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EX-32.1 - EXHIBIT 32.1 - GreenHunter Resources, Inc.ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - GreenHunter Resources, Inc.ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - GreenHunter Resources, Inc.ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - GreenHunter Resources, Inc.ex32-2.htm
EXCEL - IDEA: XBRL DOCUMENT - GreenHunter Resources, Inc.Financial_Report.xls


 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q 


 

 

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

 

 

 

For the quarterly period ended March 31, 2015

 

-OR-

 

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

 

 

 

For the transition period from             to            

 

Commission file number 001-33893 

  


GREENHUNTER RESOURCES, INC.

(Name of registrant as specified in its charter) 


 

 

Delaware

20-4864036

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

1048 Texan Trail, Grapevine, TX 76051

(Address of principal executive offices)

 

(972) 410-1044

(Issuer’s telephone number) 


 

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

 

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

 

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

As of May 14, 2015 there were 40,632,998 shares of the registrant’s common stock ($0.001 par value) outstanding.

 

 



  

 
 

 

 

PART 1—FINANCIAL INFORMATION

Item 1.       Financial Statements

GREENHUNTER RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

           

Pro Forma

         
   

March 31, 2015

   

March 31, 2015

   

December 31, 2014

 
          (See Footnote 1)        

ASSETS

 

CURRENT ASSETS:

                       

Cash and cash equivalents

  $ 421,297     $ 10,176,780     $ 396,279  

Restricted cash

    132,997       132,997       132,663  

Accounts receivable, net of allowance of $637,480 and $380,280, respectively

    2,388,146       2,388,146       3,683,589  

Related party accounts receivable, no allowance considered necessary

    1,042,232       1,042,232       768,504  

MAG Tank™ inventory

    1,476,259       1,476,259       1,620,990  

Prepaid insurance

    218,081       218,081       462,026  

Other current assets

    79,448       79,448       269,374  

Total current assets

    5,758,460       15,513,943       7,333,425  

PROPERTY AND EQUIPMENT:

                       

Property and equipment, net

    23,795,284       23,795,284       24,100,277  

Assets held for sale

    842,729       842,729       3,000,002  

Net property and equipment

    24,638,013       24,638,013       27,100,279  

OTHER ASSETS:

                       

Other non-current assets

    60,936     $ 1,164,571       19,153  

Total assets

  $ 30,457,409     $ 41,316,527     $ 34,452,857  

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

CURRENT LIABILITIES:

                       

Current portion of notes payable

  $ 4,425,221     $ 3,413,554     $ 5,254,915  

Accounts payable and accrued liabilities

    9,152,963       9,152,963       12,000,246  

Accounts payable to a related party

    83,658       83,658       199,167  

Liabilities associated with assets held for sale

    100,100       100,100       100,100  

Total current liabilities

    13,761,942       12,750,275       17,554,428  

NON-CURRENT LIABILITIES:

                       

Notes payable, less current portion

    5,319,026       17,235,693       5,854,684  

Asset retirement obligation

    960,811       960,811       933,891  

Liabilities associated with assets held for sale

    164,175       164,175       159,575  

Total liabilities

    20,205,954       31,110,954       24,502,578  

COMMITMENTS AND CONTINGENCIES (SEE NOTE 10)

                       

STOCKHOLDERS’ EQUITY:

                       

Series C Preferred Stock, $.001 par value, $25 stated value, 2,000,000 authorized shares, 1,975,250 issued and outstanding and liquidation preference of $49,381,250 at March 31, 2015, and 2,000,000 authorized shares, 1,975,250 issued and outstanding and liquidation preference of $49,381,250 at December 31, 2014

    39,710,764       39,710,764       39,710,764  

Common stock, $.001 par value, 90,000,000 shares authorized, 40,641,332 issued and 40,632,998 outstanding at March 31, 2015, and 35,846,161 issued and 35,837,827 outstanding at December 31, 2014

    40,641       40,641       35,846  

Additional paid-in capital

    125,794,197       125,794,197       122,802,350  

Accumulated deficit

    (155,284,998 )     (155,330,880 )     (152,589,532 )

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

    (9,149 )     (9,149 )     (9,149 )

Total stockholders’ equity

    10,251,455       10,205,573       9,950,279  

Total liabilities and stockholders’ equity

  $ 30,457,409     $ 41,316,527     $ 34,452,857  

 

 

See accompanying notes to the condensed consolidated financial statements

 

 
-1-

 

 

GREENHUNTER RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014 

 

   

For the Three Months Ended March 31,

 
   

