1,262,850 | |||||||||
Deposits |
110 | — | 110 | |||||||||
Net cash provided by (used in) operating activities |
(5,980,728 | ) | 332,827 | 36,971 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Change in restricted cash |
2,018,765 | (1,676,064 | ) | 48 | ||||||||
Proceeds from sale of assets |
9,775 | 13,425,994 | — | |||||||||
Additions to fixed assets |
(2,104,573 | ) | (790,362 | ) | (1,799,148 | ) | ||||||
Increase in other assets |
(1,146,136 | ) | (348,270 | ) | 50,000 | |||||||
Net cash provided by (used in) investing activities |
(1,222,169 | ) | 10,611,298 | (1,749,100 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Gross proceeds from redeemable debenture issuance |
— | 1,711,892 | — | |||||||||
Increase in notes payable |
1,020,840 | 298,323 | 964,992 | |||||||||
Payment of notes payable |
(275,051 | ) | (6,541,144 | ) | (123,201 | ) | ||||||
Payment of deferred financing costs |
(275,802 | ) | (175,451 | ) | (275,802 | ) | ||||||
Net cash provided by (used in) financing activities |
469,987 | (4,706,380 | ) | 565,989 | ||||||||
CHANGE IN CASH |
(6,732,910 | ) | 6,237,745 | (1,146,140 | ) | |||||||
CASH, beginning of period |
6,914,381 | 676,636 | 1,327,611 | |||||||||
CASH, end of period |
$ | 181,471 | $ | 6,914,381 | $ | 181,471 | ||||||
Cash paid for interest |
$ | 1,550,048 | $ | 2,994,959 | $ | 820,672 | ||||||
NONCASH TRANSACTIONS: |
||||||||||||
Issued treasury shares for payment of services |
$ | — | $ | 36,560 | $ | — | ||||||
See accompanying notes to consolidated financial statements
F-6
Table of Contents
NOTE 1. Organization And Nature Of Operations
GreenHunter Energy, Inc. (“GreenHunter”) was incorporated in the State of Delaware on June 7,
2005 under the name BTHC IV, Inc. We were formed for the purpose of reincorporating BTHC IV, LLC,
a Texas limited liability company, in the State of Delaware. BTHC IV, LLC was reincorporated in
Delaware by means of a merger into our company on April 11, 2006.
On December 6, 2006, GreenHunter Wind Energy LLC (“Wind Energy”), completed a “reverse
acquisition” with GreenHunter. In exchange for all of the membership interest of Wind Energy, we
issued 14,560,000 shares of Common Stock to the sole shareholder of Wind Energy, or 97.1% of all of
the issued and outstanding stock of the company. Simultaneous with the closing of the transaction
with Wind Energy, we changed our name to GreenHunter Energy, Inc. and increased the number of
authorized shares of common stock to 100,000,000, consisting of 90,000,000 shares of common stock,
having a par value of $.001 per share and 10,000,000 shares of preferred stock, having a par value
of $.001 per share.
Current Plan of Operations and Ability to Operate as a Going Concern
Our financial position has been adversely affected by our lack of working capital and the
overall deterioration across all capital markets, particularly those for renewable energy
companies. A substantial drop in market prices of all energy products including the price of
biodiesel and our feedstock inventories adversely impacted our inventory values and resulting
working capital positions. The lack of consistent and meaningful governmental support with tax
incentives and other credit enhancements has had a serious detrimental effect on our planned
business operations. We also were unable to make the interest payments due on our Series A
Redeemable Debentures for the periods of April 2009 through September 30, 2010. On November 26,
2010, the Company transferred all of its common stock in BioFuels to an irrevocable trust for the
benefit of the holders of the Series A Debentures and their respective successors, assigns, heirs
and devisees in full and final satisfaction of any obligation the Company might have to the holders
of the Series A Debentures, based on the terms of the debenture agreements. The trustee of the
trust is Jack C. Myers, Esq. These debentures were secured by GreenHunter Energy’s ownership
interest in GreenHunter BioFuels common stock and are otherwise non-recourse to GreenHunter Energy.
As of December 31, 2010, we had a working capital deficit of $7.3 million which includes $4.2
million related to construction at our Mesquite Lake Biomass Plant.
We have continued to experience losses from ongoing operations. These factors raise doubt
about our ability to continue as a going concern. On September 29, 2010 and December 30, 2010 the Chairman and
Chief Executive Officer loaned the Company $600 thousand and $260 thousand, respectively, to fund
short-term liquidity needs in exchange for promissory notes due October 31, 2010 and January 1,
2011, respectively, which have been extended to April 30, 2011. On March 30, 2011, we received a letter of guarantee from the Chairman and Chief Executive Officer of the company for
up to $1.5 million of credit support if needed to fund operations. In September 2010, we closed on
$29.9 million in RZFB bonds issued through the California Enterprise Development Authority (CEDA).
We did not extend the mandatory redemption date of January 20, 2011, and we are no longer pursuing
the bonds as a method of financing the Mesquite Lake project due to the lack of market to sell the
bonds. We believe the unrestricted cash, proceeds from our private placement offering beginning
February 2011, the $500 thousand in proceeds from the sale of our Ocotillo project to be received
in September 2011, discussed further in Note 6 — Acquisitions and Divestitures, and the letter of
guarantee and credit support will be sufficient to fund operations for the next twelve months.
Execution of our business plan for the next twelve months requires the ability to generate
cash to satisfy planned operating requirements. With the anticipated funds available from the
proceeds from our
private placement offering, the $500 thousand in proceeds from the sale of our Ocotillo project to
be
F-7
Table of Contents
received in September 2011, and the letter of guarantee and credit support, we anticipate having
sufficient cash reserves to meet all of our anticipated operating obligations for the next twelve
months. Planned capital expenditures are wholly dependent on the Company’s ability to secure
additional capital. As a result, we are in the process of seeking additional capital through a
number of different alternatives, and particularly with respect to procuring working capital
sufficient for the development of our Mesquite Lake biomass plant in order that we have a business
segment that can generate positive cash flow to sustain operations.
Development Stage Company
The Company has not earned significant revenue from planned principal operations since the
second quarter of 2010. Accordingly, effective July 1, 2010, the Company’s activities have been
accounted for as those of a “Development Stage Enterprise” as set forth by FASB ASC 915. Among the
disclosures required are that the Company’s financial statements be identified as those of a
development stage company, and the statements of operations, stockholders’ deficit and cash flows
disclose activity since the date of the Company’s inception of development stage.
Nature of Operations
Our business plan is to acquire and operate assets in the renewable energy sectors of biomass,
geothermal, wind, and solar. Our plan is to become a leading provider of clean energy products
offering residential, business and industrial customers the opportunity to purchase and utilize
clean energy generated from renewable sources.
We currently have ongoing business initiatives at GreenHunter in biomass through GreenHunter
Mesquite Lake, Inc, (“Mesquite Lake”).
During 2007 we acquired Channel Refining Corporation (“CRC”), which we subsequently renamed
GreenHunter BioFuels, Inc. (“BioFuels”). We completed the construction of a 105 million gallon per
year intended nameplate capacity biodiesel refinery during 2008 and began production at this
facility during August of the same year. The biodiesel refinery built on this site also includes
terminal operations, product bulk storage, as well as the ability to process contaminated methanol
(a chemical used in biodiesel production). We generated revenues during 2008 and 2009 from
biodiesel sales, methanol processing and terminal storage at this site. On November 26, 2010, the
Company transferred all of its common stock in BioFuels to an irrevocable trust for the benefit of
the holders of the Series A Debentures and their respective successors, assigns, heirs and devisees
in full and final satisfaction of any obligation the Company might have to the holders of the
Series A Debentures, based on the terms of the debenture agreements. The trustee of the trust is
Jack C. Myers, Esq. These debentures were secured by GreenHunter Energy’s ownership interest in
GreenHunter BioFuels common stock and are otherwise non-recourse to GreenHunter Energy. See Note 5
— Discontinued Operations for more information.
On May 14, 2007, we acquired an inactive 18.5 megawatt (“MW”) (nameplate capacity) biomass
plant located in Southern California. The plant is owned by our wholly-owned subsidiary,
GreenHunter Mesquite Lake, Inc. (“Mesquite Lake”), which was formed for the purpose of operating
and owning assets which convert waste material to electricity. We began refurbishing this bio-mass
plant during July 2008 but ceased work during the fourth quarter of 2008 when we were informed that
certain required permits at the facility were not in place. On August 19, 2009 we entered into a
power purchase agreement with a major public utility based in Southern California. During 2010 we restarted refurbishment activities
but ceased work during December 2010 until financing is obtained.
On August 29, 2008, we acquired an existing 14 MW (nameplate capacity) wood waste-fired
biomass
power plant located in Telogia, Florida. The biomass power plant, Telogia Power, LLC, and an
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associated entity, Telogia Power Unit #2, LLC, (collectively, “Telogia”), were acquired from a
privately-held power plant operator. Due to financial constraints, as a result of hurricane damage
at our BioFuels facility and the global capital market deterioration, we began marketing our
Telogia plant for resale during the fourth quarter of 2008 and completed the divestiture during
February 2009 which resulted in a gain of $549 thousand. See Note 5 — Discontinued Operations for
more information.
