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GRH > SEC Filings for GRH > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for GREENHUNTER RESOURCES, INC.

Form 10-Q for GREENHUNTER RESOURCES, INC.


12-May-2014

Quarterly Report


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, 2013 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

GreenHunter Resources, Inc. ("GreenHunter"), through its wholly-owned subsidiaries, operates assets involved in the fluids business as it relates to the oil and gas industry in the unconventional oil and natural gas resource plays.

Through our wholly-owned subsidiary GreenHunter Water, we provide Total Fluid Management Solutions™ in the oilfield. The Company's approach to water management includes fixed-facility and mobile water treatment systems (Frac-Cycle ®), an expanding portfolio of UIC Class II Salt Water Disposal wells with advanced hauling and fresh water logistics services, a next-generation modular above-ground storage tank system (MAG Tank™), and compliance tracking technologies (RAMCAT™) that allow producers to reduce costs while they account for their fluids from cradle-to-grave and adhere to emerging regulations.

It has been our goal to become a leading provider of water management solutions as it relates to the oil and gas industry in the unconventional resource plays in the Appalachian Region where we are predominantly active. The Company has acquired or leased acreage in the Marcellus, Utica, Mississippian Lime, Eagle Ford, and Bakken Shale areas located in Appalachia, Oklahoma, South Texas, Eastern Montana and North Dakota, respectively. As of March 31, 2014, we operated commercial water service facilities, including 10 disposal wells (nine in Appalachia and one in Oklahoma).

We operate a fleet of trucks located in Appalachia that are used to transport fluids to disposal and water treatment sites. Additionally, the Company has acquired or leased various sites along the Ohio River in Appalachia to facilitate the use of barges as a low cost method of hauling fluids. We anticipate initiating barge hauling services in 2014.

In late 2013, the Company decided to sell all of its disposal wells and properties in South Texas and Oklahoma, to either move to Appalachia or sell all of its equipment in South Texas owned by White Top and Blackwater, and to discontinue operation in both of these areas in order to concentrate our efforts in Appalachia. We believe this area represents our best opportunities for growth and highest overall margins. We closed on the sale of all of our South Texas wells except one in the first quarter of 2014, and the last one sold on May 1, 2014. We expect to close on our remaining Oklahoma fixed assets in the second quarter of 2014. At that point, we intend to cease operating in South Texas and Oklahoma. Additionally, we do not intend to develop or extend the existing leases we currently have in Montana and North Dakota.

We have deployed several modular above-ground temporary water storage systems in the Marcellus Shale and have installed and operated an onsite semi-portable water treatment facility in the Appalachian Region. We have designed and engineered and are currently marketing this proprietary next-generation large format modular above-ground water storage system. We have also deployed a proprietary tracking system that provides cradle-to-grave manifest tracking of oilfield water waste streams, and we are evaluating a license for new technologies to treat water and other fluids associated with the production of oil and natural gas for reuse. As part of our strategy of focusing our growth in the Appalachian Region, we expect to add more new disposal wells in early 2014, including constructing pipelines to transport produced liquids, which will lower the cost associated with transporting liquids as well as increase the related profit margins.

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 acquisition strategy, 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.

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

As of March 31, 2014, we had a working capital deficit of $7.7 million, of which $1.2 million is non-recourse to the parent company, GreenHunter Resources, Inc.

