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Table Of Contents

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

(Mark one)

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2014

 

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 RESOURCES, 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

 

 

 

 

Title of each class

 

Name of each exchange on which registered

Common Stock ($.001 par value)

 

NYSE MKT

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

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       No  

 

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       No  

 

 

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       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 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 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.    

 

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

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

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

 

As of June 30, 2014, the aggregate market value of voting stock held by non-affiliates was $17,458,745 as computed by reference to the closing price on that date.

 

The number of shares outstanding of the registrant’s common stock at April 14, 2015 was 39,439,083.

 

 

 

 

 

TABLE OF CONTENTS

 

 

 

PART I

 

1

 

 

Item 1.

 

Business

 

1

    Item 1A.   Risk Factors   10

 

 

Item 2.

 

Properties

 

23

 

 

Item 3.

 

Legal Proceedings

 

23

 

 

Item 4.

 

Mine Safety Disclosures

 

24

PART II

 

25

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

25

 

 

Item 6.

 

Selected Financial Data

 

26

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

 

26

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

38

 

 

Item 9.

 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

38

 

 

Item 9A.

 

Controls and Procedures

 

39

 

 

Item 9B.

 

Other Information

 

39

PART III

 

40

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

40

 

 

Item 11.

 

Executive Compensation

 

44

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

46

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence Transactions with Related Persons

 

48

 

 

Item 14.

 

Principal Accounting Fees and Services

 

49

Part IV

 

49

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

49

 

 

 

PART I

 

Item 1. Business

 

Our Business

 

GreenHunter Resources, Inc. (“the Company”) was incorporated in the state of Delaware on June 7, 2005. We are a diversified water management services company, headquartered in Grapevine, Texas that specializes in water solutions required for the unconventional oil and natural gas shale resource plays. Through our wholly-owned subsidiaries, GreenHunter Water, LLC (“GreenHunter Water”), GreenHunter Environmental Solutions, LLC (“GreenHunter Environmental Solutions”), and GreenHunter Hydrocarbons, LLC (“GreenHunter Hydrocarbons”), we provide Oilfield Fluid Management Solutions™ in the oilfield and within the shale plays of the Appalachian Basin.

 

Oil and natural gas wells typically generate produced water, which is saltwater or brine from underground formations brought to the surface during the normal course of oil or gas production operations. Since this water has been in contact with hydrocarbon-bearing formations, it contains some of the chemical characteristics of the formations and the hydrocarbons. The water that is produced from these operations must be disposed of or treated in a manner approved by the U.S. Environmental Protection Agency (“EPA”). The primary method of handling this water is through injection into a Class II saltwater disposal well. The alternative option is treating the water for reuse in hydraulic fracturing operations or treatment to fresh water qualities and discharged under a National Pollutant Discharge Elimination System (“NPDES”) permit. We have identified water reuse and water management in the oil and natural gas industry as a significant growth opportunity for the foreseeable future and are currently utilizing a water treatment system and exploring various alternatives to develop this segment of our operations through existing relationships, joint ventures, targeted acquisitions and further development of water management technologies.

 

We are a leading provider of water management solutions as it relates to the oil and gas industry in the unconventional resource plays in the Appalachian Region where we are predominantly active, including both the Marcellus and Utica Shale areas. Since late 2013, we have focused predominately all of our efforts on the Appalachian Region as the Company believes this area provides our best opportunity to profitably grow the Company.

 

GreenHunter Water

 

GreenHunter Water continues to expand its services package in the Appalachian Region by increasing down-hole injection capacity with Class II salt water disposal wells and facilities and with advanced water hauling – including a growing fleet of U.S. Department of Transportation (“DOT”) rated 407 trucks - for hauling hydrocarbons and water with the presence of hydrocarbons. GreenHunter Water has also spearheaded the movement to barge brine water, as barging is the safest and most cost-effective mode of transport.

 

At December 31, 2014, GreenHunter Water operated commercial water service facilities, including nine disposal wells. The Company had three additional disposal wells in Oklahoma, only one of which operated in 2014, which are currently being marketing for sale. GreenHunter Water is currently constructing a pipeline at its Mills Hunter offload terminal that will connect six or more existing wells to a single facility with barge unloading capabilities. The additional disposal capacity provided by these new wells will essentially double the current disposal capacity of GreenHunter Water. Since these wells are permitted and ready to operate, we can utilize this capacity as soon as the connecting pipeline is complete, which is expected to be in the first half of 2015.

 

GreenHunter Water also operates an existing fleet of 37 trucks located in Appalachia that are used to transport fluids to disposal and water treatment sites. Additionally, the Company has acquired or leased various strategic sites along the Ohio River in Appalachia to facilitate the use of barges as a low cost method of hauling fluids. The Company received U.S. Coast Guard approval to begin barging oil field waste water in the fourth quarter of 2014. We anticipate initiating barge hauling services in the near future. The Company’s Mills Hunter disposal facility is located immediately adjacent to the Ohio River. The facility, with its soon to be completed additional capacity, will be a primary destination for disposal of barged fluids. Additional infrastructure construction is currently under way at this facility to handle the planned barging operations.

 

GreenHunter Environmental Solutions

 

GreenHunter Environmental Solutions, LLC offers onsite environmental solutions at the well pad and facilities, with a service package that includes tank and rig cleaning, liquid and solid waste removal/remediation, solidification, and spill response. An understanding that an interconnected suite of services is key to E&P waste stream management shapes GreenHunter Resources’ comprehensive end-to-end approach to services.

 

As part of its services, GreenHunter Environmental Solutions has designed, engineered and is currently marketing its next-generation modular above-ground frac water storage tank (MAG Tank™). We have deployed several of these modular above-ground temporary water storage systems in the Marcellus and Utica Shale plays. MAG Tanks™ are currently offered to our customers for either purchase or on a rental basis. Additionally, the Company has installed and operates an onsite semi-portable water treatment facility in the Appalachian Region.

 

 

GreenHunter Hydrocarbons

 

GreenHunter Hydrocarbons, LLC offers transportation of hydrocarbons (oil, condensate, and NGLs) and will soon offer storage, processing, and marketing of hydrocarbons (oil, condensate, and NGLs) in the Appalachian Region, leveraging off of our existing asset base and infrastructure, which includes up to six different water based barge terminal locations presently owned or leased by GreenHunter Resources.

 

Other Divestitures and Planned Additions 

 

In late 2013, the Company decided to sell all of its disposal wells and properties located in South Texas and Oklahoma, to either sell or move to Appalachia its remaining equipment in South Texas owned by White Top and Blackwater, and to discontinue operating in both of these areas in order to concentrate 100% of its efforts in the higher revenue region of Appalachia. We believe this area represents our best opportunities for growth and highest overall margins. We closed on the sale of all of our South Texas assets in 2014 and have ceased operations in South Texas. We expect to close on our remaining Oklahoma fixed assets in the first half of 2015. At that point, we intend to cease operating in Oklahoma.

 

The Company plans to construct three pipelines that will be used to transport oilfield waste water (brine), fresh water, and hydrocarbons (condensate and NGLs), respectively. The point of delivery will be along the Ohio River, from which point we expect to deliver the hydrocarbons by barge to the purchasers, as well as deliver the waste water by barge to our disposal wells. We expect the use of the pipelines and barges to substantially reduce the cost of transporting these products and give us a significant competitive advantage in both areas. Additionally, fresh water can flow through this pipeline in the opposite direction (from the river inland toward the production areas) thereby furnishing producers with sources of fresh water needed for fracking operations. Currently, fresh water, used for hydraulic fracturing, must be delivered to these production areas by truck. Our lower cost delivery by pipeline should give us a significant competitive advantage in delivering this product. In 2014, the Company signed a definitive agreement with a third party to construct these pipelines with funding to be provided by the third party. The third party was unable to provide the financing by the August 30, 2014 deadline. The Company will need to secure additional capital in order to initiate this plan and has found investors with a high level of interest in financing the pipeline project. We are currently exploring opportunities with several interested parties to secure this capital, and we anticipate having the financing in place in late 2015 or early 2016, at which time we will begin construction of the pipelines.

 

In preparation for the completion of these pipelines, the Company will be active in building the infrastructure needed to store, transport (mainly by barge), offload, and deliver the fresh water and condensates to buyers and will also be adding new disposal wells capable of handling both the expected growth in our current disposal business, as well as the significant amounts of waste water that will be received via the new pipeline.

 

We believe that our ability to successfully compete in the oil field fluids industry depends on many factors, including the location and low cost construction of our planned facilities, execution of our growth strategies, development of strategic relationships, achievement of our anticipated low cost production model, access to adequate capital, proper and meaningful governmental support which may include tax incentives and credit enhancements, and recruitment and retention of experienced management and qualified field personnel.

 

Hydraulic Fracturing

 

Recent improvements in drilling and completion technologies have unlocked large reserves of hydrocarbons in multiple unconventional resource plays in North America. These new drilling methods often involve a procedure called hydraulic fracturing. This process involves the injection of large amounts of water, sand and chemicals under high pressures into rock formations to stimulate production. Unconventional wells can require more than four million gallons of water to complete a “frac job”. Some portion of the water used in the exploration and 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 flowback water. In addition to flowback water, oil and natural gas wells also generate produced water, or brine, which is saltwater from underground formations 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 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.

 

 

While produced water (also known as formation water, oil field brine, or brine, due to its high salinity content) can be reused if certain water quality conditions are met, approximately 95% 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 underground geologic formations or is discharged under National Pollutant Discharge Elimination System (“NPDES”) permits. The remaining 5% 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 reporting and 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.

 

Our management, which has 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 position 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.

 

GreenHunter Water is focused on water resource management specifically as it pertains to the unconventional oil and natural gas shale resource plays, with emphasis going forward on the Appalachia basin. GreenHunter Water is committed to providing a full range of solutions to address producers’ current needs and is built upon an identified need in the oilfield, to deliver Oilfield Fluid Management Solutions™ to our customer base through long term agreements. Our Oilfield Fluid Management Solutions™ are custom developed to meet producers’ water resource planning needs. These solutions include owning and operating saltwater disposal facilities, transportation of fluids, frac tank rentals, above ground storage tanks, and mobile and permanent water treatment technologies to provide as value added services to our customers.

 

Disposal Wells

 

Typically, shale wells produce significant amounts of saltwater that, in most cases, require disposal. The Underground Injection Control Program (the “UIC Program”) of the U.S. Environmental Protection Agency (“EPA”) is responsible for regulating the construction, operation, permitting, and closure of injection wells that place fluids underground for storage and disposal. The UIC Program designates six separate injection well classes based on similarity in the fluids injected, activities, construction, injection depth, design, and operating techniques. This categorization ensures that wells with common design and operating techniques are required to meet appropriate performance criteria for protecting underground sources of drinking water (“USDWs”). GreenHunter Water owns, operates and is developing Class II wells for the injection of brine and other fluids that are associated with oil and gas production. GreenHunter Water presently owns and operates disposal facilities located in the states of Ohio, Kentucky, West Virginia, and Oklahoma to service the Marcellus, Utica, and Mississippian Shale plays. It is the Company’s intention to focus on the Appalachian states going forward, and its assets in the Mississippian Shale play are classified as held for sale at December 31, 2014.

 

 

Oklahoma - Mississippian Lime Shale:

 

The Company owns three disposal wells in Oklahoma, only one of which is operational. One of the wells has not operated since the Company purchased these assets due to needing additional infrastructure to function properly. Another one of the wells located in Canadian County, Oklahoma, has an estimated injection capacity of 10,000 bbl/day; however, this property and equipment were struck by lightning on May 2, 2013, making the facility inoperable without significant new investment. The Company has classified these three wells as held for sale at December 31, 2014, and expects to sell all three of its Oklahoma wells in the first half of 2015. We recorded $1.1 million for impairment on one of these wells during the year ended December 31, 2014.

 

 

Operated Commercial Salt Water Disposal Wells

 

   

1Q2013

   

2Q2013

   

3Q2013

   

4Q2013

   

1Q2014

   

2Q2014

   

3Q2014

   

4Q2014

 

Appalachia

    7       7       8       8       9       9       9       9  

South Texas

    4       4       3       3       0       0       0       0  

Oklahoma

    2       2       1       1       1       1       1       1  

TOTAL

    13       13       12       12       10       10       10       10  

 

 

Estimated Disposal Capacity (Bbl/d)

 

   

1Q2013

   

2Q2013

   

3Q2013

   

4Q2013

   

1Q2014

   

2Q2014

   

3Q2014

   

4Q2014

 

Appalachia

    12,700       12,700       13,900       13,900       15,900       15,900       15,900       15,900  

South Texas

    85,000       85,000       75,000       75,000       0       0       0       0  

Oklahoma

    16,000       16,000       6,000       6,000       6,000       6,000       6,000       6,000  

TOTAL

    113,700       113,700       94,900       94,900       21,900       21,900       21,900       21,900  

 

 

Fluids Handling, Hauling and Barging

 

Produced water and frac-flowback are hauled from their origin at the oilfield tank battery or drilling pad to the disposal location via truck transport. These trucks operate under laws administered by the U.S. Department of Transportation (“DOT”) and respective state agencies in which the trucks will operate. Trucks typically used for hauling waste brine range in capacity from 80 barrel bobtails to 130 barrel tankers equipped with vacuum pumps, and producers of the waste product are charged for hauling at pre-determined hourly rates which vary depending on size and often include an accounting of the return “dead-head” trip.

 

In addition to hauling fluids by truck, we are currently developing various alternative means of water transport that include temporary and permanent above-ground or below-ground pipeline systems, and the use of rail and barge transport. The primary objectives are reducing road traffic while maintaining adherence to current and expected future environmental regulations; improving safety for the neighboring communities, our employees, and the employees of our customers; and ultimately reducing our customers’ total cost of water management while generating improved returns on our deployed capital. Our transportation equipment previously located in South Texas was either sold or transferred to our Appalachian operations in 2014.

 

 

Operating Vacuum Trucks

 

   

1Q2013

   

2Q2013

   

3Q2013

   

4Q2013

   

1Q2014

   

2Q2014

   

3Q2014

   

4Q2014

 

Appalachia

    26       26       32       33       37       35       37       37  

South Texas

    30       29       24       24       0       0       0       0  

TOTAL

    56       55       56       57       37       35       37       37  

 

 

As of December 31, 2014, we operated 10 commercial salt water disposal (“SWD”) wells in two geographic shale areas. The SWD wells have estimated capacities, as follows:

 

Region

 

County

 

# of Wells

 

Date Reportable

 

Bbl / Day

 
   

Noble County, OH

    2  

Feb 2012

    5,000  
   

Ritchie County, WV

    2  

Aug 2012

    3,500  
   

Meigs County, OH

    2  

Jul 2012 / Mar 2014

    4,000  
   

Washington County, OH

    2  

Nov 2012 / Sep 2013

    2,200  
   

Lee County, KY

    1  

Feb 2012

    1,200  
                       
                       

Appalachia

    9         15,900  
                       
                       
   

Kingfisher Co, OK

    1  

May 2012

    6,000  
                       

Oklahoma

    1         6,000  
                       

TOTAL SWDs

    10         21,900  

 

 

Appalachia - Marcellus and Utica Shales:

 

Our Appalachia SWD wells and associated assets predominately serve exploration and production companies that are active in the Marcellus and Utica Shale plays in the states of Pennsylvania, Ohio and West Virginia. Due to the strong demand for disposal services, we anticipate our wells will continue at or near 100% capacity for most of 2015, as they were in 2014. We intend to increase the number of our disposal wells in Appalachia in 2015 by opening new wells that will be capable of accepting water from various transportation methods including trucking, barging and through pipeline transportations.

 

We currently have multiple disposal capacity contracts with major oil and gas companies and large independent exploration and production companies active in the region. These capacity contracts typically contain rights for us to provide fluid transportation trucking on a first-call basis.

 

GreenHunter Water has identified low cost water hauling capacity as a constrained resource in our target areas of operation, and we are actively pursuing contracts for traditional hauling and advanced logistics services as part of our Oilfield Fluid Management Solution™ portfolio offering. In March 2012, we entered into a five year lease for an existing truck and barge trans-loading and water storage facility located in Washington County, Ohio. The existing facility and infrastructure are ideally positioned on the Ohio River in the heart of the Marcellus and evolving Utica Shale resource plays and serve as a strategic operating base for our Appalachia water management businesses. Originally constructed in 1966 by Mobil Oil, the approximate 10 acre facility contains 70,000 bbls of functional bulk liquids storage tank capacity, a barge trans-loading station, a covered loading station with multiple truck servicing bays, and office space. The two 20,000 bbl tanks and one 30,000 bbl tank were originally used for gasoline storage until they were decommissioned in 1990 and now serve as temporary fluids storage of fresh water and production water. The barge terminal assets located on the Ohio River should enabled GreenHunter Water to significantly increase our future logistics capabilities.

 

On March 13, 2013, we acquired a 10.8 acre barging terminal facility located in Wheeling, Ohio County, West Virginia. Previously utilized as a gasoline storage facility, we have fully engineered plans to convert the location into a water treatment, recycling and condensate handling logistics terminal. In August 2013, these plans were approved by the Wheeling, West Virginia Planning Commission, and construction is planned to start sometime in 2015. The current plan for the terminal is to convert the existing 11,000 square foot warehouse into a water recycling station and build up to 19,000 bbls of water tank storage. We plan to employ a vibration separation micro-filtration system at the barge terminal to remove suspended solids from oilfield brine. Oilfield producers will be given the option to reuse remediated fluids under our Frac-Cycle® services offering (which can be scaled to 10,000 bbls per day at the terminal) or take advantage of our advanced barge logistics capabilities to significantly reduce residual waste transportation costs.

 

 

South Texas - Eagle Ford Shale:

 

During 2013, we operated four disposal wells in South Texas during various portions of the year, and we had a lease on a fifth location, which had not been developed into an operating well at year-end 2013. We sold one disposal well in Karnes County, Texas, on June 10, 2013 that had an estimated capacity of 10,000 bbl/day.

 

In late 2013, the Company decided to sell the remaining wells and undeveloped leases in South Texas due to their low utilization and in an effort to pursue what we consider to be better use of our capital in Appalachia. We closed on the sale of all of our remaining wells in South Texas in the first half of 2014 and have ceased operations in South Texas.

 

In late 2012, the Company acquired White Top and Blackwater, two oilfield construction and service companies. On May 17, 2013, we discontinued certain portions of operations of White Top and Blackwater. For the remainder of 2013, the Company continued to operate the transportation portion of this business. In late 2013, the Company decided to discontinue its South Texas transportation business, which primarily centered around assets acquired from White Top and Blackwater. At December 31, 2013, the remaining equipment owned by White Top and Blackwater was classified as held for sale. In 2014, we sold the remaining assets from this acquisition that were not transferred to our operations in Appalachia.

 

  

Equipment and Tank Rentals and MAG Tank™

 

GreenHunter Environmental Services sells and/or rents MAG Tanks™ and 500 bbl Frac Tanks. In 2012, we contracted with an engineering firm to engineer and design a proprietary MAG Tank™ product line. Our goal was to design a flexible design for the MAG Tank™ allowing a larger variety of storage capacities and configurations. MAG Tank’s™ advanced next-generation design features a modular approach with standardized panels that enable quick assembly and disassembly. Containment capacities start at 11,000 bbls with designs that exceed 300,000 bbls. A disposable impermeable liner and geotextile substrate provide water containment and a puncture resistant ground covering.

 

After site preparation, a MAG Tank™ is typically installed in two days or less. Our MAG Panel™ design is proprietary, and we expect to receive patents on certain design elements. Moreover, we are making MAG Tanks™ available to our customers either for purchase or for rent. We have been building an inventory of panels for sale and/or rent. The key benefits of the MAG Tank™ relative to competing products are lower cost of storage, unique flexible design to meet ground specifications, and a significant reduction in the environmental impact due to reduced truck traffic. At December 31, 2014, we were contracted with two separate manufacturers that have been actively producing MAG Tank™ inventory for the Company.

 

 

Frac-Cycle™

 

Frac-Cycle™ is the general name for our water treatment service. Due to the unique characteristics of produced water from different shale plays, GreenHunter Water, in consultation with operators, has determined that no one water reuse system is ideal for all areas. We have evaluated multiple technologies and selected those that provide cost-effective solutions for the desired level of treatment for the operator’s needs. While most operators are targeting a clean brine output, Frac-Cycle’s™ flexible design allows our customers to process flowback or produced water and recycle to either clean brine or fresh water. Recycled water can be used in subsequent frac jobs, and in some cases an NPDES permit can be obtained to discharge fresh water into a stream.

 

We currently operate a riverside water treatment facility in the Marcellus Shale area and plan to offer this service at multiple locations throughout the region. The fluids will be cleaned into a clean brine solution and either sold back to operators for fracking or disposed of in one of our disposal wells. We intend to increase capacity of our treatment facility in 2015 in order to meet our current customer demand for the service.

 

 

Marketplace Opportunity

 

Unconventional hydrocarbon production continues to grow as a percentage of all domestic onshore production in the U.S. and is currently greater than 60% of U.S. production. In almost all cases, water disposal will be an associated by-product of this production. Currently, producers can either manage their own water disposal and facilities, or they can contract with third-party service providers. Based upon our industry research, we do not believe that there is any one, third-party water disposal company that would account for meaningful market share in any of the basins we are currently targeting to provide our services. Furthermore, given the smaller independent nature of these third-party service providers, we believe that they may face more obstacles in meeting ever-changing regulatory requirements. In addition, most producers view water disposal for what it is, a by-product of their primary business of producing hydrocarbons.

 

 

Governmental Regulation

 

Our business is subject to extensive and evolving federal, state or provincial and local environmental, health, safety and transportation laws and regulations. These laws and regulations are administered by the U.S. EPA and various other federal, state and local environmental, zoning, transportation, land use, health and safety agencies in the U.S. Many of these agencies regularly examine our operations to monitor compliance with these laws and regulations and have the power to enforce compliance, obtain injunctions or impose civil or criminal penalties in case of violations. In recent years, the oil and gas industry that we serve has perceived an increase in both the amount of government regulation and the number of enforcement actions being brought by regulatory entities against operations in related industries. We expect this heightened governmental focus on regulation and enforcement to continue.

 

 

The primary United States federal statutes affecting our business are summarized below:

 

The Safe Drinking Water Act (“SDWA”) is the primary statute that governs injection wells. The SDWA requires the EPA to protect USDWs from being endangered from underground injection of fluids through a well. Injection through a well is defined as the subsurface emplacement of fluids through a bored, drilled, or driven well or through a dug well where the depth of the dug well is greater than the largest surface dimension; or a dug hole whose depth is greater than the largest surface dimension; or an improved sinkhole; or a subsurface distribution system. The EPA has promulgated standards by setting minimum requirements for injection wells, including Class II injection wells such as those owned and operated by the company. The Underground Injection Control (“UIC”) provisions of the SDWA and implementing regulations control the construction, operation, permitting, and closure of injection wells that place fluids underground for storage or disposal. All injection must be authorized under either general or specific permits. Injection well owners and operators may not site, construct, operate, maintain, convert, plug, abandon, or conduct any other injection activity that endangers USDWs.

 

The SDWA allows a state to obtain primacy from the EPA for oil and gas related injection wells, either by adopting the federal UIC requirements or, under some circumstances without being required to adopt the complete set of applicable federal UIC regulations. The state must be able to demonstrate that its existing regulatory program is protecting USDWs in that state, even if the regulations may not be as stringent as federal rules. Some of the states in which we operate have primacy from the EPA for oil and gas injection wells, and in these states the requirements may differ from the federal requirements. In states in which we operate that do not have primacy, the EPA directly enforces the federal requirements.

 

The Occupational Safety and Health Act of 1970, as amended, establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the Occupational Safety and Health Administration (“OSHA”), and various reporting and record keeping obligations as well as disclosure and procedural requirements. Various standards for notices of hazards, safety in excavation and demolition work and the handling of asbestos, may apply to our operations. The Department of Transportation and OSHA, along with other federal agencies, have jurisdiction over certain aspects of hazardous materials and hazardous waste, including safety, movement and disposal. Various state and local agencies with jurisdiction over disposal of hazardous waste may seek to regulate movement of hazardous materials in areas not otherwise preempted by federal law.

