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EX-32 - EXHIBIT 32.2 - GreenHunter Resources, Inc.ex32-2.htm



 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 


FORM 10-Q


 

 

 

 

  

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2014

 

-OR-

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from             to            

 

Commission file number 001-33893 

 

 

 

 

 


GREENHUNTER RESOURCES, INC.

(Name of registrant as specified in its charter)


 

 

 

 

 

 

 

 

Delaware

20-4864036

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

1048 Texan Trail, Grapevine, TX 76051

(Address of principal executive offices)

 

(972) 410-1044

(Issuer’s telephone number)


 

 

 

 

 

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding twelve months, and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

As of November 11, 2014 there were 35,483,055 shares of the registrant’s common stock ($0.001 par value) outstanding.

 



 

 
 

 

 

PART 1—FINANCIAL INFORMATION

Item 1.       Financial Statements

GREENHUNTER RESOURCES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

   

September 30, 2014

   

December 31, 2013

 

ASSETS

               

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 570,798     $ 1,302,857  

Restricted cash

    132,000       -  

Accounts receivable, net of allowance of $370,820 and $380,280, respectively

    3,642,533       6,907,111  

Related party accounts receivable, no allowance considered necessary

    1,076,236       906,701  

MAG Tank™ inventory

    1,997,149       82,300  

Prepaid expenses and other current assets

    821,253       1,708,705  

Total current assets

    8,239,969       10,907,674  

FIXED ASSETS:

               

Fixed assets, net

    22,493,256       22,493,594  

Assets held for sale

    2,613,646       14,498,754  

Net fixed assets

    25,106,902       36,992,348  

OTHER ASSETS:

               

Other non-current assets

    87,962       125,778  

Total assets

  $ 33,434,833     $ 48,025,800  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

CURRENT LIABILITIES:

               

Current portion of notes payable

  $ 5,560,010     $ 7,056,725  

Accounts payable and accrued liabilities, $1,183,698 non-recourse to parent for biomass

    7,837,060       13,134,677  

Accounts payable to a related party

    173,913       133,517  

Liabilities associated with assets held for sale

    100,100       270,326  

Total current liabilities

    13,671,083       20,595,245  

NON-CURRENT LIABILITIES:

               

Notes payable, less current portion

    6,372,968       7,987,848  

Asset retirement obligation

    907,726       797,786  

Liabilities associated with assets held for sale

    155,104       288,514  

Total liabilities

    21,106,881       29,669,393  

COMMITMENTS AND CONTINGENCIES (Note 10 )

               

STOCKHOLDERS’ EQUITY:

               

Series C Preferred Stock, $.001 par value, $25 stated value, 2,000,000 authorized shares, 1,975,250 issued and outstanding and liquidation preference of $49,381,250 at September 30, 2014 and 2,000,000 issued and outstanding and liquidation preference of $50,000,000 at December 31, 2013

    39,710,764       40,387,706  

Common stock, $.001 par value, 90,000,000 shares authorized, 35,491,389 issued and 35,483,055 outstanding at September 30, 2014, and 33,796,389 issued and 33,788,055 outstanding at December 31, 2013

    35,491       33,796  

Additional paid-in capital

    122,163,799       118,809,722  

Accumulated deficit

    (149,572,953 )     (140,865,668 )

Treasury stock, at cost, 8,334 shares at both dates

    (9,149 )     (9,149 )

Total stockholders’ equity

    12,327,952       18,356,407  

Total liabilities and stockholders’ equity

  $ 33,434,833     $ 48,025,800  

 

See accompanying notes to the condensed consolidated financial statements

 

 
-1-

 

 

 

 

GREENHUNTER RESOURCES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013 

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2014

   

2013

   

2014

   

2013

 

REVENUES:

                               

Water disposal revenue

  $ 3,424,318     $ 2,907,559     $ 10,739,288     $ 8,218,912  

Transportation revenue

    2,442,863       2,712,986       8,698,553       6,246,322  

Environmental services revenue

    52,756       -       54,755       -  

MAG Tank™ revenue

    -       1,650,000       886,142       1,650,000  

Skim oil revenue

    197,592       226,390       718,480       761,840  

Storage rental revenue and other

    145,417       271,004       516,576       1,429,481  

Total revenues

    6,262,946       7,767,939       21,613,794       18,306,555  

COST OF GOODS AND SERVICES PROVIDED:

                               

Cost of goods and services provided

    3,541,779       5,908,310       14,551,747       12,793,604  

Depreciation and accretion expense

    725,224       699,889       2,218,366       2,129,903  

Stock based compensation

    1,110,888       355,040       3,714,700       1,255,224  

Selling, general and administrative

    2,105,876       1,904,775       6,273,264       5,510,529  

Total costs and expenses

    7,483,767       8,868,014       26,758,077       21,689,260  

OPERATING LOSS

    (1,220,821 )     (1,100,075 )     (5,144,283 )     (3,382,705 )

OTHER INCOME (EXPENSE):

                               

Interest and other income

    4,128       76,837       88,177       77,742  

Interest, amortization and other expense

    (303,848 )     (231,356 )     (1,111,492 )     (690,989 )

Gain (loss) on sale of assets

    26,000       (17,243 )     (39,198 )     2,240,076  

Gain on settlements of payables

    -       5,000       133,554       -  

Total other income / (expense)

    (273,720 )     (166,762 )     (928,959 )     1,626,829  

Net loss before taxes

    (1,494,541 )     (1,266,837 )     (6,073,242 )     (1,755,876 )

Income tax expense

    -       -       -       -  

Loss from continuing operations (Note 3)

    (1,494,541 )     (1,266,837 )     (6,073,242 )     (1,755,876 )

Income (loss) from discontinued operations

    (1,199,051 )     896,061       1,100,488       (6,613,135 )

Net loss

    (2,693,592 )     (370,776 )     (4,972,754 )     (8,369,011 )

Preferred stock dividends

    (1,234,532 )     (1,174,256 )     (3,734,531 )     (3,337,286 )

Net loss to common stockholders

  $ (3,928,124 )   $ (1,545,032 )   $ (8,707,285 )   $ (11,706,297 )
                                 

Weighted average shares outstanding, basic and diluted

    35,491,389       33,574,173       34,783,587       33,493,046  

Net loss per share from continuing operations, basic & diluted

  $ (0.08 )   $ (0.08 )   $ (0.28 )   $ (0.15 )

Net income (loss) per share from discontinued operations, basic & diluted

  $ (0.03 )   $ 0.03     $ 0.03     $ (0.20 )

Net loss per share, basic & diluted

  $ (0.11 )   $ (0.05 )   $ (0.25 )   $ (0.35 )

  

See accompanying notes to the condensed consolidated financial statements

 

 
-2-

 

 

 

 

 

GREENHUNTER RESOURCES, INC.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE PERIOD FROM JANUARY 1, 2014 TO SEPTEMBER 30, 2014

 

   

Series C Preferred Stock

   

Common Stock

   

Additional Paid in Capital

   

Accumulated Deficit

   

Treasury Stock

   

Total Stockholders' Equity

 

BALANCE, JANUARY 1, 2014

  $ 40,387,706     $ 33,796     $ 118,809,722     $ (140,865,668 )   $ (9,149 )   $ 18,356,407  

Share based payments to officers

          $ 1,695     $ 1,659,405                       1,661,100  

Stock based compensation expense

                    1,652,818                       1,652,818  

Warrants issued in connection with debt offering

                    41,854                       41,854  

Gain on settlement of lawsuits

    (676,942 )                                     (676,942 )

Dividends on preferred stock

                            (3,734,531 )             (3,734,531 )

Net loss

                            (4,972,754 )             (4,972,754 )

BALANCE, SEPTEMBER 30, 2014

  $ 39,710,764     $ 35,491     $ 122,163,799     $ (149,572,953 )   $ (9,149 )   $ 12,327,952  