2015

   

2014

 

REVENUES:

               

Water disposal revenue

  $ 3,124,111     $ 3,683,862  

Transportation revenue

    1,661,524       3,434,494  

Environmental services revenue

    27,573       -  

MAG Tank™ revenue

    125,176       800,000  

Skim oil revenue

    77,633       340,219  

Storage rental revenue and other

    131,102       219,962  

Total revenues

    5,147,119       8,478,537  

COST OF GOODS AND SERVICES PROVIDED:

               

Direct cost of goods and services provided

    3,395,859       6,029,635  

Depreciation and accretion expense

    820,580       763,984  

Selling, general and administrative

    2,156,385       2,450,519  

(Gain) loss on sale of assets

    (46,350 )     56,228  

Gain on settlements

    (34,166 )     -  

Total costs and expenses

    6,292,308       9,300,366  

OPERATING LOSS

    (1,145,189 )     (821,829 )

OTHER INCOME (EXPENSE):

               

Interest and other income

    537       10,280  

Interest expense

    (224,358 )     (446,951 )

Total other expense

    (223,821 )     (436,671 )

Net loss before taxes

    (1,369,010 )     (1,258,500 )

Income tax expense

    -       -  

Loss from continuing operations

    (1,369,010 )     (1,258,500 )

Loss from discontinued operations

    (91,924 )     (129,694 )

Net loss

    (1,460,934 )     (1,388,194 )

Preferred stock dividends

    (1,234,532 )     (1,249,999 )

Net loss to common stockholders

  $ (2,695,466 )   $ (2,638,193 )
                 

Weighted average shares outstanding, basic and diluted

    39,037,010       33,796,389  

Net loss per share from continuing operations, basic & diluted

  $ (0.07 )   $ (0.08 )

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

  $ (0.00 )   $ (0.00 )

Net loss per share, basic & diluted

  $ (0.07 )   $ (0.08 )

 

 

See accompanying notes to the condensed consolidated financial statements

 

 
-2-

 

 

GREENHUNTER RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE PERIOD FROM DECEMBER 31, 2014 TO MARCH 31, 2015

  

   

Series C Preferred Stock

   

Common Stock

   

Additional Paid in Capital

   

Accumulated Deficit

   

Treasury Stock

   

Total Stockholders' Equity

 

BALANCE, DECEMBER 31, 2014

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

Share based compensation

    -       -       222,331       -       -       222,331  

Issued shares of common stock in public offering

    -       3,579       1,906,847       -       -       1,910,426  

Issued shares of KSOP

    -       473       363,414       -       -       363,887  

Issued shares for conversion of promissory note

    -       743       499,255       -       -       499,998  

Dividends on preferred stock

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

Net loss

    -       -       -       (1,460,934 )     -       (1,460,934 )

BALANCE, MARCH 31, 2015

  $ 39,710,764     $ 40,641     $ 125,794,197     $ (155,284,998 )   $ (9,149 )   $ 10,251,455  

 

   

 See accompanying notes to the condensed consolidated financial statements

  

 
-3-

 

 

GREENHUNTER RESOURCES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREEE MONTHS ENDED MARCH 31, 2015 AND 2014  

  

   

For the Three Months Ended March 31,

 
   

2015

   

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (1,460,934 )   $ (1,388,194 )

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

               

Depreciation and accretion expense

    825,183       769,855  

Amortization of deferred financing costs

    8,217       -  

Gain on sale of assets

    (66,969 )     (263,402 )

Gain on settlement of payables

    (34,166 )     -  

Non-cash stock-based compensation

    420,370       369,409  

Amortization of debt discount

    6,973       140,867  

Changes in operating assets and liabilities:

               

Accounts receivable

    1,242,305       2,942,811  

Related party accounts receivable

    (273,728 )     (581,469 )

Inventory

    144,731       (714,411 )

Prepaid expenses and other current assets

    433,871       618,555  

Accounts payable and accrued liabilities

    (1,257,542 )     (568,883 )

Related party accounts payable

    (115,509 )     (53,290 )

Net cash used in operating activities

    (127,198 )     1,271,848  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Capital expenditures

    (1,017,317 )     (520,508 )

Proceeds from sale of assets

    1,416,300       1,844,282  

Change in restricted cash

    (334 )     (132,000 )

Net cash provided by investing activities

    398,649       1,191,774  
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from the issuance of equity securities

    1,910,426       -  

Proceeds from notes payable

    -       1,193,642  

Payment of deferred financing costs

    (50,000 )     -  

Payment of notes payable

    (872,327 )     (979,834 )

