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GRH > SEC Filings for GRH > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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Form 10-Q for GREENHUNTER RESOURCES, INC.


14-Nov-2013

Quarterly Report


NOTE 2. CURRENT PLAN OF OPERATIONS ANDABILITY TO OPERATE AS A GOING CONCERN

As of September 30, 2013, we had a working capital deficit of $7.8 million which includes $2.5 million related to earlier construction activities at our Mesquite Lake Biomass Plant that are non-recourse to the parent company, GreenHunter Resources, Inc.

We have continued to experience losses from ongoing operations but at a much reduced level. This raises substantial doubt about our ability to continue as a going concern. We received a number of capital advances in 2011 and 2012 from our Chairman in exchange for promissory notes, all of which have been repaid through September 30, 2013. We have a letter of guarantee from the Chairman of the Company for up to $2.0 million of credit support if needed to fund future operations which expires on December 31, 2013, all of which is available as of September 30, 2013. Additionally, we believe that it is probable that we will not be in compliance with certain existing covenants contained in our secured debt agreements as of December 31, 2013. Should we not be in compliance with these covenants at year end, we will likely need to obtain the necessary waivers from the specific lender(s) prior to year end. Senior management has already initiated these discussions.

On September 19, 2013, the Company sold in a private placement 181,786 units consisting of an aggregate of 181,786 shares of Series C preferred stock and 282,778 common stock warrants. The net cash proceeds received upon issuance of these securities were approximately $3.2 million. The Company issued 150,835 shares of common stock as compensation for services rendered in connection with the transaction to the placement agent.

The Company's wholly-owned subsidiary, GreenHunter Water, LLC is also in negotiations with various parties regarding the potential sale of up to three separate salt water disposal wells and associated equipment located in South Texas.

We have begun to generate significant revenues from our water management activities. Execution of our business plan for the next twelve months requires the ability to generate cash to satisfy planned operating requirements. We expect the revenue generated from our water management activities, which includes the combination of White Top and Black Water acquisitions, the Hunter Disposal acquisition, the Blue Water acquisition, the Virco acquisition, our South Texas Water Joint Venture and other capital projects in Appalachia, South Texas and other regions, letter of guarantee, credit support and proceeds expected from an unsecured credit facility (Note 10), being sufficient to meet all of our anticipated operating obligations for the next twelve months. Planned capital expenditures are largely dependent on the Company's ability to secure additional capital. As a result, we are in the process of seeking additional capital through a number of different alternatives, and particularly with respect to procuring working capital sufficient for the further development of our water management projects so that we can begin to generate positive cash flow to sustain operations. We continue to pursue numerous opportunities in the water resource and fluids management business as it specifically relates to the oil and gas industry in the unconventional resource plays.

-7-


There can be no assurance that we will be successful in generating sufficient cash flows to fund our planned development activities related to our water resource and fluids management business, or that the operations of our water resource and fluids management business will generate sufficient cash flows to fund our ongoing operations subsequent to its development. If we are unsuccessful in raising sufficient capital to fund the development of our water resource and fluids management business, or if our water resource and fluids management business fails to generate sufficient cash flows to fund our ongoing operating cash flow needs subsequent to its development, we will be required to seek alternative financing, sell our assets, or any combination thereof. Further, considering our financial condition, we may be forced to accept financing or sell assets at terms less favorable than would otherwise be available.

NOTE 3. ACQUISITIONS AND DIVESTITUTURES

Hunter Disposal

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. The terms and conditions of the equity purchase agreement between the parties were approved by an independent special committee of the Board of Directors for each company. The total consideration for this acquisition was approximately $9.9 million. The consideration paid consisted of approximately $2.2 million in cash, $3.3 million in common stock, $2.2 million in Series C Preferred Stock and a $2.2 million convertible promissory note due to the seller. In connection with the sale, Triad Hunter, LLC, a wholly owned subsidiary of Magnum Hunter Resources Corporation, 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 frac tank rental agreement with GreenHunter Water.

Helena Disposal Well

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

Wheeling Barge Facility

On March 13, 2013, the Company acquired a 10.8 acre barging terminal facility located in Wheeling, West Virginia, for $750,000 through a new 10.5 year variable-rate loan facility with a bank that also included an additional $350,000 of borrowing capacity, for construction and refurbishment purposes. The $350 thousand borrowing capacity was fully utilized at September 30, 2013. The variable interest rate is based on the prime rate of the 10 largest U.S. banks.

Virco

On November 2, 2012, we acquired two water disposal wells, land, buildings and equipment from two entities, Little Muskingum Drilling, LLC, and Virco Realty, Inc., (collectively "Virco") for $300,000 in cash and 91,425 shares of our Series C Preferred Stock having a fair value of $1,970,209 on the acquisition date. The shares of Series C Preferred Stock were issued to a small group of former shareholders of Virco.

