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GRH > SEC Filings for GRH > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for GREENHUNTER RESOURCES, INC.

Form 10-Q for GREENHUNTER RESOURCES, INC.


11-Aug-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, GreenHunter Water, LLC, GreenHunter Environmental Solutions, LLC, and GreenHunter Hydrocarbons, LLC, provides Total Water Management Solutions™/Oilfield Fluid Management Solutions™ in the oilfield and the shale plays of the Appalachian Basin. GreenHunter Water continues to expand its services package by increasing down-hole injection capacity with Class II salt water disposal wells and facilities, with the launch of next-generation modular above-ground frac water storage tanks (MAG Tank™), and with advanced water hauling - including a growing fleet of DOT rated 407 trucks, for hauling hydrocarbons and water with the presence of hydrocarbons. GreenHunter Water has also spearheaded the movement to barge brine water, as barging is the safest and most cost-effective mode of transport.

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

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

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, including both the Marcellus and Utica Shale areas. As of June 30, 2014, we operated commercial water service facilities, including 10 disposal wells (nine in Appalachia and one in Oklahoma which is currently being marketing for sale).

We operate a fleet of 35 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 the second half of 2014.

In late 2013, the Company decided to sell all of its disposal wells and properties located in South Texas and Oklahoma, to either move to Appalachia or sell most 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 the higher revenue region of Appalachia. We believe this area represents our best opportunities for growth and highest overall margins. We closed on the sale of all of our South Texas wells in the first half of 2014 and have ceased operations in South Texas. We expect to close on our remaining Oklahoma fixed assets in the second half of 2014. At that point, we intend to cease operating in Oklahoma.

We have deployed several modular above-ground temporary water storage systems in the Marcellus and Utica Shale Plays, and we 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 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 future 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 our overall profit margins.

-21-

As part of our strategic growth plans, the Company signed definitive agreements with a third party to construct three independent pipelines in the Appalachian Region that will be funded by the third party. The agreements give the Company exclusive use of the three pipelines for a period of ten years with an option to renew the agreements for another ten years. The pipelines will be used to transport oilfield waste water (brine), fresh water, and hydrocarbons (condensate and NGLs), respectively. The brine pipeline will be constructed of 12"diameter pipe capable of transporting approximately 100,000 bbls per day. The fresh water pipeline will be a 16" diameter pipe with the capacity to handle approximately 140,000 bbls per day. The condensate pipeline will be a 6" diameter pipe that will have a capacity of approximately 30,000 bbls per day. The pipelines are scheduled to be completed by January 1, 2016. The point of delivery will be along the Ohio River, from which point we expect to deliver the hydrocarbons by barge to the purchasers, as well as deliver the waste water by barge to our disposal wells. We expect the use of the pipelines and barges to substantially reduce the cost of transporting these products and give us a significant competitive advantage in both areas. Additionally, fresh water will flow through this pipeline in the opposite direction (from the river inland toward the production areas) thereby furnishing producers with sources of fresh water. Currently, fresh water, generally used for hydraulic fracturing, must be delivered to these production areas by truck. Our lower cost delivery by pipeline should give us a significant competitive advantage in delivering this product.

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

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

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

As of June 30, 2014, we had a working capital deficit of $4.4 million, of which $1.2 million is non-recourse to the parent company, GreenHunter Resources, Inc.

While we are generating increasingly significant revenues from our water management activities, we have continued to experience losses from our ongoing operations (but at a significantly reduced level), which raises doubt about our ability to continue as a going concern. Although we are on track to be in compliance with the requirements of one existing debt covenant at the next measurement date, December 31, 2014, and have a waiver from a second lender debt covenant should we not be in compliance with its provisions at December 31, 2014, we were not in compliance with these two covenants 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. 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 few remaining unsold assets continue to be held for sale at June 30, 2014. We are generating significant cash from these non-core asset sales. We are using 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.

We have determined that additional assets located in South Texas and Oklahoma should be held for sale at June 30, 2013. We anticipate we will close on the sale of these assets sometime in the last half of 2014. These assets are being marketed at amounts equal to or in excess of our net book value at June 30, 2014.