Preferred stock dividends paid

    (1,234,532 )     (1,249,999 )

Net cash used in financing activities

    (246,433 )     (1,036,191 )
                 

CHANGE IN CASH AND CASH EQUIVALENTS

    25,018       1,427,431  

CASH AND CASH EQUIVALENTS, beginning of period

    396,279       1,302,857  

CASH AND CASH EQUIVALENTS, end of period

  $ 421,297     $ 2,730,288  
                 

Cash paid for interest

  $ 282,931     $ 397,824  
                 

NON-CASH TRANSACTIONS:

               

Accrued capital costs

  $ 1,812,218     $ 669,711  

Notes receivable received in connection with sale of assets

  $ -     $ 5,250,000  

KSOP shares

  $ 363,887     $ -  

Converted debt to common stock

  $ 499,998     $ -  

 

 

See accompanying notes to the condensed consolidated financial statements

  

 
-4-

 

 

GREENHUNTER RESOURCES, INC.

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2015

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

 

In this quarterly report on Form 10-Q, the words “GreenHunter Resources”, “company”, “we”, “our” and “us” refer to GreenHunter Resources, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires. The condensed consolidated balance sheet of GreenHunter Resources, Inc. and subsidiaries as of March 31, 2015, the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014, the condensed consolidated statement of changes in stockholders’ equity for the three months ended March 31, 2015, and the condensed consolidated statements of cash flows for the three months ended March 31, 2015 and 2014, are unaudited. The December 31, 2014 condensed consolidated balance sheet information is derived from audited financial statements. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) as required by Regulation S-X, Rule 10-01 have been made to present fairly the financial position at March 31, 2015, and the results of operations for the three months ended March 31, 2015 and 2014, changes in stockholders’ equity for the three months ended March 31, 2015, and cash flows for the three month periods ended March 31, 2015 and 2014. Non-recurring adjustments based on generally accepted accounting principles for discontinued operations, assets held for sale, and liabilities associated with assets held for sale have also been made.

 

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in our December 31, 2014 Form 10-K. The results of operations for the three month period ended March 31, 2015 are not necessarily indicative of the operating results that will occur for the full year.

 

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

 

Pro Forma Condensed Consolidated Balance Sheet

 

The Company has included a pro forma condensed consolidated balance sheet of GreenHunter Resources, Inc. and subsidiaries as of March 31, 2015 showing the effects of the funding of the first tranche, totaling $13 million, of the Company's new debt $16 million senior secured financing agreement that closed subsequent to March 31, 2015. This pro forma balance sheet is also unaudited.

 

As part of this transaction, the Company repaid approximately $2.1 million of notes payable associated with its MAG Tanks, which is effected in the pro forma condensed consolidated balance sheet as of March 31, 2015.

 

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.

 

 
-5-

 

 

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 Company does not charge interest on past due balances of accounts receivable.

 

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 had no impairment charges for inventory for the three months ended March 31, 2015 and 2014, respectively.

 

 
-6-

 

 

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.

 

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 in the second half of 2014, which are classified as held for sale as of March 31, 2015.

  

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 9 for additional information on our stock-based compensation.

 

 
-7-

 

 

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.

 

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 March 31, 2015 or December 31, 2014.

 

 
-8-

 

  

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 three months ended March 31, 2015 and 2014, as their effects would have been anti-dilutive.

 

   

March 31,

 
   

2015

   

2014

 

Stock options

    14,441,169       12,182,855  

Warrants

    1,791,677       625,010  

Convertible debentures

    138,358       90,882  

Convertible promissory notes

    495,000       660,000  

Total

    16,866,204       13,558,747  

 

 

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 March 31, 2015 would be 70,544,643 common shares.

 

Recently Issued Accounting Standards

 

In January 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This guidance eliminates the requirement to consider whether an underlying event or transaction is extraordinary, and if so, to separately present the item in the income statement net of tax, after income from continuing operations. Items that are either unusual in nature or infrequently occurring will continue to be reported as a separate component of income from continuing operations. Alternatively, these amounts may still be disclosed in the notes to the financial statements. The same requirement has been expanded to include items that are both unusual and infrequent, i.e., they should be separately presented as a component of income from continuing operations or disclosed in the footnotes. The requirements of this update are effective for periods beginning after December 15, 2015. The adoption of this update is not expected to have a material impact on our consolidated financial statements.  

 

In April 2015, the FASB issued ASU 2015-03, Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this update. This amendment is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.