Our Wind Energy segment remains in the development stage. We continue to hold existing rights
to potential wind energy farm locations in California to operate and gather data produced from wind
measurement equipment located on these sites.
Note 2. Principles of Consolidation and Basis of Presentation
The accompanying financial statements include the accounts of GreenHunter Energy, Inc. and our
wholly-owned subsidiaries, GreenHunter Wind Energy, LLC and GreenHunter Mesquite Lake, LLC. We
wrote off our interests in Haining City Wind Energy, LLC at September 30, 2009 and Wheatland Wind
Power, LLC at December 31, 2009, resulting in a loss of $88 thousand and $918 thousand,
respectively. We disposed of our interests in GreenHunter Biofuels Inc. on November 26, 2010,
resulting in a gain of $33.1 million. See Note 5 — Discontinued Operations for more information.
All significant intercompany transactions and balances have been eliminated.
Note 3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
reported amounts. These estimates are based on information available at the date of the financial
statements. Therefore, actual results could differ materially from those estimates. Significant
estimates include the allocation of purchase price to assets and liabilities acquired and the
assessment of assets for impairment.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current year
presentation.
Cash and Cash Equivalents
Cash and cash equivalents include securities with maturities of 90 days or less at the date of
purchase. At times, we have cash deposits in excess of federally insured limits.
Property, Plant and Equipment
Property plant and equipment are stated at cost. Depreciation is computed using the
straight-line method based on the following useful lives:
Automobiles
|
5 years | |
Computer and office equipment
|
5 to 7 years | |
Plant equipment
|
7 to 30 years | |
Land improvements
|
15 years | |
Buildings
|
31 years |
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Depreciation expense of $190 thousand and $229 thousand was recorded for the years ending
December 31, 2010 and 2009, respectively. During planning of construction of our Mesquite Lake
plant, we capitalized $626 thousand during the twelve months ended December 31, 2010. Material
expenditures which increase the life of an asset are capitalized and depreciated over the estimated
remaining useful life of the asset. The cost of equipment sold, or otherwise disposed of, and the
related accumulated depreciation or amortization is removed from the accounts, and any gains or
losses are reflected in current operations.
Construction in progress totaling $12.8 million within Plant and other Equipment on our
balance sheet were assets not being depreciated at December 31, 2010, as they were not in use.
They will be placed in use and subject to depreciation once construction is completed on the
Mesquite Lake biomass plant. Items in Construction in Progress are not subject to depreciation
while they are under construction.
Deferred Financing Costs
Costs incurred in connection with issuing debt are capitalized and amortized as an adjustment
to interest expense over the term of the debt instrument using the interest method.
Other Non-Current Assets
Other non-current assets at December 31, 2010 and 2009 included the following (in thousands):
| 2010 | 2009 | |||||||
Power Purchase Agreement |
$ | 1,396 | $ | 300 | ||||
Deposits and other non-current assets |
50 | — | ||||||
Total |
$ | 1,446 | $ | 300 | ||||
Impairments
We periodically evaluate whether events and circumstances have occurred that may warrant
revision of the estimated useful life of long-term assets or whether the remaining balance of
long-term assets should be evaluated for possible impairment. We compare the estimate of the
related undiscounted cash flows over the remaining useful lives of the applicable assets to the
assets’ carrying values in measuring their recoverability. When the future cash flows are not
sufficient to recover an asset’s carrying value, an impairment charge is recorded for the
difference between the asset’s fair value and it’s carrying value. During 2010 we recorded
impairments of $161 thousand related to deposits on wind projects that were cancelled, and during
2009 we recorded $1.9 million in impairments, of which $1.5 million were related to our Port Sutton
lease, $170 thousand related to a decline in the value of equipment, and $218 thousand related to a
deposit on a wind project that was cancelled.
Asset Retirement Obligations
The Company accounts for asset retirement obligations based on the guidance of ASC 410 which
addresses accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. ASC 410 requires that the fair value
of a liability for an asset’s retirement obligation be recorded in the period in which it is
incurred and the corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its then present value each period, and the
capitalized cost is depreciated over the estimated useful life of the related asset. We have not
recorded any asset retirement obligations because we will conduct power generation predominately
from waste materials, and plan to continue to do so in the future. We never
intend to cease operations or retire all of our assets, and we cannot estimate costs that we
do not intend to
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incur. We do not believe we are subject to any reclamation obligations either now
or in the future.
Repairs and Maintenance
We charge the cost of repairs and maintenance, including the cost of replacing minor items not
constituting substantial betterment, to selling, general and administrative expenses as these costs
are incurred.
Revenue recognition
We record revenues when the product has been delivered or the services have been provided to
the customer, the sales price is fixed or determinable, and collectability is reasonably assured.
Transportation, shipping and handling costs incurred on shipments to customers are included in
selling, general and administrative costs. Excise and other taxes collected from customers and
remitted to governmental authorities are not included in revenue.
Stock-Based Compensation
The Company accounts for share-based compensation in accordance with the provisions of the ASC
standards which require companies to estimate the fair value of share-based payment awards made to
employees and directors, including stock options, restricted stock and employee stock purchases
related to employee stock purchase plans, on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense
ratably over the requisite service periods. We estimate the fair value of each share-based award
using the Black-Scholes option pricing model for service and performance based awards and the
lattice model for market-based awards. Certain of our grants have performance-based vesting terms.
We amortize the fair value of these awards over their estimated vesting terms which are based on
both the probability and estimated timing of the achievement of these performance goals. See Note
11 for additional information on our stock-based compensation.
Income Taxes
We account for income taxes under the liability method. Deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. We measure and record income tax contingency accruals in
accordance with ASC 740, Income Taxes.
We recognize liabilities for uncertain income tax positions based on a two-step process. The
first step is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and subjective to
estimate such amounts, as we must determine the probability of various possible outcomes. We
reevaluate these uncertain tax positions on a quarterly basis or when new information becomes
available to management. These reevaluations are based on factors including, but not limited to,
changes in facts or circumstances, changes in tax law, successfully settled issues under audit,
expirations due to statutes, and new audit activity. Such a change in recognition or measurement
could result in the recognition of a tax benefit or an increase to the tax accrual.
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We classify interest related to income tax liabilities as income tax expense, and if
applicable, penalties are recognized as a component of income tax expense. The income tax
liabilities and accrued interest and penalties that are anticipated to be due within one year of
the balance sheet date are presented as current liabilities in our consolidated balance sheets.
Fair Value of Financial Instruments
Accounting standards define fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The standards also establish a framework for measuring fair value and a
valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or
liability. Classification within the hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. The valuation hierarchy contains three levels:
| • | Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets | |
| • | Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable | |
| • | Level 3 — Significant inputs to the valuation model are unobservable |
As of December 31, 2010 and 2009 there were no transactions measured at fair value on a
nonrecurring basis. The following table shows assets and liabilities measured at fair value on a
recurring basis as of December 31, 2010 and 2009 and the input categories associated with those
assets and liabilities.
Fair value measurements on a recurring basis
December 31, 2010
December 31, 2010
| Level 1 | Level 2 | Level 3 | ||||||||||
Convertible securities |
$ | — | $ | — | $ | 1,001,622 | ||||||
Total liabilities at fair value |
$ | — | $ | — | $ | 1,001,622 | ||||||
Fair value measurements on a recurring basis
December 31, 2009
December 31, 2009
| Level 1 | Level 2 | Level 3 | ||||||||||
Convertible
securities |
$ | — | $ | — | $ | — | ||||||
Total liabilities at fair value |
$ | — | $ | — | $ | — | ||||||
The carrying value of cash and cash equivalents, receivables, and accounts payable
approximate their respective fair values due to the short-term nature of these instruments. Based
on borrowing rates which management believes would currently be available to the Company for
similar issues of debt, taking into account the current credit risk of the Company and other market
factors, the carrying value of the Company’s debt obligations approximate their fair value.
The Company had current derivative liabilities relating to its common stock warrants, Series A
Convertible Preferred Stock, and Series B Convertible Preferred Stock. The derivative instruments
were not originally entered into as hedging activities, and the change in fair value of warrant
liabilities is recorded as a component of other income or expense in the consolidated statements of
operations. The estimated fair value of the warrant liabilities is revalued at each balance sheet
date, with changes in value recorded as other income or expense in the consolidated statements of
operations. As discussed in Note 10, during 2010, we recorded an
unrealized loss of $1.0 million related to the change in fair
value of conversion and anti dilutive provisions in our outstanding
warrants and preferred stock.
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Income or Loss Per Common Share
Basic net income or loss per common share is computed by dividing the net income or loss
attributable to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income or loss per common share is calculated in the
same manner, but also considers the impact to net income or loss and common shares outstanding for
the potential dilution from stock options, unvested and unissued stock awards, warrants,
convertible debentures, and preferred stock.