   

 See accompanying notes to the condensed consolidated financial statements

 

 
-3-

 

 

 

GREENHUNTER RESOURCES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013  

  

   

For the Nine Months Ended September 30,

 
   

2014

   

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (4,972,754 )   $ (8,369,011 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and accretion expense

    2,233,063       3,083,690  

Impairment of asset value

    930,969       1,249,444  

Discount of notes receivable

    164,260       -  

Goodwill impairment

    -       2,799,044  

Gain on sale of assets

    (1,115,559 )     (1,839,608 )

Gain on settlement of payables

    (133,554 )     -  

Gain on settlement of lawsuits

    (1,859,145 )     -  

Non-cash stock-based compensation

    3,714,700       1,255,224  

Amortization of debt discount

    201,233       -  

Changes in operating assets and liabilities:

               

Accounts receivable

    3,008,578       (1,817,754 )

Related party accounts receivable

    (169,535 )     1,163,044  

Inventory

    (1,914,849 )     (82,300 )

Prepaid expenses and other current assets

    925,268       (595,531 )

Accounts payable and accrued liabilities

    (5,135,639 )     (2,952,191 )

Related party accounts payable

    40,396       -  

Net cash used in operating activities

    (4,082,568 )     (6,105,949 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Capital expenditures

    (2,257,917 )     (5,424,074 )

Proceeds from notes receivable

    5,085,740       -  

Proceeds from sale of assets

    6,817,741       5,388,657  

Change in restricted cash

    (132,000 )     -  

Net cash provided by (used in) investing activities

    9,513,564       (35,417 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from the issuance of equity securities

    -       8,329,765  

Proceeds from the exercise of warrants and options

    -       100,167  

Proceeds from notes payable

    1,755,682       3,325,979  

Payment of notes payable

    (4,184,206 )     (2,961,697 )

Preferred stock dividends paid

    (3,734,531 )     (3,337,286 )

Net cash provided by (used in) financing activities

    (6,163,055 )     5,456,928  
                 

CHANGE IN CASH

    (732,059 )     (684,438 )

CASH, beginning of period

    1,302,857       1,765,642  

CASH, end of period

  $ 570,798     $ 1,081,204  
                 

Cash paid for interest

  $ 1,093,574     $ 659,000  
                 

NON-CASH TRANSACTIONS:

               

Accrued capital costs

  $ 788,356     $ 1,347,106  

Issued shares of common stock as commission for sale of purchased stock

  $ -     $ 174,969  

Issued warrants in connection with sale of preferred stock

  $ 41,855     $ 124,422  

KSOP shares

  $ -     $ 78,108  

Notes receivable received in connection with sale of assets

  $ 5,250,000     $ -  

 

See accompanying notes to the condensed consolidated financial statements

 

 
-4-

 

  

GREENHUNTER RESOURCES, INC.

AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

 

In this quarterly report on Form 10-Q, the words “GreenHunter Resources”, “company”, “we”, “our” and “us” refer to GreenHunter Resources, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires. The condensed consolidated balance sheet of GreenHunter Resources, Inc. and subsidiaries as of September 30, 2014, the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013, the condensed consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2014, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013, are unaudited. The December 31, 2013 condensed consolidated balance sheet information is derived from audited financial statements. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) as required by Regulation S-X, Rule 10-01 have been made to present fairly the financial position at September 30, 2014, and the results of operations for the three and nine months ended September 30, 2014 and 2013, changes in stockholders’ equity for the nine months ended September 30, 2014, and cash flows for the nine month periods ended September 30, 2014 and 2013. Non-recurring adjustments based on generally accepted accounting principles for discontinued operations, assets held for sale, and liabilities associated with assets held for sale have also been made.

 

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in our December 31, 2013 Form 10-K. The results of operations for the three and nine month periods ended September 30, 2014 are not necessarily indicative of the operating results that will occur for the full year.

 

The accompanying condensed consolidated financial statements include the accounts of the company and our subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain items have been reclassified to conform with the current presentation. 

 

Fair Value of Financial Instruments

 

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.

 

Income or Loss per Common Share

 

Basic income or loss per common share is net income or loss applicable to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted 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, warrants, convertible debentures, preferred stock, and convertible promissory notes.

 

 
-5-

 

 

 

 

Shares of our common stock underlying the following securities were not included in dilutive weighted average shares outstanding for the nine months ended September 30, 2014 and 2013, as their effects would have been anti-dilutive.

 

   

September 30,

 
   

2014

   

2013

 

Stock options

    14,824,821       12,823,146  

Warrants

    625,010       3,290,278  

Convertible debentures

    56,871       83,513  

Convertible promissory notes

    550,000       770,000  

Total

    16,056,702       16,966,937  

 

Our Series C Preferred Stock is only convertible to common stock at the shareholders election upon a change in control of the Company. The potential dilutive effect of Series C Preferred Stock based on the closing price as of September 30, 2014 would be 32,065,747 common shares.

 

Management Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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. Actual results could differ from those estimates. Significant estimates include the following:

 

the allocation of purchase price to assets and liabilities acquired,

allowance for doubtful accounts receivable,

asset retirement obligations,

fair value of stock-based compensation,

contingent liabilities, and

the assessment of assets for impairment.

 

Critical Accounting Policies and Other

 

 In April 2014, the FASB issued guidance regarding the reporting of discontinued operations. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The guidance is effective for interim and annual periods beginning on or after December 15, 2014. We do not expect adoption of this guidance to have a material impact on our financial position or results of operations. We are currently evaluating the impact of this guidance on our financial statements.

 

In May 2014, the FASB issued new authoritative accounting guidance related to the recognition of revenue. This authoritative accounting guidance is effective for the annual period beginning after December 15, 2016, including interim periods within that reporting period, and is to be applied using one of two acceptable methods. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

 

NOTE 2. LIQUIDITY

 

Current Plan of Operations and Ability to Operate as a Going Concern

 

As of September 30, 2014, we had a working capital deficit of $5.4 million of which $1.2 million is non-recourse to the parent company, GreenHunter Resources, Inc. While we are generating increasingly significant revenues from our water management activities, we have continued to experience losses from our ongoing operations (but at a significantly reduced level), which raises doubt about our ability to continue as a going concern. Additionally, we were not in compliance with certain existing debt covenants contained in our secured debt agreements as of December 31, 2013. We obtained waivers from two of our lenders for the non-compliance in our debt covenants for the year ending December 31, 2013, and for an additional grace period for the year ending December 31, 2014 from one of the lenders.

 

 
-6-

 

 

In late 2013, Management decided to focus on expanding our future operations specifically only in the Appalachian Region. As part of this strategy, we committed to a plan to sell our fixed assets in South Texas and Oklahoma. These assets were classified as held for sale as of December 31, 2013. Most of these assets have been sold as of September 30, 2014, and the remaining few unsold assets continue to be held for sale at September 30, 2014. We have generated significant cash from the sale of these non-core assets. We have used this additional capital to assist in significantly reducing our working capital deficit and to provide growth capital needed to fund additional new projects that are a part of our overall business plan to grow our business in Appalachia. Our working capital deficit has improved from a $9.7 million deficit at December 31, 2013 to our current deficit of $5.4 million at September 30, 2014, $1.2 million of which is non-recourse to the parent company.