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While we are generating increasingly significant revenues from our water management activities, we have continued to experience losses from our ongoing operations (but at a significantly reduced level), which raises doubt about our ability to continue as a going concern. Additionally, we were not in compliance with certain existing covenants contained in certain secured debt agreements with two lenders as of December 31, 2013; however, waivers were obtained from the specific lenders for December 31, 2013, and for an additional grace period for the year ending December 31, 2014 from one of the lenders. The covenant's terms as defined by the other lender are less restrictive, and we believe we will be in compliance at the covenant's next measurement date at December 31, 2014. Although we have obtained waivers for the events of default resulting from the non-compliance with certain financial covenants, the lenders under the affected secured debt arrangements retain rights to call that debt in the event we are unable to attain compliance with the required ratios in future periods. While we do not believe that it is probable that we will be out of compliance with the requirements of the affected agreements once the waivers lapse, compliance is dependent upon improvements in the results of our operations. We believe that we can continue to improve the results of our operations, considering our renewed focus on our Appalachian operations and abandonment of our South Texas and Oklahoma operations as discussed elsewhere in this Form 10-Q, but there can be no assurance that we can attain such improvements. In the event that we are unable to meet the requirements of our secured debt arrangements, we will be required to either a) seek refinancing of those loans;
b) repay amounts outstanding under the agreements via new financing or sales of existing assets or operations; or c) a combination of the two. Considering our current financial position, we may be forced to accept terms of refinancing or sales that would be less favorable than those available to other entities.

In late 2013, Management decided to focus on expanding our future operations only in the Appalachian Region. As part of this strategy, we committed to a plan to sell our fixed assets in South Texas and Oklahoma. These assets were classified as held for sale as of December31, 2013, and the remaining unsold assets continue to be held for sale at March 31, 2014. We are generating significant cash from these non-core asset sales. We intend to use this additional capital to assist in significantly reducing our working capital deficit and to provide the growth capital needed to fund additional new projects that are a part of our overall business plan to grow our business in Appalachia.

On January 28, 2014, GreenHunter Water sold a saltwater disposal well and associated equipment and certain real property located in Karnes County, Texas for aggregate consideration of approximately $3.9 million pursuant to an Asset Purchase Agreement with Sable Environmental SWD 5, LLC. GreenHunter Water received $1.0 million in cash at closing and a promissory note for approximately $2.9 million with an interest rate of 10% per annum and maturity date of January 31, 2016.

On March 11, 2014, GreenHunter Water entered into an agreement to sell a saltwater disposal well and associated equipment located in Frio County, Texas to Sable Environmental SWD 7, LLC pursuant to an Asset Purchase Agreement for a purchase price of $4.6 million that included a $500 thousand non-refundable deposit. As a part of this Agreement, the purchaser has agreed to pay off the $2.9 million promissory note, in full, that was issued on January 28, 2014, when the first well in Karnes County, Texas was sold to the same purchaser. We closed on the sale of this well and received payment for the purchase price of the well and the payoff of the note on May 1, 2014. See Note 13 - Subsequent Events for further information.

On March 26, 2014, GreenHunter Water sold a saltwater disposal well and associated equipment and certain real property located in DeWitt County, Texas for aggregate consideration of approximately $3.4 million pursuant to an Asset Purchase Agreement with Clear Water Resources Partners, LLC. GreenHunter Water received $1.0 million in cash at closing and a promissory note for approximately $2.4 million with an interest rate of 10% per annum and maturity date of May 1, 2016.

We have additional assets in South Texas and Oklahoma that continue to be held for sale at March 31, 2014. We anticipate we will close on the sale of these assets sometime in the second quarter of 2014. These assets are being marketed at amounts equal to or in excess of our net book value at March 31, 2014.

In December 2013, the Company entered into a letter of intent to sell our remaining renewable asset, a biomass plant, which included a non-refundable fee of $25 thousand that granted the buyer an exclusive right to purchase the property through February 15, 2014. On February 19, 2014, GreenHunter Mesquite Lake entered an agreement to sell the biomass project to ML Energy Park, LLC for $2.0 million. The closing is scheduled for March 15, 2015. The prospective buyer made an initial payment of $50 thousand as earnest money deposit and has continued to pay $50 thousand per month to date and is required to continue the monthly payments for a year or until deciding to ultimately purchase the property. The monthly payments, as well as the initial $25 thousand fee, are non-refundable and can be used at our discretion, but will be applied to the purchase price if it is ultimately consummated. As of March 31, 2014, the Company has received $125 thousand toward the purchase price of this property.