We have issued potentially dilutive instruments in the form of our 8% Series A Preferred
Stock, Series B Preferred Stock, Series B Convertible Debentures, common stock warrants and common
stock options granted to our employees. There were 21,725,796 and 37,469,761 dilutive securities
outstanding at December 31, 2010 and 2009, respectively. We did not include any of these
instruments in our calculation of diluted loss per share during the period because to include them
would be anti-dilutive due to our net loss from continuing operations during the periods.
Shares of our common stock underlying the following securities were not included in dilutive
weighted average shares outstanding for the year ended December 31, 2010, as their effects would
have been anti-dilutive.
The following table summarizes the types of potentially dilutive securities as of December 31,
2010 and 2009:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
Stock options |
7,076,500 | 7,399,832 | ||||||
Unvested and unissued
stock awards |
462,628 | 100,000 | ||||||
Warrants |
5,443,911 | 6,251,745 | ||||||
Convertible debentures |
5,686,310 | 20,789,706 | ||||||
Preferred Stock |
3,056,447 | 2,928,478 | ||||||
Note 4. Recently Issued Accounting Standards
In January 2010, the FASB issued ASC 2010-06, Improving Disclosures about Fair Value
Measurements (ASC 820-10). These new disclosures require entities to separately disclose amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for
the transfers. In addition, in the reconciliation for fair value measurements for Level 3, entities
should present separate information about purchases, sales, issuances, and settlements. This
guidance is effective for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal years. Our adoption
of the disclosures, excluding the Level 3 activity disclosures, did not have a material impact on
our notes to the condensed consolidated financial statements. See Note 3 — Fair Value of Financial
Instruments for additional information. We are still evaluating the impact of the Level 3
disclosure requirements on our notes to the consolidated financial statements.
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Note 5. Discontinued Operations
On November 26, 2010, the Company transferred all of its common stock in BioFuels to an
irrevocable trust for the benefit of the holders of the Series A Debentures and their respective
successors, assigns, heirs and devisees in full and final satisfaction of any obligation the
Company might have to the holders of the Series A Debentures, based on the terms of the debenture
agreements. The trustee of the trust is Jack C. Myers, Esq. These debentures were secured by
GreenHunter Energy’s ownership interest in GreenHunter BioFuels common stock and are otherwise
non-recourse to GreenHunter Energy. The divestiture of our interests in GreenHunter BioFuels
resulted in a gain of $33.1 million.
The following table provides summarized income statement information related to BioFuels
discontinued operations for the year ended December 31, 2010 and 2009:
| 2010 | 2009 | |||||||
Sales and other revenues from discontinued operations |
$ | 319,170 | $ | 5,791,533 | ||||
Operating expenses from discontinued operations |
(4,449,138 | ) | (10,402,491 | ) | ||||
Other income from discontinued operations |
(4,903,259 | ) | (3,626,544 | ) | ||||
Net loss from discontinued operations |
$ | (9,033,227 | ) | $ | (8,237,502 | ) | ||
We completed the sale of the Telogia plant during February 2009 for total proceeds of
approximately $4.5 million cash received. We recorded a gain of approximately $443 thousand on the
disposal net of post closing adjustments.
The following table provides summarized income statement information related to Telogia’s
discontinued operations for the year ended December 31, 2010 and 2009:
| 2010 | 2009 | |||||||
Sales and other revenues from discontinued operations |
$ | — | $ | — | ||||
Operating expenses from discontinued operations |
— | (215,832 | ) | |||||
Other income from discontinued operations |
100,000 | 725,348 | ||||||
Net income from discontinued operations |
$ | 100,000 | $ | 509,516 | ||||
During September 2009, we abandoned the assets and our interests in Haining City Wind
Energy, LLC (“Haining City”) resulting in a loss on asset abandonment of $88 thousand.
The following table provides summarized income statement information related to Haining City’s
discontinued operations for the year ended December 31, 2009:
| 2009 | ||||
Sales and other revenues from discontinued operations |
$ | — | ||
Operating expenses from discontinued operations |
(61,080 | ) | ||
Other income from discontinued operations |
12,474 | |||
Net loss from discontinued operations |
$ | (48,606 | ) | |
During December 2009, we abandoned the assets and our interests in Wheatland Wind Power,
LLC (“Wheatland”) resulting in a loss on asset abandonment of $918 thousand.
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The following table provides summarized income statement information related to Wheatland’s
discontinued operations for the year ended December 31, 2009:
| 2009 | ||||
Sales and other revenues from discontinued operations |
$ | — | ||
Operating expenses from discontinued operations |
(87,211 | ) | ||
Other income from discontinued operations |
61,047 | |||
Net loss from discontinued operations |
$ | (26,164 | ) | |
Note 6. Acquisitions and Divestitures
BioFuels Project
On November 26, 2010, the Company transferred all of its common stock in BioFuels to an
irrevocable trust for the benefit of the holders of the Series A Debentures and their respective
successors, assigns, heirs and devisees in full and final satisfaction of any obligation the
Company might have to the holders of the Series A Debentures, based on the terms of the debenture
agreements. The trustee of the trust is Jack C. Myers, Esq. These debentures were secured by
GreenHunter Energy’s ownership interest in GreenHunter BioFuels common stock and are otherwise
non-recourse to GreenHunter Energy. See Note 5 — Discontinued Operations for additional
information.
Port Sutton Acquisition and Divestiture
During April 2009, the Company determined we were unable to make the final lease option
extension and as a result we abandoned the project and recorded an asset impairment to remove the
lease option deposits of $1.5 million from our balance sheet.
Telogia
The Company completed the sale of the Telogia plant during February 2009. See Note 5 —
“Discontinued Operations” for additional information.
Ming Yang
On October 28, 2009 we sold our equity ownership interest in Guangdong MingYang Wind Power
Technology Co., Ltd. for $9.1 million, resulting in a gain of $1.5 million.
Wheatland Wind Power Project
During December 2009, we abandoned the assets and our interests in Wheatland Wind Power, LLC
(“Wheatland”) resulting in a loss on asset abandonment of $918 thousand. See Note 5 —
Discontinued Operations for more information.
Ocotillo Wind Project
On July 30, 2009 we
sold our interest in the Ocotillo Wind Project for $250 thousand plus
future consideration of $750 thousand with an additional $25 thousand per MW of the nameplate
capacity of the WTG’s installed less the amount previously paid. The $250 thousand was subject to
and contingent upon the receipt of regulatory approval, which was granted in October 2009. We
received an additional $250 thousand in contingent consideration during September of 2010. Based
on the sale agreement, we are to receive an additional $500 thousand
in consideration in September 2011. The future consideration
is contingent upon the project developer achieving success with the development, and any future
sale proceeds will be recognized at that time. The Company has been
notified that it is their intent to begin construction on this
project in 2011 and it is anticipated that the Company will receive
approximately $4.8 million in additional consideration during
2011.
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NOTE 7. NOTES PAYABLE
Notes Payable at December 31, 2010 and 2009 consisted of the following:
| 2010 | 2009 | |||||||
Note payable due June 17, 2010, 7.0% |
$ | — | $ | 79,820 | ||||
Note payable due November 31, 2017, 5.7% |
2,982,051 | 3,072,766 | ||||||
Note payable to related party due April 30, 2011, 10% |
766,957 | — | ||||||
Notes payable due between February 15, 2011 and July
1, 2011, rates from 5.75% to 9.9% |
81,499 | — | ||||||
10% Series A Senior Secured Redeemable Debentures,
net of $0 and $1,007,039 discount, respectively |
— | 20,027,109 | ||||||
9% Series B Senior Secured Redeemable Debentures,
net of $40,069 and $49,628 discount, respectively |
5,272,249 | 5,261,739 | ||||||
| 9,102,756 | 28,441,433 | |||||||
Less: current portion |
(943,560 | ) | (169,541 | ) | ||||
Total Long-Term Debt |
$ | 8,159,196 | $ | 28,271,893 | ||||
The following table presents the approximate annual maturities of debt as of December 31, 2010:
2011 |
$ | 943,560 | ||
2012 |
100,049 | |||
2013 |
3,612,096 | |||
2014 |
1,824,672 | |||
Thereafter |
2,622,379 | |||
| $ | 9,102,756 | |||
Notes Payable
During 2009, we financed a portion of our annual insurance premiums for our Houston refinery
in the amount of $221,560 and our annual corporate insurance premiums in the amount of $76,762.
The notes bore interest at fixed rates of 6.1% and 7.0%, respectively, and both were paid off in
2010.
During 2010, we financed a portion of our annual insurance premiums in the amount of $160,840
with various notes bearing fixed rates between 5.75% and 9.0%. The notes have maturity dates
ranging from February 15, 2011 to July 1, 2011.
10% Series A Senior Secured Redeemable Debentures
We have issued approximately $21 million of our 10% Series A Senior Redeemable Debentures
(“Series A Debentures”)these debentures, resulting in net proceeds of approximately $18.9 million
since inception of this series. These debentures are non-recourse to GreenHunter Energy, and are
secured by our GreenHunter BioFuels, Inc. common stock. This offering was cancelled during April
of 2008, and all proceeds were received by June 30, 2008.