 

The remaining assets located in Oklahoma continue to be held for sale at September 30, 2014. We anticipate we will close on the sale of these assets by the end of 2014. The Company believes the amount for which it will be able to sell these assets is less than previously anticipated. The Company has also had to perform additional work on one of the wells to bring it to a saleable condition. As a result, the Company has recorded impairment of $931 thousand, which is included in discontinued operations, on these assets during the third quarter of 2014. These assets are being marketed at amounts equal to or in excess of their remaining net book value as of September 30, 2014. In December 2013, the Company entered into a letter of intent to sell our remaining renewable asset, a biomass plant, which included a non-refundable fee of $25 thousand that granted the buyer an exclusive right to purchase the property through February 15, 2014. On February 19, 2014, GreenHunter Mesquite Lake entered an agreement to sell the biomass project to ML Energy Park, LLC for $2.0 million. The closing is scheduled for March 15, 2015. The prospective buyer made an initial payment of $50 thousand as earnest money deposit and has continued to pay $50 thousand per month to date (total of $425 thousand received to date) and is required to continue the monthly payments for a one year period or until deciding to ultimately purchase the property. The monthly payments, as well as the initial $25 thousand fee, are non-refundable and can be used at our discretion, but will be applied to the purchase price if it is ultimately consummated.  The Company has used the payments to reduce the carrying value of the remaining asset on its books.

 

During the year ended December 31, 2013, the Company borrowed $1.5 million under a promissory note due to the Company’s Chairman and Chief Executive Officer. In July of 2014, the Company paid our Chairman and Chief Executive Officer $1.3 million on the loan. In September of 2014, the Company paid an additional $50 thousand on the loan. There is an outstanding balance of $150 thousand as of September 30, 2014, leaving $1.9 million available under this facility. Should the Company borrow any available amounts, they will carry an interest rate of 13% per annum which is convertible to common stock. The $2.0 million letter of guarantee associated with this note has been extended through December 31, 2014.

 

 

On August 11, 2014, GreenHunter Resources filed a shelf registration statement on Form S-3 with the SEC. The registration statement became effective on October 24, 2014. The registration will allow for the Company to sell from time to time, in one or more offerings, any combination of its debt securities, guarantees of debt securities, common stock, preferred stock and warrants in an aggregate initial offering price of up to $150 million.

 

On September 16, 2014, the Company announced the receipt of permits and the completion of downhole performance tests on new wells at our Mills Hunter facility located in Meigs County, Ohio. Recent bottom hole integrity tests of these wells indicate volume capabilities of between 3,000 to 5,000 barrels of oilfield brine water per day per well. This increase in capacity is in line with earlier projections made by the Company to double injection capacity by the end of calendar year 2014. The addition of these wells brings GreenHunter’s SWD well count up to 13 in the Appalachia Basin, with a new total daily injection capacity exceeding 31,000 barrels per day. The majority of this new oilfield brine water injection capacity at the Mills Hunter facility has already been committed to several large E&P companies active in the region, secured through long term take-or-pay agreements. Utilization of these wells will commence upon the completion of a pipeline that will connect these wells to the offload terminal at the Mills Hunter facility. The pipeline is currently under construction with over 70% of the pipeline installation completed. The Company anticipates it to be completed and in operation by the end of 2014.

 

The Company is currently negotiating with potential investors to obtain financing for a multiple pipeline project and related assets.

 

We anticipate having sufficient cash reserves to meet all of our anticipated operating obligations for the next twelve months and having available funds necessary for some of our growth projects in Appalachia from the following sources:

 

Increased revenue generated from our water management activities, including the new wells now being completed at our Mills Hunter facility

The expected sale of our remaining assets held for sale at September 30, 2014

The sale of our Mesquite Lake property

Letter of credit guarantee from our Chairman

The sale of debt or equity securities under a universal “shelf” registration statement

The proceeds from capital project related financing

  

 
-7-

 

 

Our ability to fund all of our planned capital expenditures is largely dependent on the Company’s ability to secure additional new capital. Management believes that the steps we have taken to significantly improve our working capital position will enhance the prospect of seeking additional capital through a number of different sources. However, there can be no assurance that the Company will be successful in raising sufficient capital to fund the development of our water management business and associated ventures or that we will generate sufficient cash flow to fund our ongoing operating cash flow needs, in which case, we will be required to seek alternative financing, sell our assets, or any combination thereof. Further, considering our financial condition, we may be forced to accept financing or sell assets at terms less favorable than would otherwise be available, however, we have been successful in achieving at least market value for the non-core assets sold to date.

 

NOTE 3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

 

In late 2013, we adopted a plan to sell all of our assets in South Texas and Oklahoma and discontinue our operations in these two geographical areas in order to concentrate 100% of our efforts in Appalachia. Based on this decision, the Company is continuing to negotiate with buyers for its three disposal wells in Oklahoma, has already sold all of its disposal wells in South Texas which include three operating wells and a lease to develop a fourth disposal well, and has sold or has auction dates set for the sale of the remaining assets previously classified as held for sale for White Top and Blackwater, which were used in our South Texas operations.

  

We ceased depreciation of fixed assets held for sale as of December 2013.

 

On May 14, 2007, we acquired a 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. For multiple reasons, including economic, Management subsequently determined that development of this project was not practicable. We obtained an independent evaluation of the asset’s salvage value as of December 31, 2012, which was $2.0 million, and recorded an impairment to write the asset down to that amount. On December 23, 2013, the Company entered into a letter of intent to sell the biomass plant, which included a non-refundable fee of $25 thousand that granted the buyer an exclusive right to purchase the property through February 15, 2014. On February 19, 2014, GreenHunter Mesquite Lake entered an agreement to sell the Mesquite Lake Biomass Project to ML Energy Park, LLC for $2.0 million. The final closing is scheduled for March 15, 2015. The prospective buyer made an initial payment of $50 thousand as earnest money deposit and has continued to pay $50 thousand per month, totaling $425 thousand to date, and is required to continue monthly payments for a one year period or until deciding to ultimately purchase the property. The monthly payments and the initial $25 thousand fee are non-refundable, but will be applied to the purchase price if it is ultimately consummated. The Company has used the payments to reduce the carrying value of the remaining asset on its books. The biomass assets were classified as held for sale at September 30, 2014. The previously reportable Biomass segment is being reported as part of discontinued operations.

 

The following represents selected items from the results of discontinued operations as of the dates indicated:  

 

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2014

   

2013

   

2014

   

2013

 

Revenue from discontinued operations

  $ 48,152     $ 2,895,415     $ 571,537     $ 9,861,613  

Gain on settlement of lawsuits

    -       -       1,859,145       -  

Gain (loss) on sale of assets

    12,805       76,984       1,154,756       (400,468 )

Goodwill impairment

    -       -       -       2,799,044  

Impairment of assets

    930,969       (662,473 )     930,969       1,249,444  

Net income (loss) from discontinued operations before taxes

    (1,199,051 )     896,061       1,100,488       (6,606,460 )

Income tax expense

    -       -       -       (6,675 )

Income (loss) from discontinued operations

    (1,199,051 )     896,061       1,100,488       (6,613,135 )

 

 
-8-

 

 

 

NOTE 4. ACQUISITIONS AND DIVESTITURES

 

White Top and Blackwater

 

We sold a portion of the equipment of White Top and Blackwater, which consisted mainly of fluid hauling trucks and trailers and heavy construction equipment, during the first nine months of 2014. The sales resulted in a gain of approximately $97 thousand. We moved certain of the remaining assets to our field operations in the Appalachian Region and anticipate selling at auction the few remaining assets classified as held for sale belonging to these companies in the fourth quarter of 2014. We anticipate that the remaining equipment that is scheduled to be auctioned will sell for amounts equal to or in excess of our net book value at September 30, 2014.

 

Kenedy Hunter and Coy City Hunter Disposal Wells

 

On January 28, 2014, GreenHunter Water sold a saltwater disposal well and associated equipment and certain real property located in Karnes County, Texas for aggregate consideration of approximately $3.9 million pursuant to an Asset Purchase Agreement with Sable Environmental SWD 5, LLC. GreenHunter Water received $1.0 million in cash at closing and a promissory note for approximately $2.9 million with an interest rate of 10% per annum and maturity date of January 31, 2016. GreenHunter Water paid the joint venture partner $200 thousand from the consideration received at closing, resulting in a gain on the sale of approximately $202 thousand, which is included in discontinued operations.