 

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), or the Superfund law, and comparable state laws impose liability, potentially without regard to fault or legality of the activity at the time, on certain classes of persons that are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current owner or operator of the disposal site or sites where the release occurred, past owners or operators at the time disposal activities occurred at the site, and companies that disposed or arranged for the disposal of hazardous substances that have been released at the site. Under CERCLA, these persons may be subject to joint and several liability, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, for damages to natural resources and for the costs of some health studies. In addition, neighboring landowners and other third parties may file claims under common law for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment.

 

The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 (“RCRA”) regulates the management and disposal of solid and hazardous waste. Some wastes associated with the exploration and production of oil and natural gas are exempted from the most stringent regulation in certain circumstances, such as drilling fluids, produced waters and other wastes associated with the exploration, development or production of oil and natural gas. However, these wastes and other wastes may be otherwise regulated by the EPA or state agencies. Moreover, in the ordinary course of our operations, industrial wastes such as paint wastes and waste solvents may be regulated as hazardous waste under RCRA or considered hazardous substances under CERCLA. RCRA contains authority that allows the EPA or state agencies to compel assessment and cleanup activities involving certain waste materials, and it authorizes the initiation of citizen suits in certain circumstances where parties have failed to comply with RCRA.

 

We currently own or lease, and have in the past owned or leased, and intend in the future to own or lease a number of properties that have been used as service yards in support of oil and natural gas exploration and production activities. Although we have utilized operating and disposal practices that we considered standard in the industry at the time, there is the possibility that repair and maintenance activities on rigs and equipment stored in these service yards, as well as fluids stored at these yards, may have resulted in the disposal or release of hydrocarbons or other wastes on or under these yards or other locations where these wastes have been taken for disposal. In addition, we own or lease properties that in the past were operated by third parties whose operations were not under our control. These properties and the hydrocarbons or wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under these laws, we could be required to remove or remediate previously disposed wastes or property contamination.

 

 

 

In the course of our operations, some of our equipment may be exposed to naturally occurring radiation associated with oil and natural gas deposits, and this exposure may result in the generation of wastes containing naturally occurring radioactive materials, or “NORM.” NORM wastes exhibiting trace levels of naturally occurring radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. Because many of the properties presently or previously owned, operated or occupied by us have been used for oil and natural gas production operations for many years, it is possible that we may incur costs or liabilities associated with elevated levels of NORM.

 

 

Environmental Law Compliance Costs

 

We are subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. We cannot predict the future impact of such standards and requirements which are subject to change and can have retroactive effectiveness. We continue to monitor the status of these laws and regulations. Our management believes that the likelihood of new environmental regulations resulting in a material adverse impact to our financial position, liquidity, capital resources or future results of operations is unlikely.

 

Currently, we have not been fined, cited or notified of any environmental violations that would have a material adverse effect upon our financial position, liquidity or capital resources. However, our management does recognize that by the very nature of our business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of our liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.

 

 

Customers & Contracts

 

The amount of water that can be disposed of in any one facility is dependent upon both regulatory permits, as well as the ability of the underground geologic formation to accept or absorb the waste water. As a result, the amount of waste water that GreenHunter will be able to dispose of at any one time will be finite. We expect as a result, that we will continue to enter into long-term disposal contracts with producers whereby we will assure them as certain amount of disposal capacity for their utilization. Our goal would be to continue to enter into take-or-pay contracts whereby we provide a certain amount of disposal capacity that is paid for by the producer, whether they actually utilize that capacity or not. As a result, we believe that a certain amount of our revenues will be supported by these types of contracts.

 

In addition, based upon disposal capacity versus demand for our services, we anticipate that we could enter contracts subject to us being able to increase our disposal capacity through additional acquisition, or disposal well drilling or conversion. In this scenario, we would have a comfort level as to the potential revenue and profit to be recognized prior to undertaking any capital expenditure, thereby reducing our growth risk.

 

As a customer base is secured, with long-term disposal contracts, we anticipate that we will be able to broaden our product offering to increase our net revenue per barrel through the various other services that we provide.

 

We currently have four customers that account for approximately 54% of our total 2014 revenue, with Triad Hunter, LLC and Stone Energy providing approximately 21% and 13%, respectively. However, we believe that the potential customer base is large enough that we can easily replace the revenue from any of these customers if necessary. Four customers comprise 51% of the Company’s accounts receivable as of December 31, 2014.

 

We are not currently dependent on any principal supplier or suppliers of equipment or services.

 

 

Permits and Regulatory Compliance

 

We operated 10 water disposal facilities as of December 31, 2014. Each of these facilities is permitted to inject non-hazardous oil and gas waste into an Underground Injection Control (“UIC”) Class II disposal wells. These wells have been drilled in certain acceptable geologic formations far below the base of fresh water to a point that is safely separated by other substantial geological confining layers according to environmental laws that are administered under the auspices of the federal government or states with delegated authority. We are actively seeking UIC Class II disposal permits for additional facilities that we intend to develop and operate.

 

 

We have announced our intention to utilize barges for the transport of oilfield brine in order to reduce the number of truck hours on county, state and federal roads. We intend to either own or lease and operate barge trans-loading or transfer stations in the Appalachian Region along the Ohio River and its tributaries, among other rivers. Our plan is to consolidate brine water at these stations and transport the product along navigable waterways in vessels (such as double-hulled barges) that are specifically built for this purpose. Under U.S. law, vessel operators must report domestic waterborne commercial movements to the U.S. Coast Guard. Vessel types include dry cargo ships and tankers, barges (loaded and empty), towboats (with or without barges), tug, crew and supply boats to offshore locations and new vessels from shipyards to point of delivery. Idle vessels are also reported. We have received the required permits from the U.S. Coast Guard and are proceeding ahead with the business plan.

 

Because the major component of our business is the collection and disposal of oilfield residual brine in an environmentally sound manner, a significant amount of our capital expenditures are related, either directly or indirectly, to environmental protection measures, including compliance with federal, state and local provisions that regulate the placement of oilfield residual brine into the environment. There are costs associated with siting, design, operations, monitoring, site maintenance, corrective actions, financial assurance, and facility closure and post-closure obligations. In connection with our acquisition, development or expansion of a Class II injection facility or transfer station, we must often spend considerable time, effort and money to obtain or maintain required permits and approvals. There cannot be any assurances that we will be able to obtain or maintain required governmental approvals. Once obtained, operating permits are subject to renewal, modification, suspension or revocation by the issuing agency. Compliance with current and any future regulatory requirements could require us to make significant capital and operating expenditures. However, most of these expenditures are made in the normal course of business and do not place us at any competitive disadvantage.

 

 

Intellectual Property

 

GreenHunter Water claims common law rights in a variety of marks, including but not limited to, FRAC-CYCLE®, TOTAL WATER MANAGEMENT SOLUTIONS®, OILFIELD FLUID MANAGEMENT SOLUTION™, MAG Tank™ and MAG Panel™. GreenHunter Water has registered or intends to file applications to register these trademarks with the U.S. Patent and Trademark Office.

 

GreenHunter filed U.S. Patent Application Serial No. 14/106,433 for “Modular Above-Ground Tank” on December 13, 2013. GreenHunter also filed International Patent Application No. PCT/US13/75193 on December 13, 2013 for the same invention. Both applications are based on provisional Patent Application No. 61/737,604, filed on December 14, 2012.

 

 

Other Assets and Business Opportunities

 

Other than the above-discussed assets for our water resource management initiative, our assets primarily consist of a biomass power plant located in unincorporated Imperial County, California, which we refer to as the biomass facility. The biomass facility was originally built in 1989 and has not operated since 1994. 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, Mesquite Lake entered an agreement to sell the Mesquite Lake Resource Recovery Facility and related real property (commonly referred to as the biomass project) to ML Energy Park, LLC for $2.0 million. The sale of this asset was closed on March 16, 2015. The buyer made an initial payment of $50 thousand as earnest money deposit and continued to pay $50 thousand per month to date. The non-refundable monthly payments, as well as the initial $25 thousand fee, were applied to the purchase.

 

For further information about other properties owned by the Company, see “Item 2. Properties”.

 

Our common stock is traded on the NYSE MKT under the symbol “GRH.” Our preferred stock is traded on the NYSE MKT under the symbol “GRH.PRC.”

 

 

Executive Offices and Additional Information

 

Our executive offices are located at 1048 Texan Trail, Grapevine, Texas 76051, and our telephone number is (972) 410-1044. Our website is www.greenhunterresources.com . Additional information that may be obtained through our website does not constitute part of this prospectus. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K are located at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the SEC’s Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding our filings at www.sec.gov .

 

Employees

 

We had a total of 114 full time employees as of April 14, 2015.

 

 

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 and in our other documents filed with the SEC before making an investment decision. In evaluating our company, the factors described below should be considered carefully. The risks and uncertainties described in this Form 10-K and in our other documents filed with the SEC are not the only ones facing us. Additional risks and uncertainties that we do not presently know about or that we currently believe are not material may also adversely affect our business. If any of the risks and uncertainties described in this Form 10-K and in our other documents filed with the SEC actually occur, our business, financial condition and results of operations could be adversely affected in a material way.

 

 

Risks Related to Our Business

 

We have continued to experience losses from our ongoing operations.

 

Although we are generating increasingly significant revenues from our overall water management activities, we have continued to experience losses from our ongoing operations. Our ability to implement our entire business plan has been adversely affected by our lack of working capital. Although Management has continued to implement plans to address the need of capital funding, which is improving, there is no guarantee that we will not continue to experience losses in continuing operations, which could affect the Company’s ability to continue as a going concern in the future.

 

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 and preferred stock and plan to obtain additional debt. Because we must dedicate a substantial portion of our cash flow from operations to the payment of both principal and interest on our indebtedness, 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 result in the following:

 

 

 

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 on terms and conditions favorable to us or at all;

 

 

 

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 indebtedness; and

 

 

 

limit our ability to borrow additional funds.

 

If any of these were to occur, it would adversely affect, potentially materially, our results of operations.

 

 

Covenants in our debt agreements impose restrictions on us.

 

Certain of our debt agreements with lenders contain restrictive covenants including, but not limited to, restrictions on our ability to incur debt or encumbrances or sell assets, restrictions on investments and lending, and a debt service coverage ratio. Our failure to comply with these covenants would result in an event of default pursuant to which our lenders could call the entire amount of the debt immediately due. If the entire amount of our debt outstanding under these debt agreements is called due, we may not have sufficient funds available to pay such indebtedness and may not be able to refinance the accelerated indebtedness on terms favorable to us or at all which could have a material adverse effect on our results of operations and our ability to operate as a going concern.

 

Additionally, we were not in compliance with one certain existing debt covenant contained in our secured debt agreements as of December 31, 2014. However, we did obtain a waiver from our lender for the non-compliance in our debt covenant for the years ending December 31, 2014 and December 31, 2015.

 

 We are dependent upon our key personnel.

 

Our operations and financial success 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 our executive officers, key personnel and our ability to attract and retain qualified personnel. Our profitability could be adversely affected if we lose certain 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.

 

We may not be able to meet our capital requirements.

 

Building and operating our water management 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. Our subsidiary, GreenHunter Water has identified water hauling capacity as a constrained resource in our target areas of operations, and we are actively pursuing contracts for this service as part of our Oilfield Fluid Management Solutions™ portfolio offering. Our ability to generate revenues in this market is dependent upon our ability to source capital for expansion, hire and train operating personnel and maintain our fleet of equipment so it is available when needed.

 

We will be required to pursue sources of additional capital through various means, including possible joint venture projects, which may include a profit sharing component, debt financing, equity financing or other means. We may not be successful in locating a suitable financing or strategic business combination transaction in a timely fashion or at all. In addition, we may not be successful in obtaining the capital we require by any other means. Future financings through equity investments are likely, and these are likely to be dilutive to the existing stockholders 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. 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 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 necessary financing in the future may be impaired by such factors as the capital markets, both generally and specifically in the water management industry.

 

 

Risks Related to Our Water Management Business

 

We are subject to United States federal, state and local regulations regarding issues of health, safety, transportation, and protection of natural resources and the environment. Under these regulations, we may become liable for penalties, damages or costs of remediation. Any changes in laws and government regulations could increase our costs of doing business.

 

Hydraulic fracturing is a commonly used process that involves using water, sand and certain chemicals to fracture the hydrocarbon-bearing rock formation to allow flow of hydrocarbons into the wellbore. 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 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 laws or 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. As a result of such increased costs, the pace of oil and gas activity could be slowed, resulting in less need for water management solutions. Our results of operations could be negatively affected.

 

Our water management operations are subject to other federal, state and local laws and regulations relating to protection of natural resources and the environment, health and safety, waste management, and transportation and disposal of produced-water and other materials. For example, our water management business segment is expected to include disposal into injection wells that could pose some risks of environmental liability, including leakage from the wells to surface or subsurface soils, surface water or groundwater. Liability under these laws and regulations could result in cancellation of well operations, fines and penalties, expenditures for remediation, and liability for property damage, personal injuries and natural resource damage. Sanctions for noncompliance with applicable environmental laws and regulations also may include assessment of administrative, civil and criminal penalties, revocation of permits and issuance of orders to assess and clean up contamination.

 

Failure to comply with these laws and regulations could result in the assessment of administrative, civil or criminal penalties, imposition of assessment, cleanup, natural resource loss and site restoration costs and liens, revocation of permits, and, to a lesser extent, orders to limit or cease certain operations. In addition, certain environmental laws impose strict and/or joint and several liability, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time of those actions regardless of fault and irrespective of when the acts occurred.

 

Demand for our water management services is substantially dependent on the levels of expenditures by the oil and gas industry. A substantial or an extended decline in commodity prices could result in lower expenditures by the oil and gas industry, which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

A portion of the demand for our water management services depends substantially on the level of expenditures by the oil and gas industry for the exploration, development and production of oil and natural gas reserves. These expenditures are generally dependent on the industry’s view of future oil and natural gas prices and are sensitive to the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. Declines, as well as anticipated declines, in oil and gas prices could also result in project modifications, delays or cancellations, general business disruptions, and delays in, or nonpayment of, amounts that are owed to us. These effects could have a material adverse effect on our results of operations and cash flows.

 

 

The prices for oil and natural gas have historically been volatile and may be affected by a variety of factors, including the following:

 

 

 

demand for hydrocarbons, which is affected by worldwide population growth, economic growth rates and general economic and business conditions;

 

 

 

the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels for oil;

 

 

 

oil and gas production by non-OPEC countries;

 

 

 

the level of excess production capacity;

 

 

 

political and economic uncertainty and sociopolitical unrest;

 

 

 

the level of worldwide oil and gas exploration and production activity;

 

 

 

the cost of exploring for, producing and delivering oil and gas;

 

 

 

technological advances affecting energy consumption; and

 

 

 

weather conditions.

 

The oil and gas industry historically has experienced periodic downturns. A significant downturn in the oil and gas industry could result in a reduction in demand for our water management services and could adversely affect our financial condition, results of operations and cash flows.

 

Federal and state legislative and regulatory initiatives related to hydraulic fracturing could result in operating restrictions or delays in the completion of oil and natural gas wells that may reduce demand for our water management activities and could adversely affect our financial position, results of operations and cash flows.

 

The Energy Policy Act of 2005 amended the Underground Injection Control (UIC) provisions of the Safe Drinking Water Act to exclude hydraulic fracturing from the definition of “underground injection” and associated permitting requirements under certain circumstances. However, the repeal of this exclusion has been advocated by certain advocacy organizations and others in the public. Legislation to amend the Safe Drinking Water Act to repeal this exemption and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require reporting and disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. Similar legislation could be introduced in the current session of Congress or at the state level or local level. Scrutiny of hydraulic fracturing activities continues in other ways, with the U.S. Environmental Protection Agency, or the EPA, having commenced a study of the potential environmental impacts of hydraulic fracturing. In 2010, a committee of the U.S. House of Representatives undertook investigations into hydraulic fracturing practices, including requesting information from various field services companies. The U.S. Department of the Interior has announced that it will consider regulations relating to the use of hydraulic fracturing techniques on public lands and disclosure of fracturing fluid constituents. In addition, some states and localities have adopted, and others are considering adopting, regulations or ordinances that could restrict hydraulic fracturing in certain circumstances, or that would impose higher taxes, fees or royalties on natural gas production. Moreover, public debate over hydraulic fracturing and shale gas production has been increasing and has resulted in delays of well permits in some areas.

 

Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition, including litigation, to oil and natural gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to operational delays or increased operating costs in the production of oil and natural gas, including from the developing shale plays, incurred by our customers or could make it more difficult to perform hydraulic fracturing. The adoption of any federal, state or local laws or the implementation of regulations or ordinances regarding hydraulic fracturing could potentially cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our water management activities, which could adversely affect our financial position, results of operations and cash flows.

 

 

Competitors in the market place may hinder our ability to compete.

 

We face competition in our water management business from several other water management companies, some of which are much larger enterprises than us. As a result, our ability to effectively enter into additional water management arrangements could be hindered by competition.

 

Some oil and gas producers have their own water management services, which could limit the demand for our services.

 

Our water management business is predicated on providing water management solutions to oil and gas producers. Some of the larger oil and gas producers have their own water management solutions and some have even implemented their own injection well sites to dispose of the waste water produced from their own oil and gas drilling activities. With access to their own water management solutions, larger oil and gas producers will have less need for the water management solutions that we provide. A lower demand for our services will adversely affect our financial position and ability to continue as an ongoing concern.

 

We may be subject to product liability claims for which we do not have adequate insurance coverage. If we were required to pay a substantial product liability claim, our business and financial condition would be materially adversely affected.

 

We face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury or destruction of property. Such claims may include, among others, that our products introduce other contaminants into the water. Product liability claims relating to defective products could have a material adverse effect on our business and financial condition.

 

We must meet evolving customer requirements for water treatment and invest in the development of our water treatment technologies. If we fail to do this, our business and operating results will be adversely affected.

 

We need to continually evaluate our technology and product offerings to remain competitive in our markets, in particular, the treatment of water used in the hydraulic fracturing process. If we are unable to develop or enhance our systems and services when necessary, whether through internal development or acquisition, to satisfy evolving customer demands, our business, operating results, financial condition and prospects will be harmed significantly.

 

Adverse weather conditions, natural disasters, droughts, climate change, and other adverse natural conditions can impose significant costs and losses on our business.

 

Our ability to provide water management operations is subject to the availability of water, which is vulnerable to adverse weather conditions, including extended droughts and temperature extremes, which are quite common, in our operating regions, but difficult to predict and may be influenced by global climate change. This risk is particularly true with respect to regions where oil and gas operations are significant. In extreme cases, entire operations may be unable to continue without substantial water reserves. These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.

 

Salt water injection wells potentially may create earthquakes if near faults. In December 2011, the state of Ohio shut down a disposal site located in another part of the state because it was determined that the disposal facility was completed into a previously unknown fault line and may have been a contributing factor in creating low energy earthquakes. We are not currently insured for earthquake coverage in Ohio, but we are evaluating options for business interruption insurance that may provide coverage for a disposal well being shut-in by a geological event.

 

We may be subject to risks arising from our previous ownership of our idle biomass facility in Imperial County, California.

 

We owned an idle biomass power plant located in Imperial County, California, which we refer to as the biomass facility. The biomass facility was originally built in 1989 and has not operated since 1994. We did not complete construction and retrofitting of the biomass facility before selling it to ML Energy Park, LLC on March 16, 2015.

 

 

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. Under certain circumstances, 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 the ownership or operation of the biomass facility. If any hazardous materials are found within our operations and are in violation of the law or exceed regulatory action concentrations 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, including the biomass facility, and may apply to hazardous materials present within the properties before we acquired or commenced use of them. If significant losses arise from hazardous substance contamination, our financial viability may be substantially and adversely affected. Moreover, electric utilities and electric power plants such as the biomass facility are subject to environmental laws, rules and regulations that are subject to change. Additional capital expenditures may be required to comply with existing or new environmental laws, rules and regulations. We cannot predict at this time whether any additional legislation or rules will be enacted which will affect the biomass facility, and if such laws or rules are enacted, what the costs to us might be in the future because of such action.

 

 

Risks Related to the Ownership of Our Series C Preferred Stock and Common Stock

 

The price of our common stock and Series C Preferred Stock may be volatile.

 

We expect the price of our common stock and Series C Preferred Stock 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 capital stock;

 

 

 

tax and other regulatory developments;

 

 

 

our ability to develop water solutions for shale or “unconventional” oil and gas exploration;

 

 

 

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 this “Risk Factors” section and elsewhere in this document.

 

 

Our directors and officers have significant voting power and may take actions that may not be in the best interests of our other stockholders.

 

As of April 14, 2015, our officers and directors beneficially owned a majority of our common stock in the aggregate. As a result, these stockholders, if they act together, will be able to control our management and affairs and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock.

 

If we issue additional shares in the future, it will result in dilution to our existing stockholders.

 

Our certificate of incorporation, as amended, does not permit 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 the Company.

 

We may issue shares of our capital stock or debt securities to complete a business combination, acquire assets, or to help fund our ongoing operations, which would dilute the equity interest of our stockholders and could cause a change in control of our ownership.

 

Our certificate of incorporation, as amended, authorizes the issuance of up to 90,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of April 14, 2015, there were 50,552,583 authorized but unissued shares of our common stock and 8,024,750 authorized but unissued shares of our preferred stock.

 

We may issue a substantial number of additional shares of our common stock or preferred stock or debt securities (which may be convertible into our capital stock), or a combination of common stock, preferred stock and debt 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 debt securities may:

 

 

 

significantly dilute the equity interest of our current stockholders;

 

 

 

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 the following:

 

 

 

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 other personnel we hire to manage the acquired business and whom we would have only a limited ability to evaluate.

 

Our ability to successfully effect a business combination and successfully integrate the acquired business’s operations with our own will be dependent upon the efforts of our key personnel and other personnel we hire to manage the acquired business. However, we cannot presently ascertain the future role of our key personnel in the target business. Moreover, while we intend to closely scrutinize any individuals we engage in connection with a business combination, our assessment of these individuals may prove to be incorrect. 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.

 

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. Such financing may not 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.

 

 

 

Our failure to maintain effective internal control over financial reporting could result in our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common stock to decline.

 

Our disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements or fraud. Any controls system, no matter how well designed and operated, can only provide reasonable, and not absolute, assurance of achieving the desired control objectives. Because of such limitations there is a risk that material misstatements or instances of fraud will not be prevented or detected on a timely basis by the financial reporting process. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

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 the 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 the 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, convertible promissory notes and Series C Preferred Stock may have an adverse effect on the market price of our common stock and make it more difficult to effect a business combination.

 

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 outstanding options and warrants or conversion of convertible promissory notes or our Series C 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, convertible promissory notes and Series C 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 a sale, of the shares underlying the options, warrants, convertible promissory notes and Series C 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, options, warrants, convertible promissory notes or shares of Series C Preferred Stock are exercised or converted, as applicable, you may experience dilution to your holdings.

 

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.

 

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.

 

 

 

Our certificate of incorporation and bylaws and Delaware law may inhibit a takeover.

 

In certain circumstances, the fact that corporate devices are in place that will inhibit or discourage takeover attempts could reduce the market value of our common stock. Our certificate of incorporation, as amended, bylaws, as amended, and certain other agreements contain certain provisions that may discourage other persons from attempting to acquire control of us. These provisions include, but are not limited to, the following:

 

 

 

staggered terms of service for our board of directors;

 

 

 

the authorization of the board of directors to issue shares of undesignated preferred stock in one or more series without the specific approval of the stockholders;

 

 

 

the establishment of advance notice requirements for director nominations and actions to be taken at annual meetings; and

 

 

 

a provision of our bylaws providing that special meetings of the stockholders may be called by our chairman, our president, or our board of directors, or by our president or secretary at the request in writing of the holders of not less than 30% of all shares issued, outstanding and entitled to vote.

 

All of these provisions could impede a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

 

If we do not continue to meet the listing standards established by the NYSE MKT, our common stock or Series C Preferred Stock may not remain listed for trading.