 

 
-9-

 

 

NOTE 2. LIQUIDITY

 

Current Plan to Fund Ongoing Operations

 

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 was a principal amount of $13.0 million and was funded on May 1, 2015 and has been reflected on a pro forma basis as of March 31, 2015, on the condensed consolidated balance sheets, with an additional tranche of up to $3.0 million of principal available at the request of the borrower and subject to certain conditions.

 

As of March 31, 2015, we had a working capital deficit of $8.0 million. 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 March 31, 2015. 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 March 31, 2015. We expect to close on our remaining Oklahoma fixed assets during 2015. At that point, we intend to cease operating in Oklahoma.

 

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 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 June 30, 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 $1.9 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.

  

 
-10-

 

 

Projects being funded by the new $16.0 million financing ($13 million of which has been funded) 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 which is expected to be completed in early June of 2015, 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 new disposal well capacity and 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 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 May 15, 2015, 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 March 31, 2015;

 

 

 

     

 

Letter of credit guarantee and other financial support from our Chairman;

 

 

 

     

 

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

 

 

 

 

       

 

Up to $16.0 million in proceeds ($13 million of which has been funded) from capital project related senior secured financing which the Company entered into with private lenders on April 15, 2015, 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. The Company has a debt covenant from one of its lenders for which it does not expect to be in compliance at December 31, 2015, the next measurement date. The lender has already waived any default for non-compliance with that covenant for December 31, 2015. Additionally, the Company was in default on its note to Triad Hunter at March 31, 2015 due to failure to make a scheduled note payment during the first quarter of 2015. The note payment was brought current and subsequently paid after March 31, 2015.

 

 
-11-

 

 

NOTE 3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

 

In late 2013, we adopted a plan to sell all of our assets in South Texas and Oklahoma and discontinue our operations in these two geographical areas in order to concentrate 100% of our efforts in Appalachia. Based on this decision, the Company is continuing to negotiate with buyers for its three dormant 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 March 31, 2015. 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 March 31, 2015. We expect to close on our remaining Oklahoma fixed assets during the second half of 2015. At that point, we intend to cease operating in Oklahoma.

 

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 previously made an initial payment of $50 thousand as an earnest money deposit and continued to pay $50 thousand per month through February 2015. 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 Three Months Ended March 31,

 
   

2015

   

2014

 

Revenue from discontinued operations

  $ -     $ 419,350  

Gain loss on sale of assets

    20,619       319,630  

Net loss from discontinued operations before taxes

    (91,924 )     (129,694 )

Income tax expense

    -       -  

Loss from discontinued operations

    (91,924 )     (129,694 )

 

 
-12-

 

 

NOTE 4. PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost. The following is a schedule of our property and equipment as of March 31, 2015 and December 31, 2014:  

 

   

March 31, 2015

   

December 31, 2014

 

Land and improvements

  $ 1,603,799     $ 1,603,799  

Buildings

    2,517,869       2,517,869  

Water facilities and other property and equipment

               

Water disposal and handling facilities

    12,971,030       12,929,428  

Property and equipment not yet in service

    4,038,224       4,156,530  

Transportation equipment

    7,848,806       7,847,948  

Other equipment

    2,804,497       2,255,672  

Furniture, fixtures and other

    709,283       697,442  

Total facilities and other property and equipment

    28,371,840       27,887,020  

Total property and equipment

    32,493,508       32,008,688  

Less: Accumulated depreciation

    (8,698,224 )     (7,908,411 )

Net property and equipment

  $ 23,795,284     $ 24,100,277  

 

 

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

 

 

NOTE 5. ASSET RETIREMENT OBLIGATIONS

 

The following table summarizes the Company’s asset retirement obligation transactions during the three months ended March 31, 2015.

 

   

2015

 
         

Asset retirement obligation at beginning of period

  $ (1,193,566 )

Liabilities incurred on new wells

    -  

Liabilities relieved on retirement of wells

    -  

Accretion expense

    (31,519 )

Asset retirement obligation at end of period

    (1,225,085 )

Less: current portion (1)

    (100,100 )

Non-current portion of asset retirement obligation (2)

  $ (1,124,985 )

 

(1)

The total current portion of asset retirement obligation of $100 thousand at March 31, 2015 is associated with assets held for sale.

 

(2)

The non-current portion of asset retirement obligation at March 15, 2015 includes $164 thousand associated with assets held for sale.