 

Dilley Disposal Well

 

On May 1, 2014, the Company’s wholly-owned subsidiary, GreenHunter Water, LLC, completed the sale of a saltwater disposal well and associated equipment located in Frio County, Texas pursuant to an Asset Purchase Agreement with Sable Environmental SWD 7, LLC. The Dilley Hunter SWD well was sold for total consideration of $4.7 million which was received at closing. The Company also received at closing the final payment for that certain promissory note dated January 29, 2014, in the principal amount of approximately $2.9 million between GreenHunter Water, LLC and Sable Environmental SWD 5, LLC, resulting in a gain of approximately $765 thousand. Therefore, the amount of cash consideration for these transactions totaled approximately $7.6 million.

  

Westhoff Hunter Disposal Well

 

On March 26, 2014, GreenHunter Water sold a saltwater disposal well and associated equipment and certain real property located in DeWitt County, Texas for aggregate consideration of approximately $3.4 million pursuant to an Asset Purchase Agreement with Clear Water Resources Partners, LLC. GreenHunter Water received $1.0 million in cash at closing and a promissory note for approximately $2.4 million with an interest rate of 10% per annum and maturity date of May 1, 2016. GreenHunter Water paid the joint venture partner $100 thousand from the consideration received at closing, resulting in a gain on the sale of approximately $140 thousand. The purchaser previously made all the required payments of principal and interest on the note prior to August 21, 2014. On August 21, 2014, the Company entered into an agreement with the purchaser to discount the note and release its lien on the property in exchange for a full payoff of the note. The purchaser paid off the note in full for a total consideration of approximately $2.2 million, representing a 7.5% discount to the remaining principal balance owed on the note.

 

Oklahoma Disposal Wells

 

We are currently in negotiations with various parties to sell all three Oklahoma SWD wells and facilities, one of which was in operation at September 30, 2014, to a single buyer. This sale is anticipated to close by the end of 2014. We anticipate that we will receive less for this property than previously anticipated, so we recorded and impairment to these properties of approximately $931 thousand in the third quarter of 2014, which includes some costs incurred to get the assets in saleable condition.

 

 
-9-

 

 

NOTE 5. FIXED ASSETS

 

Fixed assets are stated at cost. The following is a schedule of our fixed assets as of September 30, 2014 and December 31, 2013:  

 

   

September 30, 2014

   

December 31, 2013

 

Land and improvements

  $ 1,567,824     $ 1,549,059  

Buildings

    2,517,869       2,517,869  

Water facilities, equipment, and other fixed assets

               

Water disposal and handling facilities

    12,915,884       12,645,594  

Fixed assets not yet in service

    1,883,757       858,000  

Transportation equipment

    7,847,948       7,390,667  

Other equipment

    2,135,882       1,663,646  

Furniture, fixtures & other

    579,989       590,071  

Total plant, equipment and other

    25,363,460       23,147,978  

Total fixed assets

    29,449,153       27,214,906  

Less: Accumulated depreciation

    (6,955,897 )     (4,721,312 )

Net fixed assets

  $ 22,493,256     $ 22,493,594  

 

Fixed assets are not subject to depreciation until construction is complete and the assets are placed in service. We ceased depreciation of the assets held for sale as of December 2013 when we committed to the plan to sell these assets.

 

 

NOTE 6. ASSET RETIREMENT OBLIGATIONS

 

The following table summarizes the Company’s asset retirement obligation transactions during the nine months ended September 30, 2014.

 

   

2014

 

Asset retirement obligation at beginning of period

  $ (1,119,249 )

Liabilities incurred on new wells

    (36,441 )

Liabilities relieved on retirement of wells

    80,953  

Accretion expense

    (88,193 )

Asset retirement obligation at end of period

    (1,162,930 )

Less: current portion (1)

    (100,100 )

Non-current portion of asset retirement obligation (2)

  $ (1,062,830 )

 

(1)

The total current portion of asset retirement obligation of $100 thousand at September 30, 2014 is associated with assets held for sale.

 

(2)

The non-current portion of asset retirement obligation at September 30, 2014 includes $155 thousand associated with assets held for sale.

  

 
-10-

 

 

 

NOTE 7. NOTES PAYABLE

 

Notes Payable at September 30, 2014 and December 31, 2013 consisted of the following:  

 

   

September 30,

2014

   

December 31,

2013

 

Notes payable for insurance premiums due in monthly installments through various dates ending September, 2015, 6.73% fixed rate

  $ 372,896     $ 309,035  

9% Series B Senior Secured Redeemable Debentures due on various dates ranging from September 30, 2013 to February 28, 2014, continues in default

    90,000       90,000  

Note payable collateralized by building due in monthly installments with a balloon payment at November 30, 2017, 5.7% fixed rate (2)

    1,280,635       1,347,051  

Notes payable collateralized by equipment due in montly installments from December 9, 2014 to August 25, 2018, various rates from 4.25% to 15.05% (3)

    4,355,519       5,676,297  

Note payable collateralized by real estate due in monthly installments though December 28, 2032, 4.25% variable rate

    1,055,797       1,083,886  

10% convertible promissory note to a related party due in quarterly installments commencing May 17, 2013 due February 17, 2017, 10% fixed rate

    1,375,000       1,787,500  

Promissory notes assumed in acquisition secured by accounts receivable, inventory and equipment due on demand, maturing January 25, 2013 and February 10, 2013, 7% fixed rate, which have now been settled

    -       979,863  

Note payable collateralized by real estate due in monthly installments, maturing September 1, 2026, 6% variable rate

    41,483       42,786  

Note payable assumed in acquisition collateralized by equipment due in monthly installments, maturing January 20, 2013 to November 2, 2017, rates ranging from 4.99% to 12.93%

    94,895       257,176  

Note payable assumed in acquisition collateralized by equipment due in monthly capital lease installments, maturing September 14, 2014 to January 11, 2017, rates ranging from 11.23% to 12.08% (1)

    468,764       807,376  

Note payable collateralized by property and equipment due in monthly installments, maturing September 13, 2023, 3.25% variable rate

    27,618       74,989  

Promissory note to related party interest and principal due March 31, 2015, 13% fixed rate

    150,000       1,382,341  

Notes payable for MAG TankTM financing in 2013, including $200 thousand to related parties, with interest due on the first of each month, maturing on various dates from November 14, 2014 to December 19, 2014, 15% fixed rate

    1,502,811       1,443,652  

Notes payable for MAG TankTM financing in 2014 with interest due on the first of each month, maturing on February 28, 2015 and March 14, 2015, 15% fixed rate

    1,117,560       -  
      11,932,978       15,281,952  

Less: current portion

    (5,560,010 )     (7,226,951 )

Total long-term debt

  $ 6,372,968     $ 8,055,001  

 

 

(1)

Includes notes classified as liabilities associated with assets held for sale as of December 31, 2013, of which $170 thousand is current and $67 thousand is long term. There were not any notes classified as liabilities associated with assets held for sale as of September 30, 2014.

 

 

(2)

Note includes debt covenants for which we were not in compliance at December 31, 2013. The lender waived the default provisions related to our non-compliance as of December 31, 2013 and as of the next measurement period, December 31, 2014.

 

 

(3)

Includes notes that contained debt covenants for which we were not in compliance at December 31, 2013. The lender waived the default provisions related to our non-compliance as of December 31, 2013. The covenant’s next measurement period is as of December 31, 2014, and we anticipate that we will be in compliance with the current provisions as of that date.