The Series A Debentures were offered in a private placement and have not been registered. The
debentures have a term of five years from the date of issue and may be exchangeable at our option
into freely tradable shares of our common stock. We have the right to call for redemption at any
time. If redeemed, we would be required to pay a redemption price, in cash and/or common stock,
equal to the following percentage of the principal amount depending on the year after issuance:
105% during the first year, 104% during the second year, 103% during the third year, and 102%
during the fourth year and
continuing through maturity.
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During April 2009 through September 2010, we were unable to make the interest payments on
these debentures. On November 26, 2010, the Company transferred all of its common stock in
BioFuels to an irrevocable trust for the benefit of the holders of the Series A Debentures and
their respective successors, assigns, heirs and devisees in full and final satisfaction of any
obligation the Company might have to the holders of the Series A Debentures, based on the terms of
the debenture agreements. The trustee of the trust is Jack C. Myers, Esq. These debentures were
secured by GreenHunter Energy’s ownership interest in GreenHunter BioFuels common stock and are
otherwise non-recourse to GreenHunter Energy.
9% Series B Senior Secured Redeemable Debentures
During July 2008, we announced the offering of a 9% Series B Senior Secured Redeemable
Debentures (“Series B Debentures”). These debentures have a term of five years and may be
exchangeable into shares of our common stock after one year, at our option. These debentures are
non-recourse to GreenHunter Energy, and are secured by our GreenHunter Mesquite Lake, Inc. common
stock. Since inception of this series, we have issued approximately $5.3 million of these
debentures, resulting in net proceeds of approximately $4.9 million. This offering was cancelled
during April of 2009.
Note Payable to Related Party
On September 29, 2010 and December 30, 2010, the Company entered into a promissory note with
our Chairman and Chief Executive Officer for $600,000 and $260,000, respectively, due on October
31, 2010 and January 1, 2011, respectively, at an interest rate of 10%. The promissory notes were
extended to April 30, 2011. The promissory note was offset against related party receivable
balance of $93,043. Therefore, the remaining promissory note balance is $766,957.
NOTE 8. INCOME TAXES
At December 31, 2010, we had available for U.S. federal income tax reporting purposes, a
net operating loss (NOL) carry forward for regular tax purposes
of approximately $52 million which
expires in varying amounts during the tax years 2011 through 2030. No provision for federal income
tax expense or benefit is reflected on the statement of operations for the year ended December 31,
2010 because we are uncertain as to our ability to utilize our NOL in the future.
The NOL above includes $2.5 million of deductions for excess stock-based compensation. Excess
stock-based compensation deductions represent stock-based compensation that have generated tax
deductions that have not yet resulted in a cash tax benefit because the Company has NOL
carryforwards. The Company plans to recognize the federal NOL tax assets associated with excess
stock-based compensation tax deductions only when all other components of the federal NOL tax
assets have been fully utilized. If and when the excess stock-based compensation related NOL tax
assets are realized, the benefit will be credited directly to equity.
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The following is a reconciliation of the reported amount of income tax expense (benefit) for
the years ended December 31, 2010 and 2009, to the amount of income tax expense that would result
from applying domestic federal statutory tax rates to pretax income:
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
Statutory tax expense (benefit) |
$ | (1,185 | ) | $ | (2,398 | ) | ||
Change in valuation allowance |
||||||||
Net operating loss |
823 | 2,234 | ||||||
Effect of permanent differences and other |
||||||||
Interest expense disallowed for tax |
— | 162 | ||||||
Effect of other permanent differences |
21 | 2 | ||||||
Unrealized
losses on convertible securities |
$ | 341 | — | |||||
Total Tax Expense |
$ | — | $ | — | ||||
The components of our deferred income taxes were as follows for the years ended December 31,
2010 and 2009:
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
Deferred tax assets: |
||||||||
Net operating loss carryover |
$ | 17,706 | $ | 15,602 | ||||
Capital loss carryover |
77 | 77 | ||||||
Charitable contributions carryover |
4 | 4 | ||||||
Share based compensation |
5,516 | 5,024 | ||||||
Property and equipment |
527 | 2,300 | ||||||
Deferred tax liabilities: |
||||||||
Property, equipment |
— | — | ||||||
Net deferred tax assets |
23,830 | 23,007 | ||||||
Less valuation allowances |
(23,830 | ) | (23,007 | ) | ||||
Net deferred tax |
$ | — | $ | — | ||||
In June 2006, the FASB issued ASC 740 Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109. We adopted ASC 740 on January 1, 2007. Under ASC 740,
tax benefits are recognized only for tax positions that are more likely than not to be sustained
upon examination by tax authorities. The amount recognized is measured as the largest amount of
benefit that is greater than fifty percent likely to be realized upon ultimate settlement.
Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these
recognition and measurement standards.
Upon the adoption of ASC 740, we had no liabilities for unrecognized tax benefits, and, as
such, the adoption had no impact on our financial statements, and we have recorded no additional
interest or penalties. The adoption of ASC 740 did not impact our effective tax rates.
Our policy is to recognize potential interest and penalties accrued related to unrecognized
tax benefits within income tax expense. For the years ended December 31, 2010 and 2009, we did not
recognize any interest or penalties in our consolidated condensed statement of operations, nor did
we have any interest or penalties accrued in our consolidated condensed balance sheet at December
31, 2010 and 2009 relating to unrecognized tax benefits.
In May 2006, the Governor of Texas signed into law a Texas margin tax (H.B. No. 3) which
restructures the state business tax by replacing the taxable capital and earned surplus components
of the
current franchise tax with a new “taxable margin” component. Specifically, we are subject to
a new
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entity level tax on the portion of our total revenue (as that term is defined in the
legislation) that is generated in Texas beginning in our tax year ending December 31, 2008.
Specifically, the Texas margin tax is imposed at a maximum effective rate of 0.7% of our total
revenue that is apportioned to Texas. The new tax had no material impact on our financial
statements.
The tax years 2007-2010 remain open to examination for federal income tax purposes and by the other
major taxing jurisdictions to which we are subject. The tax years 2006-2010 remain open for the
Texas Franchise tax.
Note 9. Stockholders’ Equity
The following table reflects changes in our outstanding common stock, preferred stock and
warrants during the periods reflected in our financial statements:
| Preferred | Common | Treasury | ||||||||||||||||||
| Stock | Stock | Stock | KSOP | Warrants | ||||||||||||||||
January 1, 2009 |
23,075 | 20,988,876 | 44,436 | 15,200 | 6,208,948 | |||||||||||||||
Conversion of Series A Preferred Shares |
(5,750 | ) | 1,150,000 | — | — | — | ||||||||||||||
Issue warrants on 9% Series B Redeemable Debentures issuances |
— | — | — | — | 42,797 | |||||||||||||||
Issue treasury shares for services provided |
— | — | (22,024 | ) | — | — | ||||||||||||||
December 31, 2009 |
17,325 | 22,138,876 | 22,412 | 15,200 | 6,251,745 | |||||||||||||||
Issued 100,000 warrants upon receipt of letter of guaranty
|
— | — | — | — | 100,000 | ) | ||||||||||||||
Warrants expired |
(907,834 | ) | ||||||||||||||||||
December 31, 2010 |
17,325 | 22,138,876 | 22,412 | 15,200 | 5,443,911 | |||||||||||||||
Preferred Stock
Series A Preferred
On March 9, 2007, we authorized and established a series of preferred stock that was
designated as “2007 Series A 8% Convertible Preferred Stock” (“Series A Preferred”). This series
was constituted as 12,500 shares with a stated value per share initially set equal to $1,000. On
March 12, 2007, we executed a securities purchase agreement with institutional investors whereby we
agreed to issue to such institutional investors the following securities of the company for an
aggregate consideration of $15 million: $12.5 million in principal amount of our Series A
Preferred, 500 thousand shares of our common stock at $5.00 per share and 1.5 million common stock
purchase warrants at an exercise price of $7.50 per warrant (of which 1,250,000 warrants were
allocable to the holders of the Series A Preferred).
We allocated $4.62 to each share of common stock and $0.76 to each common stock warrant in
establishing the fair value of these securities. Gross proceeds of $15 million ($14.95 million net
of expenses) were received by us thereafter through May 15, 2007 from the issuance of the preferred
and common stock and the common stock warrants to these institutional investors. The warrants are
described further below.
The Series A Preferred provides for a cumulative dividend that may be payable at our option in
cash or shares of common stock at 115% of the cash dividend payable and using the 10-day average
price per share of common stock. A holder of the Series A Preferred has the right to convert these
shares at any time into shares of common stock at a conversion price of $5.00 per common share. We
may force conversion at any time subject to the following conditions: (i) the closing price of our
common stock exceeds $20.00 for thirty-one trading days, and (ii) the average trading volume of the
shares over the same 31-day period equals or exceeds 65,000 shares. After five years, we may
redeem the preferred stock for cash. Other provisions of the this series of preferred stock
include a liquidation preference, anti-dilution provisions where by the conversion price maybe reduced if we issue securities for less than the then effective conversion price,
voting rights equal to the common
shareholders and other protective provisions. [See Note 10 for additional information on the unrealized loss associated with the antidilutive provision.]