 

The NYSE MKT has established certain quantitative and qualitative standards that companies must meet in order to remain listed for trading on these markets. We cannot guarantee that we will be able to maintain all necessary requirements for listing; therefore, we cannot guarantee that our common stock or Series C Preferred Stock will remain listed for trading on the NYSE MKT or other similar markets.

 

The Series C Preferred Stock has historically been thinly traded, which may negatively affect investors’ ability to sell their shares. The Series C Preferred Stock has no stated maturity date.

 

Since the Series C Preferred Stock has no stated maturity date, investors seeking liquidity will be limited to selling their shares of Series C Preferred Stock in the secondary market. While shares of our Series C Preferred Stock trade on the NYSE MKT, our Series C Preferred Stock is thinly traded, which may negatively affect investors’ ability to sell their shares. The low trading volume of our Series C Preferred Stock is outside of our control, and may not increase in the near future or, even if it does increase in the future, may not be maintained.

 

 

The market value of our equity securities could be adversely affected by various factors.

 

The trading price of our common stock and our Series C Preferred Stock may depend on many factors, including the following:

 

 

 

market liquidity;

 

 

 

particularly with respect to our Series C Preferred Stock, prevailing interest rates;

 

 

 

the market for similar securities

 

 

 

general economic conditions; and

 

 

 

our financial condition, performance and prospects.

 

For example, higher market interest rates could cause the market price of our equity securities, including our Series C Preferred Stock, to decrease.

 

We could be prevented from paying dividends on the Series C Preferred Stock.

 

Although dividends on the Series C Preferred Stock are cumulative and arrearages will accrue until paid, you will only receive cash dividends on the Series C Preferred Stock if we have funds legally available for the payment of dividends and such payment is not restricted or prohibited by law, the terms of any senior shares, or any documents governing our indebtedness. Our business may not generate sufficient cash flow from operations to enable us to pay dividends on the Series C Preferred Stock when payable. Our business is speculative and dependent upon the implementation of our new business strategy, as well as our ability to enter into agreements with third parties for necessary financing for the construction of facilities related to our water management operations. 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 to satisfy our current obligations. As a result, we may not be able to generate sufficient revenues to pay dividends on the Series C Preferred Stock in the future. We have paid the dividends accrued on the currently issued and outstanding shares of Series C Preferred Stock.

 

In addition, future debt, contractual covenants or arrangements we enter into may restrict or prevent future dividend payments. Accordingly, there is no guarantee that we will be able to pay any cash dividends on our Series C Preferred Stock. Furthermore, in some circumstances, we may pay dividends in stock rather than cash, and our stock price may be depressed at such time.

 

The Series C Preferred Stock has not been rated and will be subordinated to all of our existing and future debt.

 

The Series C Preferred Stock has not been rated by any nationally recognized statistical rating organization. In addition, with respect to dividend rights and rights upon our liquidation, winding-up or dissolution, the Series C Preferred Stock will be subordinated to all of our existing and future debt, and all future capital stock designated as senior to the Series C Preferred Stock. We may also incur additional indebtedness in the future to finance potential acquisitions or other activities and the terms of the Series C Preferred Stock do not require us to obtain the approval of the holders of the Series C Preferred Stock prior to incurring additional indebtedness. As a result, our existing and future indebtedness may be subject to restrictive covenants or other provisions that may prevent or otherwise limit our ability to make dividend or liquidation payments on our Series C Preferred Stock. Upon our liquidation, our obligations to our creditors would rank senior to our Series C Preferred Stock and would be required to be paid before any payments could be made to holders of our Series C Preferred Stock.

 

Investors should not expect us to redeem the Series C Preferred Stock on the date the Series C Preferred Stock becomes redeemable or on any particular date afterwards.

 

We may not redeem the Series C Preferred Stock prior to June 30, 2015, except pursuant to the special redemption upon a Change of Ownership or Control discussed below. On and after June 30, 2015, we may redeem the Series C Preferred Stock for cash at our option, from time to time, in whole or in part, at a redemption price of $25.00 per share, plus accrued and unpaid dividends (whether or not earned or declared) to the redemption date.

 

 

Following a “Change of Ownership or Control” of us by a person, entity or group, we (or the acquiring entity) will have the option to redeem the Series C Preferred Stock, in whole but not in part, within 120 days after the date on which the Change of Ownership or Control has occurred for cash, at $25.00 per share, plus accrued and unpaid dividends (whether or not earned or declared), up to the redemption date. However, if we (or the acquiring entity) have not notified the holders of the Series C Preferred Stock before such an event of our intent to redeem the Series C Preferred Stock, the holders of the Series C Preferred Stock have the right to convert their Series C Preferred Stock into shares of our common stock immediately before consummation of the Change of Ownership or Control transaction and to participate in such transaction along with the holders of our common stock. The Series C Preferred Stock is convertible at such time into an amount of common stock equal to the result of dividing the sum of the $25.00 per share liquidation preference plus the amount of any accumulated but unpaid dividends to but not including the date of the Change of Ownership or Control by the value of the consideration paid for each share of common stock in the Change of Ownership or Control; provided that such common stock may not exceed 27.9329 shares of common stock per share of converted Series C Preferred Stock, which 27.9329 amount is subject to pro rata adjustments for any stock splits, subdivisions or combinations, which we refer to in our certificate of designations as the “Share Cap”.

 

The Series C Preferred Stock does not have any stated maturity date and will not be subject to any sinking fund or mandatory redemption provisions except for redemption at our option upon a Change of Ownership or Control as described above or after June 30, 2015.

 

Any decision we may make at any time to redeem the Series C Preferred Stock will depend upon, among other things, our evaluation of our capital position, including the composition of our stockholders’ equity and general market conditions at that time.

 

Holders of Series C Preferred Stock have extremely limited voting rights.

 

Except as expressly stated in the certificate of designations governing the Series C Preferred Stock, as a holder of Series C Preferred Stock, you will not have any relative, participating, optional or other special voting rights and powers and your approval will not be required for the taking of any corporate action other than as provided in the certificate of designations. For example, your approval would not be required for any merger or consolidation in which we are involved or sale of all or substantially all of our assets except to the extent that such transaction materially adversely changes the express powers, preferences, rights or privileges of the holders of Series C Preferred Stock. None of the provisions relating to the Series C Preferred Stock contains any provisions affording the holders of the Series C Preferred Stock protection in the event of a highly leveraged or other transaction, including a merger or the sale, lease or conveyance of all or substantially all of our assets or business, that might adversely affect the holders of the Series C Preferred Stock, so long as the terms and rights of the holders of Series C Preferred Stock are not materially and adversely changed.

 

The issuance of future offerings of preferred stock may adversely affect the value of our Series C Preferred Stock.

 

Our certificate of incorporation, as amended, currently authorizes us to issue up to 10,000,000 shares of preferred stock in one or more series on terms that may be determined at the time of issuance by our board of directors. We may issue other classes of preferred shares that would rank on parity with or senior to the Series C Preferred Stock as to dividend rights or rights upon liquidation, winding up or dissolution. The creation and subsequent issuance of additional classes of preferred shares on parity with or, with the consent of the holders of the Series C Preferred Stock, senior to our Series C Preferred Stock would dilute the interests of the holders of Series C Preferred Stock and any issuance of preferred stock that is senior to the Series C Preferred Stock could affect our ability to pay dividends on, redeem or pay the liquidation preference on the Series C Preferred Stock.

 

You may be required to use other sources of funds to pay income taxes in respect of dividends received, or deemed to be received, on the Series C Preferred Stock in certain circumstances.

 

If we are required to pay dividends on the Series C Preferred Stock in shares of our common stock or additional shares of Series C Preferred Stock and such shares are not marketable at such time, you will be required to satisfy your income tax liability with respect to such dividends from other sources.

 

 

Holders of the Series C Preferred Stock may be unable to use the dividends-received deduction.

 

Distributions paid to corporate U.S. holders of the Series C Preferred Stock may be eligible for the dividends-received deduction if we have current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. We do not currently have accumulated earnings and profits. Additionally, we may not have sufficient current earnings and profits during future fiscal years for the distributions on the Series C Preferred Stock to qualify as dividends for U.S. federal income tax purposes. If the distributions fail to qualify as dividends, U.S. holders would be unable to use the dividends-received deduction. If any distributions on the Series C Preferred Stock with respect to any fiscal year are not eligible for the dividends-received deduction because of insufficient current or accumulated earnings and profits, it is possible that the market value of the Series C Preferred Stock might decline.

 

Non-U.S. Holders may be subject to U.S. income tax with respect to gain on disposition of their Series C Preferred Stock.

 

If we are a U.S. real property holding corporation at any time within the five-year period preceding a disposition of Series C Preferred Stock by a non-U.S. holder or the holder’s holding period of the shares disposed of, whichever period is shorter, such non-U.S. holder may be subject to U.S. federal income tax with respect to gain on such disposition. If we are a U.S. real property holding corporation, which we expect we are, so long as the Series C Preferred Stock is regularly traded on an established securities market, a non-U.S. holder will not be subject to U.S. federal income tax on the disposition of the Series C Preferred Stock unless the holder beneficially owns (directly or by attribution) more than 5% of the total fair market value of the Series C Preferred Stock at any time during the five-year period ending either on the date of disposition of such interest or other applicable determination date.

 

Our ability to use net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

 

We currently have net operating loss carryforwards that may be available to offset future taxable income. However, changes in the ownership of our stock (including certain transactions involving our stock that are outside of our control) could result (or may have already resulted) in an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, which may significantly limit our ability to utilize our net operating loss carryforwards. To the extent an ownership change has occurred or were to occur in the future, it is possible that the limitations imposed on our ability to use pre-ownership change losses could cause a significant net increase in our U.S. federal income tax liability and could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect.

 

Our Series C Preferred Stock is not generally convertible, and purchasers may not realize a corresponding upside if the price of our common stock increases.

 

Our Series C Preferred Stock is not generally convertible into our common stock and earns dividends at a fixed rate. Accordingly, the market value of our Series C Preferred Stock may depend on dividend and interest rates for other preferred stock, commercial paper and other investment alternatives and our actual and perceived ability to pay dividends on, and in the event of dissolution satisfy the liquidation preference with respect to, our Series C Preferred Stock. Moreover, our right to redeem the Series C Preferred Stock on or after June 30, 2015 or in the event of a Change of Ownership or Control could impose a ceiling on its value.

 

Following a “Change of Ownership or Control” of us by a person, entity or group, we (or the acquiring entity) will have the option to redeem the Series C Preferred Stock, in whole but not in part, within 120 days after the date on which the Change of Ownership or Control has occurred for cash, at $25.00 per share, plus accrued and unpaid dividends (whether or not earned or declared), up to the redemption date. However, if we (or the acquiring entity) have not notified the holders of the Series C Preferred Stock before such an event of our intent to redeem the Series C Preferred Stock, the holders of the Series C Preferred Stock have the right to convert their Series C Preferred Stock into shares of our common stock immediately before consummation of the Change of Ownership or Control transaction and to participate in such transaction along with the holders of our common stock. The Series C Preferred Stock is convertible at such time into an amount of common stock equal to the result of dividing the sum of the $25.00 per share liquidation preference plus the amount of any accumulated but unpaid dividends to but not including the date of the Change of Ownership or Control by the value of the consideration paid for each share of common stock in the Change of Ownership or Control; provided that such common stock may not exceed 27.9329 shares of common stock per share of converted Series C Preferred Stock, which 27.9329 amount is subject to pro rata adjustments for any stock splits, subdivisions or combinations, which we refer to in our certificate of designations as the “Share Cap”.

 

 

Item 2. Properties

 

Other than the above-discussed assets for our new water resource management initiative, our assets primarily consist of a biomass power plant located in unincorporated Imperial County, California, which we refer to as the biomass facility. The biomass facility was originally built in 1989 and has not operated since 1994. We sold the biomass facility to ML Energy Park, LLC on March 16, 2015.

 

We own one office building comprising 10,100 usable square feet of space located in Grapevine, TX for use as our corporate headquarters. Additionally, the Company owns 23.5 acres in Washington County, Ohio, where there exists multiple office and workshop buildings which also serves as a field operating office.

 

On July 8, 2010, Hunter Disposal acquired a lease covering 98 acres, more or less, in the county of Noble, state of Ohio. The lease term is for three years and for so long thereafter as the property is operated for the purpose of injecting salt water. On June 11, 2010, Hunter Disposal acquired a lease covering 43.365 acres, more or less, in the county of Noble, state of Ohio. The lease term is for three years and for so long thereafter as the property is operated for the purpose of injecting salt water.

 

On March 13, 2013, the Company acquired a 10.8 acre barging terminal facility located in Wheeling, West Virginia for $750 thousand. When the facility is ultimately refurbished, it will contain a water recycling station using GreenHunter’s Frac-Cycle product line capable of being scaled to 10,000 BBL’s per day of processing. This location will also serve as a barging station with 19,000 BBLs per day of onsite storage.

 

Item 3. Legal Proceedings

 

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 proceeding 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 our operations.

 

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 previously performed at our Mesquite Lake biomass plant in Imperial County, California. GreenHunter Energy, Inc. had a construction contract directly with Crown Engineering only. 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 is attempting to enforce payment of its claim of approximately $328,000 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.

 

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 potential claim will be covered by insurance.

 

Jose Torres, et al. v. GreenHunter Resources, Inc. and GreenHunter Water, LLC, in the 130th District Court, Matagorda County, Texas, Cause No. 15-E-0036. Jose Torres, an employee of Hunter Hauling, LLC, a subsidiary of the defendants, was killed on December 17, 2013 while working inside a tanker truck on 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 its insurance carriers for coverage. The Company is in the process of answering the lawsuit.

 

 
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Table Of Contents
 
 

 

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.

 

Hunt Guillot and Associates v. GreenHunter Hydrocarbons, LLC, et al., in the Court of Common Pleas of Alleghaney, PA, Case No. GD15-821. Plaintiff sued Defendants for breach of contract regarding the payment of engineering and construction management services related to the engineering and construction of two condensate plants. Defendants have responded to the lawsuit and have begun discovery in this matter.

 

Quality Lease Rental Service LLC v. GreenHunter Water, LLC. In the 23rd Judicial District in the District Court of Wharton County, Texas, Cause No. 48051 .Plaintiff brought suit against defendant for damages for failure to pay for certain equipment services. The Company is in the process of answering the lawsuit. The Company believes this case has no merit.

 

White Top and Blackwater Related . 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 Preferred 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.

 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock trades on the NYSE MKT 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 NYSE MKT for each quarterly period for the last two fiscal years. On April 14, 2015, the last reported sale price of our common stock, as reported on the NYSE MKT, was $0.80 per share.

 

   

High

   

Low

   

Average Daily

Trading Volume

(Shares)

 

2014

                       

First Quarter

  $ 1.32     $ 0.80       106,285  

Second Quarter

  $ 2.09     $ 0.86       172,389  

Third Quarter

  $ 3.62     $ 1.45       641,219  

Fourth Quarter

  $ 1.55     $ 0.42       240,963  

2013

                       

First Quarter

  $ 1.96     $ 1.35       47,628  

Second Quarter

  $ 1.57     $ 0.75       59,805  

Third Quarter

  $ 1.75     $ 0.80       113,081  

Fourth Quarter

  $ 1.71     $ 1.14       112,075  

 

Our registrar and transfer agent is Securities Transfer Corporation, located at 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034. As of April 14, 2015, there were 572 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.

 

The following table sets forth, for the periods indicated, the actual high and low sales prices of our Series C Preferred Stock (rounded to the nearest penny) as reported by the NYSE MKT:

 

   

High

   

Low

 

2014

               

First Quarter

  $ 19.54     $ 18.32  

Second Quarter

  $ 25.00     $ 18.70  

Third Quarter

  $ 26.49     $ 24.10  

Fourth Quarter

  $ 25.54     $ 10.05  

2013

               

First Quarter

  $ 20.30     $ 16.48  

Second Quarter

  $ 19.36     $ 15.60  

Third Quarter

  $ 19.20     $ 16.52  

Fourth Quarter

  $ 19.85     $ 17.83  

 

The following table provides information on our equity plans:

 

Plan Category

 

Number of securities to be issued upon exercise of outstanding options

   

Weighted- average exercise price of outstanding options

   

Number of securities remaining available for future issuance under equity compensation plans

 

2007 Board of Directors Approved

    4,380,826     $ 8.06       0  

2008 Long-Term Incentive Plan

    1,840,333     $ 2.01       0  

2010 Long-Term Incentive Plan

    4,013,994     $ 1.32       0  

2013 Long-Term Incentive Plan

    4,677,500     $ 1.04       2,322,500  

 

 

Item 6. Selected Financial Data

 

Not required

 

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. 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. Actual events or results may differ materially from those indicated in such forward-looking statements.

 

Oil and Gas Industry Economic Update

 

In the latter part of 2014 and particularly in the fourth quarter of 2014, oil and natural gas prices declined significantly. West Texas Intermediate (“WTI”) closing spot prices for crude oil peaked for the year 2014 at $107.95 per barrel on June 20, 2014. Prices declined in the third quarter of 2014 with WTI closing at $91.17 on September 30, 2014. The fourth quarter of 2014 saw WTI spot prices decline at a more rapid pace closing the year at $53.45 on December 31, 2014, which was also the lowest closing price of the year. Subsequent to year end, prices have fluctuated in a range from mid $40s to low $50s. These rapid price declines in oil are generally considered to be related to an over-supply of world-wide crude oil due to a combination of factors including the increase in oil production in the U.S. resulting from the rapid development of the country’s shale oil coupled with a global decline in demand for oil. The price of oil has also been subject to significant geo-political influence. These price declines have, as expected, substantially reduced the profitability of U.S. exploration and production companies that produce oil as well as resulted in a reduction of the need for goods and services related to the exploration and production of oil, particularly in the oil producing shale regions and particularly with services related to drilling and hydraulic fracturing. The result is expected to be a significant decline in activity and profitability of oil service providers. Most industry experts expect lower prices to be the norm for the remainder of 2015.

 

At the same time, but for different reasons, natural gas prices have also declined over a similar period, but the decline has not been quite as severe. Henry Hub natural gas spot prices were generally over $4.50 per million British thermal units (“mmBtu”) during the first half of 2014 and declined to a range that hovered around $3.90 per mmBtu in the last part of the third quarter of 2014. Prices declined more in the fourth quarter of 2014 closing at $3.00 on December 31, 2014. Prices continued to decline somewhat in early 2015, but have fluctuated mainly between about $2.60 and $3.22 per mmBtu through the first quarter of 2015. The decline in gas prices is also generally attributed to increased natural gas production in the gas producing shale regions of the U.S., which has increased overall natural gas storage levels. Exploration and production companies as well as service related companies with exposure to these natural gas prices are seeing a reduction in activity and related revenue similar to those with an exposure to oil price reduction. In general, most exploration and production companies have an exposure to both oil and natural gas, as do most companies that provide services to these producers.

 

Management believes GreenHunter Resources, Inc. is in a relatively strong position during this significant downturn in the U.S. oil and gas industry. The Company has concentrated its efforts in the Appalachian Region of the country which includes the Marcellus and Utica Shale plays. While Baker Hughes reports that the U.S. rig count, which peaked at 1,931 drilling rigs active for the week ending October 3, 2014, is down to 1,840 rigs drilling for the week ending December 26, 2014, or a decline of almost 5%, it further reports that the U.S. rig count has continued to decrease to less than 1,000 drilling rigs for the week ending April 10, 2015, a decline of over 50% from the 2014 peak. However, the rig count declined 40% in the Utica basin and only about 18% in the Marcellus Shale basin during the same time period. These two shale basins, and the Marcellus in particular, have wells that produce “wet gas”, which is a combination of natural gas and hydrocarbon liquids that are also present with the natural gas, generally referred to as condensate. The natural gas is sold at natural gas rates while the condensate is divided into various products with prices more similar to the price of oil. With the production of both of these products in many gas wells in these two shale basins, exploration and production companies are somewhat shielded from the extreme lows that one or the other might reach.

 

 

 However, aside from the fact that the area of operations within which the Company provides its services has, so far, been less impacted by the downturn in commodity prices, another unusual combination of factors has not only shielded the Company from the severity of the downturn, but has caused demand for our services to actually increase. A lack of availability of disposal well capacity in the Appalachian Region, particularly in Pennsylvania, contributes to this increase in demand for our services. This lack of availability, when compared to many oil producing areas in the U.S., is due both to the limited number of available wells and also to the limited amount of disposal volumes per well that wells in this region are capable of disposing on a daily basis due to the characteristics of the geological formations involved.

 

Due to this limited disposal capacity and the costs many exploration and production companies must incur to transport both produced water and frac water to available disposal facilities, which are often long distances, many producers have turned to processes that purify the water to a degree that it is usable for hydraulic fracturing purposes and then store and re-use both their produced water and the water used in hydraulic fracturing. This alternative, while expensive, is often the best economic alternative when given the high costs to transport and dispose of water in this region. However, with drilling decreasing, which also results in decreased hydraulic fracturing, production companies quickly run out of storage for recycled water when their demand for water for hydraulic fracturing decreases and these production companies have no choice but to take at least some of their water, if not all, to disposal wells.

 

The Company currently operates in this unique part of the oil and gas economic environment. While the Company was at maximum disposal capacity before the economic downturn in the industry, it now faces a demand for its services far greater than existed before the downturn. As the Company prepares to more than double its disposal capacity in the near future, production companies are seeking contacts with us that we expect will fill this new capacity quickly as it comes online. Additionally, we believe the addition of barging, which is a low cost alternative to trucking, to our array of services will significantly further the demand for our business in our operation region.

 

 

Overview

 

We are focused on providing water management solutions as it relates to the oil and gas industry in the unconventional resource plays in the Appalachian Region where we are predominantly active, including both the Marcellus and Utica Shale areas. Since late 2013, we have focused our efforts on the Appalachian Region as the Company believes this area provides our best opportunity to profitably grow the Company.

 

In late 2013, the Company decided to cease operations in other areas outside of the Appalachian Region and classified its oil and gas service related assets located in other areas as held for sale at December 31, 2013 including disposal wells, trucking assets and other assets in South Texas and it disposal wells in Oklahoma. During 2014, the Company sold all of its assets in South Texas except for a small amount of equipment that was transferred to Appalachia. The disposal wells in Oklahoma remain held for sale at December 31, 2014.

 

GreenHunter Water

 

GreenHunter Water currently operates nine disposal wells strategically located in the Appalachian Region. At December 31, 2014, the Company was in the process of constructing a pipeline at its Mills Hunter offload terminal that will connect six or more wells to this facility. Only two of these wells are currently operational and included in the nine currently operated disposal wells. The others represent additional disposal capacity that will be added to our current capacity when the pipeline is completed. The Mills Hunter terminal is located along the Ohio River. It is our intention to continue to develop the facility during 2015 to include barge unloading capabilities. When the Mills Hunter pipeline is completed and the additional disposal wells are operational, which we expect to be in the second quarter of 2015, the total down-hole injection capacity of all of our Appalachian Class II salt water disposal wells will more than double, increasing our disposal capacity to approximately 32,000 barrels per day.

 

GreenHunter Water also operates a fleet of 37 trucks located in Appalachia that are used to transport fluids to disposal and water treatment sites. Included in this total is a growing fleet of U.S. Department of Transportation (“DOT”) rated 407 trucks for hauling hydrocarbons and water with the presence of hydrocarbons. We believe growing our fleet by adding additional DOT rated 407 trucks will be key in giving us the advanced water hauling capabilities required by our customers in much of the Appalachian Region. In addition, we can bill a higher rate per hour for these trucks when compared to more traditional water hauling trucks. In much of 2014, we relied heavily on less profitable third party trucking companies for much of our water hauling needs. The Company plans to add approximately 10 trucks with a 407 rating in 2015, enabling us to use fewer third party haulers and charge higher hourly rates on these new trucks, which should increase our trucking margin.

 

 

Over the last couple of years, the Company has acquired or leased various sites along the Ohio River in Appalachia in anticipation of the use of barges as a low cost method of hauling fluids. We anticipate initiating barge hauling services in the second half of 2015 as we complete the addition of the new disposal wells at the Mills Hunter facility, develop the barge offload infrastructure at Mills Hunter and develop the infrastructure at our various other leased sites.