  

 
-11-

 

 

 

The following table presents the approximate annual maturities based on the calendar year of debt and capital lease obligations as of September 30, 2014:  

 

2014

  $ 2,663,519  

2015

    3,439,131  

2016

    2,028,962  

2017

    2,038,785  

2018

    311,971  

Thereafter

    1,475,238  
    $ 11,957,606  

 

Debt Covenants

 

The terms of the Company’s obligations with two financial institutions collateralized by equipment and real estate require the Company to comply, on an annual basis, with specific financial covenants including a debt service coverage ratio. The Company is required by the two financial institutions to maintain a ratio of debt service coverage equal to or in excess of 1.3 to 1.0 and 1.0 to 1.0, respectively. The respective ratios are calculated as the ratio of adjusted net income as defined by the specific covenants to required principal and interest payments on indebtedness. The Company was not in compliance with certain existing debt covenants contained in our secured debt agreements as of December 31, 2013. We obtained waivers from two of our lenders for the non-compliance in our debt covenants for the year ending December 31, 2013, and for an additional grace period for the year ending December 31, 2014 from one of the lenders.

 

Notes Payable

 

In the first quarter of 2014, the Company closed on the private placement of approximately $1.1 million of the Company’s Unsecured Term Notes due one year from the date of issuance together with 100,879 common stock purchase warrants. Each warrant entitles the holder to purchase one share of common stock of the Company for $2.25 per share and has an expiration date of five years from the date of issuance. The fair value of these warrants of approximately $42 thousand was recorded as a discount to the notes. The interest rate for the notes is 15%. The net proceeds of the placement funded additional MAG Panel™ inventory.

 

During the second quarter of 2014, the Company settled multiple lawsuits related to the White Top and Blackwater acquisitions. The Company acquired debt payable to a certain bank as a result of the acquisitions that was guaranteed by White Top and Blackwater. As part of the settlement, this bank agreed to release the Company from all debt and accrued interest owed to the bank for a payment of $50 thousand which was made by the Company. The Company realized a gain of $1.2 million based on the accrued interest and debt extinguished by the settlement, which is included in discontinued operations.

  

During the year ended December 31, 2013, the Company borrowed $1.5 million under a promissory note due to the Company’s Chairman and Chief Executive Officer. In July of 2014, the Company paid our Chairman and Chief Executive Officer $1.3 million on the loan. In September of 2014, the Company paid an additional $50 thousand on the loan. As of September 30, 2014, there is $1.9 million available under this facility. Interest for this note was $115 thousand for the nine months ended September 30, 2014 and $10 thousand for the year ended December 31, 2013. Should the Company borrow any available amounts, they will carry an interest rate of 13% per annum which is convertible to common stock. The $2.0 million letter of guarantee associated with this note has been extended through December 31, 2014.

 

 
-12-

 

 

 

NOTE 8. STOCKHOLDERS’ EQUITY

 

The following table reflects balances in our outstanding preferred stock, common stock, and treasury stock as of the periods reflected in our financial statements.  

 

   

Preferred Stock

   

Common Stock

   

Treasury Stock

 

BALANCE, JANUARY 1, 2014

    2,000,000       33,796,389       8,334  

Share based payments to officers

    -       1,695,000       -  

Preferred stock received from settlement of lawsuits

    (24,750 )     -       -  

BALANCE, SEPTEMBER 30, 2014

    1,975,250       35,491,389       8,334  

  

Preferred Stock

 

The Company’s books reflected 2,000,000 shares of 10% Series C Cumulative Preferred Stock at December 31, 2013. During the second quarter of 2014, the Company settled multiple lawsuits related to the White Top and Blackwater acquisitions. As part of the settlement, the individuals who sold us those companies agreed to return 32,750 shares of Series C Preferred Stock that were originally transferred to the sellers as part of the purchase price consideration. The return of this stock resulted in a gain to the Company of $677 thousand, which is included in discontinued operations. As a result of the return of this stock, the Company currently reflects 1,975,250 shares of Series C Preferred shares on its books. The Company has authorized 2,000,000 shares of its 10% Series C Preferred Stock in its certificate of designation for such preferred stock.

 

The Company has authorized a total of 10,000,000 shares for five classes of Preferred Stock, which includes an authorization limit of 2,000,000 shares of our Series C Preferred Stock. Series A Preferred Stock has been fully converted to Series C Preferred Stock, Series B Preferred Stock has been fully converted to common stock, Series D and Series E Preferred Stock have not been issued as of September 30, 2014. The Series C Preferred Stock is redeemable solely at the Company’s option after June 30, 2015 at the stated value of $25.00 per share. The Series C Preferred Stock pays a dividend at 10% per annum. If it is ever redeemed, a deemed dividend of the variance between the stated value and the carrying value will be recognized upon redemption.

 

Common Stock

 

We have 90,000,000 authorized shares of common stock. We cannot pay any dividends on our common stock until all Series C cumulative preferred dividends have been satisfied.

 

On April 25, 2014, our Board of Directors approved a common stock grant of 1,250,000 shares for Mr. Gary C. Evans, our Chairman and Interim Chief Executive Officer, as consideration for his past credit support to the Company. The Board also approved stock-based bonuses of 445,000 shares to certain members of management. The shares were valued at $0.98 per share for a total grant of $1.7 million.

 

Common Stock Warrants

 

The following is a summary of warrant activity for the nine months ended September 30, 2014.

  

   

Shares

   

Weighted Average Exercise Price

   

Weighted Average Expected Life

 

Outstanding - Beginning of Period

    3,531,631     $ 1.98       0.78  

Granted

    100,879     $ 2.25       4.41  

Exercised

    -                  

Expired

    (3,007,500 )   $ 2.01          

Outstanding - End of Period

    625,010     $ 1.87       4.11  

Exercisable - End of Period

    625,010     $ 1.87       4.11  

 

In the first quarter of 2014, the Company issued a total of 100,879 warrants, which expire five years from their issue dates, with an exercise price of $2.25 in connection with private debt placements.

 

On August 11, 2014, GreenHunter Resources filed a shelf registration statement on Form S-3 with the SEC. For further information, see Note 2 – Liquidity in this Form 10-Q.

 

 
-13-

 

 

 

NOTE 9. STOCK-BASED COMPENSATION

 

Common Stock Options

 

On January 27, 2014, our Board of Directors approved the granting of 120,000 options of the Company’s common stock to employees under the 2013 Long-Term Incentive Plan. The options have a ten year life and an exercise price of $1.09 per share and vest in an equal amount over a three year period beginning one year from the date of grant.

 

 

On April 25, 2014, our Board of Directors approved the granting of 2,600,000 options of the Company’s common stock to certain members of management under the 2013 Long-Term Incentive Plan. The options have a ten year life and an exercise price of $0.98 per share. A total 180,000 of the options vest in equal amounts over a three year period beginning one year from the date of grant. A total 2,420,000 of the options vest based on performance metrics. We determined these performance options are expected to vest in approximately one year, and compensation expense will be recognized over the same period.

 

On June 10, 2014, our Board of Directors approved the granting of 62,500 options of the Company’s common stock to employees under the 2013 Long-Term Incentive Plan. The options have a ten year life and an exercise price of $1.21 per share and vest in an equal amount over a three year period beginning one year from the date of grant.

 

As of September 30, 2014, there was $1.7 million of total unrecognized compensation cost related to unvested shares associated with stock options which will be recognized over a weighted-average period of 1.16 years. We recognize compensation expense for our stock options on a straight-line basis over their vesting term. We are required to issue new shares of common stock upon the exercise of the stock options by such holder(s).

 

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 nine months ended September 30, 2014 are as follows:  

 

Number of options issued

    2,782,500  

Weighted average stock price

  $ 0.99  

Weighted average exercise price

  $ 0.99  

Weighted average expected life of options (a)

    6.00  

Weighted average expected volatility (b)

    66 %

Weighted average risk-free interest rate

    2.01 %

Expected annual dividend per share

    -  

Weighted average fair value of each option

  $ 0.60  

 

(a)

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. This also approximates the Company’s recent historical volatility.