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During March 2009, the holders of 400 shares of our Series A Preferred Stock elected to
convert their preferred shares into common shares. We issued 80,000 shares of common stock upon
the conversion.
During April 2009, the holders of 350 shares of our Series A Preferred Stock elected to
convert their preferred shares into common shares. We issued 70,000 shares of common stock upon
the conversion.
During June 2009, the holders of 5,000 shares of our Series A Preferred Stock elected to
convert their preferred shares into common shares. We issued 1,000,000 shares of common stock upon
the conversion.
We were not able to pay dividends on our Series A Preferred Stock for the quarters ending
December 31, 2008 through September 30, 2010. In accordance with the terms of this preferred
stock, accrued dividends of $1.5 million were added to the stated value of the preferred stock,
resulting in a stated value per share of $1,220 at December 31, 2010. This additional $1.5 million
in stated value will accrue dividends at a 10% rate.
Series B Preferred
On August 21, 2008, we authorized and established a series of preferred stock that was
designated as “2008 Series B Convertible Preferred Stock” (“Series B Preferred”). This series was
constituted as 10,575 shares with a stated value per share equal to $1,000. We executed a
securities purchase agreement with the buyer at this time whereby the buyer returned 1,410,000 of
their existing $7.50 common stock warrants and paid $10.6 million in cash (net of expenses) to
GreenHunter, and we issued 10,575 shares of the Series B Preferred and 1,410,000 common stock
warrants with an exercise price of $25.00. We cancelled the $7.50 common stock warrants which were
returned to us in this transaction.
The Series B Preferred does not provide for any preferential dividends. A holder of the
Series B Preferred has the right to convert these shares at any time into shares of common stock at
a conversion price of $7.50 per common share. We may force conversion at any time subject to the
following conditions: (i) the closing price of our common stock exceeds $20.00 for thirty-one
trading days, and (ii) the average trading volume of the shares over the same 31-day period equals
or exceeds 65,000 shares. After five years, we may redeem the preferred stock for cash. Other
provisions of this series of preferred stock include a liquidation preference, anti-dilution
provisions whereby the conversion price may be reduced if we issue securities for less than the then
effective conversion price, voting rights equal to the common shareholders
and other protective provisions. [See Note 10 for additional information on the unrealized
loss associated with the antidilutive provision.]
We recorded a deemed preferred dividend of $13.9 million in relation to the Series B Preferred
which reflects the excess of the fair value of the securities issued in the transaction over the
carrying value of the warrants cancelled. We also recorded a deemed dividend of $666 thousand
related to the beneficial conversion feature of the stock at the time of the placement.
Common Stock
We have 90,000,000 authorized shares of common stock. We may not pay any dividends on our
common stock until all Series A cumulative preferred dividends have been satisfied.
During 2009, we issued 1,150,000 shares of our common stock to holders of our Series A
Preferred Stock in association with the conversion of 5,750 shares of the preferred as described
above.
On March 31, 2010, the Company granted 192,028 shares of common stock as matching contribution
to the Company’s 401K plan. Additionally, during the year ended December 31, 2010, we granted
share awards to directors totaling 170,600 shares.
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Treasury Stock
During July 2009, we issued 22,024 shares of our treasury stock with a value of $37 thousand
for payment of services provided.
No treasury stock was issued during 2010.
Common Stock Warrants
In association with the Series A preferred stock placement, we issued 1.5 million common stock
warrants. Each of these warrants entitle the holder thereof to purchase one share of our common
stock at $7.50 per share until the expiration date of five years after issuance. We can cause the
warrant to be exercised after one year from March 12, 2007, if our common stock is trading at an
average price over the prior 10 consecutive days of at least $12.50 per share. The warrants
contain customary anti-dilution provisions. [See Note 10 for additional information on the unrealized loss associated with the antidilutive provision.] Additionally, the warrants issued in connection with
the preferred stock were treated as a dividend paid on the preferred stock upon their issuance,
with a fair value of $950 thousand. In association with our Series B Preferred issuance, we
cancelled 1.4 million of these warrants when they were returned to the company.
In association with our April 2007 common stock placement, we issued 500 thousand common stock
warrants. Each common stock purchase warrant entitles the holder thereof to purchase one share of
our common stock at $7.50 per share at any time prior to the expiration date of April 5, 2012. We
can cause the warrants to be exercised after April 5, 2008 if our common stock is trading at an
average price over the prior ten consecutive days of at least $12.50 per share. The warrants
contain customary anti-dilution provisions.
In association with our December 2007 common stock placement, we issued 807,834 common stock
warrants. Each of these warrants entitled the holder to purchase a share of our common stock for
$18.00 per share. These warrants were exercisable immediately and expired three years from the
issue date, in December 2010. The warrants were callable by us if our common stock trades at an
average price at or above $24.00 per share for the previous ten trading days.
During the second quarter of 2008, we issued warrants to our 10% Debenture holders (“Debenture
Warrants”) after the close of the Debenture program. We issued one Debenture Warrant for each $25
of Debentures purchased through April 30, 2008. These warrants have a three-year term beginning
April 30, 2008 and will entitle the holder to purchase one common share of our stock at an exercise
price of $25. The Debenture Warrants will be callable by GreenHunter if our common stock trades
over $30 per share over a 10-day trading period, beginning two years after issuance. Upon the
issuance of these warrants, we recorded a discount on our debentures of $1.7 million which will be
amortized to expense over the contractual term of the related debenture. The discount was
determined based on the relative fair values of the warrants (as determined by the Black-Scholes
options pricing model) and the Debentures.
During the third quarter of 2008, we issued 2,470,004 warrants with a strike price of $27.50
to our common stock and preferred stock holders as dividends. We issued an additional 173,750
warrants with a strike price of $25.00 for exercise inducements. We recorded a common dividend of
$3.2 million and deemed preferred dividends of $599 thousand on our warrant dividends.
During the fourth quarter of 2008, we issued 89,747 warrants upon the issuance of our Series B
Debentures. Under our Series B Debenture offering, subscribers are entitled to 125 warrants for
each $5,000 in principal issued. Warrant pricing was $25 for units acquired prior to October 15,
2008, $27.50 for units acquired after October 15, 2008 but prior to November 15, 2008, and $30.00
for units acquired
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after November 15, 2008. These warrants are exercisable immediately upon issuance and have a
three-year life. We can require the warrant be exercised after one year of issuance if our common
stock is trading at an average price of at least $35.00 per share over the prior 10 consecutive
days of trading. These warrants contain customary anti-dilution provisions.
During the first quarter of 2009, we issued an additional 42,797 warrants upon the issuance of
our Series B Debentures.
During the first quarter of 2010, we granted 100,000 warrants upon the receipt of the letter
of guarantee and credit support from our Chairman and Chief Executive Officer. The exercise price
of the warrants was set at $1.34 as of the issuance date of March 31, 2010, and will be
proportionately increased or decreased upon subsequent combinations or subdivisions of common
stock. These warrants are exercisable immediately upon issuance and have a five-year life. We
determined the grant-date fair value of the warrants to be approximately $69 thousand, or $.69 per
share using the Black-Scholes method with the following inputs: Stock price on the date of grant of
$1.30, exercise price of $1.34, term of 5 years, volatility of 63.13% based on the average
volatility of the Company and five comparable companies, and discount rate of 1.60% based on
expected life of 2.5 years. The grant-date fair value of $69 thousand is included in selling,
general, and administrative expense on our consolidated statement of operations for the year ended
December 31, 2010. In the third quarter of 2010, the Chairman and Chief Executive Officer has
rescinded his right to these warrants.
The following is a summary of warrant activity for the three years ended December 31, 2010 and
2009.
| 2010 | 2009 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average Exercise | Average Exercise | |||||||||||||||
| Shares | Price | Shares | Price | |||||||||||||
Outstanding — Beginning of Year |
6,251,745 | $ | 23.98 | 6,208,948 | $ | 10.52 | ||||||||||
Granted |
100,000 | $ | 1.34 | 42,797 | $ | 30.00 | ||||||||||
Exercised |
— | — | — | $ | — | |||||||||||
Cancelled |
(907,834 | ) | $ | 16.16 | — | $ | — | |||||||||
Outstanding — End of Year |
5,443,911 | $ | 24.87 | 6,251,745 | $ | 23.98 | ||||||||||
Exercisable — End of Year |
5,443,911 | $ | 24.87 | 6,251,745 | $ | 23.98 | ||||||||||
Note 10. Convertible Securities
Effective January 1, 2009, the Company adopted the provisions of Emerging Issues Task Force
(EITF) 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock, which was primarily codified into FASB ASC 815, Derivatives and Hedging (“ASC 815”). As a
result of adopting ASC 815, warrants to purchase shares of the Company’s common stock, the
Company’s Series A Convertible Preferred Stock, and the Company’s Series B Convertible Preferred
Stock previously treated as equity were reclassified as derivative liabilities. As such, effective
January 1, 2009, the Company reclassified the fair value of these securities from equity to
liability status as if these securities were recorded as a derivative liability since their dates
of issuance due to the securities having anti-dilutive provisions.