 

GreenHunter Environmental Solutions

 

GreenHunter Environmental Solutions, LLC offers onsite environmental solutions at the well pad and facilities, with a service package that includes tank and rig cleaning, liquid and solid waste removal/remediation, solidification, and spill response. An understanding of how an interconnected suite of services related to E&P waste stream management satisfies the needs of our customers is what shapes our comprehensive end-to-end approach to these services. Our revenue related to these services was limited in 2014 due to a lack of capital to acquire all of the equipment needed in the performance of these services. Our revenue was also limited by our performing some of these services for our own benefit, which cost us less than hiring outside contractors to do the work. As capital becomes available, we plan to enhance and grow our services which are complementary to our overall water management solution strategy.

 

As part of its services, GreenHunter Environmental Solutions has designed, engineered and is currently marketing its next-generation modular above-ground frac water storage tank (MAG Tank™). We have deployed several of these modular above-ground temporary water storage systems in the Marcellus and Utica Shale plays. MAG Tanks™ are currently offered to our customers for either purchase or on a rental basis. Our first Mag Tank rental contract began in early 2015. Additionally, the Company has installed and operates an onsite semi-portable water treatment facility in the Appalachian Region.

 

GreenHunter Hydrocarbons

 

GreenHunter Hydrocarbons, LLC offers transportation of hydrocarbons (oil, condensate, and NGLs) utilizing our DOT rated 407 trucks. We plan to offer storage, processing, and marketing of hydrocarbons (oil, condensate, and NGLs) in the Appalachian Region, leveraging off of our existing asset base and infrastructure, which includes up to six different barge terminal locations presently owned or leased by GreenHunter Resources.

 

In 2014, the Company announced plans to construct three pipelines that will be used to transport oilfield waste water (brine), fresh water, and hydrocarbons (condensate and NGLs), respectively, with the point of delivery being along the Ohio River. We expect to deliver the hydrocarbons by barge to the purchasers, as well as deliver the waste water by barge to our disposal wells. We also expect the use of the pipelines and barges to substantially reduce the cost of transporting these products and give us a significant competitive advantage in both areas. In mid-2014, the Company signed a definitive agreement with a third party to construct these pipelines with funding to be provided by the third party. The third party was unable to provide the financing by the August 30, 2014 deadline. The Company will need to secure additional capital in order to initiate this plan and has found investors with a high level of interest in financing the pipeline project. We are currently exploring opportunities with several interested parties to secure this capital, and we anticipate having the financing in place in late 2015 or early 2016, at which time we will begin construction of the pipelines.

 

Other

 

On July 22, 2014, the Company announced that it has filed with the Internal Revenue Service a request for a ruling that income derived by a newly formed Limited Partnership (“MLP”) from the handling of fluid, storage, treatment and disposal services, frac tank rental, water monitoring services, and environmental remediation services that constitute a part of the exploration, developmental, mining, processing, refining and transportation of natural resources will in fact constitute “Qualified Income” under certain sections of the Internal Revenue Code of 1986, as amended. Management and the Board have determined that utilizing an MLP structure will be the most efficient way to fund our future capital needs. The Internal Revenue Service discontinued issuing letter rulings related to MLPs as it considered new guidelines related to the issuing of these rulings, but the pause was lifted as of March 6, 2015, and we anticipate receiving a ruling after the associated regulations are issued. We received a letter from the Internal Revenue Service dated April 1, 2015 requesting additional information concerning our business operations.

 

 

Current Plan to Fund Ongoing Operations

 

As of December 31, 2014, we had a working capital deficit of $10.2 million. We are generating increasing revenues from our water management activities and improved margins related to revenues less direct cost of goods and services provided. We were not in compliance with a certain existing debt covenant contained in one of our secured debt agreements as of December 31, 2014. However, we obtained a waiver from our lender for the non-compliance in our debt covenant for the years ending December 31, 2014 and December 31, 2015.

 

In late 2013, the Company decided to sell all of its disposal wells, properties and equipment located in South Texas and Oklahoma with the exception of a small amount of equipment that we moved to Appalachia and to discontinue operation in both of these areas in order to concentrate its efforts in the higher revenue region of Appalachia. We believe the Appalachian region represents our best opportunities for growth and highest overall margins. We closed on the sale of all of our South Texas assets in 2014 and have ceased operations in South Texas. The remaining assets located in Oklahoma continue to be held for sale at December 31, 2014. The Company has recorded impairment of $1.1 million on these Oklahoma assets during the second half of 2014. The assets are being marketed at amounts equal to or in excess of their remaining net book value as of December 31, 2014. We expect to close on our remaining Oklahoma fixed assets in the first half of 2015. At that point, we intend to cease operating in Oklahoma.

 

On February 19, 2014, Mesquite Lake entered an agreement to sell its last remaining renewable energy asset, the biomass project, to ML Energy Park, LLC for $2.0 million. The sale closed on March 16, 2015. The prospective buyer had paid non-refundable monthly payments as earnest money deposits toward the purchase of this property totaling $575 thousand as of December 31, 2014, with another $50 thousand being paid in both January and February of 2015. All of these deposits were applied to the $2.0 million sales price of the property at closing.

 

The Company has a credit facility with its Chairman and Interim Chief Executive Officer under which the Company can borrow up to $2.0 million. During the year ended December 31, 2013, the Company borrowed $1.5 million under a promissory note related to this credit facility. In 2014, the Company paid our Chairman and Chief Executive Officer net $1.4 million on the loan. There was an outstanding balance of $130 thousand as of December 31, 2014. The remaining principal and interest were subsequently repaid by the Company, leaving $2.0 million available under this facility. The credit facility has currently been extended until December 31, 2016.

 

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 allows 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 $150.0 million. The Company has received net proceeds of approximately $2.1 million related to selling stock in early 2015, including both a private placement of 3,333,334 shares and additional shares issued at the ATM of 246,100. The Company may opt to sell additional shares of stock during 2015 based upon its financial needs, market conditions and other factors.

 

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 second half of 2015. 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 32,000 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, and the Company anticipates it will be completed in the second quarter of 2015. Since these new wells will utilize existing offload facilities that connect to the wells via the new pipeline, the Company will experience a relatively small amount of incremental cost to operate these new wells resulting in a significant increase in cash flows during the second half of 2015.

 

Subsequent to year-end, the Company entered into a senior secured financing agreement with private lenders to borrow up to $16.0 million to finance capital projects planned for 2015. The initial tranche of loan proceeds will be in the principal amount of $13.0 million, subject to customary conditions, with an additional tranche of up to $3.0 million of principal available at the request of the borrower and subject to certain conditions.

 

 

Projects that will be funded by the financing arrangement would include, but are not limited to, the purchase of 10 DOT rated 407 trucks and trailers and the building out of infrastructure that will enable us to commence barging operations. The new trucks should begin operating in July of 2015. The addition of these new trucks, which are billable at rates in excess of traditional fluid hauling trucks, are expected to contribute incremental cash flow to the Company’s operations in the last half of 2015. Any contribution to cash in 2015 from barging operations would be dependent upon completion of the required infrastructure, which would likely be during the latter part of 2015.

 

We believe that our ability to successfully compete in the oil field fluids industry depends on many factors, including the location and low cost construction of our planned facilities, execution of our growth strategies, development of strategic relationships, achievement of our anticipated low cost production model, access to adequate capital, proper and meaningful governmental support which may include tax incentives and credit enhancements, and recruitment and retention of experienced management and qualified field personnel.

 

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 Oklahoma wells held for sale at December 31, 2014;

 

Letter of credit guarantee from our Chairman;

 

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

 

Up to $16.0 million in proceeds from capital project related senior secured financing which the Company entered into with private lenders subsequent to year end and the cash flow generated from projects funded by this financing.  

 

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.

 

 

 

Results of Operations

 

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013:

 

The following table summarizes results from continuing operations for the years ended December 31, 2014 and 2013:

 

   

2014

   

2013

   

Change

   

Change %

 

Revenues:

                               

Water disposal revenue

  $ 13,062,462     $ 9,459,970     $ 3,602,492       38.1 %

Water disposal fees - take or pay

    431,308       2,135,089       (1,703,781 )     -79.8 %

Transportation revenue

    10,868,985       9,564,522       1,304,463       13.6 %

Environmental services revenue

    243,837       -       243,837       0.0 %

MAG Tank™ revenue

    1,066,142       1,854,750       (788,608 )     -42.5 %

Skim oil revenue

    803,046       1,050,784       (247,738 )     -23.6 %

Storage rental revenue and other

    645,858       1,672,342       (1,026,484 )     -61.4 %

Total revenues

    27,121,638       25,737,457       1,384,181       5.4 %

Direct cost of goods and services provided

    18,281,974       19,180,338       (898,364 )     -4.7 %

Margin (1)

    8,839,664       6,557,119       2,282,545       34.8 %

Margin %

    32.6 %     25.5 %                

Depreciation and accretion expense

    3,197,045       2,884,286       312,759       10.8 %

Stock based compensation

    4,239,334       1,142,066       3,097,268       271.2 %

Other selling, general and administrative

    7,901,944       7,281,261       620,683       8.5 %

Total selling, general and administrative

    12,141,278       8,423,327       3,717,951       44.1 %

(Gain) loss on sale of assets

    86,370       (2,205,047 )     2,291,417       -103.9 %

Gain on settlements

    (585,640 )     (152,113 )     (433,527 )     285.0 %

Operating Loss

    (5,999,389 )     (2,393,334 )     (3,606,055 )     150.7 %

 

(1)

Margin is defined as revenues less direct cost of goods and services provided and excludes the following: depreciation and accretion; impairment; selling, general and administrative expense; and gains and/or losses on asset sales and settlements.

 

 

Total Revenues

 

The following table compares disposal volumes and revenue from continuing operations for the years ended December 31, 2014 and 2013:

 

   

Barrels

   

Revenue

   

Average Price

 

2014

    3,783,656     $ 13,062,462     $ 3.45  

2013

    2,858,188     $ 9,459,970     $ 3.31  

Increase / (Decrease)

    925,468     $ 3,602,492     $ 0.14  

Increase / (Decrease) %

    32.4 %     38.1 %     4.3 %

 

 

The increase in disposal revenue related to continuing operations was mainly due to an increase in both capacity and volumes. We operated a total of nine disposal wells in Appalachia as of December 31, 2014. Eight wells operated for the first two months of 2014, and an additional new well was put into service in Meigs County, Ohio on March 1, 2014. Only seven wells were in operation in Appalachia for the first eight months of 2013, and an additional well was put in service in Washington County, Ohio in September of 2013. In addition to this increase in overall average capacity year-over-year, our wells in Appalachia, as a whole, operated at a higher rate of overall utilization when compared to last year. The combination of both higher capacity and higher utilization of the available capacity contributed to the 32% increase in utilization year over year, which also directly contributed to our increase in disposal revenue of 38% for the total year of 2014 when compared to the total year of 2013.

 

 

The following table compares internal trucking hours and revenue from continuing operations for the years ended December 31, 2014 and 2013:

 

   

Hours

   

Revenue

   

Average Price

 

2014

    70,915     $ 7,508,602     $ 105.88  

2013

    46,785     $ 4,990,562     $ 106.67  

Increase / (Decrease)

    24,129     $ 2,518,040     $ (0.79 )

Increase / (Decrease) %

    51.6 %     50.5 %     -0.7 %

 

The increase in transportation revenue was due to our Appalachia trucking fleet increasing from an average of 29 trucks in 2013 to an average of 37 trucks in 2014, which enabled us to haul more fluids resulting in a corresponding increase in revenues in the current year versus last year.

 

The following table compares third party trucking hours and revenue from continuing operations for the years ended December 31, 2014 and 2013:

 

   

Hours

   

Revenue

   

Average Price

 

2014

    37,333     $ 3,360,383     $ 90.01  

2013

    45,491     $ 4,573,960     $ 100.55  

Increase / (Decrease)

    (8,158 )   $ (1,213,577 )   $ (10.54 )

Increase / (Decrease) %

    -17.9 %     -26.5 %     -10.5 %

 

The decrease in both third party trucking hours and revenue were substantially due to reducing our third party trucking use in the last half of 2014, even though we had extensive use of third party trucking in the first two quarters of 2014.

 

Environmental services is a new business in 2014.

 

The decrease in MAG Tank™ revenue was due to a lower number of our MAG Tank™ panels being sold in the year of 2014 when compared to the year of 2013.

 

Skim oil revenue decreased from $1.1 million in 2013 to $803 thousand in 2014 or approximately 24%. Skim oil, or hydrocarbon liquids, a by-product of the disposal process, is oil that is mixed with the water and is hauled to our disposal tanks. The oil floats to the top of the tank and is “skimmed” off and ultimately sold. Skim oil sales are determined by the quantity of oil in the waste water delivered to our facilities, over which we have no control.

 

Our storage rental and other revenue decreased mainly due to a large remediation contract we obtained early in 2013 that did not occur in 2014.

 

 

Direct Cost of Goods and Services Provided 

 

Our operating costs related to continuing operations decreased year-over-year due to several reasons, but the largest factor was our limited use of third party trucking in the last half of 2014. We had been losing money using third party trucking in prior quarters including the prior year. Management believes that the decreased use of third party trucking as well as developing alternative low cost methods of transporting fluids, including the use of barging and pipelines, will continue to improve our operating margins as we implement these changes. The Company plans to expand the internal truck fleet with the purchase of 10 DOT rated 407 trucks and trailers anticipated to begin operating in the summer of 2015. These new trucks are billable at rates in excess of traditional fluid hauling trucks.

 

Depreciation and Accretion Expense

 

Depreciation and accretion expense increased mainly due to having more disposal wells and internal trucks in service for the whole year of 2014 compared to 2013.

 

 

Stock Based Compensation

 

This increase in stock based compensation for the year of 2014 versus the year of 2013 is mainly due to the following:

 

 

A common stock grant in April of 2014 of 1,250,000 shares for Mr. Gary C. Evans, our Chairman and Interim Chief Executive Officer, as consideration for his past credit support that he has provided to the Company when no other financing was available

     

 

A stock based bonus in April of 2014 of 445,000 shares to certain members of management

 
       

 

A 2,600,000 option grant in April of 2014 to certain members of management, of which 1,000,000 options were granted to our Chairman of the Board and Interim Chief Executive Officer Mr. Gary C. Evans

     
 

A 62,500 option grant in June of 2014 to employees

     
 

A 905,000 option grant in December of 2014 to certain members of management, of which 500,000 options were granted to our Chairman of the Board and Interim Chief Executive Officer Mr. Gary C. Evans

 

 

We expect overall stock based compensation expense to increase in future periods as we continue to expand our personnel necessary to conduct our water management business.

 

Other Selling, General and Administrative Expense

 

Other selling, general and administrative expense (“SG&A”), excluding stock compensation expense, was approximately $7.9 million and $7.3 million during the years ended December 31, 2014 and 2013, respectively. This 8.5% increase was due to expansion of our business activities. We believe our SG&A costs have been stable in 2014 but may grow if we see significant growth in our overall business.

 

The following is a schedule of our selling, general and administrative expense for the years ended December 31,:

 

   

2014

   

2013

   

Variance

   

Change %

 

Personnel and related costs

  $ 5,058,690     $ 3,882,759     $ 1,175,931       30.3 %

Office and related costs

    1,081,139       1,185,962       (104,823 )     -8.8 %

Travel, selling, and marketing

    419,198       652,868       (233,670 )     -35.8 %

Professional fees

    1,171,182       1,280,094       (108,912 )     -8.5 %

Taxes and permits

    171,735       279,578       (107,843 )     -38.6 %

Total

  $ 7,901,944     $ 7,281,261     $ 620,683       8.5 %

 

The increase in personnel and related costs is due partly to bonus expense accrued in 2014 but not in 2013 and to a lesser extent due to a general increase in personnel as the Company has grown.

 

 

Operating Loss

 

The increase in operating loss is primarily due to the increase in non-cash stock compensation in 2014 compared to 2013, and to the increased personnel and related costs in selling, general, and administrative expenses. In addition, the loss on the sale of assets was $86 thousand in 2014 versus a gain of $2.2 million in 2013, and the settlement of payables resulted in a gain of $586 thousand in 2014 versus a gain of $152 thousand in 2013.

 

 

Other Income and Expense

 

Total other income was $1.3 million for the year ended December 31, 2014 as compared to income of $919 thousand for the year ended December 31, 2013. The components of the total other income/expense include the following: 1) Interest expense was approximately $1.4 million in 2014 compared to approximately $1.0 million for 2013, and we expect our interest expense will continue to increase as we add overall indebtedness to fund our future expansion activities; and 2) other income was $96 thousand and $93 thousand for 2014 and 2013, respectively.

 

 

Liquidity and Capital Resources

Overview

 

In 2014, we generally relied upon cash generated from operations, proceeds from the sale of non-core assets, proceeds from the sale of securities in the capital markets and through private placements, and proceeds from borrowings from a credit facility arrangement with our Chairman / Interim Chief Executive Officer to fund our business. Our ability to fund our ongoing operations, our planned capital expenditures and our potential acquisitions depends on our future operating performance, our continued ability to borrow under the credit facility arrangement with our Chairman / Interim Chief Executive Officer, our ability to access capital markets as well as our ability to enter into additional financing arrangements. All of these abilities are affected by prevailing economic conditions in our industry along with financial, business, and other factors, some of which are beyond our control.

 

As of December 31, 2014, we had a working capital deficit of $10.2 million. We are generating increasing revenues from our water management activities and increased margins related to revenues less direct cost of goods and services provided. Our future capital resources and liquidity depend on our ability to continue to grow our transportation and disposal business.

 

We were not in compliance with a certain existing debt covenant contained in one of our secured debt agreements as of December 31, 2014. However, we obtained a waiver from our lender for the non-compliance in our debt covenant for the years ending December 31, 2014 and December 31, 2015.

 

Cash Flow and Working Capital

 

As of December 31, 2014, we had cash and cash equivalents of approximately $396 thousand and a working capital deficit of $10.2 million as compared to cash and cash equivalents of $1.3 million and a working capital deficit of $9.7 million as of December 31, 2013. The causes of the decreases in cash and cash equivalents of $906 thousand and in the working capital deficit of $533 thousand were due to the activities described below.

 

Cash flows from both continuing operations and discontinued operations are included in the Company’s Statement of Cash Flows.

 

Operating Activities

 

During 2014 and 2013, operating activities used $935 thousand and $1.4 million, respectively. Although cash flows from operating activities may not be sufficient to meet our operating needs in the near term and we may have to rely on other sources of cash, we expect increases in cash flows from new assets placed in service over the next six months to improve our ability to fund our operations within operating cash flow.

 

Investing Activities

 

During 2014, investing activities provided approximately $8.0 million in cash. This was comprised of $6.4 million of cash in net proceeds from the sale of assets, which were primarily part of the assets held for sale at December 31, 2013, including the sale of three disposal wells and other equipment in South Texas. There were additional proceeds of $5.1 million related to the notes receivable acquired in the sale of two of the South Texas wells. Offsetting this was approximately $3.3 million used mainly for capital expenditures for water disposal facilities in Appalachia and $133 thousand of cash classified as restricted.

 

During 2013, investing activities used approximately $5.3 million in cash. This was comprised of $11.0 million of cash invested mostly on new disposal wells and transport trucks that went into service in 2013, offset by $5.7 million from the sale of assets during 2013 of which $5.3 million was for the sale of our Helena disposal well in South Texas.

 

 

Financing Activities

 

During 2014, our financing activities used $8.0 million. The net financing uses were comprised of net payments of $3.3 million and preferred stock dividends of $5.0 million, offset by net proceeds from the sale of equity securities of $232 thousand.

 

During 2013, our financing activities provided $6.2 million, comprised of $8.3 million of net proceeds from equity transactions and $2.5 million in net borrowings, offset by $4.6 million of preferred stock dividend payments.

 

Forecast

 

In late 2013, the Company decided that the best use of its resources was to concentrate its future growth exclusively on the Appalachian Region. Significant steps were taken in 2014 to aid in this strategy including the disposition of all of our assets and the cessation of our operations in South Texas. At December 31, 2014, we continue to classify our Oklahoma assets as held for sale.

 

For 2015, we have formulated specific project budgets. Our ability to fund these specific projects as well as our ongoing operations is dependent on our operating cash flow as well as other sources of capital.

 

The Company has a credit facility with its Chairman / Interim Chief Executive Officer under which the Company can borrow up to $2.0 million. During the year ended December 31, 2013, the Company borrowed $1.5 million under a promissory note related to this credit facility. In 2014, the Company paid our Chairman / Chief Executive Officer net $1.4 million on the loan. There is an outstanding balance of $130 thousand as of December 31, 2014. The remaining principal and interest were repaid by the Company during the first quarter of 2015, leaving $2.0 million available under this facility. The credit facility has currently been extended until December 31, 2016.

 

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 allows 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 $150.0 million. The Company has received net proceeds of approximately $2.1 million related to selling stock in early 2015, including both a private placement of 3,333,334 shares and additional shares issued at the ATM of 246,100. The Company may opt to sell additional shares of stock during 2015 based upon financial need, market conditions and other factors.

 

Along with our cash flows from operations, our ability to access the credit facility provided by our Chairman / Interim Chief Executive Officer, and our ability to access capital markets, we have entered, in the second quarter of 2015, into a new senior secured financing agreement with private lenders for up to $16.0 million. This facility includes an initial first tranche of $13.0 million in proceeds with an additional tranche of up to $3.0 million, subject to certain conditions, at the request of the Company. We believe these sources of cash will enable us to complete our growth plans for 2015.

 

Our failure to service this $16.0 million credit facility or to comply with its applicable debt covenants could result in default under the related debt agreement, which could result in the acceleration of the payment of such debt and loss of ownership interest in secured properties.

 

  

Our expectations are that our cash flow from operations should increase substantially as we complete the capital projects we have planned for 2015. Our near-term growth, which is focused on our completion of these capital projects in Appalachia in 2015, is expected to center around the following:

 

 

The initial use of new disposal wells that have been acquired, tested, and permitted in 2014 in the Appalachian Region. We are currently building pipelines to connect these wells to our Mills Hunter offload facility. We expect these pipelines to be completed early in the second quarter of 2015, at which time the wells will be placed into service allowing us to reach our goal of doubling our disposal capacity. We intend to continue to look for opportunities to add additional disposal wells in 2015.

     

  

The addition of new DOT rated 407 transport trucks and trailers to our fleet to reduce our dependence on third party trucking needed and to meet the current and future demands of our customers. We also expect these trucks, which are billable at rates higher than standard water hauling trucks, to improve our profit margins.

     

  

The development of our barge facilities which will enable the Company to transport water to disposal sites at prices more competitive than traditional transportation methods such as trucking. The Company expects this to result in higher profit margins as compared to traditional transportation methods. The Company received permission from the U.S. Coast Guard in the fourth quarter of 2014 to begin barging oilfield waste water, and barging activities are expected to begin in the second half of 2015.

 

We have a high level of interest among various investors to finance our longer-term growth plans once we have completed our short-term growth strategies. The Company expects our longer-term growth to center around the following:

 

 

The construction of three independent pipelines in the Appalachian Region. The Company is currently negotiating financing to fund the construction of the pipelines. The pipelines will be used to transport oilfield waste water (brine), fresh water, and hydrocarbons (condensate and NGLs), respectively. The point of delivery will be along the Ohio River. We expect to have this financing in place in late 2015 or early 2016.

     

  

The addition of strategically located wells and barging facilities and additional DOT rated 407 trucks to complement our current strategies.

 

 

While we believe that the capital resources available to us from anticipated operating cash flows, borrowings under the credit facility with our Chairman and Interim Chief Executive Officer, proceeds from future capital market transactions, and proceeds from our new $16 million Senior Secured Financing Agreement will be adequate to fund our operations, finance our 2015 capital projects, and meet our debt service obligations for 2015, there is no guarantee that we will achieve the expected results due to certain risks and uncertainties.