  

 

 

The following is a summary of stock option activity during the nine months ended September 30, 2014. 

 

   

Shares

   

Weighted Average Exercise Price

   

Aggregate Intrinsic Value* ($000s)

 

Outstanding - Beginning of Period

    12,173,255     $ 3.83     $ 530  

Granted

    2,782,500       0.99       1,531  

Exercised

    -       -       -  

Cancelled

    (130,934 )     1.14       53  

Outstanding - End of Period

    14,824,821       3.32       3,311  

Exercisable - End of Period

    10,145,610     $ 4.31     $ 1,450  

 

 

*

The Aggregate Intrinsic Value was calculated using the September30, 2014 and December 31, 2013 closing stock price of $1.54 and $1.16, respectively.

 

 
-14-

 

 

 

The following is a summary of stock options outstanding at September 30, 2014:  

 

 

Exercise Price

   

Number of Options Outstanding

   

Weighted Average

Remaining Contractual Life

   

Number of Exercisable Options

 
  $ 0.90 - $1.00       4,589,999       8.25       1,989,999  
  $ 1.01 - $1.20       1,265,000       8.71       418,333  
  $ 1.21 - $1.55       512,500       8.22       133,333  
  $ 1.56 - $1.75       2,286,163       7.60       1,472,786  
  $ 1.76 - $2.00       1,780,667       4.97       1,740,667  
  $ 2.01 - $10.00       3,490,332       2.66       3,490,332  
  $ 10.01 - $15.00       43,999       3.41       43,999  
  $ 15.01 - $18.00       36,667       3.39       36,667  
  $ 18.01 - $20.00       792,828       3.38       792,828  
  $ 20.01 - $22.75       26,666       3.63       26,666  
            14,824,821               10,145,610  

 

 

NOTE 10. COMMITMENTS AND CONTINGENCIES

 

Officers’ Benefits

 

On April 25, 2014, our Board of Directors approved certain officers of the Company to receive benefits pursuant to a change in control in accordance with their job descriptions and responsibilities to the Company, ranging from one year annual salary payment to three years annual salary payment.

 

Pipeline Commitments

 

On June 24, 2014, the Company’s wholly-owned subsidiary, GreenHunter Pipeline, LLC entered into three definitive agreements with Tuesday Pipeline, LLC concerning the transportation of brine, condensate and water through three pipelines to be constructed by Tuesday Pipeline in and around the Claysville, PA area to an area located around Benwood, WV, pursuant to a Brine Transportation Agreement, a Condensate Transportation Agreement and a Water Transportation Agreement.

 

Each Agreement obligated Tuesday Pipeline to furnish to GreenHunter Pipeline, LLC a formal commitment letter from a lender providing for the funding for the construction of the pipeline by August 30, 2014. Tuesday Pipeline failed to deliver the formal commitment letter by August 30, 2014. Therefore, GreenHunter Pipeline has terminated each agreement pursuant to its terms and conditions. The Company is currently seeking other financing options for this project.

 

Leases

 

The Company rents property, equipment and certain office equipment under operating leases. Lease expense under operating leases and rental contracts amounted to $890 thousand and $1.4 million for the nine months ended September 30, 2014 and 2013, respectively.

 

Lawsuits

 

We operate in a highly regulated industry. We are subject to the regulatory authority of the SEC, the EPA and numerous other federal and state governmental agencies. From time to time, we may become involved in litigation relating to claims arising from our ordinary course of business. While we cannot predict the outcome of any proceedings with certainty, we do not believe that there are any claims or actions pending or threatened against us, the ultimate disposition of which we believe would have a material adverse effect on us or on our operations.

 

 
-15-

 

 

 

ABB, Inc., Plaintiff v. GreenHunter Energy, Inc., Defendant, In the Superior Court of California, County of Imperial, Case No. ECU07002 . ABB, Inc. was a subcontractor to Crown Engineering for the work done at our Mesquite Lake plant in Imperial County, California. GreenHunter Energy, Inc. had a construction contract directly with Crown Engineering only and no direct working relationship with ABB, Inc. On or about January 18, 2010, GreenHunter entered into a settlement agreement with Crown Engineering settling any disputes between the parties regarding the work done at our Mesquite Lake plant. Green Hunter performed all of its obligations under the settlement agreement. ABB has been attempting to enforce payment of its claim of approximately $328 thousand by asserting it is a third party beneficiary under our settlement agreement with Crown Engineering.

 

A hearing was held in September 2013 solely on the issue of whether ABB was a third party beneficiary to the settlement agreement with Crown. The court ruled in favor of GreenHunter Energy, Inc. and decided that ABB was not a third party beneficiary. The court has awarded the Company some of its attorney’s fees. ABB has filed its notice of appeal.

 

PetroChem, Inc. v. GreenHunter Energy, Inc., et al. in the Superior Court for the State of California, County of Imperial, Case No. ECU-05216. PetroChem, Inc. was a subcontractor to Crown Engineering for the work done at our Mesquite Lake plant in Imperial County, California. GreenHunter Energy, Inc. had a construction contract directly with Crown Engineering only and no direct working relationship with PetroChem, Inc. On or about January 18, 2010, GreenHunter entered into a settlement agreement with Crown Engineering settling any disputes between the parties regarding the work done at our Mesquite Lake plant. Green Hunter performed all of its obligations under the settlement agreement. PetroChem is attempting to enforce payment of its claim of approximately $207 thousand by asserting it is a third party beneficiary under our settlement agreement with Crown Engineering.

 

The PetroChem claim was stayed by the bankruptcy court but PetroChem is attempting to move forward with their claim now by asserting they are third party beneficiary to our Crown settlement agreement, and they have filed a mechanic’s lien claim. As this claim is similar to the ABB claim above, management believes this case has little or no merit and the Company will ultimately prevail.

 

Elisema R. Jones and Gregory Joseph Jones v. Blackwater Services and Damien Pacheco. 365th District Court of Dimmitt County, Texas, Cause No. 11-12-11539-DCVAJA. Plaintiff brought suit against defendants for damages caused by an automobile accident with defendant Damien Pacheco, allegedly an employee of Blackwater. The claim is being handled by the insurance carrier and the Company estimates any damages will be covered by insurance.

 

Marcos Eric Ramon and Juan Castillo v .White Top Oilfield Construction and Jennay Marie Hawkins. 293rd District Court of Dimmitt County, Texas, Cause No. 13-07-12036-DCV. Plaintiff brought suit against defendants for damages caused by an automobile accident with defendant Jennay Hawkins, allegedly an employee of White Top. The claim is being handled by the insurance carrier and the Company estimates any damages will be covered by insurance. This case has been settled for $50 thousand.

 

SPX v. GreenHunter Energy, Inc., et al. in the Superior Court for the State of California, County of Imperial, Case No. ECU-5082. SPX was a subcontractor to Crown Engineering for the work done at our Mesquite Lake plant in Imperial County, California. GreenHunter Energy, Inc. had a construction contract directly with Crown Engineering only and no direct working relationship with SPX. On or about January 18, 2010, GreenHunter entered into a settlement agreement with Crown Engineering settling any disputes between the parties regarding the work done at our Mesquite Lake plant. GreenHunter performed all of its obligations under the settlement agreement.

 

The parties have settled this matter for $115 thousand.