As
of December 31, 2010 and 2009, the fair value of the unrealized
loss associated with the antidilution provisions on convertible
securities was estimated to be $1.0 million and $0, respectively, using the option-pricing method.
The Company recorded a $1.0 and $0 non-cash charge related to the change in fair value of
unrealized loss on convertible securities for the years ended December 31, 2010 and 2009,
respectively. These warrant
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liabilities are marked to fair value from January 1, 2009 resulting in the recognition of gain
or loss in the Company’s consolidated statements of operations as gain or loss from change in fair
value of warrant liabilities from that date.
Due to the nature of these derivative instruments, the instruments contain no
credit-risk-related contingent features.
Note 11. Stock-Based Compensation
We account for our stock-based compensation in accordance with ASC standards on Share-based
Payments. The standards apply to transactions in which an entity exchanges its equity instruments
for goods or services and also applies to liabilities an entity may incur for goods or services
that are to follow a fair value of those equity instruments. Under the ASC standards, we are
required to follow a fair value approach using an option-pricing model, such as the Black-Scholes
option valuation model, at the date of a stock option grant. The deferred compensation calculated
under the fair value method would then be amortized over the respective vesting period of the stock
option.
Common Stock Options
The company did not grant any stock options during the year ended December 31, 2010.
During June 2009, as compensation for joining the Board, 100,000 shares of stock options were
granted to a Board Member at a strike price of $.97 with an estimated fair value of $.52 per share.
The options have a life of ten years and vest in equal amounts over a three year period beginning
with the date of grant.
During August 2009 the Board of Directors authorized the issuance of 1,961,000 shares of stock
options to current employees. The options were issued at an exercise price of $1.96 with an
estimated fair value of $1.13 per share. The options have a life of 10 years and vest in equal
amounts over a three year period beginning with the date of grant.
During August 2009, as compensation for continued service on the Board, 100,000 shares of
stock options were granted to a Board Member at a strike price of $1.96 with an estimated fair
value of $1.13
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per share. The options have a life of ten years and vest in equal amounts over a three year
period beginning with the date of grant.
During December 2009 the Board of Directors authorized the grant of 500,000 shares of stock
options to current employees. The options have a strike price of $1.41, an estimated fair value of
$0.82 per share and a term of 10 years. Of these options, 100,000 vest after 1 year of service and
400,000 vest upon performance conditions being met.
In September 2010, the Company adopted its 2010 Long-Term Incentive Compensation Plan (the
“Incentive Plan”), which provides for equity incentives to be granted to employees, officers or
directors of the Company, as well as key advisers or consultants. Equity incentives may be in the
form of stock options with an exercise price not less that the fair market value of the underlying
shares on the date of grant, stock appreciation rights, restricted stock awards, stock bonus
awards, other stock-based awards, or any combination of the foregoing. A maximum of 5,000,000
shares of Common Stock were authorized for issuance under the Incentive Plan.
We recorded share-based compensation expense of $1.6 million and $702 thousand during the
years ended December 31, 2010 and 2009, respectively. These expenses are included in our selling,
general and administrative expenses.
As of December 31, 2010, there was $1.2 million of total unrecognized compensation cost
related to unvested shares associated with stock options which will be recognized over a
weighted-average period of 1.55 years. We recognize compensation expense for our stock options on
a straight-line basis over their vesting term. We will issue new shares upon the exercise of the
stock options.
We estimated the fair value of each stock based grant using the Black-Scholes option pricing
method for service and performance based options, and the Lattice Model for market based awards.
The weighted average values for options issued for the year ended December 31, 2009 was as follows:
| 2009 | ||||
Number of options issued |
2,661,000 | |||
Weighted average stock price |
$ | 1.81 | ||
Weighted average exercise price |
$ | 1.52 | ||
Weighted average expected life of options(a) |
5.00 | |||
Weighted average expected volatility (b) |
67.2 | % | ||
Weighted average risk-free interest rate |
2.4 | % | ||
Expected annual dividend per share |
— | |||
Weighted average fair value of each option |
$ | 1.05 | ||
| (a) | As determined by the simplified method under Staff Accounting Bulletin 107. The options have a life of ten years. | |
| (b) | The expected volatility of our common stock was estimated using an average of volatilities of publicly traded companies in similar energy businesses. |
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The following is a summary of stock option activity during the years ended December 31, 2010 and
2009.
| 2010 | 2009 | |||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||
| Average | Aggregate Intrinsic | Average | Aggregate Intrinsic | |||||||||||||||||||||
| Shares | Exercise Price | Value* | Shares | Exercise Price | Value* | |||||||||||||||||||
Outstanding — Beginning of Year |
7,399,832 | $ | 5.93 | $ | — | 5,629,500 | $ | 9.88 | $ | — | ||||||||||||||
Granted |
— | $ | — | — | 2,661,000 | $ | 1.52 | 97,000 | ||||||||||||||||
Exercised |
— | $ | — | — | — | $ | — | — | ||||||||||||||||
Cancelled |
(323,332 | ) | $ | 9.28 | — | (890,668 | ) | $ | 14.40 | — | ||||||||||||||
Outstanding — End of Year |
7,076,500 | $ | 5.95 | — | 7,399,832 | $ | 5.93 | 97,000 | ||||||||||||||||
Exercisable — End of Year |
5,257,497 | $ | 7.65 | — | 4,499,663 | $ | 8.38 | — | ||||||||||||||||
| * | The Aggregate Intrinsic Value was calculated using the December 31, 2010 and 2009 stock price of $0.81 and $1.15. |
The following is a summary of stock options outstanding at December 31, 2010 :
| Weighted | ||||||||||||
| Average | ||||||||||||
| Number of | Number of | Remaining | ||||||||||
| Exercise | Options | Exercisable | Contractual | |||||||||
| Price | Outstanding | Options | Life (Years) | |||||||||
$0.97 |
100,000 | 33,333 | 8.68 | |||||||||
$1.41 |
500,000 | — | 9.21 | |||||||||
$1.96 |
1,725,000 | 574,999 | 8.91 | |||||||||
$5.00 |
3,247,000 | 3,247,000 | 6.63 | |||||||||
$7.50 |
33,333 | 33,333 | 7.01 | |||||||||
$10.00 |
243,333 | 243,333 | 7.16 | |||||||||
$10.12 |
2,500 | 1,666 | 8.03 | |||||||||
$12.00 |
6,500 | 6,500 | 7.24 | |||||||||
$13.66 |
3,000 | 3,000 | 7.76 | |||||||||
$17.76 |
40,000 | 40,000 | 7.37 | |||||||||
$18.00 |
16,667 | 16,667 | 7.45 | |||||||||
$18.91 |
1,099,167 | 997,666 | 7.38 | |||||||||
$19.75 |
13,333 | 13,333 | 7.55 | |||||||||
$20.64 |
25,000 | 25,000 | 7.69 | |||||||||
$22.75 |
21,667 | 21,667 | 7.32 | |||||||||
Share Awards
During the year ended December 31, 2010, we granted 170,600 shares of common stock to the
nonemployee Board of Directors as payment for their fees for the years 2010 and 2009 in lieu of
receiving cash for their fees. These common shares vest immediately. These shares were valued at
weighted average of $1.05 per share, based on the quoted market value of the stock on the date of
the grant, and $179 thousand of expense was recognized in our selling, general, and administrative
expenses as of December 31, 2010 related to these shares. These shares were not issued as of
December 31, 2010 but are included in weighted average basic shares outstanding as of December 31,
2010.
On October 1, 2009, we granted 100,000 shares of restricted common stock to a new executive of
the company. These common shares vest at 25,000 after one year of service, 25,000 vest after two
years of
service, and 50,000 shares vest upon performance conditions being met. These shares were
valued at $1.87, based on the quoted market value of the stock on the date of grant. Share-based
compensation
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expense recognized for these shares was $110,382 and $38,309 for the years ended
December 31, 2010 and 2009, respectively. The remaining $38,309 will be recognized over the
remaining vesting term.