 

 

Critical Accounting Policies and Other

 

Our significant accounting policies are disclosed in Note 3 of our consolidated financial statements. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.

 

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.

 

Revenue Recognition

 

The majority of the Company’s revenue results from contracts with direct customers for water resource management where revenues are generated upon performance of contracted services, including transportation and disposal of fresh and salt water by Company-owned trucks and/or third-party trucks to customer sites for use in drilling and hydraulic fracturing activities and from customer sites to remove and dispose of backflow and produced water originating from oil and gas wells. Revenues are also generated through fees charged for use of the Company’s disposal wells and from the rental of tanks and other equipment.

 

Impairment of Asset Value

 

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.

 

 

Recently Issued Accounting Standards

 

In April 2014, the Financial Accounting Standards Board (“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 are currently evaluating the impact of this guidance on our financial statements.

 

In May 2014, the FASB issued an accounting standards update to provide guidance on the recognition of revenue from customers.  Under this guidance, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. This guidance also requires more detailed disclosures to enable users of the financial statements to understand the nature, amount, timing and uncertainty, if any, of revenue and cash flows arising from contracts with customers. The requirements in this update are effective during interim and annual periods beginning after December 15, 2016. The guidance provides the option of adoption by an entity by either retrospective adjustment to each prior reporting period presented or with the cumulative effect of initially applying the guidance recognized at the date of initial application. We are currently evaluating the impact this guidance will have on our consolidated financial statements, as well as the method of adoption.  

 

In June 2014, the FASB issued an accounting standards update to provide guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. The requirements in this update are effective during interim and annual periods beginning after December 15, 2015. The adoption of this update is not expected to have a material impact on our consolidated financial statements.  

 

Contractual Obligations and Commercial Commitments

 

Not required.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, unconsolidated variable interest entities, or financing partnerships.

 

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. Controls and Procedures

 

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 amended (the “Exchange Act”) as of the end of December 31, 2014. 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and that information required to be disclosed in reports filed by us under the 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 December 31, 2014.

 

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 Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014, based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2014.

 

 

Item 9B. Other Information

 

None.

 

 

 

PART III

 

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

  

 

57

  

  

Chairman and Interim Chief Executive Officer

Roy E. Easley

  

 

55

  

  

Director

Julie E. Silcock

  

 

58

  

  

Director

Ronald H. Walker

  

 

77

  

  

Director

Kirk J. Trosclair

  

 

43

  

  

Executive Vice President and Chief Operating Officer

Morgan F. Johnston

  

 

54

  

  

Senior Vice President, General Counsel and Secretary

Ronald T. McClung

  

 

64

  

  

Senior Vice President and Chief Financial Officer

 

 

Gary C. Evans — Chairman and Interim Chief Executive Officer

 

Mr. Evans has served as Chairman and Chief Executive Officer of GreenHunter Resources, Inc. since December 2006. From January 1, 2013 to January 15, 2014, Mr. Evans served solely as the Company’s Chairman of the Board, but as of January 14, 2014, he also because the Company’s Interim Chief Executive Officer. Gary C. Evans presently serves as Chairman of the Board and Chief Executive Officer of Magnum Hunter Resources Corporation (NYSE “MHR”), a Houston based oil and gas exploration and production company specializing in unconventional resource plays in North America where he has held that position since May 2009. Mr. Evans previously founded and served as the Chairman and Chief Executive Officer of Magnum Hunter Resources, Inc., or MHRI, an unrelated NYSE-listed company of similar name, for twenty years before selling MHRI to Cimarex Energy for approximately $2.2 billion in June 2005. He previously served as Chief Executive Officer of GreenHunter from December 2006 through December 2012. Mr. Evans serves as an individual trustee of TEL Offshore Trust, a publicly-listed oil and gas trust, and is a director of Novavax Inc., a NASDAQ-listed clinical-stage vaccine biotechnology company. Mr. Evans was recognized by Ernst & Young LLP 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. Mr. Evans was also recognized as the Energy Industry Leader of the year in 2013 and chosen by Finance Monthly in 2013 as one of the most respected CEOs. Mr. Evans was chosen as the Best CEO in the “Large Company” category by Texas Top Producers in 2013. He additionally won the Deal Maker of the Year Award in 2013 by Finance Monthly. Mr. Evans serves on the Board of the Maguire Energy Institute at Southern Methodist University and speaks regularly at energy industry conferences around the world on the current affairs of the oil and gas business. The Board has concluded that the Company benefits from Mr. Evans’ extensive oil and gas industry expertise, his expertise as a chief executive officer with publicly held energy companies, his industry, investment banking and commercial lending contacts and his vast professional experience.

 

 

Roy E. Easley – Director

 

Mr. Easley has been a Director of the Company since February 14, 2012. Mr. Easley has over 33 years of business development and executive management experience in the oil and natural gas exploration and production industry. Mr. Easley is Managing Partner of Easley Exploration Partners, LLC in Dallas which was formed to develop exploration projects in Texas. Previously, Mr. Easley served in various roles with Hunt Oil Company including Senior Vice President of Hunt’s U.S. Exploration, U.S. Exploration and Production and Gulf Coast/Gulf of Mexico operations. Prior to Hunt, Mr. Easley was Director of Business Development for Chieftain International where he was responsible for acquisitions as well as assisting the Chief Operating Officer in management of the Company’s Gulf of Mexico business activities.

 

Mr. Easley was also associated with Tana Oil and Gas Corporation and he began his career with Exxon Company USA after graduating from the University of Texas at Austin with a Bachelor of Science in Geological Sciences. Mr. Easley is a member of IPAA and recently served as Vice President and Director of the Dallas Petroleum Club.

 

 

 

 

Julie E. Silcock — Director

 

Ms. Silcock has been a Director of the Company since January 8, 2013. Ms. Silcock is Managing Director and Co-Head of Houlihan Lokey’s Investment Banking practice in the Southwest region of the U.S. She has more than 25 years of experience advising companies on M&A, equity and debt capital market transactions, private debt and equity placements, and high-yield offerings for growth-oriented companies across all industries. She joined Houlihan Lokey in March 2009 to expand its client coverage through her broad and deep relationships with CEOs and business leaders in these regions. Ms. Silcock is based in the Dallas office.

 

Before joining the firm, Ms. Silcock was Founder, Managing Director, and Head of Southwest Investment Banking for Citigroup Global Markets Inc. from 2000 to early 2009. From 1997 to 2000, she was a Managing Director with Donaldson, Lufkin & Jenrette’s Investment Banking Practice in Dallas, where she executed the full range of transactions for clients in the industrial, business and financial services, energy, consumer, technology, and media and telecom sectors. From 1989 to 1997, she was a Senior Managing Director at Bear Stearns & Co. in Dallas, where she focused on growth-oriented companies in the Southwest and Southeast. During the course of her career, she has led teams on initial and a series of subsequent capital market and M&A transactions for companies that have reached significant scale, including Affiliated Computer Services, Inc. (now part of Xerox Corp.), Aleris International, Inc. (taken private by TPG Capital), Brightstar Corp., Cinemark, Inc., Compaq Computer Corp. (now part of Hewlett-Packard Co.), Dean Foods Co., Outdoor Systems (now part of Clear Channel Communications Inc.), Ubiquitel, Inc. (Sprint affiliate sold to Sprint Nextel Corp.), and United Insurance Co. (now part of Aon PLC). Ms. Silcock began her career at Credit Suisse Group in New York in the Mergers and Acquisitions Group.

 

Ms. Silcock graduated cum laude with a Bachelor of.Arts from Princeton University and earned a Master of Business Administration from the Stanford Graduate School of Business. She remains active with both Princeton and Stanford (Co-Chairman of Stanford’s 25th Reunion Fundraising Campaign in 2010), and is on the Board of the United States Ski and Snowboard Association, which supports Olympic athletes. She was formerly on the Board of Mesa Airlines, a publicly traded company. She is currently a member of Women Corporate Directors (WCD), an organization of women who serve on public company Boards.

 

 

Ronald H. Walker — Director

 

Ronald H. Walker has been a Director of the Company since November 1, 2007. Mr. Walker currently serves as the Chairman 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.

 

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 Bachelor of Arts in Government and American History. He also served in the US Army reaching the rank of captain.

 

 

Kirk J. Trosclair — Executive Vice President and Chief Operating Officer

 

Mr. Trosclair has served as our Chief Operating Officer since January 2014, and previously served as our Executive Vice President from 2008 to January 2014. Mr. Trosclair served as our Director of Terminal Operations prior to serving as our Executive Vice President. Mr. Trosclair previously served as Senior Vice President of Alpha Hunter Drilling, LLC, a subsidiary of Magnum Hunter Resources Corporation, a position which he held from 2009 to July 18, 2014. Mr. Trosclair has more than 22 years of diversified energy experience, and his background includes drilling and exploration, engineering design, oilfield fluid terminal operations, logistics management, construction, and business development. Mr. Trosclair received his Bachelor of Arts in Petroleum Engineering Technology from Nicholls State University.

 

 

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., an 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.

 

 

Ronald T. McClung — Senior Vice President and Chief Financial Officer

 

Mr. McClung has served as our Senior Vice President and Chief Financial Officer since September 1, 2013. Mr. McClung, who is a Certified Public Accountant (CPA), brings more than 20 years of both public and private company audit, treasury, risk management, SEC public company reporting, Sarbanes-Oxley compliance, due diligence and acquisition integration experience. Mr. McClung initiated his career as an auditor while at public accounting firms KPMG and Robinson, Burdette, Martin & Cowan, LLP, and as a Corporate Controller while at Key Energy Services, Inc. and as a Chief Financial Officer at Basic Energy Services, Inc. Mr. McClung’s experience includes working in the oilfield service sector with companies that are heavily involved in both salt water disposal and trucking operations associated with this business. Most recently, Mr. McClung has served as Corporate Controller for Patterson-UTI Energy, Inc., a land-based oil and gas well drilling and pressure pumping services company. Mr. McClung earned a Bachelor of Business Administration in Accounting from Texas Tech University where he graduated summa cum laude.

 

 

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 address 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 MKT corporate governance listing standards. The Board has affirmatively determined that all directors, with the exception of Mr. Gary C. Evans, Chairman and Interim CEO, 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 MKT 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: Ms. Julie E. Silcock, Chairman and the Company’s designated financial expert, 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, 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.greenhunterresources.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.

 

 

Item 11. Executive Compensation

 

Summary Compensation Table

 

The following table sets forth all compensation for the fiscal years ended 2014 and 2013 awarded to, earned by or paid to executive officers of the Company.

 

Name and Principal Position

 

Year

 

Salary ($)

   

Bonus ($)

   

Deferred Comp ($) ******

   

Stock Awards ($)

   

Option Awards ($) *****

   

All Other Comp - Car Allowance ($)

****

   

Total ($)

 

Gary C. Evans* -

 

2014

    300,000       -       300,000       795,000       759,000       12,000       2,166,000  

Chairman and Interim CEO

 

2013

    300,000       225,000       -       -       690,000       12,000       1,227,000  

Kirk Trosclair** -

 

2014

    144,807       -       100,000       53,000       346,900       -       644,707  

Executive VP and COO

 

2013

    -       -       -       -       -       -       -  

Ronald T. McClung*** -

 

2014

    205,000       -       60,000       13,250       165,300       12,000       455,550  

Sr. VP and CFO

 

2013

    63,086       -       -       -       195,000       3,696       261,782  

Morgan F. Johnston -

 

2014

    200,000       -       25,000       5,300       66,120       12,000       308,420  

Sr. VP, Gen Counsel and Secretary

 

2013

    200,000       25,000       -       -       106,000       12,000       343,000  

Jonathan D. Hoopes** -

 

2014

    19,730       -       -       -       -       -       19,730  

President, COO, and Interim CEO

 

2013

    281,096       175,000       -       27,250       318,000       12,000       813,346  

David S. Krueger*** -

 

2014

    -       -       -       -       -       -       -  

VP and CFO

 

2013

    142,160       25,000       -       -       132,500       8,307       307,967  

 

 

*

Mr. Evans’ was appointed as Chief Executive Officer on an interim basis on January 15, 2014 following the resignation of Mr. Hoopes as director, interim chief executive officer, president and chief operating officer effective as of the same date.

**

Mr. Trosclair became the Company’s Executive Vice President and COO on January 15, 2014 following the resignation of Mr. Hoopes as director, interim chief executive officer, president and chief operating officer effective as of the same date.

***

Mr. Krueger was the Company’s Vice President and CFO until August 23, 2013. Mr. McClung was appointed the Company’s Senior Vice President and CFO effective September 1, 2013.

****

This column represents the employees’ car allowance for the applicable year.

*****

Mr. Evans received a stock option grant for 1,000,000 shares, vesting over a three year period at an exercise price of $1.15 on June 14, 2013. Mr. Hoopes received a stock option grant for 300,000 shares, vesting over a three year period at an exercise price of $1.74 on February 1, 2013. Mr. Krueger received a stock option grant for 125,000 shares, vesting over a three year period at an exercise price of $1.74 on February 1, 2013. Mr. Johnston received a stock option grant for 100,000 shares, vesting over a three year period at an exercise price of $1.74 on February 1, 2013. Mr. McClung received a stock option grant for 250,000 shares vesting over a three year period at an exercise price of $1.33 on October 15, 2013.

   
 

Mr. Evans received a stock option grant for 1,000,000 shares, vesting upon completion of certain performance criteria at an exercise price of $0.98 on April 25, 2014. Mr. Trosclair received a stock option grant for 500,000 shares, vesting upon completion of certain performance criteria at an exercise price of $0.98 on April 25, 2014. Mr. Johnston received a stock option grant for 100,000 shares, vesting upon completion of certain performance criteria at an exercise price of $0.98 on April 25, 2014. Mr. McClung received a stock option grant for 250,000 shares vesting upon completion of certain performance criteria at an exercise price of $0.98 on April 25, 2014.

   
 

Mr. Evans received a stock option grant for 500,000 shares, vesting over a three year period at an exercise price of $0.60 on December 23, 2014. Mr. Trosclair received a stock option grant for 150,000 shares, vesting over a three year period at an exercise price of $0.60 on December 23, 2014. Mr. Johnston received a stock option grant for 20,000 shares, vesting over a three year period at an exercise price of $0.60 on December 23, 2014. Mr. McClung received a stock option grant for 50,000 shares vesting over a three year period at an exercise price of $0.60 on December 23, 2014.

******

This column represents the employees’ deferred cash bonus for the applicable year.

   

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following non-incentive stock options were outstanding to the below named executives at December 31, 2014

 

Name and Principal Position

 

Number of shares of common stock underlying unexercised options exercisable

   

Number of shares of common stock underlying unexercised options unexercisable

   

Price ($/sh)

 

Expiration Date

Gary C. Evans -

    176,000       -       18.91  

February 13, 2018

Chairman and Interim CEO

    176,000       -       18.91  

February 13, 2018

      1,000,000       -       1.96  

August 26, 2019

      1,000,000       -       0.90  

April 6, 2021

      200,000       -       1.65  

February 13, 2022

      200,000       -       1.65  

February 13, 2022

      200,000       -       1.65  

February 13, 2022

      -       150,000       1.65  

February 13, 2022

      333,333       666,667       1.15  

June 14, 2023

      400,000       200,000       0.98  

April 25, 2024

      200,000       -       1.65  

December 15, 2024

      50,000       -       1.65  

December 15, 2024

      -       500,000       0.60  

December 23, 2024

Kirk Trosclair -

    5,000       -       20.02  

June 16, 2018

Executive VP and COO

    10,000       -       1.96  

August 26, 2019

      350,000       -       0.90  

April 6, 2021

      -       25,000       1.65  

February 13, 2022

      -       50,000       1.65  

February 13, 2022

      -       15,000       1.65  

February 13, 2022

      10,000       -       1.65  

February 13, 2022

      61,666       123,334       1.74  

February 1, 2023

      200,000       100,000       0.98  

April 25, 2024

      50,000       -       1.65  

December 15, 2024

      -       150,000       0.60  

December 23, 2024

Ronald T. McClung -

    83,333       166,667       1.33  

October 15, 2023

Sr. VP and CFO

    150,000       100,000       0.98  

April 25, 2024

      -       50,000       0.60  

December 23, 2024

Morgan F. Johnston -

    500,000       -       5.00

*

May 16, 2017

Sr. VP, Gen Counsel and Secretary

    55,000       -       18.91  

February 13, 2018

      55,000       -       18.91  

February 13, 2018

      300,000       -       1.96  

August 26, 2019

      150,000       -       0.90  

April 6, 2021

      66,666       33,334       1.65  

February 13, 2022

      33,333       66,667       1.74  

February 1, 2023

      -       100,000       0.98  

April 25, 2024

      -       20,000       0.60  

December 23, 2024

 

 

*

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, 2014:

 

Name

 

Fees Earned or Paid in Cash ($)

   

Stock

Awards ($) *

   

Option

Awards ($)

   

Total ($)

 

Roy E. Easley

    -       50,000       -       50,000  

Julie E. Silcock

    -       50,000       -       50,000  

Ronald H. Walker

    37,500       12,500       -       50,000  

 

 

*

Our board of directors determined not to receive any cash compensation payments with respect to 2013 for acting as a director. However, our directors received restricted stock payments in lieu of their annual retainer payment. Each director received 10,776 shares of restricted common stock for fees in the last quarter of 2013. The number of shares each director received was based on the market price of the stock on the date the retainer was earned.

 
     
 

Mr. Easley and Ms. Silcock determined not to receive any cash compensation payments with respect to 2014 for acting as a director. However, both directors received 19,119 shares of restricted stock payments in lieu of their annual retainer payment. The number of shares each director received was based on the market price of the stock on the date the retainer was earned.

 

 

For fiscal 2015, 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.

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth information regarding beneficial ownership of our common stock and Series C Preferred Stock as of March 15, 2015 held by (i) each of our directors and named executive officers; (ii) all directors and executive officers as a group; and (iii) any person (or group) who is known to us to be the beneficial owner of more than 5% of our common stock or Series C Preferred Stock.

 

The number of shares beneficially owned by each director or executive officer is determined under SEC rules, and the information is not necessarily indicative of the beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares to which the individual has the sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days of March 15, 2015, through the exercise of any stock option or other right to purchase, such as a warrant. Unless otherwise indicated, each person has sole investment and voting power (or shares such power with his or her spouse) with respect to the shares set forth in the following table. In certain instances, the number of shares listed may include, in addition to shares owned directly, shares held by the spouse or children of the person, or by a trust or estate of which the person is a trustee or an executor or in which the person may have a beneficial interest. The table that follows is based upon information supplied in a questionnaire completed by each executive officer, director and principal stockholder.

 

There are no arrangements known to us which may at a subsequent date result in a change-in-control.

 

 

Unless otherwise specified in a footnote to the table below, the address of each of the persons set forth is in care of GreenHunter Resources, Inc., 1048 Texan Trail, Grapevine, Texas 76051.

 

Title of Class (11)

 

Name of Beneficial Owner

 

Amount and Nature of Beneficial Ownership

   

Percent of

Class (10)

 

Common Stock

 

Gary C. Evans

    21,751,599 (1)      52.1  

Common Stock

 

Roy E. Easley

    324,983 (2)      *  

Common Stock

 

Julie E. Silcock

    183,352 (3)      *  

Common Stock

 

Ronald H. Walker

    391,894 (4)     1.0  

Common Stock

 

Kirk J. Trosclair

    1,026,896 (5)      2.7  

Common Stock

 

Morgan F. Johnston

    1,246,528 (6)      3.2  

Common Stock

 

Ronald T. McClung

    273,333 (7)      *  

Common Stock

 

All officers and directors as a group (7 persons named above)

    25,198,585       56.9  

Common Stock

 

West Coast Opportunity Fund, LLC

    1,225,250 (8)      3.3  

Common Stock

 

Triad Hunter, LLC

    2,341,722 (9)      6.2  

Series C Preferred Stock

 

West Coast Opportunity Fund, LLC

    345,000 (8)      17.2  

 

* Less than 1%

 

(1)

Includes 10,167,100 shares held directly by Investment Hunter, LLC, 4,000,000 shares held directly by Evans Equities LP, and 15,800 shares held as custodian for his children. It also includes 8,888 common stock purchase warrants at an exercise price of $2.25, 107,142 common stock purchase warrants at an exercise price of $0.01, 352,000 common stock purchase options at an exercise price of $18.91 per share, 1,000,000 common stock purchase options at an exercise price of $1.96, 1,000,000 common stock purchase options at an exercise price of $.90, 850,000 common stock purchase options at an exercise price of $1.65, 333,333 common stock purchase options at an exercise price of $1.15 and 400,000 common stock purchase options at an exercise price of $0.98. Gary C. Evans is the manager of Investment Hunter, LLC and the general partner of Evans Equities LP and his children are the beneficial owners of each.

 

(2)

Includes 100,000 common stock purchase options at an exercise price of $1.65 per share.

 

(3)

Includes 66,666 common stock purchase options at an exercise price of $1.53.

 

(4)

Includes 100,000 common stock purchase options at an exercise price of $10.00 per share and 100,000 common stock purchase options at an exercise price of $1.96 per share.

 

(5)

Includes 5,000 common stock purchase options at an exercise price of $20.02 per share, 10,000 common stock purchase options at an exercise price of $1.96, 350,000 common stock purchase options at an exercise price of $.90, 60,000 common stock purchase options at an exercise price of $1.65, 123,333 common stock purchase options at an exercise price of $1.74, 200,000 common stock purchase options at an exercise price of $0.98 and 8,888 common stock purchase warrants at an exercise price of $2.25.

 

(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, 300,000 common stock purchase options at an exercise price of $1.96 per share, 150,000 common stock purchase options at an exercise price of $.90 per share, 100,000 common stock purchase options at an exercise price of $1.65 per share and 66,666 common stock purchase options at an exercise price of $1.74.

 

(7)

Includes 83,333 common stock purchase options at an exercise price of $1.33 per share and 150,000 common stock purchase options at an exercise price of $0.98 per share.

 

(8)

West Coast Asset Management, Inc. is the sole managing member of West Coast Opportunity Fund, LLC. R. Atticus Lowe, Lance W. Helfert and Paul J. Orfalea are principals of West Coast Asset Management, Inc. and have voting and dispositive authority over the securities of the Company held by West Coast Opportunity Fund, LLC. The address for West Coast Opportunity Fund, LLC is 2151 Alessandro Drive, Suite 1000, Ventura, California 93001.

 

(9)

Includes 1,846,722 shares of common stock and 495,000 shares of common stock issuable upon the conversion of a promissory note in the original principal amount of $2.2 million ate the option of Triad Hunter, LLC based on a conversion price of $2.50 per share. The address for Triad Hunter, LLC is c/o Magnum Hunter Resources Corporation, 777 Post Oak Blvd., Suite 650, Houston, Texas 77056.

 

(10)

A total of 37,659,869 shares of GreenHunter Resources’ 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.

 

(11)

Our directors and executive officers do not beneficially own Series C Preferred Stock.

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence Transactions with Related Persons

 

Review, Approval or Ratification of Transactions with Related Persons

 

As provided by our audit committee charter, all related party transactions are to be reviewed and pre-approved by our audit committee. A “related party transaction” is defined to include any transaction or series of transactions exceeding $120,000 in which we are a participant and any related person has a material interest. Related persons would include our directors, executive officers (and immediate family members of our directors and executive officers), and persons controlling over five percent of our outstanding common stock. In determining whether to approve a related party transaction, the audit committee will generally evaluate the transaction in terms of the following:

 

 

 

The nature of the relationships among the parties;

 

 

 

The materiality of the transaction to the Company;

 

 

 

The availability of other sources for comparable products or services;

 

 

 

The terms available to unrelated third parties or to employees generally;

 

 

 

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, our board of directors 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.

 

The audit committee will then document its findings and conclusions in written minutes. In the event a transaction relates to a member of our audit committee, that member will not participate in the audit committee’s deliberations.