The following table summarizes the purchase price and the final valuation of the net assets acquired at the date of acquisition:

Fair value of consideration transferred:

Cash paid                                                              $   300,000
91,425 shares of Series C Preferred Stock (stated value of $25
per share) at the $21.55 per share closing price on November 2,
2012                                                                     1,970,209

Total                                                                  $ 2,270,209

Amounts recognized for assets acquired and liabilities assumed:
Cash                                                                   $    41,599
Accounts receivable                                                        223,247
Accounts payable                                                            (4,960 )
Disposal wells                                                             778,953
Trucks and equipment                                                       131,580
Land and buildings                                                       1,400,000
Asset retirement obligation                                               (300,210 )

Total                                                                  $ 2,270,209

-8-


White Top and Black Water

On December 31, 2012, we completed an acquisition of two oilfield water service and construction companies that provide services to oil and natural gas producers in the Eagle Ford Shale. The two entities, White Top Oilfield Construction, LLC ("White Top") and Black Water Services, LLC ("Black Water"), with common management, had been providing services since 2008 to operators active in the Eagle Ford Shale play of South Texas. Combined assets included vacuum water trucks, dump trucks, drilling rig wash trailers and heavy equipment. Located in Louise, Wharton County, Texas, White Top and Black Water previously serviced E&P operators predominantly concentrated in the Texas counties of Gonzales, Karnes and DeWitt.

Pursuant to the terms of the acquisition agreements, the companies were acquired for an aggregate $1,200,000 cash, 41,000 shares of the Company's Series C preferred stock and 589,657 shares of the Company's common stock. The shares of Series C preferred stock and common stock were issued to a small group of former shareholders of White Top and Black Water. The shares of Series C preferred stock are not convertible into or exchangeable for any of the Company's other property or securities except that the shares of Series C preferred stock are convertible into shares of the Company's common stock under certain circumstances in connection with a change of ownership or control transaction. $450,050 of the cash price was paid on December 31, 2012 and the balance of the cash price, $750,000, was paid in January 2013. As of the date of this report, none of these shares of common stock or preferred stock issued to the former shareholders of White Top and Black Water have been sold. The Company has placed a stop order with the Company's transfer agent preventing any transfer of shares. The Company has initiated litigation in Dallas County against these individuals which include the former shareholders of White Top and Black Water to fully recover the equity consideration issued to them under the terms of the acquisition agreements.

The acquisition of White Top and Black Water was accounted for using the acquisition method of accounting, which requires the net assets acquired to be recorded at their fair values. All valuations of assets and liabilities assumed are preliminary and subject to further review and adjustment. The following table summarizes the preliminary purchase price and the preliminary estimate of the fair values of the net assets acquired at the date of acquisition, as updated through June 30, 2013:

Fair value of consideration transferred:

Cash paid at closing December 31, 2012                                $    450,050
Cash paid in January 2013                                                  750,000
589,657 shares of common stock issued at $1.62 per share                   955,244
41,000 shares of Series C preferred stock, stated value of $25
per share, issued at $19.20 per share                                      787,200

Total                                                                 $  2,942,494

Amounts recognized for assets acquired and liabilities assumed:
Working capital                                                       $    809,750
Land                                                                        70,760
Field equipment                                                          2,333,181
Goodwill                                                                 2,799,044
Debt assumed                                                            (3,070,241 )

Total                                                                 $  2,942,494

Working capital acquired (assumed):
Cash                                                                  $      3,785
Accounts receivable                                                      2,460,792
Accounts payable & accrued expenses                                     (1,654,827 )

Total working capital acquired                                        $    809,750

On March 31, 2013, we recorded a change in estimate of the liabilities assumed during the White Top and Black Water acquisitions. As a result of our analysis, we decreased our estimate of debt assumed by approximately $208 thousand.

On May 17, 2013, the Company discontinued certain portions of the operations of White Top and Black Water, resulting in increased uncertainties regarding the timing and nature of a recovery of capital expenditures. Taking these factors into account, the Company reassessed its financial outlook of, and consequently reevaluated the recoverability of goodwill associated with these acquisitions. The Company performed the two-step impairment test and concluded that the fair value of goodwill was substantially lower than the carrying value of goodwill associated with the acquisition. Accordingly, during the first quarter of fiscal 2013, the Company recorded an impairment charge of $2.8 million.

-9-


On June 30, 2013, the Company wrote-off certain assets acquired as part of the White Top and Black Water acquisition that were repossessed as partial consideration for loans the Company assumed as part of the White Top and Black Water acquisition, and which were defaulted on by White Top and Black Water. Also on June 30, 2013, the Company wrote-off certain assets that were not in the possession of the Company, and has taken legal course to reacquire the assets. These items resulted in a total loss on sale of assets of approximately $397 thousand at September 30, 2013. See Note 9 - Commitments and Contingencies, for additional information.