The following is a summary of unvested share awards for the year ended December 31, 2010:
| 2010 | 2009 | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Number of | Grant Date Fair | Number of | Grant Date Fair | |||||||||||||
| Shares | Value per Share | Shares | Value per Share | |||||||||||||
Unvested — Beginning of Year |
100,000 | $ | 1.87 | — | — | |||||||||||
Granted |
170,600 | $ | 1.10 | 100,000 | $ | 1.87 | ||||||||||
Cancelled |
— | — | — | — | ||||||||||||
Exercised |
— | — | — | — | ||||||||||||
Vested |
(195,600 | ) | $ | 1.22 | — | — | ||||||||||
Unvested — End of Period |
75,000 | $ | 1.87 | 100,000 | $ | 1.87 | ||||||||||
Note 12. Commitments and Contingencies
During 2007, we entered into an agreement which grants Chateau, the entity from whom we
purchased the Mesquite Lake plant, the non-exclusive right to represent us in the location and
development of renewable energy projects. In exchange for a quarterly fee of $98 thousand, Chateau
was responsible for locating, analyzing and delineating the business viability, as well as
providing an adequate development strategy for these projects. We paid first quarterly payment of
$98 thousand during June 2007, and these payments were scheduled to continue each quarter until the
final payment in March 31, 2012. During the fourth quarter of 2008, we suspended all payments to
Chateau pending resolution of a dispute regarding the validity of certain air permits that were in
place at Mesquite Lake at the date of our acquisition. On May 4, 2010, we received a release from
all consulting fee obligations pertaining to the agreement to purchase the Mesquite Lake facility.
We reduced selling, general, and administrative expenses by $686 thousand for the year ended
December 31, 2010 as a result of reversing liabilities previously accrued pursuant to the
agreement. We are no longer obligated for the remaining $784 thousand in fees which would have
been previously due under this agreement.
In association with our purchase of the Port Sutton lease option, we agreed to issue
restricted shares to the Seller worth $2 million, subject to a floor price of $14.25 and ceiling of
$25. These shares were to be issued the sooner of 18 months from the October 2008 close date or
upon the first biodiesel production or storage at the site. Accordingly, we were to issue 80,000 shares related to this
acquisition.
In August, 2009 we entered into a 20 year Power Purchase Agreement with a major public utility
based in Southern California for 100% of the net output of our Mesquite Lake biomass power plant
located in Southern California. Under this power purchase agreement we are required to begin power
sales in 2011. Pursuant to the related brokerage agreement, we are required to pay commissions of
$300 thousand within 30 days of execution of the contract and an additional sum of $1.1 million on
various dates subsequent to commercial operations of the plant for a total obligation of $1.4
million. The future obligation is contingent upon us finding financing for capital improvements
and completing the required development of the plant for it to be in operations.
We have an outstanding employment agreement with an executive officer for a term of two years.
Our maximum commitment under the employment agreement, which would apply if the employee covered by
the agreement was terminated without cause, was $500 thousand at December 31, 2010.
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Bioversel
On September 24, 2008, Bioversel, Inc. (“Bioversel”) brought suit against GreenHunter
BioFuels, Inc. alleging that BioFuels has repudiated its biodiesel tolling agreement, as amended,
with Bioversel. Bioversel has alleged breach of contract, fraud and conversion regarding our
ability to process feedstock into biodiesel under the contract.
We have been served with this lawsuit and we have responded. to Bioversel’s first set of
discovery requests and have requested our own sets of discovery. We vigorously deny the
allegations in the lawsuit and believe the lawsuit is completely without merit and have filed a
countersuit against Bioversel for failure to make payments to us under the contract. Trial is set
for April 5, 2011. No amounts have been accrued as no losses are expected as a result of this
claim.
Crown Engineering
Crown Engineering and Construction brought suit against GreenHunter Energy, Inc. on April 1,
2009 alleging that we breached our contract for services to refurbish our biomass plant in
California. On January 18, 2010, a settlement was reached in the lawsuit with Crown Engineering
for $1.8 million.
On October 29, 2010, pursuant to a bankruptcy court order, the bankruptcy trustee, on behalf
of Crown Engineering and GreenHunter Energy entered into an executed mutual release of all claims
each had against the other pending in any state court or other appropriate jurisdiction, including
the release in full of the mechanics lien filed by Crown Engineering against the property and any
indemnification obligations to the other. The difference between the settlement amount and the
original claim was recognized as forgiveness of trade payable and other income for the year ended
December 31, 2010.
As a result of the final settlement with Crown, approximately $1.6 million accrued in
unsettled claims due to subcontractors were written off in October 2010 to forgiveness of trade
payable.
Timothy Aden
On or about June 29, 2007 GreenHunter issued a Private Placement Memorandum to potential
investors for 10% Series A Secured Redeemable Debentures. The plaintiffs allege that the
defendants fraudulently made representations to the plaintiffs that the debentures were
collaterally backed by the biodiesel refinery, when in fact the only collateral for the Debentures
was security in GreenHunter.
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Plaintiffs allege that such misrepresentations violate Alabama state securities laws.
Defendant has not yet responded to this lawsuit. GreenHunter Energy has successfully removed this
case to federal court and has filed a motion demanding arbitration as required by the documents
between the parties. GreenHunter Energy has also filed a motion to dismiss for failure to state a
claim.
Plaintiffs filed an arbitration case for this matter to be heard in Houston, Texas. No date
has been set for arbitration at this time.
Note 13. Related Party Transactions
During 2010 and 2009, we rented an airplane for business use at various times from Pilatus
Hunter, LLC, an entity 100% owned by Mr. Evans. Airplane rental expenses totaled $12 thousand and
$158 thousand, during 2010 and 2009, respectively.
During the year ended December 31 2009, we leased excess office space to Gruy Petroleum
Management, LLC, an entity 100% owned by Mr. Evans, for $48 thousand.
During the year ended December 31, 2010, we provided accounting services and received a fee
from Magnum Hunter Resources Corporation, an entity for which our Chairman and Chief Executive
Officer is an officer and major shareholder. Professional services revenues totaled $90 thousand
for the year ended December 31, 2010.
During 2010, we granted 100,000 warrants upon the receipt of the letter of guarantee and
credit support from our Chairman and Chief Executive Officer, which he subsequently rescinded, as
discussed in Note 9.
On September 29, 2010, and December 30, 2010, the Chairman and Chief Executive Officer loaned
the Company $600 thousand and $260 thousand, respectively, in exchange for promissory notes due
October 31, 2010, and January 1, 2011, respectively, which have been extended to April 30, 2011.
The promissory note was offset against a related party receivable balance $93,043, therefore, the
remaining promissory note balance is $766,957. See Note 7 for additional information.
F-28
Table of Contents
Note 14. Quarterly Financial Data
The following tables set forth unaudited summary financial results on a quarterly basis for
the three most recent years.
| Quarter Ended | Total | |||||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | Year | ||||||||||||||||
2010 |
||||||||||||||||||||
Operating loss |
$ | (1,200,166 | ) | $ | (872,666 | ) | $ | (1,766,333 | ) | $ | (1,581,555 | ) | $ | (5,420,720 | ) | |||||
Net income (loss) attributable to common shareholders |
(2,700,582 | ) | (4,297,358 | ) | (2,749,306 | ) | 29,729,001 | 19,981,755 | ||||||||||||
Basic and diluted earnings (loss) per common share |
$ | (0.12 | ) | $ | (0.19 | ) | $ | (0.12 | ) | $ | 1.32 | $ | 0.89 | |||||||
Weighted average shares |
22,101,861 | 22,373,261 | 22,500,492 | 22,533,363 | 22,428,950 | |||||||||||||||
2009 |
||||||||||||||||||||
Operating loss |
$ | (4,446,274 | ) | $ | (220,806 | ) | $ | (1,245,932 | ) | $ | (2,454,253 | ) | $ | (8,367,265 | ) | |||||
Net income (loss) attributable to common shareholders |
(8,746,889 | ) | 4,449,187 | (3,522,968 | ) | (8,373,542 | ) | (16,194,212 | ) | |||||||||||
Basic and diluted earnings (loss) per common share |
$ | (0.42 | ) | $ | 0.21 | $ | (0.16 | ) | $ | (0.38 | ) | $ | (0.75 | ) | ||||||
Weighted average shares |
20,935,018 | 21,296,822 | 22,097,434 | 22,101,264 | 21,612,172 | |||||||||||||||
Note 15. Segment Data
We currently have two reportable segments: Wind Energy and Biomass. Each of our segments is
a strategic business that offers different products and services. They are managed separately
because each business unit requires different technology, marketing strategies and personnel. All
of our segments are still in development stages with no significant operations.
Our Wind Energy segment is currently in the development stage. We currently have no wind
projects that we are developing.
Our Biomass segment is also in the development stage. We have purchased an inactive 18.5 MW
(nameplate capacity) biomass power plant located in California, Mesquite Lake, and an inactive 14
MW (nameplate capacity) biomass power plant located in Telogia, Florida which was sold during the
first quarter of 2009. We began refurbishing the plant during the third quarter in 2008. During
2008, we found that the existing air permit for the plant was not sufficient to support our planned
operations, and we put this project on hold during the fourth quarter of 2008 while we went through
the re-permitting process. We executed a new power purchase agreement for this facility in October
2009 and we obtained the air permit in July 2010. We plan to resume construction on the facility,
including an expansion of up to 10 Megawatts (“MW”), sometime during the second quarter of 2011,
assuming additional sources of funding are obtained.
Our Biomass segment will produce energy from organic matter available at or near the plant
sites.
The accounting policies for our segments are the same as those described in Note 3. There are
no intersegment revenues or expenses.