-22-

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 June 30, 2014, the Company has received $275 thousand toward the sales 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 June 30, 2014. We expect sales and rentals of MAG Tanks™ to increase our operating cash flows in 2014. We currently have $2.0 million of panels in inventory with additional panels being constructed.

During the year ended December 31, 2013, the Company borrowed $1.5 million under a promissory note due to the Company's Chairman and Chief Executive Officer. As of June 30, 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 expected sale of our remaining assets held for sale at June 30, 2014
• The sale of our Mesquite Lake property
• Letter of credit guarantee from our Chairman
• The sale of debt or equity securities under a universal "shelf" registration statement during the last half of 2014
• The proceeds from capital project related financing

The Company intends to file a "shelf" registration statement in the first part of August, 2014. As soon as this registration is effective, the Company will be able, should it so choose, to sell additional shares of its common stock.

The Company intends to file a request with the Internal Revenue Service for a ruling that income derived by a newly formed Limited Partnership ("MLP") from the handling of fluid, storage, treatment and disposal services, frac tank rental, water monitoring services, and environmental remediation services that constitute a part of the exploration, developmental, mining, processing, refining and transportation of natural resources will in fact constitute "Qualified Income" under certain sections of the Internal Revenue Code of 1986, as amended. Management and the Board have determined that utilizing an MLP structure will be the most efficient way to fund our future capital needs.

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 and associated ventures or that we will generate sufficient cash flow to fund our ongoing operating cash flow needs, in which case, we will be required to seek alternative financing, sell our assets, or any combination thereof. Further, considering our financial condition, we may be forced to accept financing or sell assets at terms less favorable than would otherwise be available, however, we have been successful in achieving at least market value for the non-core assets sold to date.

-23-

Results of Operations



Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013:



The following table summarizes results from continuing operations for the three
months ended June 30, 2014 and 2013:



                                               2014            2013            Change         Change %
Revenues:
Water disposal revenue                     $  3,618,936     $ 2,757,173     $    861,763           31.3 %
Transportation revenue                        2,821,196       1,919,019          902,177           47.0 %
Environmental services revenue                   14,172               -           14,172            0.0 %
MAG Tank™ revenue                                86,142               -           86,142            0.0 %
Skim oil revenue                                180,669         382,118         (201,449 )        -52.7 %
Storage rental revenue and other                151,197         754,057         (602,860 )        -79.9 %
Total revenues                                6,872,312       5,812,367        1,059,945           18.2 %
Cost of goods and services provided           4,980,333       3,679,691        1,300,642           35.3 %
Margin (1)                                    1,891,979       2,132,676         (240,697 )        -11.3 %
Margin %                                           27.5 %          36.7 %
Depreciation and accretion expense              729,158         713,130           16,028            2.2 %
Stock based compensation                      2,234,403         483,261        1,751,142          362.4 %
Selling, general and administrative           2,086,278       1,786,867          299,411           16.8 %
Operating Loss                               (3,157,860 )      (850,582 )     (2,307,278 )        271.3 %

(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 both capacity and volumes. We operated nine disposal wells in Appalachia for most of the second quarter of 2014. Only seven wells were in operation in Appalachia for the second quarter of 2013, and these wells generally operated at below capacity levels in 2013. All but one of our wells in Appalachia operated at or near their capacity for most of the second quarter of 2014.

The increase in transportation revenue was due to two factors. Our Appalachia trucking fleet increased from 26 trucks in the second quarter of 2013 to 36 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.

We moved two MAG Tanks™ for customers in the second quarter of 2014. We had not yet initiated the sale, lease, or relocation of MAG Tanks™ in the second quarter of 2013.

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. Skim oil revenue decreased in the second quarter of 2014 versus the second quarter of 2013 mainly due to timing. The skim oil has been removed and sold on a consistent basis each month of 2014. However, a significant amount of the skim oil placed in the tanks in the first quarter of 2013 was not sold until the second quarter of 2013, resulting in higher revenue amounts in the second quarter of 2013. Also, skim oil sales are dependent on the amount of oil in the waste water delivered to our facilities, over which we have no control.