The following unaudited summary, prepared on a pro forma basis, presents the results of operations for the three and nine months ended September 30, 2012, as if the acquisitions of Hunter Disposal, White Top, Black Water and Virco, along with transactions necessary to finance the acquisitions, had occurred January 1, 2012. The unaudited pro forma information includes the effects of adjustments for interest expense, dividends and depreciation expense. The unaudited pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been completed as of the beginning of each period presented, nor are they necessarily indicative of future consolidated results.

                                                 For the Three        For the Nine
                                                  Months Ended        Months Ended
                                                 September 30,       September 30,
                                                      2012                2012
 Total operating revenue                         $    8,480,783      $   24,584,024
 Total operating costs and expenses                  21,247,312          37,764,943

 Operating loss                                     (12,766,529 )       (13,180,919 )
 Interest expense and other                            (327,682 )          (849,668 )

 Net loss before taxes                              (13,094,211 )       (14,030,587 )
 Income tax expense                                          -                   -

 Net loss                                           (13,094,211 )       (14,030,587 )

 Dividends on preferred stock                        (2,363,925 )        (3,057,323 )

 Net loss attributable to common stock holders   $  (15,458,136 )    $  (17,087,910 )

 Net loss per share, basic & diluted             $        (0.51 )    $        (0.59 )

NOTE 4. NOTES PAYABLE

Notes Payable at September 30, 2013 and December 31, 2012, consisted of the
following:



                                                       September 30,         December 31,
                                                           2013                  2012
Notes payable for insurance premiums due in
monthly installments through April, 2014,
weighted average 6.73% fixed rate                     $       443,556       $      127,090
9% Series B Senior Secured Redeemable Debentures
due on various dates ranging from September 30,
2013 to February 28, 2014                                      90,000               90,000
Note payable collateralized by building due in
monthly installments with a balloon payment at
November 30, 2017, 5.7% variable rate                       1,368,958            1,415,582
Notes payable collateralized by equipment due in
monthly installments through December 9, 2014 to
August 25, 2018, various rates described below              5,075,101            5,140,056
Note payable collateralized by real estate due in
monthly installments through December 28,
2032, 4.25% variable rate                                   1,093,092            1,120,000
10% convertible promissory note to a related
party due in quarterly installments commencing
May 17, 2013 due February 17, 2017, 10% fixed
rate                                                        1,925,000            2,200,000

-10-

--------------------------------------------------------------------------------
                                                      September 30,         December 31,
                                                          2013                  2012
Promissory notes assumed in acquisition secured
by accounts receivable, inventory and equipment
due on demand on, maturing January 25, 2013 and
February 10, 2013, 7% fixed rate, which are now
in default, accruing at 18%                                  910,215              942,774
Note payable collateralized by building due in
monthly installments maturing January 13,
2022, 15.49% fixed rate                                           -                30,217
Note payable collateralized by real estate due
in monthly installments maturing September 1,
2026, 6% variable rate                                        43,525               45,419
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%                                                       270,674              501,723
Note payable assumed in acquisition
collateralized by equipment due in monthly
capital lease installments maturing
September 14, 2014 to January 11, 2017, rates
ranging from 11.23% to 12.08%                              1,017,412            1,528,198
Note payable assumed in acquisition due to a
factoring company as part of an accounts
receivable factoring arrangement, effective
interest rate of 20.4%                                            -               229,693
Note payable collateralized by property and
equipment due in monthly installments maturing
September 13, 2023, 3.25%, variable rate                   1,099,950                   -

                                                          13,337,483           13,370,752

Less: current portion                                     (4,526,252 )         (4,053,749 )

Total Long-Term Debt                                 $     8,811,231        $   9,317,003

The following table presents the approximate annual contractual maturities of debt based on the calendar year as of September 30, 2013:

                         Remaining in 2013   $  2,048,964
                         2014                   3,233,784
                         2015                   2,139,349
                         2016                   1,984,111
                         2017                   2,148,144
                         Thereafter             1,783,131

                                             $ 13,337,483

Debt Covenants

The terms of the Company's obligations collateralized by certain 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 to maintain a ratio of debt service coverage equal to or in excess of 1.30 to 1.00, and is calculated as the ratio of consolidated EBITDA to required principal and interest payments on all indebtedness, as defined in the credit agreement. The Company has determined that it is probable that it will not be in compliance with this covenant at December 31, 2013. The Company is seeking to obtain waivers from the lender should it not be in compliance with the above ratio on that date. Senior management has already initiated these discussions with the financial institution that has this requirement.