In late 2013 and early 2014, the Company closed on several private placements of unsecured debt totaling $1.5 million in 2013 and an additional $1.1 million in 2014 for the purpose of building MAG Tanks™. The Company had contracted with two manufacturing facilities to build MAG Panel™ inventory at March 31, 2014. We expect sales and rentals of MAG Tanks™ to increase our operating cash flows in 2014.

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During the year ended December 31, 2013, the Company borrowed an additional $1.5 million under a promissory note due to the Company's Chairman and Interim Chief Executive Officer. As of March 31, 2014, there is $500 thousand available under this facility. The letter of guarantee associated with this note has been extended through December 31, 2014.

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

• Increased revenue generated from our water management activities

• The sale of certain assets classified as held for sale during the first quarter of 2014 and the expected sale of our remaining assets held for sale at March 31, 2014

• The sale of our Mesquite Lake property

• The proceeds from unsecured credit facilities (such as those related to our MAG Panel™ production)

• Letter of credit guarantee from our Chairman

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

Results of Operations



Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013:



The following table summarizes results from continuing operations for the three
months ended March 31, 2014 and 2013:



                                           2014             2013           Change         Change %
Revenues:
Water disposal revenue                  $ 3,683,862     $  2,554,180     $ 1,129,682            44.2 %
Transportation revenue                    3,434,494        1,614,317       1,820,177           112.8 %
MAG Tank™ revenue                           800,000                -         800,000             0.0 %
Skim oil revenue                            340,219          153,332         186,887           121.9 %
Storage rental revenue and other            219,962          404,420        (184,458 )         -45.6 %
Total revenues                            8,478,537        4,726,249       3,752,288            79.4 %
Cost of goods and services provided       6,029,635        3,205,603       2,824,032            88.1 %
Margin (1)                                2,448,902        1,520,646         928,256            61.0 %
Margin %                                       28.9 %           32.2 %
Depreciation and accretion expense          763,984          716,884          47,100             6.6 %
Stock based compensation                    369,409          416,923         (47,514 )         -11.4 %
Selling, general and administrative       2,081,110        1,818,887         262,223            14.4 %
Operating Loss                             (765,601 )     (1,432,048 )       666,447           -46.5 %

(1) Margin is defined as revenues less cost of goods and services provided and excludes depreciation and accretion, impairment, selling, general and administrative and stock compensation expense costs.

Total Revenues

The increase in disposal revenue related to continuing operations was mainly due to an increase in capacity and volumes. We operated nine disposal wells in Appalachia as of the end of the first quarter of 2014. Eight wells operated for the first three months of 2014, and an additional new well was put into service in Meigs County, Ohio, on March 1, 2014. Only seven wells were in operation in Appalachia for the first quarter of 2013. All of our wells in Appalachia operated at or near their capacity in the first quarter of 2014.

The increase in transportation revenue was due to two factors. Our Appalachia trucking fleet increased from 26 trucks in the first quarter of 2013 to 37 trucks for the same period in 2014, which enabled us to haul more fluids. Additionally, we had customer demands for hauling services beyond our capacity, so we were required to hire third-party trucking companies to provide those services, which we subsequently billed to our customers.

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We sold a MAG Tank™ in the first quarter of 2014. We had not yet initiated the sale of MAG Tanks™ in the first three months of 2013.

Skim oil revenue increased mainly due to increased disposal volumes in the Utica shale play, which has a greater percentage of hydrocarbon liquids. Skim oil, or hydrocarbon liquids, a by-product of the disposal process, is oil that was mixed with the water that is hauled to our disposal tanks. The oil floats to the top of the tank and is "skimmed" off and ultimately sold.

Our other revenue decreased mainly due to a large remediation contract we obtained early in 2013 that did not continue into 2014.