 

 

 

Transactions with Management and Others

 

In the fourth quarter of 2013, the Company closed on the private placement of approximately $1.5 million of the Company’s Unsecured Term Notes due one year from the date of issuance together with 134,211 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. 17,776 of these warrants were issued to officers of the Company in association with $200 thousand of the notes. The net proceeds of the placement are intended to fund MAG Panel™ inventory. On January 23, 2015, the Company converted the principal amount of these promissory notes issued to two officers of the Company to common equity. The total principal amount of $200 thousand was converted for 322,580 shares of common stock.

 

On December 12, 2013, the Company issued 107,142 warrants with an exercise price of $0.01 to the Company’s Chairman. The warrants expire five years from the date of issue and are associated with a loan from the Chairman to the Company of $1.5 million. The Company entered into a promissory note with the Chairman for the loan which has an interest rate of 13% and a maturity date of March 31, 2015. The maturity date can be extended by the Company for 30 days with notification.

 

 

Item 14. Principal Accounting Fees and Services

 

   

For the Year Ended December 31,

 
   

2014

   

2013

 

Audit(a)

  $ 481,464     $ 462,830  

Audit related fees

           

Tax preparation fees

           

All other fees

           

TOTAL

  $ 481,464     $ 462,830  

 

(a)

Includes fees paid to Hein & Associates, LLP for our 2013 annual audit and first two quarterly reviews in 2014, as well as services in connection with our filing of registration statements and an employee stock ownership plan audit. Also includes fees paid to BDO USA, LLP for our 2014 annual audit and 2014 third quarter review.

     

 

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.

 

Part IV

 

Item 15. Exhibits and Financial Statement Schedules

 

(a) Index to Financial Statements

 

 

 

 

 

 

 

  

Page

 

Audited Consolidated Financial Statements of GreenHunter Resources, Inc.

  

 

 

 

Report of Independent Registered Public Accounting Firm

  

 

F-1

  

Consolidated Balance Sheets at December 31, 2014 and 2013

  

 

F-2

  

Consolidated Statements of Operations for the years ended December 31, 2014 and 2013

  

 

F-3

  

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014 and 2013

  

 

F-4

  

Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013

  

 

F-5

  

Notes to Financial Statements

  

 

F-6

  

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

GreenHunter Resources, Inc.

 

We have audited the accompanying consolidated balance sheet of GreenHunter Resources, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2014, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended. 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 audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Resources, Inc. and subsidiaries as of December 31, 2014 and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

 

 

/s/ BDO USA, LLP

Dallas, Texas

April 15, 2015

  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Board of Directors and Stockholders

GreenHunter Resources, Inc.

 

We have audited the accompanying consolidated balance sheet of GreenHunter Resources, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2013, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended. 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 audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Resources, Inc. and subsidiaries as of December 31, 2013 and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

 

 

 

/s/ Hein & Associates LLP

 

Dallas, Texas

March 31, 2014, except for Note 16, as to which the date is August 20, 2014

 

 

 

 

 

 

GREENHUNTER RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

 

   

December 31, 2014

   

December 31, 2013

 

ASSETS

 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 396,279     $ 1,302,857  

Restricted cash

    132,663       -  

Accounts receivable, net of allowance of $698,788 and $380,280, respectively

    3,683,589       6,907,111  

Related party accounts receivable, no allowance considered necessary

    768,504       906,701  

MAG Tank™ inventory

    1,620,990       82,300  

Prepaid insurance

    462,026       585,175  

Other current assets

    269,374       1,123,530  

Total current assets

    7,333,425       10,907,674  

PROPERTY AND EQUIPMENT:

               

Property and equipment, net

    24,100,277       22,493,594  

Assets held for sale

    3,000,002       14,498,754  

Net property and equipment

    27,100,279       36,992,348  

OTHER ASSETS:

               

Other non-current assets

    19,153       125,778  

Total assets

  $ 34,452,857     $ 48,025,800  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

CURRENT LIABILITIES:

               

Current portion of notes payable

  $ 5,254,915     $ 7,056,725  

Accounts payable and accrued liabilities

    12,000,246       13,134,677  

Accounts payable to a related party

    199,167       133,517  

Liabilities associated with assets held for sale

    100,100       270,326  

Total current liabilities

    17,554,428       20,595,245  

NON-CURRENT LIABILITIES:

               

Notes payable, less current portion

    5,854,684       7,987,848  

Asset retirement obligation

    933,891       797,786  

Liabilities associated with assets held for sale

    159,575       288,514  

Total liabilities

    24,502,578       29,669,393  

COMMITMENTS AND CONTINGENCIES (Notes 1 and 13 )

               

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 December 31, 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, 35,846,161 issued and 35,837,827 outstanding at December 31, 2014, and 33,796,389 issued and 33,788,055 outstanding at December 31, 2013

    35,846       33,796  

Additional paid-in capital

    122,802,350       118,809,722  

Accumulated deficit

    (152,589,532 )     (140,865,668 )

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

    (9,149 )     (9,149 )

Total stockholders’ equity

    9,950,279       18,356,407  

Total liabilities and stockholders’ equity

  $ 34,452,857     $ 48,025,800  

 

 

See accompanying notes to consolidated financial statements

 

 

 

 

GREENHUNTER RESOURCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   

For the Year Ended December 31,

 
   

2014

   

2013

 

REVENUES:

               

Water disposal revenue

  $ 13,493,770     $ 11,595,059  

Transportation revenue

    10,868,985       9,564,522  

Environmental services revenue

    243,837       -  

MAG Tank™ revenue

    1,066,142       1,854,750  

Skim oil revenue

    803,046       1,050,784  

Storage rental revenue and other

    645,858       1,672,342  

Total revenues

    27,121,638       25,737,457  

COST OF GOODS AND SERVICES PROVIDED:

               

Direct cost of goods and services provided

    18,281,974       19,180,338  

Depreciation and accretion expense

    3,197,045       2,884,286  

Selling, general and administrative

    12,141,278       8,423,327  

(Gain) loss on sale of assets

    86,370       (2,205,047 )

Gain on settlements

    (585,640 )     (152,113 )

Total costs and expenses

    33,121,027       28,130,791  

OPERATING LOSS

    (5,999,389 )     (2,393,334 )

OTHER INCOME (EXPENSE):

               

Interest and other income

    96,366       92,702  

Interest expense

    (1,435,037 )     (1,011,547 )

Total other expense

    (1,338,671 )     (918,845 )

Net loss before taxes

    (7,338,060 )     (3,312,179 )

Income tax expense

    8,000       7,000  

Loss from continuing operations

    (7,346,060 )     (3,319,179 )

Income (loss) from discontinued operations

    591,256       (6,603,321 )

Net loss

    (6,754,804 )     (9,922,500 )

Preferred stock dividends

    (4,969,060 )     (4,587,285 )

Net loss to common stockholders

  $ (11,723,864 )   $ (14,509,785 )
                 

Weighted average shares outstanding, basic and diluted

    34,997,890       33,567,431  

Net loss per share from continuing operations, basic & diluted

  $ (0.35 )   $ (0.23 )

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

  $ 0.02     $ (0.20 )

Net loss per share, basic & diluted

  $ (0.33 )   $ (0.43 )

 

 

See accompanying notes to consolidated financial statements

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE PERIOD FROM JANUARY 1, 2013 TO DECEMBER 31, 2014

 

   

Series C Preferred Stock

   

Common Stock

   

Additional Paid in Capital

   

Accumulated Deficit

   

Treasury Stock

   

Unearned Shares in KSOP

   

Total Stockholders' Equity

 

BALANCE, JANUARY 1, 2013

  $ 32,825,967     $ 33,120     $ 116,832,776     $ (126,355,883 )   $ (15 )   $ (225,913 )   $ 23,110,052  

Share based compensation

    -       117       1,141,950       -       -       -       1,142,067  

Net proceeds from issuance of equity securities

    7,561,739       372       860,414       -       -       -       8,422,525  

Proceeds from exercise of equity securities

    -       113       115,637       -       -       -       115,750  

Purchase of Treasury Stock

    -       -       -       -       (9,134 )     -       (9,134 )

Issued shares for KSOP

    -       74       84,858       -       -       -       84,932  

Allocation of unearned shares in KSOP

    -       -       (225,913 )     -       -       225,913       -  

Dividends on preferred stock

    -       -       -       (4,587,285 )     -       -       (4,587,285 )

Net loss

    -       -       -       (9,922,500 )     -       -       (9,922,500 )

BALANCE, DECEMBER 31, 2013

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

Share based compensation

    -       1,766       3,719,194       -       -       -       3,720,960  

Warrants issued in connection with debt offering

    -       -       41,854       -       -       -       41,854  

Gain on settlement of lawsuits

    (676,942 )     -       -       -       -       -       (676,942 )

Net proceeds from issuance of equity securities

    -       284       231,580       -       -       -       231,864  

Dividends on preferred stock

    -       -       -       (4,969,060 )     -       -       (4,969,060 )

Net loss

    -       -       -       (6,754,804 )     -       -       (6,754,804 )

BALANCE, DECEMBER 31, 2014

  $ 39,710,764     $ 35,846     $ 122,802,350     $ (152,589,532 )   $ (9,149 )   $ -     $ 9,950,279  

 

 

See accompanying notes to consolidated financial statements

 

 

 

 

 

 

GREENHUNTER RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

For the Year Ended December 31,

 
   

2014

   

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (6,754,804 )   $ (9,922,500 )

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

               

Depreciation and accretion expense

    3,215,571       4,096,062  

Impairment of asset value

    1,092,223       1,280,444  

Discount of notes receivable

    164,260       -  

Goodwill impairment

    -       2,753,362  

Gain on sale of assets

    (1,035,375 )     (1,311,102 )

Gain on settlement of payables

    (631,332 )     (951,507 )

Gain on settlement of lawsuits

    (1,859,145 )     -  

Non-cash stock-based compensation

    4,239,333       1,142,066  

Amortization of debt discount

    215,398       37,370  

Changes in operating assets and liabilities:

               

Accounts receivable

    2,967,522       (2,841,417 )

Related party accounts receivable

    138,197       1,240,138  

Inventory

    (1,538,690 )     (82,300 )

Prepaid expenses and other current assets

    1,083,930       (1,504,739 )

Accounts payable and accrued liabilities

    (2,297,398 )     6,271,354  

Related party accounts payable

    65,650       (1,604,870 )

Net cash used in operating activities

    (934,660 )     (1,397,639 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Capital expenditures

    (3,308,240 )     (10,956,214 )

Proceeds from notes receivable

    5,085,740       -  

Proceeds from sale of assets

    6,386,509       5,681,671  

Change in restricted cash

    (132,663 )     -  

Net cash provided by (used in) investing activities

    8,031,346       (5,274,543 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from the issuance of equity securities

    231,864       8,201,148  

Proceeds from the exercise of warrants and options

    -       115,750  

Proceeds from notes payable

    1,924,601       6,573,291  

Payment of notes payable

    (5,190,669 )     (4,084,373 )

Preferred stock dividends paid

    (4,969,060 )     (4,587,285 )

Purchase of treasury stock

    -       (9,134 )

Net cash provided by (used in) financing activities

    (8,003,264 )     6,209,397  
                 

CHANGE IN CASH AND CASH EQUIVALENTS

    (906,578 )     (462,785 )

CASH AND CASH EQUIVALENTS, beginning of period

    1,302,857       1,765,642  

CASH AND CASH EQUIVALENTS, end of period

  $ 396,279     $ 1,302,857  
                 

Cash paid for interest

  $ 1,427,353     $ 911,464  
                 

NON-CASH TRANSACTIONS:

               

Accrued capital costs

  $ 2,493,488     $ 740,287  

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

  $ -     $ 174,969  

Issued warrants in connection with sale of preferred stock

  $ -     $ 345,799  

KSOP shares

  $ -     $ 84,932  

Notes receivable received in connection with sale of assets

  $ 5,250,000     $ -  

 

 

See accompanying notes to consolidated financial statements

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. DESCRIPTION OF OUR BUSINESS

 

GreenHunter Resources, Inc. (“the Company” or “GreenHunter”) is a diversified water management services company, headquartered in Grapevine, Texas that specializes in water solutions required for the unconventional oil and natural gas shale resource plays. Through our wholly-owned subsidiaries, GreenHunter Water, LLC (“GreenHunter Water”), GreenHunter Environmental Solutions, LLC (“GreenHunter Environmental Solutions”), and GreenHunter Hydrocarbons, LLC (“GreenHunter Hydrocarbons”), we provide Oilfield Fluid Management Solutions™ in the oilfield and within the shale plays of the Appalachian Basin.

 

Oil and natural gas wells typically generate produced water, which is saltwater or brine from underground formations brought to the surface during the normal course of oil or gas production operations. Since this water has been in contact with hydrocarbon-bearing formations, it contains some of the chemical characteristics of the formations and the hydrocarbons. The water that is produced from these operations must be disposed of or treated in a manner approved by the U.S. Environmental Protection Agency (“EPA”). The primary method of handling this water is through injection into a Class II saltwater disposal well. The alternative option is treating the water for reuse in hydraulic fracturing operations or treatment to fresh water qualities and discharged under a National Pollutant Discharge Elimination System (“NPDES”) permit. We have identified water reuse and water management in the oil and natural gas industry as a significant growth opportunity for the foreseeable future and are currently utilizing a water treatment system and exploring various alternatives to develop this segment of our operations through existing relationships, joint ventures, targeted acquisitions and further development of water management technologies.

 

We provide water management solutions as they relate to the oil and gas industry in the unconventional resource plays in the Appalachian Region where we are predominantly active, including both the Marcellus and Utica Shale areas. Since late 2013, we have focused predominately all of our efforts on the Appalachian Region as the Company believes this area provides our best opportunity to profitably grow the Company.

 

 

Current Plan to Fund Ongoing Operations

 

As of December 31, 2014, we had a working capital deficit of $10.2 million. We are generating increasing revenues from our water management activities and increased margins related to revenues less direct cost of goods and services provided. We were not in compliance with a certain existing debt covenant contained in one of our secured debt agreements as of December 31, 2014. However, we did obtain a waiver from our lender for the non-compliance in our debt covenant for the years ending December 31, 2014 and December 31, 2015.

 

In late 2013, the Company decided to sell all of its disposal wells, properties and equipment located in South Texas and Oklahoma with the exception of a small amount of equipment that we moved to Appalachia and to discontinue operation in both of these areas in order to concentrate its efforts in the higher revenue region of Appalachia. We believe the Appalachian region represents our best opportunities for growth and highest overall margins. We closed on the sale of all of our South Texas assets in 2014 and have ceased operations in South Texas. The remaining assets located in Oklahoma continue to be held for sale at December 31, 2014. The Company has recorded impairment of $1.1 million on these Oklahoma assets during the second half of 2014. The assets are being marketed at amounts equal to or in excess of their remaining net book value as of December 31, 2014. We expect to close on our remaining Oklahoma fixed assets in the first half of 2015. At that point, we intend to cease operating in Oklahoma.

 

On February 19, 2014, Mesquite Lake entered an agreement to sell its last remaining renewable energy asset, the biomass project, to ML Energy Park, LLC for $2.0 million. The sale closed on March 16, 2015. The prospective buyer had paid non-refundable monthly payments as earnest money deposits toward the purchase of this property totaling $575 thousand as of December 31, 2014, with another $50 thousand being paid in both January and February of 2015. All of these deposits were applied to the $2.0 million sales price of the property at closing.

 

The Company has a credit facility with its Chairman and Interim Chief Executive Officer under which the Company can borrow up to $2.0 million. During the year ended December 31, 2013, the Company borrowed $1.5 million under a promissory note related to this credit facility. In 2014, the Company paid our Chairman and Chief Executive Officer net $1.4 million on the loan. There is an outstanding balance of $130 thousand as of December 31, 2014. The remaining principal and interest were repaid by the Company during the first quarter of 2015, leaving $2.0 million available under this facility. The credit facility has currently been extended until December 31, 2016.

 

 

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 $150.0 million. The Company has received net proceeds of approximately $2.1 million related to selling stock in early 2015, including both a private placement of 3,333,334 shares and additional shares issued at the ATM of 246,100. The Company may opt to sell additional shares of stock during 2015 based upon financial need, market conditions and other factors.

 

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. 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, and the Company anticipates it will be completed early in the second quarter of 2015. Since these new wells will utilize existing offload facilities that connect to the wells via the new pipeline, the Company will experience a relatively small amount of incremental cost to operate these new wells resulting in an expected increase in cash flows during the second half of 2015.

 

Subsequent to year-end, the Company entered into a senior secured financing agreement with private lenders to borrow up to $16.0 million to finance capital projects planned for 2015. The initial tranche of loan proceeds will be in the principal amount of $13.0 million, subject to customary conditions, with an additional tranche of up to $3.0 million of principal available at the request of the borrower and subject to certain conditions.

 

Projects being funded by the new $16.0 million financing agreement would include, but are not limited to, the purchase of 10 DOT rated 407 trucks and trailers, the completion of the pipeline currently under construction at the Mills Hunter facility, and the building out of infrastructure that will enable us to commence barging operations. We expect the new trucks will begin operating in July of 2015. The addition of these new trucks, which are billable at rates in excess of traditional fluid hauling trucks, are expected to contribute significant cash flow to the Company’s operations in the last half of 2015. Any contribution to cash for in 2015 from barging operations would be dependent upon completion of the required infrastructure, which would likely be late in 2015 at the earliest.

 

We believe that our ability to successfully compete in the oil field fluids industry depends on many factors, including the location and low cost construction of our planned facilities, execution of our growth strategies, development of strategic relationships, achievement of our anticipated low cost production model, access to adequate capital, proper and meaningful governmental support which may include tax incentives and credit enhancements, and recruitment and retention of experienced management and qualified field personnel.

 

We anticipate having sufficient cash reserves to meet all of our anticipated operating obligations for the next twelve months from the date of these financial statements and from the date these financial statements were issued, 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 Oklahoma wells held for sale at December 31, 2014;

     

 

Letter of credit guarantee from our Chairman;

     
 

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

       
 

Up to $16.0 million in proceeds from capital project related senior secured financing which the Company entered into with private lenders subsequent to year end and the cash flow generated from projects funded by this financing.  

 

Management believes that the above outlined steps we have taken to improve our working capital position will enhance the prospect of seeking additional capital through a number of different sources. Our ability to fund additional longer-term capital projects is largely dependent on the Company’s ability to secure this new capital.

 

 

NOTE 2. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of GreenHunter Resources, Inc. and our wholly-owned subsidiaries, Hunter Disposal, LLC, GreenHunter Water, LLC (“GreenHunter Water”), GreenHunter Mesquite Lake, LLC (“Mesquite Lake”), Hunter Hauling, LLC (“Hunter Hauling”), Eagle Ford Water Hunter Joint Venture (“Eagle Ford Water”), GreenHunter Wind Energy, LLC (“Wind”), Little Muskingum Drilling, LLC (“Virco”), Virco Realty, Inc, (“Virco”), White Top Oilfield Construction, LLC (“White Top”) Blackwater Services, LLC (“Blackwater”) GreenHunter Environmental Solutions, LLC (“Environmental”), GreenHunter Hydrocarbons, LLC (“Hydrocarbons”), and GreenHunter Pipeline, LLC (“Pipeline”). All significant intercompany transactions and balances have been eliminated.

 

 

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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.

 

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current year presentation. In the current year, certain insurance costs that were previously accounted for as selling, general, and administrative costs were instead accounted for as cost of goods and services provided. Similar costs in the prior year have been re-classed in a consistent manner for presentation purposes.

 

 

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.

 

 

Revenue Recognition

 

The Company recognizes revenues in accordance with Accounting Standards Codification 605 (ASC 605 “Revenue Recognition”) and Staff Accounting Bulletin No 104, and accordingly all of the following criteria must be met for revenues to be recognized: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectability is reasonably assured. The majority of the Company’s revenue results from contracts with direct customers and revenues are generated upon performance of contracted services. The Company derives the majority of its revenue from water resource management as it relates to the oil and gas industry, including transportation and disposal of fresh and salt water by Company-owned trucks and/or third-party trucks to customer sites for use in drilling and hydraulic fracturing activities and from customer sites to remove and dispose of backflow and produced water originating from oil and gas wells. Revenues are also generated through fees charged for use of the Company’s disposal wells and from the rental of tanks and other equipment. Transportation and disposal rates are generally based on a fixed fee per barrel of disposal water or, in certain circumstances, transportation is based on an hourly rate. Rates for other services are based on negotiated rates with the Company’s customers and revenue is recognized when the services have been performed. Excise and other taxes collected from customers and remitted to governmental authorities are not included in revenue.

 

 

Accounts Receivable

 

Accounts receivable consists of water disposal, transportation, storage and other revenue from rental of our water storage tanks. We review accounts receivable periodically and reduce the carrying amount with a valuation allowance that reflects our best estimate of the amount that may not be collectible. The allowance deemed necessary was $699 thousand and $380 thousand as of December 31, 2014 and 2013, respectively. Bad debt expense was $366 thousand and $0 for the years ended December 31, 2014 and 2013, respectively. The Company does not charge interest on past due balances of accounts receivable.

 

 

Concentration of Customer Risk

 

Four of the Company’s customers comprised approximately 54% of the Company’s consolidated revenues for the year ended December 31, 2014. Four customers comprised approximately 51% of the Company’s consolidated accounts receivable at December 31, 2014.

 

Five of the Company’s customers comprised approximately 50% of the Company’s consolidated revenues for the year ended December 31, 2013. Two customers comprised approximately 45% of the Company’s consolidated accounts receivable at December 31, 2013.

 

 

Inventories

 

Inventory consists of MAG Tank panels and is stated at the lower of cost or market. We impair the carrying value of our inventory for discontinued, obsolete, excess and damaged inventory. This impairment is equal to the difference between the cost of inventory and its estimated market value based upon assumptions of future demand, targeted inventory turn rates, management strategy and market conditions. If actual market conditions are less favorable than those projected by management or management strategy changes, additional inventory impairments may be required and, in the event of a major change in strategy or downturn in market conditions, such impairments could be significant. We did not have any significant impairment charges for inventory for the years ended December 31, 2014 and December 31, 2013.

 

 

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:

 

   

(in years)

 

Transportation equipment

    5 to 7  

Furniture, fixtures & other

    5 to 7  

Water disposal, handling and storage equipment

    7 to 20  

Land improvements

    15  

Buildings

    30  

Water disposal and handling facilities

    7 to 20  

 

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.

 

Long-lived assets, including property and equipment, are evaluated for impairment when certain triggering events of changes in circumstances indicate that the carrying values may not be recoverable over their estimated remaining useful life.

 

 

Deferred Financing Costs

 

Costs incurred in connection with issuing debt are capitalized and amortized on a straight-line basis as an adjustment to interest expense over the term of the debt instrument using the interest method.

 

 
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Impairment of Asset Value

 

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. We recorded $1.1 million for impairment for our Oklahoma disposal wells, which are classified as held for sale as of December 31, 2014.

 

 

Repairs and Maintenance

 

We charge the cost of repairs and maintenance, including the cost of replacing minor items not constituting substantial betterment, to cost of goods and services expenses as these costs are incurred.

 

 

Stock-Based Compensation

 

The Company accounts for share-based compensation in accordance with the provisions of Accounting Standards Codification 718 (ASC 718 “Compensation – Stock Compensation”) which requires 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. 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 12 for additional information on our stock-based compensation.

 

 

Asset Retirement Obligation

 

The Company accounts for asset retirement obligations based on the guidance of Accounting Standards Codification 410 (ASC 410 “Asset Retirement and Environmental Obligations”) 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.

 

 

Income Taxes

 

We account for income taxes under the asset and 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 fifty percent 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.

 

 
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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

 

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 based on a Level 3 fair value measurement. The Company had no assets or liabilities that are being re-measured at fair value at either December 31, 2014 or December 31, 2013.

 

 

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.

 

Shares of our common stock underlying the following securities were not included in dilutive weighted average shares outstanding for the years ended December 31, 2014 and 2013, as their effects would have been anti-dilutive.

 

   

December 31,

 
   

2014

   

2013

 

Stock options

    14,912,653       12,173,255  

Warrants

    625,010       3,531,631  

Convertible debentures

    140,454       71,860  

Convertible promissory notes

    495,000       715,000  

Total

    16,173,117       16,491,746  

 

 

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 December 31, 2014 would be 68,585,069 common shares.