-11-


Notes Payable

On March 13, 2013, we entered into a note payable with a bank in the amount of $750 thousand, collateralized by property and equipment, which included an additional $350 thousand of borrowing capacity, for construction and refurbishment purposes. The note has a variable interest rate based on the prime rate of the 10 largest U.S. banks, monthly interest and principal payments of $11 thousand, and matures on September 13, 2023. The $350 thousand borrowing capacity was fully utilized at September 30, 2013.

On July 25, 2013 we entered into a notes payable with a bank in the amount of $1.065 million for the purchase of water hauling trucks. The note has a variable interest rate of 1 month LIBOR plus 4%, currently 4.25% with interest in principle payments of $19 thousand and matures on August 25, 2018.

9% Series B Senior Secured Redeemable Debentures

The Company had not paid interest on the Series B debentures for the period March 2011 through September 2013. Therefore, we were technically in default on our Series B Debentures at September 30, 2013, and December 31, 2012. Upon an event of default, the debentures become due and payable upon demand, so we have classified the debentures as a current liability as of September 30, 2013, and December 31, 2012. These debentures are secured by GreenHunter Resources' interest in GreenHunter Mesquite Lake, LLC, and are otherwise non-recourse to the parent company, GreenHunter Resources. As of September 30, 2013, there is a principal balance of $90 thousand outstanding under the Series B debentures.

Note Payable to Related Party

During the nine months ended September 30, 2013, the Company did not borrow under a letter of guarantee from the Company's Chairman. As of September 30, 2013, there is $2.0 million available under this facility. Should the Company borrow any available amounts, they will carry an interest rate of 14% per annum which is convertible to common stock at the Chairman's option. This letter of guarantee has been extended through December 31, 2013.

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 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 include principal payments of $137,500 per quarter. Interest expense related to this note was $165 thousand for the nine months ended September 30, 2013. The balance owed on the note was $1.9 million at September 30, 2013. The promissory note matures on February 17, 2017 and is convertible at any time by the holder into shares of common stock of the Company at a conversion price of $2.50 per share. See Note 3-Acquisitions and Divestitures, for additional information.

Black Water and White Top Notes Payable

Certain notes were assumed by the Company as part of the White Top and Black Water acquisition. See Note 3-Acquisitions and Divestitures, for additional information.

NOTE 5. STOCKHOLDERS' EQUITY

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



                                       Preferred          Common         Treasury
                                         Stock            Stock           Stock          KSOP          Warrants
December 31, 2012                       1,561,144        33,120,483              1        15,200        3,020,000
Issued shares of Series C preferred
stock in public offering                  265,436                -              -             -                -
Issued shares of common stock upon
exercise of warrants                           -             12,500             -             -           (12,500 )
Issued shares of common stock upon
exercise of stock options                      -            100,000             -             -                -
Issued shares of common stock in
public offering                                -            221,946             -             -                -
Issued shares of common stock for
Share based payments                           -            150,835             -             -                -
Issued shares of common stock for
Stock Compensation                             -            118,922             -             -                -
Issued shares of Series C Preferred
stock in private placement                181,786                -              -             -           282,778
Issued shares to KSOP                          -             67,920             -             -                -
Adjustment of Series C Shares              (8,366 )              -              -             -                -
Allocation of unearned shares in
KSOP                                           -                 -              -        (15,200 )             -

September 30, 2013                      2,000,000        33,792,606              1            -         3,290,278

-12-


Preferred Stock

The Company currently reflects 2,008,366 shares of 10% Series C Cumulative Preferred Stock on its books. The Company has authorized 2,000,000 shares of its 10% Series C Cumulative Preferred Stock in its certificate of designations for such preferred stock. The balance of 8,366 shares refers to shares that the Company has not yet issued because of i) claims the Company has against such holders for breaches of various agreements which the Company is currently pursuing legal action to recover and ii) outstanding conversion applications from Series B Debentures to Series C Preferred Stock at the time of the report.

The Company has authorized a total of 10,000,000 shares for five classes of Preferred Stock, which includes an authorization limit of 2,000,000 shares of our Series C Preferred Stock. Series A Preferred Stock has been fully converted to Series C Preferred Stock, Series B Preferred Stock has been fully converted to common stock, Series D and Series E Preferred Stock have not been issued as of September 30, 2013. The Series C Preferred Stock has been fully issued as of September 30, 2013 at the stated value of $25.00 per share. The Company has obtained common shareholder approval to increase the authorization limit on the Series C Preferred Stock to 8,000,000 shares. However, the approval of a majority of the shareholders of the Series C Preferred Stock is also required before the limit can be increased, which the Company has not yet obtained. The Series C Preferred Stock pays a dividend at 10% per annum. If it is ever redeemed, a deemed dividend of the variance between the stated value and the carrying value will be recognized upon redemption.

During the nine months ended September 30, 2013, the Company issued the remaining common stock and Series C preferred stock under its current registration statement. The net cash proceeds received upon issuance of these . . .

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