Cost of Goods and Services Provided

Our operating costs related to continuing operations increased due to the overall increase in the activity of our business. However, operating costs increased at a faster rate than revenue when comparing the first quarter of 2014 to the first quarter of 2013. This was due to several reasons, but the largest factor was our use of third-party trucking which is less profitable for us, in order to meet a significant portion of our customers' demand requirements. Due to the competitiveness of the oilfield environment, we were not able to generate adequate revenues to cover all of these transportation costs. We are looking at ways to cause our trucking operation to be more efficient as well as developing alternative methods of transporting fluids, including the use of barging and pipelines. We expect our trucking margins to improve over the remainder of 2014 as we implement these changes.

Depreciation and Accretion Expense

Depreciation and accretion expense increased due to assets that were in service for the full first quarter of 2014 versus only part of the first quarter for 2013, as well as due to the depreciation for assets added during 2014. However, these increases were mostly offset because depreciation for assets sold and assets held for sale in the first quarter of 2014 was not recorded.

Stock Based Compensation

This decrease in stock based compensation for the first three months of 2014 versus the first three months of 2013 is mainly due to the lower stock prices for more recent stock grants in contrast to the higher prices in earlier years. We expect stock based compensation expense to increase in future periods as we continue to expand our personnel necessary to conduct our water management business.

Selling, General and Administrative Expense

Selling, general and administrative expense ("SG&A") was approximately $2.1 million and $1.8 million during the quarter ended March 31, 2014 and 2013, respectively. This increase is due to expansion of our business activities. We believe our SG&A costs will be stable in 2014 but may grow if we see significant growth in our business.

The following is a schedule of our selling, general and administrative expense for the three months ended March 31,:

                                    2014            2013          Variance
Personnel and related costs      $ 1,238,246     $   906,389     $  331,857
Office and related costs             359,724         261,167         98,557
Travel, selling, and marketing       101,590         167,637        (66,047 )
Professional fees                    330,940         445,938       (114,998 )
Taxes and permits                     50,610          37,756         12,854
Total                            $ 2,081,110     $ 1,818,887     $  262,223

Operating Loss

The decrease in operating loss is primarily due to the sale of a MAG Tank™ in the first quarter of 2014 without a corresponding sale in the first quarter of 2013. The increase in water disposal volumes in the Appalachian Region where our margins are higher also contributed to the improved operating loss.

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Other Income and Expense

Total other expense was $493 thousand for the quarter ended March 31, 2014 as compared to an expense of $228 thousand for the quarter ended March 31, 2013. The components of the total other income/expense include the following: 1) Interest expense was approximately $447 thousand in 2014 compared to approximately $229 thousand for 2013. We expect our interest expense will continue to increase as we add overall indebtedness to fund our future expansion activities. 2) The loss on the sale of assets was $56 thousand in 2014 versus $0 in 2013. 3) Other income was $10 thousand and $1 thousand for 2014 and 2013, respectively.

Liquidity and Capital Resources

Cash Flow and Working Capital

As of March 31, 2014, we had cash and cash equivalents of approximately $2.7 million and a working capital deficit of $7.7 million as compared to cash and cash equivalents of $1.3 million and a working capital deficit of $9.7 million as of March 31, 2013. The increase in cash and decrease in the working capital deficit were due to the activities described below.

Operating Activities

During the first three months of 2014 and 2013, operating activities provided $1.3 million and used $4.1 million, respectively. We expect cash flows from operating activities will be sufficient to meet our operating needs in the near term, but we expect increases in cash flows from new assets placed in service over the next twelve months to improve our ability to fund our operations within operating cash flow.

Investing Activities

During the quarter ended March 31, 2014, investing activities provided approximately $1.2 million in cash. This was comprised of $1.8 million of cash in net proceeds from the sale of assets, which were primarily part of the assets held for sale at December 31, 2013, including the sale of the Kenedy and Coy City disposal wells, the sale of the Westhoff disposal well, and the sale of certain equipment related to White Top and Blackwater . Also, offsetting this was approximately $521 thousand used for capital expenditures for water disposal facilities in Appalachia and $132 thousand of cash classified as restricted.