  

 
-13-

 

 

NOTE 6. NOTES PAYABLE

 

Notes Payable at March 31, 2015 and December 31, 2014 consisted of the following:  

  

   

March 31,
2015

   

December 31,
2014

 

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

  $ 86,853     $ 272,776  

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 (1)

    1,234,784       1,257,629  

Notes payable collateralized by equipment due in montly installments from
December 9, 2014 to August 25, 2018, various rates from 4.25% to 15.05%
(2)

    2,507,276       2,905,137  

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

    1,036,361       1,046,192  

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       1,237,500  

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

    40,292       40,932  

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

    70,041       82,601  

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

    389,616       427,959  

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

    956,525       980,848  

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

    -       130,001  

Notes payable for MAG TankTM financing in 2013, including $200 thousand to related parties, with interest due on the first of each month,and amortizing over the last six months of the notes, maturing on various dates from November 14, 2015 to December 19, 2015, 15% fixed rate

    1,110,000       1,510,000  

Notes payable for MAG TankTM financing in 2014 with interest due on the first of each month and amortizing over the last six months of the loans, maturing on February 28, 2016 and March 14, 2016, 15% fixed rate

    984,999       1,128,024  
      9,744,247       11,109,599  

Less: current portion

    (4,425,221 )     (5,254,915 )

Total long-term debt

  $ 5,319,026     $ 5,854,684  

 

 

(1)

Note includes debt covenants for which we were not in compliance at December 31, 2014. The lender waived the default provisions related to our non-compliance for 2014 and as of the next measurement period, December 31, 2015.

   

(2)

Includes notes that contained debt covenants for which we were in compliance with the debt covenants at December 31, 2014 and expect to be in compliance going forward.

   

 
-14-

 

 

The following table presents the approximate annual maturities based on the calendar year of debt and capital lease obligations as of March 31, 2015:  

 

2015

  $ 3,231,678  

2016

    2,685,635  

2017

    2,038,463  

2018

    312,024  

2019

    162,159  

Thereafter

    1,314,288  
    $ 9,744,247  

 

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. We were not in compliance with a certain debt covenant related to the note payable collateralized by real estate at December 31, 2014. We obtained a waiver from the lender for both December 31, 2014 and December 31, 2015.

 

Additionally, the Company has three specific financial covenants related to the $16 million ($13 million drawn) senior secured financing agreement entered into on April 15, 2015, which includes certain financial ratios that are measured on a quarterly basis. The first of these covenants requires certain maximum ratios between the total outstanding principal balance of the Company’s debt to annualized adjusted net income as defined by the specific covenant starting at 4.0 to 1.0 at June 30, 2015 and decreasing quarterly over the following four quarters to 2.0 to 1.0 by June 30, 2016. The second of these covenants requires a minimum ratio of 1.5 to 1.0 beginning June 30, 2016 between the net book value of certain tangible assets owned by the Company as defined in the specific covenant to net debt, defined as the total principal balance of all debt less cash and cash equivalents. The third covenant requires a minimum ratio between adjusted net income as defined by the specific covenant when compared to certain fixed charges including cash taxes, cash dividends, and all principal and interest payments. The minimum ratio is 1.0 to 1.0 beginning on September 30, 2015 and increases to 1.2 to 1.0 by June 30, 2016.

 

 

Notes Payable

 

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. The $1.5 million in notes had a debt discount of $66 thousand and an interest rate of 15%. The net proceeds of the placement were used 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 $1.1 million of the 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 were to be fully amortized for the remainder of the extended notes. $50 thousand of the original $1.5 million in notes were paid in the first quarter of 2015 and the Company converted the remaining $350 thousand of its original promissory notes into common shares based upon the closing price of the Company’s closing stock on the day prior to the holder’s election. The remaining $1.1 million of notes payable at March 31, 2015 were paid in full subsequent to March 31, 2015.

 

 
-15-

 

 

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. The Company reached a new agreement with the holders of $985 thousand of the 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 were to be fully amortized for the remainder of the extended notes. During the first quarter of 2015, the Company converted the remaining $150 thousand of its original promissory notes into common shares based upon the closing price of the Company’s closing stock on the day prior to the holder’s election. The remaining $985 thousand of notes payable at March 31, 2015 were paid in full subsequent to March 31, 2015.