F-29
Table of Contents
Segment
data for the two years ended December 31, 2010 and 2009 follows:
| 2010 | ||||||||||||||||
| Unallocated | ||||||||||||||||
| Corporate | BioMass | Wind Energy | TOTAL | |||||||||||||
Total operating costs (recoveries) |
— | — | (10,630 | ) | (10,630 | ) | ||||||||||
Depreciation expense |
189,758 | — | — | 189,758 | ||||||||||||
Loss on asset impairments |
— | — | 160,824 | 160,824 | ||||||||||||
Selling, general and administrative |
4,466,508 | 597,325 | 16,936 | 5,080,769 | ||||||||||||
Operating income (loss) |
(4,656,266 | ) | (597,325 | ) | (167,130 | ) | (5,420,721 | ) | ||||||||
Other income and (expense) |
(619,373 | ) | 2,305,527 | 250,002 | 1,936,156 | |||||||||||
Income (loss) from continuing operations |
$ | (5,275,639 | ) | $ | 1,708,202 | $ | 82,872 | $ | (3,484,565 | ) | ||||||
Total Assets |
$ | 5,038,025 | $ | 18,358,457 | $ | 21,530 | $ | 23,418,012 | ||||||||
Capital Expenditures |
$ | 634,293 | $ | 1,470,232 | $ | — | $ | 2,104,525 | ||||||||
| 2009 | ||||||||||||||||
| Unallocated | ||||||||||||||||
| Corporate | BioMass | Wind Energy | TOTAL | |||||||||||||
Total operating costs (recoveries) |
(449,941 | ) | 38,309 | 67,136 | (344,496 | ) | ||||||||||
Depreciation expense |
182,405 | — | 46,291 | 228,696 | ||||||||||||
Loss on asset impairments |
1,651,161 | — | 217,750 | 1,868,911 | ||||||||||||
Selling, general and administrative |
4,835,147 | 1,139,979 | 639,028 | 6,614,154 | ||||||||||||
Operating loss |
(6,218,772 | ) | (1,178,288 | ) | (970,205 | ) | (8,367,265 | ) | ||||||||
Other income and (expense) |
2,030,461 | 7,878 | (723,360 | ) | 1,314,979 | |||||||||||
Loss from continuing operations |
$ | (4,188,311 | ) | $ | (1,170,410 | ) | $ | (1,693,565 | ) | $ | (7,052,286 | ) | ||||
Total Assets |
$ | 12,753,524 | $ | 15,704,951 | $ | 229,484 | $ | 28,687,959 | ||||||||
Capital Expenditures |
$ | 6,748 | $ | 40,865 | $ | — | $ | 47,613 | ||||||||
Note
16. Subsequent Events (Unaudited)
We have sold 347,500 units for total proceeds of $695 thousand under our private placement
only to accredited investors from December 31, 2010 through the date of this report. Each unit
consists of two shares of common stock and one common stock purchase
warrant with an exercise price of $1.50 and one common stock purchase
warrant with an exercise price of $2.50. The warrants are exercisable immediately and
expire on January 31, 2014.
On
March 30, 2011, we received a letter of guarantee from the
Chairman and Chief Executive Officer of the Company for up to
$1.5 million of credit support if needed to fund operations.
F-30
Table of Contents
(b) Exhibits
| Exhibit | |||
| Number | Exhibit Title | ||
3.1*
|
Certificate of Incorporation | ||
3.2*
|
Amendment to the Certificate of Incorporation | ||
3.3*
|
Bylaws | ||
4.1***
|
Amended and Restated Certificate of Designations of 2007 Series A 8% Convertible Preferred Stock | ||
4.2***
|
Form of Warrant Agreement by and between GreenHunter Energy, Inc. and West Coast Opportunity Fund, LLC | ||
4.3*
|
Form of Warrant Agreement by and between GreenHunter Energy, Inc. and certain accredited investors | ||
4.4***
|
Certificate of Designations of 2008 Series B Convertible Preferred Stock | ||
10.1*
|
Stock Purchase Agreement dated February 2007 among Channel Refining Corporation, GreenHunter Energy, Inc. and certain selling shareholders | ||
10.2*
|
Amendment No. 1 to Stock Purchase Agreement dated February 2007 among Channel Refining Corporation, GreenHunter Energy, Inc. and certain selling shareholders | ||
10.3*
|
Purchase and Sale Agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. regarding acquisition of power purchase agreement | ||
10.4*
|
Purchase and Sale Agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. regarding acquisition of Mesquite Lake Resource Recovery Facility | ||
10.5*
|
Consulting Agreement dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. | ||
10.6*
|
Registration rights agreement, dated March 9, 2007 between GreenHunter Energy, Inc. and certain institutional investors | ||
10.7*
|
Registration rights agreement, dated April 13, 2007 between GreenHunter Energy, Inc. and certain selling shareholders | ||
10.8*
|
Investor rights agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. | ||
10.9*
|
Form of subordinated promissory note of GreenHunter BioFuels, Inc. | ||
10.10**
|
Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | ||
10.11****
|
First Amendment to Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | ||
10.12†
|
Second amendment to Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | ||
10.13*****
|
Third amendment to Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | ||
21.1†
|
List of Subsidiaries | ||
31.1 †
|
Certifications of the Chief Executive Officer. | ||
31.2 †
|
Certifications of the Chief Financial Officer. | ||
32.1 †
|
Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 †
|
Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| * | Incorporated by reference to the Company’s Form 10, dated October 19, 2007 | |
| ** | Incorporated by reference to the Company’s Form 10-Q, dated May 15, 2008 | |
| *** | Incorporated by reference to the Company’s Form 8-K, dated August 21, 2008 | |
| **** | Incorporated by reference to the Company’s Form 8-K, dated June 25, 2009 | |
| ***** | Incorporated by reference to the Company’s Form 8-K, dated March 30, 2010 | |
| † | Filed herewith |
F-31
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| GreenHunter Energy, Inc. |
||||
| Date: March 31, 2010 | By: | /s/ Gary C. Evans | ||
| Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and in
the capacity and on the dates indicated.
| Signature | Title | Date | ||
/s/ Gary C. Evans
|
Chairman and Chief Executive Officer | March 31, 2011 | ||
/s/ Jonathan D. Hoopes
|
President and COO | March 31, 2011 | ||
/s/ Morgan F. Johnston
|
Sr. Vice President, General Counsel and Secretary | March 31, 2011 | ||
/s/ David S. Krueger
|
Vice President and Chief Financial Officer | March 31, 2011 | ||
/s/ Ronald D. Ormand
|
Director | March 31, 2011 | ||
/s/ Ronald H. Walker
|
Director | March 31, 2011 |
F-32
Table of Contents
Exhibit Index
| Exhibit | ||
| Number | Exhibit Title | |
3.1*
|
Certificate of Incorporation | |
3.2*
|
Amendment to the Certificate of Incorporation | |
3.3*
|
Bylaws | |
4.1***
|
Amended and Restated Certificate of Designations of 2007 Series A 8% Convertible Preferred Stock | |
4.2***
|
Form of Warrant Agreement by and between GreenHunter Energy, Inc. and West Coast Opportunity Fund, LLC | |
4.3*
|
Form of Warrant Agreement by and between GreenHunter Energy, Inc. and certain accredited investors | |
4.4***
|
Certificate of Designations of 2008 Series B Convertible Preferred Stock | |
10.1*
|
Stock Purchase Agreement dated February 2007 among Channel Refining Corporation, GreenHunter Energy, Inc. and certain selling shareholders | |
10.2*
|
Amendment No. 1 to Stock Purchase Agreement dated February 2007 among Channel Refining Corporation, GreenHunter Energy, Inc. and certain selling shareholders | |
10.3*
|
Purchase and Sale Agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. regarding acquisition of power purchase agreement | |
10.4*
|
Purchase and Sale Agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. regarding acquisition of Mesquite Lake Resource Recovery Facility | |
10.5*
|
Consulting Agreement dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. | |
10.6*
|
Registration rights agreement, dated March 9, 2007 between GreenHunter Energy, Inc. and certain institutional investors | |
10.7*
|
Registration rights agreement, dated April 13, 2007 between GreenHunter Energy, Inc. and certain selling shareholders | |
10.8*
|
Investor rights agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. | |
10.9*
|
Form of subordinated promissory note of GreenHunter BioFuels, Inc. | |
10.10**
|
Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | |
10.11****
|
First Amendment to Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | |
10.12†
|
Second amendment to Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | |
10.13*****
|
Third amendment to Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | |
31.1 †
|
Certifications of the Chief Executive Officer. | |
31.2 †
|
Certifications of the Chief Financial Officer. | |
32.1 †
|
Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 †
|
Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
*
|
Incorporated by reference to the Company’s Form 10, dated October 19, 2007 | |
**
|
Incorporated by reference to the Company’s Form 10-Q, dated May 15, 2008 | |
***
|
Incorporated by reference to the Company’s Form 8-K, dated August 21, 2008 | |
****
|
Incorporated by reference to the Company’s Form 8-K, dated June 25, 2009 | |
*****
|
Incorporated by reference to the Company’s Form 8-K, dated March 30, 2010 | |
†
|
Filed herewith |