During the quarter ended March 31, 2013, we used approximately $779 thousand in cash in investing activities, principally for the acquisition of a barging terminal facility and construction of our South Texas wells.

Financing Activities

During the quarter ended March 31, 2014, our financing activities used $1.0 million. The net financing proceeds were mostly due to net borrowings of $214 thousand offset by $1.3 million in preferred stock dividends.

The cash provided during the 2013 first quarter was $4.3 million. The 2013 period proceeds were $5.1 million, net of costs, for the sale of our Series C Preferred Stock and common stock, proceeds of $116 thousand from the exercise of warrants and options, and proceeds of approximately $850 thousand from borrowing on notes payable. We made payments on notes payable of $768 thousand and paid approximately $1.0 million of dividends on our 10% Series C Preferred Stock.

Investing Activities and Future Requirements

Capital Expenditures

During the first three months of 2014, we invested approximately $521 thousand in capital expenditures, mainly for new disposal wells in Appalachia.

During the first three months of 2013, we invested approximately $779 thousand in capital expenditures, principally for the acquisition of a barging terminal facility and construction of our South Texas wells.

Forecast

For 2014, we have not adopted a formal corporate capital expenditure budget due to our uncertainty of future capital resources. We have formulated specific project budgets and will adopt a formal corporate capital expenditure budget upon securing necessary financing commitments.

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Water Resource Management

In late 2013, the Company decided that the best use of its resources was to concentrate its future growth on the Appalachian Region. As part of this plan, the Company expects this growth to center around the following:

• The addition of new disposal wells in the Appalachian Region. One new disposal well was added during the first quarter of 2014, and several additional wells are currently being developed or are in the planning stages, and we expect to approximately double our disposal capacity over the next twelve months in Appalachia.

• The development of its current barge facilities as well as adding additional barging locations which will enable the Company to transport water to disposal sites at prices more competitive than traditional transportation methods. The Company expects this to result in higher profit margins as compared to traditional transportation methods. Barging activities are expected to begin late in the second quarter or early in the third quarter of 2014.

• The construction of pipelines to carry produced water to disposal wells. We expect this lower cost method of transporting water to enhance our ability to attract and retain customers in this market. The new disposal well added during the first quarter of 2014 is fed by a pipeline from an existing off-load facility, which we expect to increase the incremental profit margin for water disposal for this well. Most of the wells we intend to add during 2014 will be fed by pipelines from existing or new off-load terminals.

• The addition of transport trucks and trailers to our fleet to reduce our dependence on third party trucking needed to meet the demands of our customers, which we also expect to improve our profit margins. We are in the process of increasing our truck fleet in Appalachia by the transfer of a portion of the truck fleet formerly used in South Texas to the Appalachian Region.

• An increase in the sales and rental of our MAG Tanks. We are currently having MAG Tank™ inventory constructed in two manufacturing locations in anticipation of growth in this business activity.

• The addition of additional water treatment facilities to broaden the use of our Frac Cycle technology.

As part of our focus on the Appalachia Region going forward, the Company expects to sell most of its fixed assets in South Texas and Oklahoma to improve both our working capital deficit and to provide capital necessary for our growth plans in Appalachia. Some equipment formerly used in South Texas has been or is in the process of being transferred to Appalachia.

We have previously closed the sale of all of our South Texas wells except one in the first quarter of 2014, and the last well closed on May 1, 2014. We expect to sell our Oklahoma wells sometime in the second quarter of 2014.

The estimated total net proceeds from assets sold or currently under contract exceed $10.0 million. Management is continuing its discussions with various parties concerning new loans and/or possibly equity necessary to fund its future growth plans in Appalachia.

Critical Accounting Policies and Other

In addition to established accounting policies, our consolidated financial statements are impacted by certain estimates and assumptions made by management. No changes in our critical accounting policies have occurred since the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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Contractual Obligations and Commercial Commitments



We have the following contractual obligations as of March 31, 2014.



                                                              Payments Due by Period
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