 

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

 

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 repaid by the Company during the first quarter of 2015, leaving $2.0 million available under this facility. Interest for this note was $3 thousand for the three months ended March 31, 2015 and $49 thousand for the three months ended March 31, 2014. 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 $2 thousand and $8 thousand for the three months ended March 31, 2015 and March 31, 2014, respectively. The net proceeds of the placement were 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 $31 thousand and $43 thousand for the three months ended March 31, 2015 and March 31, 2014, 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. The payment due to Triad Hunter for the first quarter of 2015 was in default at March 31, 2015. The Company paid this payment subsequent to March 31, 2015, including interest at the default rate of 13% from the date the payment was due until the date of the payment.

  

 
-16-

 

 

NOTE 7. STOCKHOLDERS’ EQUITY

 

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

 

   

Preferred Stock

   

Common Stock

   

Treasury Stock

   

KSOP

 

BALANCE, DECEMBER 31, 2014

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

Issued shares of common stock in public offering

    -       3,579,434       -       -  

Issued shares of KSOP

    -       472,580       -       -  

Issued shares for conversion of promissory note

    -       743,157       -       -  

BALANCE, MARCH 31, 2015

    1,975,250       40,641,332       8,334       -  

 

Preferred Stock

 

The Company’s books reflected 2,000,000 shares of 10% Series C Cumulative Preferred Stock at December 31, 2013. During the second quarter of 2014, the Company settled multiple lawsuits related to the White Top and Blackwater acquisitions. As part of the settlement, the individuals who sold us those companies agreed to return 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 March 31, 2015. The Series C Preferred Stock is redeemable solely at the Company’s option after June 30, 2015 at the stated value of $25.00 per share. The Series C Preferred Stock pays a dividend at 10% per annum. If it is ever redeemed, a deemed dividend of the variance between the stated value and the carrying value will be recognized upon redemption.

 

 Common Stock

 

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

 

On 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.

 

In the first quarter of 2015, the Company issued common stock under the new registration statement. The net cash proceeds received upon issuance of 3,579,434 shares of these securities was approximately $1.9 million.

 

 
-17-

 

 

Common Stock Warrants

 

The following is a summary of warrant activity for the three months ended March 31, 2015.

   

   

Shares

   

Weighted Average Exercise Price

   

Weighted Average Expected Life

 

Outstanding - Beginning of Period

    625,010     $ 1.87       3.86  

Granted

    1,166,667     $ 0.81       2.83  

Exercised

    -                  

Expired

    -     $ -          

Outstanding - End of Period

    1,791,677     $ 1.18       3.10  

Exercisable - End of Period

    1,791,677     $ 1.18       3.10  

 

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.

 

In the first quarter of 2015, the Company issues a total of 1,166,667 warrants, which expire in three years from their issue date, with an exercise price of $0.81 in connection with the sale of common stock in a private placement.

 

 

NOTE 8. STOCK-BASED COMPENSATION

 

Common Stock Options

 

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

 

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

 

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

 

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.

 

 The Company did not grant any options in the first quarter of 2015.

 

We recorded share based compensation of approximately $222 thousand and $369 thousand for the three months ended March 31, 2015 and 2014, respectively, related to vesting of employee common stock options.

 

 
-18-

 

 

As of March 31, 2015 and March 31, 2014, there were $892 thousand and $1.4 million, respectively, of total unrecognized compensation cost related to unvested shares associated with stock options to be recognized over weighted-average periods of 1.55 and 2.07 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).

 

   

The following is a summary of stock option activity during the three months ended March 31, 2015. 

 

   

Shares

   

Weighted Average Exercise Price

   

Aggregate Intrinsic Value* ($000s)

 

Outstanding - Beginning of Period

    14,912,653     $ 3.29     $ 109  

Granted

    -       -       -  

Exercised

    -       -       -  

Cancelled

    (471,484 )     1.00       14  

Outstanding - End of Period

    14,441,169       3.37       77  

Exercisable - End of Period

    12,086,486     $ 3.82     $ -  

 

 

*

The Aggregate Intrinsic Value was calculated using the March 31, 2015 and December 31, 2014 closing stock price of $0.70 and $0.80, respectively.

 

 

The following is a summary of stock options outstanding at March 31, 2015:  

 

Exercise Price

   

Number of Options Outstanding

   

Weighted Average Remaining Contractual Life

   

Number of Exercisable Options

 
$0.60 - $1.00       4,271,665       7.86       3,286,665  
$1.01 - $1.20       1,085,000       8.21       411,666  
$1.21 - $1.55       462,500       7.56       249,999  
$1.56 - $1.75       2,490,845       7.66       2,006,997  
$1.76 - $2.00       1,740,667       4.42       1,740,667  
$2.01 - $10.00       3,490,332       2.16       3,490,332  
$10.01 - $15.00       43,999       2.91       43,999  
$15.01 - $18.00       36,667       2.89       36,667  
$18.01 - $20.00       792,828       2.88       792,828  
$20.01 - $22.75       26,666       3.13       26,666  
            14,441,169               12,086,486  

  

 
-19-

 

 

Share Awards

 

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 and financial 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 9. 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 $264 thousand and $382 thousand for the three months ended March 31, 2015 and 2014, respectively.