 

Jose Torres, et al. v. GreenHunter Resources, Inc. and GreenHunter Water, LLC, in the 25th District Court, Lavaca County, Texas, Cause No. 14-04-22652 CV. Jose Torres, an employee of Hunter Hauling, LLC, a subsidiary of the defendants, died on December 17, 2013 while working at the Company’s location in Moulton, Texas. Plaintiff claims injuries and damages were caused by the negligence and gross negligence of the named defendants. Defendants have tendered the case to the insurance companies for coverage. The Company has answered the lawsuit and is currently conducting an investigation into this matter. This matter is in the early stages of discovery and the Company cannot estimate the probability of any loss at this time. However, the claim is being handled by the insurance carrier and the Company estimates any damages will be covered by insurance.

  

Jonathan D. Hoopes v. GreenHunter Resources, Inc., in the 162nd District Court of Dallas, County, Texas, Cause No. DC-14-03179. Plaintiff has sued the Company for breach of an employment agreement and enforcement of certain rights under various stock option agreements with the Company. Plaintiff is alleging he is owed one years’ salary upon termination and wants to continue to vest in certain stock options after his termination. The Company denies the allegations in the complaint as the Company had either reached an agreement with the plaintiff for his severance payment or had good cause to terminate the plaintiff. This case will be arbitrated in accordance with the employment agreement and is currently being set for the month of January 2015. The Company has accrued six months’ severance payment to the plaintiff and anticipates that this matter will result in no further obligations to the plaintiff.

 

 
-16-

 

 

 

Edward Bujnoch et al v. Sanchez Oil & Gas Corporation, et al; In the 113th Judicial District Court of Harris County, Texas Cause No. 2012-71172. Plaintiff has sued Blackwater Services, LLC for wrongful death due to a car accident. Plaintiff alleges Defendant’s truck spilled drilling fluid on the highway causing Plaintiff’s car to lose control. Evidence indicates that Blackwater truck was not the truck carrying the spilled drilling fluid. In addition, the Plaintiffs were driving while intoxicated. Defendants have tendered the case to the insurance companies for coverage. The Company has answered the lawsuit and is currently conducting an investigation into this matter. Management believes this case has little or no merit and the Company will ultimately prevail.

 

 

White Top and Blackwater Lawsuits. During the second quarter of 2014, we settled multiple lawsuits related to the White Top and Blackwater acquisitions. These lawsuits included a lawsuit filed by the Company against the sellers seeking injunctive relief to force the defendants to turn over certain assets in their possession, as well as for breach of equity purchase agreements, statutory fraud and common fraud. A certain bank sued the Company demanding payment of $1.0 million plus accrued interest for promissory notes owed to the bank by White Top and Blackwater. As part of the settlement agreement, the bank agreed to unconditionally release the Company from any further liability to the bank, and the Company agreed to make a $50 thousand payment to the bank. The settlement agreement also required the sellers to return 32,750 Series C Preferrred Stock given to them as part of the original purchase price. Settlement of these lawsuits resulted in a gain of approximately $1.9 million, which is included in discontinued operations on the Statement of Operations. For additional information related to these gains, see Note 7 – Notes Payable and Note 8 – Stockholders’ Equity in this Form 10-Q.

 

NOTE 11. RELATED PARTY TRANSACTIONS

 

During the nine months ended September 30, 2014, we earned storage rental revenue for providing water storage tanks and equipment for lease to Triad Hunter, LLC (a wholly-owned subsidiary of Magnum Hunter Resources Corporation, an entity for which Gary C. Evans, our Chairman, is an officer and significant shareholder). Additionally, we also sold multiple MAG Tank™ panels to Triad Hunter, LLC. We also provided water disposal and transport services for Shale Hunter, Virco, Inc., Triad Hunter, and Eureka Hunter Pipeline, LLC (all wholly-owned subsidiaries of Magnum Hunter Resources Corporation, an entity for which Gary C. Evans, our Chairman, is an officer and significant shareholder) during the nine months ended September 30, 2014. Revenue from the affiliated companies totaled approximately $1.4 million and $5.2 million for the three and nine months ended September 30, 2014.

 

During the nine months ended September 30, 2013, we earned storage rental revenue for providing water storage tanks and equipment for lease to Shale Hunter, LLC, Eagle Ford Hunter, LLC and Triad Hunter, LLC, all wholly-owned subsidiaries of Magnum Hunter Resources Corporation, an entity for which Gary C. Evans, our Chairman, is an officer and significant shareholder. We also provided water disposal and transport services for Shale Hunter and Triad Hunter during the nine months ended September 30, 2013. Revenue from Eagle Ford Hunter, prior to its sale to an unaffiliated entity in April of 2013 was $-0- and $978 thousand for the three and nine months ended September 30, 2013. Revenue from the then currently affiliated companies totaled $805 thousand and $1.2 million for the three and nine months ended September 30, 2013. Revenue for the three related parties was $663 thousand and $1.9 million for the three and nine months ended September 30, 2013.

 

 Accounts receivable associated with the above revenue for related parties totaled $1.1 million at September 30, 2014.

 

The Company had an accounts receivable from Pilatus Hunter, a company owned by Mr. Evans, totaling $82 thousand at September 30, 2014 for pilot expenses.

 

We paid for air travel services to a company owned by Mr. Evans of $-0- and $19 thousand for the three and nine months ended September 30, 2014.

 

 On February 17, 2012, the Company entered into a 10% convertible promissory note for $2.2 million payable to Triad Hunter as partial consideration in the Hunter Disposal acquisition. Terms of payment under the note are interest only due quarterly from May 17, 2012 to February 17, 2013. Thereafter, beginning May 17, 2013 and continuing quarterly until February 17, 2017, the payments due will include accrued interest and principal payments of $137.5 thousand per quarter. Interest expense related to this note was $124 thousand for the nine months ended September 30, 2014 and $162 thousand for the nine months ended September 30, 2013. The promissory note matures on February 17, 2017 and is convertible at any time by the holder into shares of common stock of the Company at a conversion price of $2.50 per share. The balance of this note is $1.4 million at September 30, 2014.

  

During the year ended December 31, 2013, the Company borrowed $1.5 million under a promissory note due to the Company’s Chairman and Chief Executive Officer. In July of 2014, the Company paid our Chairman and Chief Executive Officer $1.3 million on the loan. In September of 2014, the Company paid an additional $50 thousand on the loan. As of September 30, 2014, there is $1.9 million available under this facility. Interest for this note was $115 thousand for the nine months ended September 30, 2014 and $10 thousand for the year ended December 31, 2013. Should the Company borrow any available amounts, they will carry an interest rate of 13% per annum which is convertible to common stock. The $2.0 million letter of guarantee associated with this note has been extended through December 31, 2014.

  

 
-17-

 

 

 

NOTE 12. SEGMENT DATA

 

We currently have one reportable segment: Water Management. However, we previously had two reportable segments: Water Management and Biomass. We have entered an agreement to sell the Biomass project with a final closing set for March 15, 2015. Since we are planning on selling this segment within the next nine months, we have classified the Biomass assets as held for sale as of September 30, 2014.

 

The total assets for the Company’s one reporting segment are the total assets less the assets held for sale on the balance sheet. The capital expenditures for the single segment are noted on the cash flow statement.

 

See Note 3 – Discontinued Operations and Assets Held for Sale for more information.

 

NOTE 13. CONDENSED CONSOLIDATED GUARANTOR FINANCIAL STATEMENTS

 

Certain of the Company’s 100% owned subsidiaries, including GreenHunter Water, LLC, GreenHunter Environmental Solutions, LLC, GreenHunter Hydrocarbons, LLC, GreenHunter Pipeline, LLC, Hunter Disposal, LLC, and Hunter Hauling, LLC (collectively, “Guarantor Subsidiaries”), have fully and unconditionally guaranteed the obligations of the Company under any debt securities that it may issue under a universal shelf registration statement on Form S-3, on a joint and several basis.