 

 
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Recently Issued Accounting Standards

 

In April 2014, the Financial Accounting Standards Board (“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 are currently evaluating the impact of this guidance on our financial statements.

 

In May 2014, the FASB issued an accounting standards update to provide guidance on the recognition of revenue from customers.  Under this guidance, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. This guidance also requires more detailed disclosures to enable users of the financial statements to understand the nature, amount, timing and uncertainty, if any, of revenue and cash flows arising from contracts with customers. The requirements in this update are effective during interim and annual periods beginning after December 15, 2016. We are currently evaluating the impact this guidance will have on our consolidated financial statements.  

 

In June 2014, the FASB issued an accounting standards update to provide guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. The requirements in this update are effective during interim and annual periods beginning after December 15, 2015. The adoption of this update is not expected to have a material impact on our consolidated financial statements.  

 

 

NOTE 4. 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 and has either sold or moved to Appalachia all of its assets in South Texas and ceased operations in South Texas. We ceased depreciation of fixed assets held for sale in December 2013.

 

The remaining assets located in Oklahoma continue to be held for sale at December 31, 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 $1.1 million on these assets during the second half of 2014. These assets are being marketed at amounts equal to or in excess of their remaining net book value as of December 31, 2014. We expect to close on our remaining Oklahoma fixed assets in the first half of 2015. At that point, we intend to cease operating in Oklahoma.

 

 
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On May 14, 2007, we acquired a biomass plant located in Southern California. The plant was 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, Mesquite Lake entered an agreement to sell the Mesquite Lake Resource Recovery Facility and related real property (commonly referred to as the biomass project) to ML Energy Park, LLC for $2.0 million. The sale was closed on March 16, 2015. The buyer made an initial payment of $50 thousand as earnest money deposit and continued to pay $50 thousand per month to date. The non-refundable monthly payments, as well as the initial $25 thousand fee, were applied to the purchase. 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 Year Ended December 31,

 
   

2014

   

2013

 

Revenue from discontinued operations

  $ 552,087     $ 12,175,169  

Gain on settlement of lawsuits

    1,859,145       -  

Gain (loss) on sale of assets

    1,121,745       (893,946 )

Goodwill impairment

    -       2,784,362  

Impairment of assets

    1,092,223       1,249,444  

Net income (loss) from discontinued operations before taxes

    591,256       (6,603,321 )

Income tax expense

    -       -  

Income (loss) from discontinued operations

    591,256       (6,603,321 )

 

 

NOTE 5. ACQUISITIONS AND DIVESTITURES

 

 

Helena Disposal Well

 

On June 10, 2013, the Company’s wholly-owned subsidiary, GreenHunter Water, LLC, closed on the sale of a saltwater disposal well and associated equipment located in South Texas, pursuant to an Asset Purchase Agreement with Sable Environmental SWD 4, LLC, for which the Company received $5.2 million, resulting in a gain of $2.3 million.

 

White Top and Blackwater

 

The Company made an acquisition as of December 31, 2012 that resulted in the recognition of goodwill. On May 17, 2013, the Company discontinued certain portions of operations of White Top and Blackwater due to continued losses, resulting in increased uncertainties regarding the timing and nature or a recovery of capital expenditures. Taking these factors into account, the Company reassessed is financial outlook of, and consequently reevaluated the recoverability of goodwill associated with these acquisitions. The Company performed the two-step impairment test and concluded that the fair value of goodwill was substantially lower than the carrying value of goodwill associated with the acquisition. Accordingly, during the first quarter of fiscal 2013, the Company recorded an impairment charge of $2.8 million. The carrying value of goodwill at March 31, 2013 was fully impaired due to the elimination of operating segments of White Top and Blackwater. In the fourth quarter, the Company made a purchase accounting adjustment for Blackwater of $45.7 thousand. The effect of this adjustment was to reduce our previous recorded loss on the impairment of goodwill related to the Blackwater purchase.

 

 
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On June 30, 2013, the Company wrote off certain assets acquired as part of the White Top and Blackwater acquisition that were repossessed as partial consideration for loans the Company had assumed as part of the White Top and Blackwater acquisition. The Company subsequently defaulted on these loans. Also on June 30, 2013, the Company wrote off certain assets that were not in possession of the Company, for which the Company had taken legal action in an attempt to take possession of the assets previously acquired. Certain assets related to these discontinued activities were subsequently sold. The write-offs and sale resulted in a loss on sale of assets of approximately $788 thousand.

 

We sold most of our equipment in South Texas which consisted mainly of fluid hauling trucks and trailers and heavy construction equipment, during 2014. The sales resulted in a gain of approximately $64 thousand. We moved certain of the remaining assets to our field operations in the Appalachian Region.

 

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.

 

 Wheeling Barge Facility

 

On March 13, 2013, the Company acquired a barging terminal facility located in Wheeling, West Virginia, for $750 thousand. When the facility is refurbished, it will contain a water recycling station using GreenHunter’s Frac-Cycle product line. This location will also serve as a barging station. This asset, most of which is land, has not been placed in service and is not being depreciated.

 

 
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NOTE 6. PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost. The following is a schedule of our property and equipment as of December 31,:

 

   

2014

   

2013

 

Land and improvements

  $ 1,603,799     $ 1,549,059  

Buildings

    2,517,869       2,517,869  

Water facilities and other property and equipment

               

Water disposal and handling facilities

    12,929,428       12,645,595  

Property and equipment not yet in service

    4,156,530       858,000  

Transportation equipment

    7,847,948       7,390,668  

Other equipment

    2,255,672       1,663,645  

Furniture, fixtures and other

    697,442       590,070  

Total facilities and other property and equipment

    27,887,020       23,147,978  

Total property and equipment

    32,008,688       27,214,906  

Less: Accumulated depreciation

    (7,908,411 )     (4,721,312 )

Net property and equipment

  $ 24,100,277     $ 22,493,594  

 

Depreciation expense of $3.2 million and $2.9 million from continuing operations was recorded for the years ending December 31, 2014 and 2013, respectively. Property and equipment are not subject to depreciation until they are not under construction and placed in service. We ceased depreciation of the assets held for sale in December 2013 when we committed to the plan to sell these assets. We have approximately $950 thousand invested in assets in barging facilities, some of which is land, which are not in service and are not being depreciated at December 31, 2014.

 

 

NOTE 7. ASSET RETIREMENT OBLIGATIONS

 

During 2012, we recorded an estimate of the asset retirement obligation on our disposal wells acquired and drilled based on estimated costs to plug and abandon these wells and an analysis of the capacity of the water disposal wells to accept fluid and the effect on useful lives and well plugging cost estimates, a level three measurement in the fair value valuation hierarchy. The following table summarizes the Company’s asset retirement obligation transactions during the years ended December 31, 2014 and 2013.

 

   

2014

   

2013

 

Asset retirement obligation at beginning of period

  $ (1,119,248 )   $ (922,386 )

Liabilities incurred on new wells

    (36,441 )     (121,347 )

Liabilities relieved on retirement of wells

    80,953       25,930  

Accretion expense

    (118,829 )     (101,445 )

Asset retirement obligation at end of period

    (1,193,565 )     (1,119,248 )

Less: current portion (1)

    (100,100 )     (100,100 )

Non-current portion of asset retirement obligation (2)

  $ (1,093,465 )   $ (1,019,148 )

 

 

(1)

The total current portion of asset retirement obligation of $100 thousand at both December 31, 2014 and 2013, is associated with assets held for sale.

 

(2)

The non-current portion of asset retirement obligation at December 31, 2014 and 2013, includes $160 thousand and $221 thousand, respectively, associated with assets held for sale.

 

 
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NOTE 8. NOTES PAYABLE

 

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

 

   

December 31,

2014

   

December 31,

2013

 

Notes payable for insurance premiums due in monthly installments through various dates ending July 1, 2015, 6.73% fixed rate

  $ 272,776     $ 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)

    1,257,629       1,347,051  

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

    2,905,137       4,674,817  

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

    1,046,192       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

    1,237,500       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

    40,932       42,786  

Notes 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%

    82,601       257,176  

Notes 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)

    427,959       807,376  

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

    980,848       1,076,468  

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

    130,000       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

    1,510,000       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

    1,128,025       -  
      11,109,599       15,281,951  

Less: current portion

    (5,254,915 )     (7,226,951 )

Total long-term debt

  $ 5,854,684     $ 8,055,000  

 

 

(1)

The 2013 balance includes notes classified as liabilities associated with assets held for sale 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 December 31, 2014.

   

(2)

Note includes debt covenants for which we were not in compliance at both December 31, 2014 and December 31, 2013. The lender waived the default provisions related to our non-compliance for both years and additionally has given the Company a waiver for any non-compliance for the next measurement period, December 31 2015.

(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. We were in compliance with the covenant as of December 31, 2014.

 

 
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The following table presents the approximate annual maturities of debt and capital lease obligations as of December 31, 2014:

 

2015

  $ 5,254,915  

2016

    2,028,974  

2017

    2,038,417  

2018

    312,002  

2019

    162,163  

Thereafter

    1,313,128  
    $ 11,109,599  

 

 

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 ended December 31, 2013, and for an additional grace period for the year ending December 31, 2014 from one of the lenders. We were not in compliance with one of the same debt covenants at December 31, 2014. We obtained a waiver from the lender for both December 31, 2014 and December 31, 2015.

 

 

Notes Payable

 

During both 2013 and 2014, we entered into various premium finance agreements to finance certain insurance premiums. The combined amount financed under these agreements was $831 thousand for 2013 and $713 thousand for 2014. The agreements bear interest at rates ranging from 5% to 6.5% for 2013 and from 3.6% to 6.5% for 2014 and are due in monthly installments for one year.

 

On March 13, 2013, we entered into a note payable with a bank in the amount of $750 thousand, collateralized by property and equipment, which included an additional $350 thousand of borrowing capacity for construction and refurbishment purposes. The note has a variable interest rate based on the prime rate of the 10 largest U.S. banks and was 3.25% at year-end 2013 and 2014. Monthly interest and principal payments of $11 thousand are required, and the note matures on September 13, 2023. The $350 thousand borrowing capacity was fully utilized during 2013.

 

 On July 25, 2013, we entered into a note payable with a bank in the amount of $1.07 million for the purchase of water hauling trucks. The note has a variable interest rate of one month LIBOR plus 4%, with interest and principal payments of $19 thousand and matures on August 25, 2018.

 

On November 1, 2013, we entered into a note payable with a financing company in the amount of $30 thousand for the purchase of a pick-up truck. The note has an interest rate of 5.24%, with principal and interest payable monthly to the maturity date of November 24, 2016.

 

 
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In the fourth quarter of 2013, the Company closed on the private placement of approximately $1.5 million of the Company’s Unsecured Term Notes due one year from the date of issuance together with 134,211 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. 116,435 of these warrants were issued to third parties in association with $1.3 million of the notes, which have a debt discount of $66 thousand and an interest rate of 15%. The net proceeds of the placement are intended to fund MAG Panel™ inventory. The Company was unable to repay these notes when due at November, 2014, and they were in default at December 31, 2014. In the first quarter of 2015, the Company reached a new agreement with the holders of $1.2 million of promissory notes issued in connection with the financing of the production of MAG Tanks to extend the notes for an additional one year period from the original maturity date. The amended notes provide for payments of interest only at an annual rate of 15% through August 14, 2015, and will be fully amortized for the remainder of the extended notes. Additionally, the Company converted the remaining principal amount of its promissory notes to three non-affiliated holders into common shares based upon the closing price of the Company’s closing stock on the day prior to their election. The principal amount of $300 thousand was converted to 420,577 shares of common stock.

 

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.

 

 

Notes Payable to Related Parties

 

During the year ended December 31, 2013, the Company borrowed an additional $1.5 million under a promissory note due to the Company’s Chairman and Interim Chief Executive Officer. As of December 31, 2014, there is $1.9 million available under this facility. Interest for this note was $109 thousand for the year ended December 31, 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. The letter of financial support associated with this note has been extended through June 30, 2016.

 

As part of the $1.5 million MAG Tank financing, two officers of the Company comprised $200 thousand of the notes and 17,776 of the warrants issued. Interest on the MAG Tank loans for the officers was $30 thousand and $2 thousand for the years ended December 31, 2014 and December 31, 2013, respectively. The net proceeds of the placement are intended to fund MAG Panel™ inventory. The notes were in default on December 31, 2014. On January 23, 2015, the Company converted the principal amount of these promissory notes issued to two officers of the Company to common equity. The total principal amount of $200 thousand was converted for 322,580 shares of common stock.

 

 

Convertible Promissory Note Payable to Related Party

 

On February 17, 2012, the Company entered into a 10% convertible promissory note for $2.2 million payable to Triad Hunter, a related party through our Chairman, 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 $151 thousand and $205 thousand for the years ended December 31, 2014 and December 31, 2013, respectively. 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.

 

 
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NOTE 9. INCOME TAXES

 

The total provision for income taxes consists of the following:

 

   

2014

   

2013

 
   

(in thousands)

 

Current Taxes:

               

Federal

  $     $  

State

    8       7  

Deferred

               

Federal

           

State

           
                 
    $ 8     $ 7  

 

At December 31, 2014, we had available for U.S. federal income tax reporting purposes, a net operating loss (NOL) carry-forward for regular tax purposes of approximately $76 million which expires in varying amounts during the tax years 2027 through 2034. No provision for federal income tax benefit is reflected on the statement of operations for the year ended December 31, 2014 because we are uncertain as to our ability to utilize our NOL in the future.

 

The NOL above includes $2.6 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 carry-forwards. 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.

 

The following is a reconciliation of the reported amount of income tax expense (benefit) for the years ended December 31, 2014 and 2013, to the amount of income tax expense that would result from applying domestic federal statutory tax rates to pretax income:

 

   

2014

   

2013

 
   

(in thousands)

 

Statutory tax expense (benefit)

  $ (2,297

)

  $ (842 )

State income tax

    8       7  

Change in valuation allowance

    2,216       804  

Effect of permanent differences and other

               

Interest expense disallowed for tax

    3       3  

Effect of other permanent differences

    78       35  

Total Tax Expense

  $ 8     $ 7  

 

 
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The components of our deferred income taxes were as follows for the years ended December 31, 2014 and 2013:

 

   

2014

   

2013

 
   

(in thousands)

 

Deferred tax assets:

               

Net operating loss carryover

  $ 25,499     $ 23,569  

Capital loss carryover

    ---       77  

Charitable contributions carryover

    2       ---  

Share based compensation

    7,560       6,890  

Property and equipment

    3,232       2,854  

Goodwill

    ---       888  

Deferred book liabilities

    583       381  

Total net deferred tax assets

    36,876       34,659  

Less valuation allowances

    (36,876

)

    (34,659

)

Net deferred tax assets

  $     $  

 

We follow ASC 740 Accounting for Uncertainty in Income Taxes. 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. We had no liabilities for unrecognized tax benefits at December 31, 2014 and 2013.

 

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, 2014 and 2013, we did not recognize any interest or penalties in our consolidated statement of operations, nor did we have any interest or penalties accrued in our consolidated balance sheet at December 31, 2014 and 2013 relating to unrecognized tax benefits.

 

The tax years 2011-2014 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which we are subject. The tax years 2010-2014 remain open for the Texas Margin tax.

 

The goodwill originally recorded and which was attributable to the acquisition of White Top and Blackwater would have been amortized over 15 years for tax purposes. The goodwill was subsequently fully impaired on the financial statements and was deducted for tax tables when the properties were sold in 2014.

 

 
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NOTE 10. STOCKHOLDERS’ EQUITY

 

The following table reflects changes in shares of our outstanding preferred stock, common stock, and treasury stock during the periods reflected in our financial statements:

 

   

Preferred Stock

   

Common Stock

   

Treasury Stock

   

KSOP

 

BALANCE, JANUARY 1, 2013

    1,561,144       33,120,483       1       15,200  

Issued shares of Series C Preferred Stock in public offering

    265,436       -       -       -  

Issued shares of common stock upon exercise of warrants

    -       12,500       -       -  

Issued shares of common stock upon exercise of stock options

    -       100,000       -       -  

Issued shares of common stock in public offering

    -       221,946       -       -  

Issued shares for share based payments

    -       150,835       -       -  

Issued shares of common stock for stock compensation

    -       116,771       -       -  

Issued shares of Series C Preferred Stock in private placement

    181,786       -       -       -  

Issued shares of KSOP

    -       73,854       -       -  

Adjustment of Series C Preferred Stock

    (8,366 )     -       -       -  

Allocation of unearned shares in KSOP

    -       -       -       (15,200 )

Purchase of treasury stock

    -       -       8,333       -  

BALANCE, DECEMBER 31, 2013

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

Share based payments to officers

    -       1,695,000       -       -  

Share based payments to directors

    -       70,726       -       -  

Issued shares of common stock in public offering

    -       284,046       -       -  

Preferred stock received from settlement of lawsuits

    (24,750 )     -       -       -  

BALANCE, DECEMBER 31, 2014

    1,975,250       35,846,161       8,334       -  

 

 
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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 24,750 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 December 31, 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.

 

During the first quarter of 2013, the Company issued the remaining Series C Preferred Stock under its then current registration statement. The net cash proceeds received upon issuance of these securities were approximately $4.8 million for the issuance of 265,436 shares of Series C Preferred Stock through our At-The-Market (“ATM”) facility.

 

On September 19, 2013, the Company sold in a private placement, 181,786 units consisting of an aggregate of 181,786 shares of Series C Preferred Stock and 282,778 common stock warrants. The net cash proceeds received upon issuance of these securities were approximately $3.1 million. The Company issued 150,835 shares of common stock as compensation for services rendered in connection with the transaction to the placement agent. As part of the agreement with the purchasers of the securities, the Company agreed to register the shares within 90 days of September 19, 2013, which it did.

 

 

 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.

 

In the first quarter of 2013, the Company issued the remaining common stock under its then current registration statement. The net cash proceeds received upon issuance of 221,946 shares of these securities was approximately $340 thousand through our ATM facility.

 

On September 19, 2013, the Company issued 150,835 shares as compensation to the placement agent for services rendered in connection with a transaction. The Company agreed to register the shares within 90 days, which it did.

 

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. In the fourth quarter of 2014, the Company issued common stock under the new registration statement. The net cash proceeds received upon issuance of 284,046 shares of these securities was approximately $232 thousand through our ATM facility.

 

Treasury Stock

 

During the year ended December 31, 2013, the Company purchased 8,333 shares of common stock from an officer of the Company for $9 thousand based on the market closing price on the day of the transaction. The stock is being held by the Company as treasury stock.

 

 
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Common Stock Warrants

 

The following is a summary of warrant activity for the two years ended December 31, 2014 and 2013.

 

   

2014

   

2013

 
   

Shares

   

Weighted Average Exercise Price

   

Weighted Average Expected Life

   

Shares

   

Weighted Average Exercise Price

   

Weighted Average Expected Life

 

Outstanding - Beginning of Period

    3,531,631     $ 1.98       0.78       3,020,000     $ 2.01       1.08  

Granted

    100,879     $ 2.25       4.16       524,131     $ 1.79       4.81  

Exercised

    -                       (12,500 )   $ 1.50          

Expired

    (3,007,500 )   $ 2.01               -     $ -          

Outstanding - End of Period

    625,010     $ 1.87       3.86       3,531,631     $ 1.98       0.78  

Exercisable - End of Period

    625,010     $ 1.87       3.86       3,531,631     $ 1.98       0.78  

 

 

On September 19, 2013, the Company issued 282,778 warrants, which expire five years from their issue date, with an exercise price of $2.25 per share in connection with the sale of Series C Preferred Stock.

 

In the fourth quarter of 2013, the Company issued a total of 134,211 warrants, which expire five years from their issue dates, with an exercise price of $2.25 in connection with private debt placements. 17,776 of these warrants were issued to officers of the Company.

 

On December 12, 2013, the Company issued 107,142 warrants, which expire five years from their issue date, with an exercise price of $0.01 to the Company’s Chairman in connection with a loan made to the Company by the Chairman.

 

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.

 

 

Employee Benefit Plans

 

The Company sponsors a defined contribution 401KSOP plan that is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). Under this plan, the Company matches a percentage of the participants’ contributions up to a specified amount and also makes a profit sharing contribution up to the maximum amount allowed by law. The Company has, in the past, made this contributions in Company stock rather than cash. Total expenses related to the plan were $581 thousand and $142 thousand for the years ended December 31, 2014 and 2013, respectively. A similar amount has been accrued on the Company’s books for 2014, but the calculated contributions for the 2014 grant have not been completed.

 

 

NOTE 11. 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”). The Company had current derivative liabilities resulting from the antidilutive features on its common stock warrants, Series A Convertible Preferred Stock, and Series B Convertible Preferred Stock. The estimated fair value of the convertible securities liability was revalued at each balance sheet date, with changes in value recorded as other income or expense in the consolidated statements of operations. All warrants with anti-dilutive features have expired as of December 31, 2014.

 

 
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 NOTE 12. STOCK-BASED COMPENSATION

 

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 than 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. As of December 31, 2013, this Plan has no remaining securities available for future issuance.

 

On February 1, 2013, the Board of Directors approved the Company’s 2013 Long-Term Incentive Compensation Plan. This Plan provides for equity incentives to be granted to employees, officers or directors of the Company as well as key advisors or consultants. Equity incentives may be in the form of stock options with an exercise price not less than 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 7,000,000 shares of Common Stock were authorized for issuance under the Incentive Plan. This Plan received stockholder approval at a Special Meeting of Stockholders which occurred on May 8, 2013. As of December 31, 2014, this Plan had 2,322,500 securities remaining for future issuance.

 

 

Common Stock Options

 

During the year ended December 31, 2013, the Company granted 2,637,400 common stock options to members of management and employees of the Company at an average exercise price of $1.40 with an average estimated fair value of $0.85 per share. The options have a life of ten years and vest in equal amounts over a three year period beginning one year from the date of grant.

 

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.

 

On December 15, 2014, a total of 512,500 options previously canceled were re-issued.

 

On December 23, 2014, our Board of Directors approved the granting of 905,000 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 $0.60 per share. The options vest in equal amounts over a three year period beginning one year from the date of grant.

 

We recorded share based compensation of approximately $2.0 million and $1.1 million for the years ended December 31, 2014 and 2013, respectively, related to vesting of employee common stock options.

 

As of December 31, 2014 and December 31, 2013, there were $1.4 million and $1.8 million, respectively, of total unrecognized compensation cost related to unvested shares associated with stock options which will be recognized over weighted-average periods of 1.70 years and 2.00 years, respectively. 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).

 

 
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We estimated the fair value of each stock based grant using the Black-Scholes option pricing method for service and performance based options. The weighted average values for options issued for the year ended December 31, 2014 are as follows:

 

   

2014

   

2013

 

Number of options issued

    4,200,000       2,637,400  

Weighted average stock price

  $ 0.99     $ 1.40  

Weighted average exercise price

  $ 0.99     $ 1.40  

Weighted average expected life of options (a)

    6.00       6.00  

Weighted average expected volatility (b)

    65 %     67 %

Weighted average risk-free interest rate

    1.84 %     1.30 %

Expected annual dividend per share

    -       -  

Weighted average fair value of each option

  $ 0.59     $ 0.85  

 

(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 five year historical volatility.

 

The following is a summary of stock option activity during the years ended December 31, 2014 and 2013.

 

   

2014

   

2013

 
   

Shares

   

Weighted Average Exercise Price

   

Aggregate Intrinsic Value* ($000s)

   

Shares

   

Weighted Average Exercise Price

   

Aggregate Intrinsic Value* ($000s)

 

Outstanding - Beginning of Period

    12,173,255     $ 3.83     $ 530       10,827,165     $ 4.71     $ 1,571  

Granted

    4,200,000       0.99       109       2,637,400       1.40       -  

Exercised

    -       -       -       (100,000 )     0.97       -  

Cancelled

    (1,460,602 )     1.15       -       (1,191,310 )     1.61       -  

Outstanding - End of Period

    14,912,653       3.29       109       12,173,255       3.83       530  

Exercisable - End of Period

    11,388,109     $ 3.97     $ -       8,450,046     $ 4.93     $ 352  

 

 

*

The Aggregate Intrinsic Value was calculated using the December 31, 2014 and 2013 closing stock price of $0.72 and $1.16, respectively.