 

Lawsuits

 

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

 

 ABB, Inc., Plaintiff v. GreenHunter Energy, Inc., Defendant, In the Superior Court of California, County of Imperial, Case No. ECU07002. ABB, Inc. was a subcontractor to Crown Engineering for the work done at our Mesquite Lake plant in Imperial County, California. GreenHunter Energy, Inc. had a construction contract directly with Crown Engineering only. 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, approximately $328 thousand, by asserting it is a third party beneficiary under our settlement agreement with Crown Engineering.

 

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

  

 
-20-

 

  

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

 

Jose Torres, et al. v. GreenHunter Resources, Inc., GreenHunter Water, LLC et al., 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 the insurance companies 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, drawings and proposed construction of a condensate splitter plant and associated pipeline. 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.

 

Heckmann Water Resources v. GreenHunter Water, in the District Court of Tarrant County, Cause No. 067-277554-15. Plaintiff brought suit against defendant for services rendered in South Texas. The claim is for $18,645. The Company is in the process of answering the lawsuit.

 

Permian Tank & Manufacturing Inc. v. GreenHunter Water, in the District Court of Tarrant County, Cause No. 048-276276-15. Plaintiff brought suit against defendant for good sold in Oklahoma and Texas. The claim is for $67,342. The Company is in the process of answering the lawsuit.

 

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

 

 
-21-

 

 

NOTE 10. RELATED PARTY TRANSACTIONS

 

During the three months ended March 31, 2015 and March 31, 2014, we earned revenue for the respective services from the following companies, which are either wholly-owned or significantly owned and controlled 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

 

 

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, and MAG Tank™ purchase or rental

 

 

Virco, Inc. for water disposal and transportation services

 

Accounts receivable for these entities totaled $1.0 million and $769 thousand at March 31, 2015 and March 31, 2014, respectively.

 

The Company had an accounts receivable from Pilatus Hunter, a company owned by Mr. Evans, totaling $101 thousand at March 31, 2015 for pilot expenses.

 

We paid for air travel services from a company owned by Mr. Evans of $0 and $19 thousand for the three months ended March 31, 2015 and 2014, 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. As of March 31, 2015, there remained a credit of $154 thousand associated with the prepayment.

 

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 repaid by the Company during the first quarter of 2015, leaving $2.0 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.

 

Total related party payables were $84 thousand and $80 thousand at March 31, 2015 and 2014, respectively.

 

 
-22-

 

 

NOTE 11. 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.

 

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

 

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

 

NOTE 12. 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 consolidated guarantor financial information for GreenHunter Resources Corporation, the Guarantor Subsidiaries and the other subsidiaries of the Company (the “Non Guarantor Subsidiaries”) as of March 31, 2015 and December 31, 2014, and for the three months ended March 31, 2015 and 2014, was as follows:

 

GreenHunter Resources, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   

As of March 31, 2015

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

ASSETS

                                       

Current assets

  $ 833,653     $ 4,272,565     $ 652,242     $ -     $ 5,758,460  

Intercompany accounts receivable

    22,125,664       (30,726 )     (22,094,938 )     -       -  

Property and equipment

    2,029,554       20,371,077       2,292,373       (54,991 )     24,638,013  

Investment in subsidiaries

    (7,298,462 )     (3,384,670 )     29,935,381       (19,252,249 )     -  

Other assets

    50,000       10,936       -       -       60,936  

Total Assets

  $ 17,740,409     $ 21,239,182     $ 10,785,058     $ (19,307,240 )   $ 30,457,409  
                                         

LIABILITIES AND STOCKHOLDERS' EQUITY

                                 

Current liabilities

  $ 26,926,195     $ 8,134,935     $ (21,299,188 )   $ -     $ 13,761,942  

Intercompany accounts payable

    (22,125,664 )     30,726       22,094,938       -       -  

Long-term liabilities

    2,688,423       3,167,892       587,697       -       6,444,012  

Stockholders' equity

    10,251,455       9,905,629       9,401,611       (19,307,240 )     10,251,455  

Total Liabilities and Stockholders' Equity

  $ 17,740,409     $ 21,239,182     $ 10,785,058     $ (19,307,240 )   $ 30,457,409  
                                         