 

Condensed consolidating guarantor financial information for GreenHunter Resources Corporation, the Guarantor Subsidiaries and the other subsidiaries of the Company (the “Non Guarantor Subsidiaries”) as of September 30, 2014 and December 31, 2013, and for the three and nine months ended September 30, 2014 and 2013, was as follows:

 

GreenHunter Resources, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

 

   

As of September 30, 2014

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

ASSETS

                                       

Current assets

  $ 1,360,654     $ 3,886,539     $ (21,930,611 )   $ 24,923,387     $ 8,239,969  

Intercompany accounts receivable

    24,923,411       -       -       (24,923,411 )     -  

Fixed assets

    2,077,978       18,596,649       4,097,234       335,041       25,106,902  

Investment in subsidiaries

    19,234,244       4,539,391       (4,466,395 )     (19,307,240 )     -  

Other assets

    27,026       60,936       -       -       87,962  

Total Assets

  $ 47,623,313     $ 27,083,515     $ (22,299,772 )   $ (18,972,223 )   $ 33,434,833  
                                         

LIABILITIES AND STOCKHOLDERS' EQUITY

                                       

Current liabilities

  $ 6,218,288     $ 3,634,192     $ (21,104,784 )   $ 24,923,387     $ 13,671,083  

Intercompany accounts payable

    -       2,489,285       22,434,102       (24,923,387 )     -  

Long-term liabilities

    3,030,842       3,694,257       710,699       -       7,435,798  

Stockholders' equity

    38,374,183       17,265,781       (24,339,789 )     (18,972,223 )     12,327,952  

Total Liabilities and Stockholders' Equity

  $ 47,623,313     $ 27,083,515     $ (22,299,772 )   $ (18,972,223 )   $ 33,434,833  

 

 

 

 

 

   

As of December 31, 2013

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

ASSETS

                                       

Current assets

  $ 1,949,764     $ 7,442,231     $ (32,896,562 )   $ 34,412,241     $ 10,907,674  

Intercompany accounts receivable

    33,719,606       811,535       -       (34,531,141 )     -  

Fixed assets

    2,167,250       14,402,410       16,033,258       4,389,430       36,992,348  

Investment in subsidiaries

    19,234,244       4,539,391       (4,466,395 )     (19,307,240 )     -  

Other assets

    64,842       60,936       -       -       125,778  

Total Assets

  $ 57,135,706     $ 27,256,503     $ (21,329,699 )   $ (15,036,710 )   $ 48,025,800  
                                         

LIABILITIES AND STOCKHOLDERS' EQUITY

                                       

Current liabilities

  $ 5,648,819     $ 11,954,865     $ (31,539,580 )   $ 34,531,141     $ 20,595,245  

Intercompany accounts payable

    -       -       34,531,141       (34,531,141 )     -  

Long-term liabilities

    3,574,506       4,517,062       982,580       -       9,074,148  

Stockholders' equity

    47,912,381       10,784,576       (25,303,840 )     (15,036,710 )     18,356,407  

Total Liabilities and Stockholders' Equity

  $ 57,135,706     $ 27,256,503     $ (21,329,699 )   $ (15,036,710 )   $ 48,025,800  

 

 
-18-

 

 

GreenHunter Resources, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

 

   

For the Three Months Ended September 30, 2014

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Revenues

  $ -     $ 8,695,472     $ -     $ (2,432,526 )   $ 6,262,946  

Expenses

    2,634,158       7,899,784       21,320       (2,797,775 )     7,757,487  

Income (loss) from continuing operations before tax

    (2,634,158 )     795,688       (21,320 )     365,249       (1,494,541 )

Income tax expense

    -       -       -       -       -  

Income (loss) from continuing operations

    (2,634,158 )     795,688       (21,320 )     365,249       (1,494,541 )

Income from discontinued operations, net of tax

    -       -       (1,199,051 )     -       (1,199,051 )

Net income (loss)

    (2,634,158 )     795,688       (1,220,371 )     365,249       (2,693,592 )

Dividends on preferred stock

    (1,234,532 )     -       -       -       (1,234,532 )

Net income (loss) to common stockholders

  $ (3,868,690 )   $ 795,688     $ (1,220,371 )   $ 365,249     $ (3,928,124 )

 

 

   

For the Three Months Ended September 30, 2013

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Revenues

  $ -     $ 9,854,120     $ -     $ (2,086,181 )   $ 7,767,939  

Expenses

    1,069,269       9,896,191       20,904       (1,951,588 )     9,034,776  

Income (loss) from continuing operations before tax

    (1,069,269 )     (42,071 )     (20,904 )     (134,593 )     (1,266,837 )

Income tax expense

    -       -       -       -       -  

Income (loss) from continuing operations

    (1,069,269 )     (42,071 )     (20,904 )     (134,593 )     (1,266,837 )

Loss from discontinued operations, net of tax

    -       -       896,061       -       896,061  

Net income (loss)

    (1,069,269 )     (42,071 )     875,157       (134,593 )     (370,776 )

Dividends on preferred stock

    (1,174,256 )     -       -       -       (1,174,256 )

Net income (loss) to common stockholders

  $ (2,243,525 )   $ (42,071 )   $ 875,157     $ (134,593 )   $ (1,545,032 )

 

 

   

For the Nine Months Ended September 30, 2014

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Revenues

  $ -     $ 28,108,315     $ -     $ (6,494,521 )   $ 21,613,794  

Expenses

    8,482,496       26,025,471       63,599       (6,884,530 )     27,687,036  

Income (loss) from continuing operations before tax

    (8,482,496 )     2,082,844       (63,599 )     390,009       (6,073,242 )

Income tax expense

    -       -       -       -       -  

Income (loss) from continuing operations

    (8,482,496 )     2,082,844       (63,599 )     390,009       (6,073,242 )

Income from discontinued operations, net of tax

    -       -       1,100,488       -       1,100,488  

Net income (loss)

    (8,482,496 )     2,082,844       1,036,889       390,009       (4,972,754 )

Dividends on preferred stock

    (3,734,531 )     -       -       -       (3,734,531 )

Net income (loss) to common stockholders

  $ (12,217,027 )   $ 2,082,844     $ 1,036,889     $ 390,009     $ (8,707,285 )

 

 

   

For the Nine Months Ended September 30, 2013

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Revenues

  $ -     $ 23,723,503     $ 2,781     $ (5,419,729 )   $ 18,306,555  

Expenses

    3,415,595       21,596,281       66,512       (5,015,957 )     20,062,431  

Income (loss) from continuing operations before tax

    (3,415,595 )     2,127,222       (63,731 )     (403,772 )     (1,755,876 )

Income tax expense

    -       -       -       -       -  

Income (loss) from continuing operations

    (3,415,595 )     2,127,222       (63,731 )     (403,772 )     (1,755,876 )

Loss from discontinued operations, net of tax

    -       -       (6,613,135 )     -       (6,613,135 )

Net income (loss)

    (3,415,595 )     2,127,222       (6,676,866 )     (403,772 )     (8,369,011 )

Dividends on preferred stock

    (3,337,286 )     -       -       -       (3,337,286 )

Net income (loss) to common stockholders

  $ (6,752,881 )   $ 2,127,222     $ (6,676,866 )   $ (403,772 )   $ (11,706,297 )

 

 

 

 

 
-19-

 

 

GreenHunter Resources, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

 

   

For the Nine Months Ended September 30, 2014

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Cash flow from operating activities

  $ 3,619,528     $ 3,071,330     $ (11,163,458 )   $ 390,032     $ (4,082,568 )

Cash flow from investing activities

    (95,999 )     (1,520,996 )     11,520,591       (390,032 )     9,513,564  

Cash flow from financing activities

    (4,392,675 )     (1,368,149 )     (402,231 )     -       (6,163,055 )

CHANGE IN CASH

    (869,146 )     182,185       (45,098 )     -       (732,059 )