 

The following is a summary of stock options outstanding at December 31, 2014:

 

 

Exercise Price

 

Number of Options Outstanding

   

Weighted Average Remaining Contractual Life

   

Number of Exercisable Options

 

$0.60 - $1.00

    4,501,665       8.19       2,886,665  

$1.01 - $1.20

    1,245,000       8.46       418,333  

$1.21 - $1.55

    512,500       7.97       216,666  

$1.56 - $1.75

    2,497,329       7.91       1,735,286  

$1.76 - $2.00

    1,765,667       4.70       1,740,667  

$2.01 - $10.00

    3,490,332       2.41       3,490,332  

$10.01 - $15.00

    43,999       3.15       43,999  

$15.01 - $18.00

    36,667       3.14       36,667  

$18.01 - $20.00

    792,828       3.12       792,828  

$20.01 - $22.75

    26,666       3.38       26,666  
      14,912,653               11,388,109  

 

 
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 Share Awards

 

During 2013, the shareholders approved a grant of 116,771 shares of common stock to the nonemployee members of the Board of Directors in lieu of receiving cash for their fees for the last quarter of 2012 and the first nine months of 2013. These common shares vested immediately and were valued as of the grant dates.

 

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.

 

On December 19, 2014, the shareholders approved a grant of 70,726 shares of common stock to the nonemployee members of the Board of Directors in lieu of receiving cash for their fees for the last quarter of 2013 and the first six months of 2014. These common shares vested immediately and were valued as of the grant dates. These shares were not issued as of December 31, 2014, but are included in weighted average basic shares outstanding as of December 31, 2014. The shares had a total value of $88 thousand based on the following:

 

 

The 32,328 shares for the fourth quarter 2013 were valued at $1.16 per share for a total grant of $38 thousand.

 

 

The 25,772 shares for the first quarter 2014 were valued at $0.97 per share for a total grant of $25 thousand.

 

 

The 12,626 shares for the second quarter 2014 were valued at $1.98 per share for a total grant of $25 thousand.

 

 

NOTE 13. 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.

 

 

Leases

 

The Company rents property, equipment and certain office equipment under operating leases. Lease expense under operating leases and rental contracts amounted to $1.3 million and $1.4 million for the years ended December 31, 2014 and 2013, respectively.

 

Future minimum lease payments, by year and in the aggregate, for non-cancelable operating leases with initial or remaining terms of one year or more were as follows as of December 31, 2014:

 

2015

  $ 395,171  

2016

    261,186  

2017

    147,186  

2018

    111,186  

2019

    111,186  

Thereafter

    543,498  
    $ 1,569,413  

 

 
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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.

 

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 previously performed at our Mesquite Lake biomass plant in Imperial County, California. GreenHunter Energy, Inc. had a construction contract directly with Crown Engineering only. 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 is attempting to enforce payment of its claim of approximately $328,000 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.

 

 

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 potential claim will be covered by insurance.

 

Jose Torres, et al. v. GreenHunter Resources, Inc. and GreenHunter Water, LLC, in the County Court at Law # 1, Nueces County, Texas, Cause No. 2013-CCU-62314-1. Jose Torres, an employee of Hunter Hauling, LLC, a subsidiary of the defendants, was killed on December 17, 2013 while working inside a tanker truck on 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 its insurance carriers for coverage. The Company is in the process of answering the lawsuit.

 

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.

 

Hunt Guillot and Associates v. GreenHunter Hydrocarbons, LLC, et al., in the Court of Common Pleas of Alleghaney, PA, Case No. GD15-821. Plaintiff sued Defendants for breach of contract regarding the payment of engineering and construction management services related to the engineering and construction of two condensate plants. Defendants have responded to the lawsuit and have begun discovery in this matter.

 

Quality Lease Rental Service LLC v. GreenHunter Water, LLC. In the 23rd Judicial District in the District Court of Wharton County, Texas, Cause No. 48051 .Plaintiff brought suit against defendant for damages for failure to pay for certain equipment services. The Company is in the process of answering the lawsuit. The Company believes this case has no merit.

 

White Top and Blackwater Related . 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 Preferred 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.

 

 
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NOTE 14. RELATED PARTY TRANSACTIONS

 

During the years ended December 31, 2014 and December 31, 2013, we earned revenue for the respective services from the following companies, which are all wholly-owned subsidiaries of Magnum Hunter Resources Corporation, an entity for which Gary C. Evans, our Chairman, is an officer and significant shareholder.

 

 

Alpha Hunter Drilling, Inc. for contract services and environmental services (2014 only)

 

 

Eureka Hunter Pipeline, LLC for water disposal and transportation services

 

 

Shale Hunter, LLC for water storage tank rental, water disposal and transportation services

 

 

Triad Hunter, LLC for water storage tank and equipment rental, water disposal and transportation services, environmental services (2014 only), and MAG Tank™ purchase or rental

 

 

Virco, Inc. for water disposal and transportation services

 

As of December 18, 2014, Magnum Hunter Resources Corporation no longer held a controlling financial interest in Eureka Hunter Pipeline, LLC. Revenue from Eagle Ford Hunter, prior to its sale by Magnum Hunter Resources Corporation to an unaffiliated entity in April of 2013, was $978 thousand. Revenue from the affiliated companies totaled $6.5 million and $3.4 million for the years ended December 31, 2014 and 2013, respectively. Accounts receivable for these entities totaled $769 thousand and $907 thousand at December 31, 2014 and December 31, 2013, respectively.

 

The Company had an accounts receivable from Pilatus Hunter, a company owned by Mr. Evans, totaling $113 thousand at December 31, 2014 for pilot expenses.

 

We paid for air travel services from a company owned by Mr. Evans of $15 thousand and $178 thousand for the years ended December 31, 2014 and 2013, respectively.

 

On February 17, 2012, the Company, through its wholly-owned subsidiary, GreenHunter Water, closed on the acquisition of 100% of the equity ownership interest of Hunter Disposal, LLC, a wholly-owned subsidiary of Magnum Hunter Resources Corporation. In connection with the sale, Triad Hunter, LLC, entered into agreements with Hunter Disposal, and GreenHunter Water, for wastewater hauling and disposal capacity in the states of Kentucky, Ohio and West Virginia and a five-year tank rental agreement with GreenHunter Water. On December 22, 2014, Triad Hunter entered into an amendment of the agreement dated February 17, 2012 with GreenHunter Water that allowed Triad Hunter to secure long-term water disposal at reduced rates through December 31, 2019. On December 29, 2014, Triad Hunter made a prepayment of $1.0 million towards services to be provided under the amendment. GreenHunter Water will provide a 50% credit for all services until the prepayment amount is utilized in full, which is anticipated to occur in 2015.

 

During the year ended December 31, 2013, the Company borrowed an additional $1.5 million under a promissory note due to the Company’s Chairman and Interim Chief Executive Officer. As of December 31, 2014, there is $1.9 million available under this facility. Should the Company borrow any available amounts, they will carry an interest rate of 13% per annum. The letter of financial support associated with this note has been extended through June 30, 2016. In association with this loan, the Company issued 107,142 warrants with an exercise price of $0.01 to the Company’s Chairman. The warrants expire five years from the date of issue.

 

In the fourth quarter of 2013, the Company closed on the private placement of approximately $1.5 million of the Company’s Unsecured Term Notes due one year from the date of issuance together with 134,211 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. 17,776 of these warrants were issued to officers of the Company in association with $200 thousand of the notes, which have an interest rate of 15%. The net proceeds of the placement are intended to fund MAG Panel™ inventory.

 

Total related party payables were $199 thousand and $134 thousand at December 31, 2014 and 2013, respectively.

 

 
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NOTE 15. SEGMENT DATA

 

We currently have one reportable segment: Water Management. However, we previously had two reportable segments: Water Management and Biomass. We sold the Company’s remaining Biomass plant on March 16, 2015. We initially classified the Biomass assets as held for sale as of March 31, 2014, and have continued to classify the asset as held for sale as of December 31, 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 4 – Discontinued Operations and Assets Held for Sale for more information.

 

NOTE 16. 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 December 31, 2014 and December 31, 2013, and for the years ended December, 2014 and 2013, was as follows:

 

GreenHunter Resources, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   

As of December 31, 2014

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

ASSETS

                                       

Current assets

  $ 982,029     $ 5,845,243     $ 506,153     $ -     $ 7,333,425  

Intercompany accounts receivable

    22,879,067       35,106       (22,914,173 )     -       -  

Property and equipment

    2,051,636       20,121,388       4,466,618       460,637       27,100,279  

Investment in subsidiaries

    (7,401,968 )     (2,562,993 )     29,732,837       (19,767,876 )     -  

Other assets

    8,217       10,936       -       -       19,153  

Total Assets

  $ 18,518,981     $ 23,449,680     $ 11,791,435     $ (19,307,239 )   $ 34,452,857  
                                         

LIABILITIES AND STOCKHOLDERS' EQUITY

                                       

Current liabilities

  $ 28,588,224     $ 10,161,391     $ (21,195,187 )   $ -     $ 17,554,428  

Intercompany accounts payable

    (22,879,067 )     (35,106 )     22,914,173       -       -  

Long-term liabilities

    2,859,545       3,417,763       670,842       -       6,948,150  

Stockholders' equity

    9,950,279       9,905,632       9,401,607       (19,307,239 )     9,950,279  

Total Liabilities and Stockholders' Equity

  $ 18,518,981     $ 23,449,680     $ 11,791,435     $ (19,307,239 )   $ 34,452,857  

 

   

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     $ 1,634,579     $ (118,900 )   $ 10,907,674  

Intercompany accounts receivable

    33,719,606       625,988       (34,345,594 )     -       -  

Property and equipment

    2,167,251       14,402,410       16,033,258       4,389,429       36,992,348  

Investment in subsidiaries

    (10,321,732     (5,237,887     30,053,502       (14,493,883 )     -  

Other assets

    64,842       60,936       -       -       125,778  

Total Assets

  $ 27,579,731     $ 17,293,678     $ 13,375,745     $ (10,223,354 )   $ 48,025,800  
                                         

LIABILITIES AND STOCKHOLDERS' EQUITY

                                       

Current liabilities

  $ 39,368,424     $ 12,580,854     $ (31,354,033 )   $ -     $ 20,595,245  

Intercompany accounts payable

    (33,719,606 )     (625,988 )     34,345,594       -       -  

Long-term liabilities

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

Stockholders' equity

    18,356,407       821,750       9,401,604       (10,223,354 )     18,356,407  

Total Liabilities and Stockholders' Equity

  $ 27,579,731     $ 17,293,678     $ 13,375,745     $ (10,223,354 )   $ 48,025,800  

 

 
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GreenHunter Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

 

   

For the Year Ended December 31, 2014

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Revenues

  $ -     $ 35,636,175     $ -     $ (8,514,537 )   $ 27,121,638  

Expenses

    9,666,562       33,738,257       85,045       (9,030,166 )     34,459,698  

Income (loss) from continuing operations before equity in net income of subsidiaries

    (9,666,562 )     1,897,918       (85,045 )     515,629       (7,338,060 )

Equity in net income of subsidiaries

    2,919,758       (1,897,918 )     (506,211 )     (515,629 )     -  

Loss from continuing operations before tax

    (6,746,804 )     -       (591,256 )     -       (7,338,060 )

Income tax expense

    (8,000 )     -       -       -       (8,000 )

Loss from continuing operations

    (6,754,804 )     -       (591,256 )     -       (7,346,060 )

Income from discontinued operations, net of tax

    -       -       591,256       -       591,256  

Net loss

    (6,754,804 )     -       -       -       (6,754,804 )

Dividends on preferred stock

    (4,969,060 )     -       -       -       (4,969,060 )

Net loss to common stockholders

  $ (11,723,864 )   $ -     $ -     $ -     $ (11,723,864 )

 

   

For the Year Ended December 31, 2013

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Revenues

  $ -     $ 33,423,682     $ 2,781     $ (7,689,006 )   $ 25,737,457  

Expenses

    4,285,769       31,824,662       89,855       (7,150,650 )     29,049,636  

Income (loss) from continuing operations before equity in net income of subsidiaries

    (4,285,769 )     1,599,020       (87,074 )     (538,356 )     (3,312,179 )

Equity in net income of subsidiaries

    (5,629,731 )     (1,599,020 )     6,690,395       538,356       -  

Income (loss) from continuing operations before tax

    (9,915,500 )     -       6,603,321       -       (3,312,179 )

Income tax expense

    (7,000 )     -       -       -       (7,000 )

Income (loss) from continuing operations

    (9,922,500 )     -       6,603,321       -       (3,319,179 )

Loss from discontinued operations, net of tax

    -       -       (6,603,321 )     -       (6,603,321 )

Net loss

    (9,922,500 )     -       -       -       (9,922,500 )

Dividends on preferred stock

    (4,587,285 )     -       -       -       (4,587,285 )

Net loss to common stockholders

  $ (14,509,785 )   $ -     $ -     $ -     $ (14,509,785 )

 

 


 

GreenHunter Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flow

 

   

For the Year Ended December 31, 2014

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Cash flow from operating activities

  $ 4,639,457     $ 4,427,580     $ (10,517,325 )   $ 515,628     $ (934,660 )

Cash flow from investing activities

    (96,662 )     (2,284,470 )     10,928,106       (515,628 )     8,031,346  

Cash flow from financing activities

    (5,682,083 )     (1,865,302 )     (455,879 )     -       (8,003,264 )

CHANGE IN CASH

    (1,139,288 )     277,808       (45,098 )     -       (906,578 )

CASH, beginning of period

    1,480,942       (223,183 )     45,098       -       1,302,857  

CASH, end of period

  $ 341,654     $ 54,625     $ -     $ -     $ 396,279  

 

 

    For the Year Ended December 31, 2013  
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Cash flow from operating activities

  $ (7,952,678 )   $ 4,916,134     $ 1,638,905     $ -     $ (1,397,639 )

Cash flow from investing activities

    (10,000 )     (4,422,491 )     (842,052 )     -       (5,274,543 )

Cash flow from financing activities

    6,395,278       611,230       (797,111 )     -       6,209,397  

CHANGE IN CASH

    (1,567,400 )     1,104,873       (258 )     -       (462,785 )

CASH, beginning of period

    3,048,315       (1,328,059 )     45,386       -       1,765,642  

CASH, end of period

  $ 1,480,915     $ (223,186 )   $ 45,128     $ -     $ 1,302,857  

 

 
F-31

Table Of Contents
 

 

NOTE 17. SUBSEQUENT EVENTS

 

In January and February of 2015, the Company issued and sold common stock with gross proceeds totaling $2.2 million, which included the following transactions:

 

 

An aggregate of 3,333,334 shares of the Company’s common stock and warrants to purchase up to an additional 1,166,667 shares of the Company’s common stock at a price of $0.60 per unit. Each unit consists of one share and one warrant. The warrants entitle the holder to purchase shares of the Company’s common stock at an initial exercise price of $0.81 per share, are immediately exercisable and expire on the third anniversary of the date of issuance. The Company received $2.0 million in proceeds from the offering, not including any proceeds from future exercises of the warrants and not taking into account placement agent fees and other offering expenses. The Company engaged MLV & Co. LLC (“MLV”) as its exclusive placement agent in connection with the offering and paid MLV a commission consisting of 6% of the aggregate gross proceeds received by the Company from the sale of the securities, plus certain costs and expenses not to exceed $15 thousand.

 

An aggregate of 246,100 shares issued under the ATM for a gross amount of $200 thousand

 

On January 23, 2015, the Company converted the principal amount of certain promissory notes due to two officers of the Company (one of which is Gary C. Evans, our Chairman and Interim CEO) issued in connection with the financing of the production of MAG Tanks to common equity. The total principal amount converted was $200 thousand for 322,580 shares.

 

In the first quarter of 2015, the Company reached a new agreement with the holders of $1.2 million of promissory notes issued in connection with the financing of the production of MAG Tanks to extend the notes for an additional one year period from the original maturity date. The amended notes provide for payments of interest only at an annual rate of 15% through August 14, 2015, and will be fully amortized for the remainder of the extended notes.

 

In March of 2015, the Company offered to convert the principal amount of its promissory notes issued in connection with the financing of the production of MAG Tanks to common equity to any existing holder of such promissory notes. Three non-affiliated holders elected to convert the principal amount of their promissory note from the Company into common shares based upon the closing price of the Company’s closing stock on the day prior to their election. The total principal amount converted was $300 thousand for 420,577 shares.

 

On March 16, 2015, the Company’s wholly-owned subsidiary, GreenHunter Mesquite Lake, LLC, sold for cash consideration of $2.0 million to ML Energy Park, LLC its Mesquite Lake Resource Recovery Facility located in Imperial County, California pursuant to an asset purchase agreement.

 

On April 14, 2015, as compensation for Mr. Evans' continuing to provide credit support to the Company in the amount of $2.0 million through June 30, 2016, the Board authorized Mr. Evans to receive a restricted stock grant in the amount of 1,000,000 shares, subject to shareholder approval.

 

On April 15, 2015, the Company entered into a senior secured financing agreement with private lenders to borrow up to $16.0 million to finance capital projects planned for 2015. The initial tranche of loan proceeds will be in the principal amount of $13.0 million, subject to customary conditions, with an additional tranche of up to $3.0 million of principal available at the request of the borrower and subject to certain conditions. These notes have a three year maturity and bear interest at an annual rate of 9%. The principal balance amortizes at 1/60th of the original principal amount per month plus accrued but unpaid interest with the balance due at maturity. The agreement provides for an equity kicker via royalty payments to the lender of $0.10 per barrel for all of the Company’s disposal facilities subject to certain limitations and a fixed expiration date.

 

 
F-32

Table Of Contents
 

 

(b) Exhibits

 

Exhibit

Number  

 

Exhibit Title

 

 

 

3.1

 

Certificate of Incorporation (Incorporated by reference to the Company’s Form 10, dated October 19, 2007)

 

 

 

3.2

 

Amendment to the Certificate of Incorporation (Incorporated by reference to the Company’s Form 10, dated October 19, 2007)

 

 

 

3.3

 

Bylaws (Incorporated by reference to the Company’s Form 10, dated October 19, 2007)

 

 

 

3.3.1

 

  Amendment to Bylaws (Incorporated by reference to the Company’s DEF 14A Proxy Statement filed September 3, 2009

 

 

 

4.1

 

Form of Warrant Agreement by and between the Company and purchasers of securities, dated November 14, 2013 (Incorporated by reference to the Company’s Form 8-K, dated November 19, 2013)

 

 

 

4.2

 

Form of Warrant Agreement by and between the Company and purchasers of securities, dated September 19, 2013 (Incorporated by reference to the Company’s Form 8-K, dated September 24, 2013)

 

 

 

4.3

 

Form of Warrant Agreement between the Company and Gary C. Evans, dated December 12, 2013 (Incorporated by reference to the Company’s Form 8-K, dated December 12, 2013)

 

 

 

4.4

 

Form of Warrant Agreement by and between the Company and purchasers of securities, dated February 28, 2014 (Incorporated by reference to the Company’s Form 8-K, dated February 28, 2014)

 

 

 

4.5

 

Amended and Restated Certificate of Designations of 10% Series C Cumulative Preferred Stock (Incorporated by reference to the Company’s Form 8-K, dated April 25, 2012)

 

 

 

4.6

 

Certificate of Correction to the Amended and Restated Certificate of Designations, Rights, Number of Shares and Preferences of the 10% Series C Cumulative Preferred Stock (Incorporated by reference to the Company’s Form 10-K, dated April 5, 2013)

 

 

 

10.1

 

Form of securities purchase agreement by and between the Company and purchasers of securities, dated September 19, 2013 (Incorporated by reference to the Company’s Form 8-K, dated September 24, 2013)

 

 

 

10.2

 

Form of registration rights agreement by and between the Company and purchasers of securities, dated September 19, 2013 (Incorporated by reference to the Company’s Form 8-K, dated September 24, 2013)

 

 

 

10.3

 

Equity Purchase Agreement between Triad Hunter LLC and the Company dated February 17, 2012 (Incorporated by reference to the Company’s Form 8-K, dated February 17, 2012)

 

 

 

10.4

 

Registration Rights Agreement dated February 17, 2012 between the Company and Triad Hunter, LLC (incorporated by reference from the registrant’s Annual Report on Form 10-K filed on March 30, 2012)

 

 

 

 

 

 

10.5

 

Asset Purchase Agreement by and among GreenHunter Water, LLC, Helena Hunter Water Disposal, LLC and Sable Environmental SWD 4, LLC dated June 10, 2013 (incorporated by reference from Form 8-K, dated June 14, 2013)

 

 

 

10.6

 

Form of Note by and between the Company and purchasers of securities, dated November 14, 2013 (Incorporated by reference to the Company’s Form 8-K, dated November 19, 2013)

 

 

 

10.7

 

Form of Note between the Company and Gary C. Evans, dated December 12, 2013 (Incorporated by reference to the Company’s Form 8-K, dated December 12, 2013)

 

 

 

10.8

 

Form of Note by and between the Company and purchasers of securities, dated February 28, 2014 (Incorporated by reference to the Company’s Form 8-K, dated February 28, 2014)

 

 

 

10.9

 

Asset Purchase Agreement by and among GreenHunter Water, LLC, Kenedy Hunter LLC, Coy City Hunter LLC and Sable Environmental SWD 5, LLC dated January 29, 2014 (Incorporated by reference to the Company’s Form 8-K, dated January 29, 2014)

 

 

 

10.10

 

Purchase and Sale Agreement between GreenHunter Mesquite Lake, LLC, (“Seller”)and ML Energy Park, LLC, a California limited liability company (“Purchaser”) dated February 19, 2014 (Incorporated by reference to the Company’s Form 8-K, dated January 29, 2014)

 

 

 

10.11

 

Form of the Company’s Stock Option Agreement (incorporated by reference from the registrant’s Amendment No. 2 to its registration statement on Form S-1, filed on May 18, 2012)

 

 

 

10.12

 

2013 Long-Term Incentive Compensation Plan (Incorporated by reference to the Company’s Form 10-Q dated June 30, 2013)

 

 

 

10.13

 

Asset Purchase Agreement by and among GreenHunter Water, LLC, Westhoff Hunter, LLC, and Clear Water Resources Partners, LLC, dated March 26, 2014 (Incorporated by reference to the Company’s Form 8-K, dated March 28, 2014)

 

 

 

10.14

 

Asset Purchase Agreement by and among GreenHunter Water, LLC, Dilley Hunter, LLC, and Sable Environmental SWD 7, LLC, dated March 11, 2014, as amended (Incorporated by reference to the Company’s Form 8-K, dated March 26, 2014)

     
21.1 †     List of Subsidiaries
     
23.1 †     Consent of BDO USA, LLP

 

 

 

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.

101.INS

 

XBRL Instance Document

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

Filed herewith

 

 

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 Resources, Inc.

 

 

 

 

Date: April 15, 2015

 

 

 

By:

 

/s/ Gary C. Evans

 

 

 

 

 

 

Chairman and Interim 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 Interim Chief Executive Officer

 

April 15, 2015

 

Gary C. Evans

  

 

 

 

 

 

 

 

 

/s/ Kirk J. Trosclair

  

Executive Vice President and Chief Operating Officer

 

April 15, 2015

 

Kirk J. Trosclair

  

 

 

 

 

 

 

 

 

 

 

/s/ Morgan F. Johnston

  

Sr. Vice President, General Counsel and Secretary

 

April 15, 2015

 

 

Morgan F. Johnston

  

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Ronald T. McClung

  

Sr. Vice President and Chief Financial Officer

 

April 15, 2015

 

 

 

Ronald T. McClung

  

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Roy E. Easley

  

Director

 

April 15, 2015

 

 

 

Roy E. Easley

  

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Julie E. Silcock

  

Director

 

April 15, 2015

 

 

 

Julie E. Silcock

  

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Ronald H. Walker

  

Director

 

April 15, 2015

 

 

 

Ronald H. Walker