 

   

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  

 

 
-23-

 

 

GreenHunter Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

 

   

For the Three Months Ended March 31, 2015

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Revenues

  $ -     $ 6,809,482     $ -     $ (1,662,363 )   $ 5,147,119  

Expenses

    1,564,441       6,592,476       21,575       (1,662,363 )     6,516,129  

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

    (1,564,441 )     217,006       (21,575 )     -       (1,369,010 )

Equity in net income of subsidiaries

    103,507       (217,006 )     113,499       -       -  

Loss from continuing operations before tax

    (1,460,934 )     -       91,924       -       (1,369,010 )

Income tax expense

    -       -       -       -       -  

Loss from continuing operations

    (1,460,934 )     -       91,924       -       (1,369,010 )

Income from discontinued operations, net of tax

    -       -       (91,924 )     -       (91,924 )

Net loss

    (1,460,934 )     -       -       -       (1,460,934 )

Dividends on preferred stock

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

Net loss to common stockholders

  $ (2,695,466 )   $ -     $ -     $ -     $ (2,695,466 )

 

 

   

For the Three Months Ended March 31, 2014

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Revenues

  $ -     $ 11,176,533     $ -     $ (2,697,996 )   $ 8,478,537  

Expenses

    2,089,802       10,328,235       16,972       (2,697,972 )     9,737,037  

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

    (2,089,802 )     848,298       (16,972 )     (24 )     (1,258,500 )

Equity in net income of subsidiaries

    701,608       (848,298 )     146,666       24       -  

Income (loss) from continuing operations before tax

    (1,388,194 )     -       129,694       -       (1,258,500 )

Income tax expense

    -       -       -       -       -  

Income (loss) from continuing operations

    (1,388,194 )     -       129,694       -       (1,258,500 )

Loss from discontinued operations, net of tax

    -       -       (129,694 )     -       (129,694 )

Net loss

    (1,388,194 )     -       -       -       (1,388,194 )

Dividends on preferred stock

    (1,249,999 )     -       -       -       (1,249,999 )

Net loss to common stockholders

  $ (2,638,193 )   $ -     $ -     $ -     $ (2,638,193 )

  

 
-24-

 

 

GreenHunter Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

   

For the Three Months Ended March 31, 2015

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Cash flow from operating activities

  $ (115,437 )   $ 1,974,570     $ (1,471,030 )   $ (515,635 )   $ (127,198 )

Cash flow from investing activities

    (334     (1,123,591 )     1,522,574       -       398,649  

Cash flow from financing activities

    227,293       (422,182 )     (51,544 )     -       (246,433 )

CHANGE IN CASH

    111,856       428,797       -       (515,635 )     25,018  

CASH, beginning of period

    341,654       54,625       -       -       396,279  

CASH, end of period

  $ 453,510     $ 483,422     $ -     $ (515,635 )   $ 421,297  

 

 

   

For the Three Months Ended March 31, 2014

 
   

GreenHunter Resources, Inc.

   

Guarantor Subsidiaries

   

Non Guarantor Subsidiaries

   

Eliminations

   

GreenHunter Resources, Inc. Consolidated

 

Cash flow from operating activities

  $ 2,008,139     $ 1,046,488     $ (1,782,779 )   $ -     $ 1,271,848  

Cash flow from investing activities

    (122,000 )     (530,259 )     1,844,033       -       1,191,774  

Cash flow from financing activities

    (506,969 )     (463,075 )     (66,147 )     -       (1,036,191 )

CHANGE IN CASH

    1,379,170       53,154       (4,893 )     -       1,427,431  

CASH, beginning of period

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

CASH, end of period

  $ 2,860,112     $ (170,029 )   $ 40,205     $ -     $ 2,730,288  

 

 
-25-

 

 

NOTE 13. SUBSEQUENT EVENTS

 

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 was in the principal amount of $13.0 million, 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 1/60 th 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. See Note 6 for further discussion of the terms and debt covenant requirements of this agreement. 

 

 
-26-

 

 

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes associated with them contained in our Form 10-K for the year ended December 31, 2014 and with the financial statements and accompanying notes included herein. 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.

 

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 March 31, 2015.

 

GreenHunter Water

 

GreenHunter Water currently operates nine disposal wells strategically located in the Appalachian Region. At March 31, 2015, 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.

 

 
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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 monitori