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

-24-

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 second quarter of 2014 to the second 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 have recently implemented 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 primarily due to having two additional disposal wells in service for all of the second quarter of 2014 that had been placed into service in Appalachia after the second quarter of 2013.

Stock Based Compensation

This increase in stock based compensation for the second three months of 2014 versus the second three months of 2013 is mainly due to the following items:

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

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

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

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

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 June 30, 2014 and 2013, respectively. This 16.8% increase was 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 overall business.

The following is a schedule of our selling, general and administrative expense for the three months ended June 30,:

                                    2014            2013          Variance
Personnel and related costs      $ 1,435,428     $   800,901     $  634,527
Office and related costs             277,794         525,048       (247,254 )
Travel, selling, and marketing        60,172         134,786        (74,614 )
Professional fees                    224,176         286,987        (62,811 )
Taxes and permits                     88,708          39,145         49,563
Total                            $ 2,086,278     $ 1,786,867     $  299,411

Operating Loss

The increase in operating loss is primarily due to additional expenses mainly related to personnel incurred for the future expansion of our new business activities. It also includes a common stock based bonus to certain members of management.

-25-

Other Income and Expense

Total other expense was $162 thousand for the quarter ended June 30, 2014 as compared to income of $2.0 million for the quarter ended June 30, 2013. The components of the total other income/expense include the following: 1) Interest expense was approximately $361 thousand in 2014 compared to approximately $231 thousand for 2013, and we expect our interest expense will continue to increase as we add overall indebtedness to fund our future expansion activities; 2) the sale of assets resulted in a $9 thousand loss in 2014 versus $2.3 million gain in 2013; 3) the settlement of payables was favorable by $134 thousand in 2014 versus unfavorable by $5 thousand in 2013; and 4) other income was $74 thousand and $1 thousand for 2014 and 2013, respectively.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013:



The following table summarizes results from continuing operations for the six
months ended June 30, 2014 and 2013:



                                               2014             2013            Change         Change %
Revenues:
Water disposal revenue                     $  7,302,798     $  5,311,353     $  1,991,445           37.5 %
Transportation revenue                        6,255,690        3,533,336        2,722,354           77.0 %
Environmental services revenue                   14,172                -           14,172            0.0 %
MAG Tank™ revenue                               886,142                -          886,142            0.0 %
Skim oil revenue                                520,888          535,450          (14,562 )         -2.7 %
Storage rental revenue and other                371,159        1,158,477         (787,318 )        -68.0 %
Total revenues                               15,350,849       10,538,616        4,812,233           45.7 %
Cost of goods and services provided          11,009,968        6,885,294        4,124,674           59.9 %
Margin (1)                                    4,340,881        3,653,322          687,559           18.8 %
Margin %                                           28.3 %           34.7 %
Depreciation and accretion expense            1,493,142        1,430,014           63,128            4.4 %
Stock based compensation                      2,603,812          900,184        1,703,628          189.3 %
Selling, general and administrative           4,167,388        3,605,754          561,634           15.6 %
Operating Loss                               (3,923,461 )     (2,282,630 )     (1,640,831 )         71.9 %

(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 both capacity and volumes. We operated a total of 10 disposal wells in Appalachia as of the end of the second quarter of 2014. Nine wells operated for the first two months of 2014, and an additional new well was put into service in Meigs County, Ohio, on March 1, 2014. An existing well, one of our smaller capacity wells, was not fully operating in the second quarter of 2014. Only seven wells were in operation in Appalachia for the first six months of 2013. All of our wells except one in Appalachia operated at or near their capacity for most of the first six month period of 2014.

The increase in transportation revenue was due to two factors. Our Appalachia trucking fleet increased from 26 trucks in the first six months of 2013 to an average of 36 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 rebilled to our customers.

We sold a MAG Tank™ in the first quarter of 2014, and we moved two MAG Tanks™ for customers in the second quarter of 2014. We had not yet initiated the sale, lease, or relocation of MAG Tanks™ during the first six months of last year.

-26-

Skim oil revenue was relatively stable in the first six months of 2014 versus the same period in 2013. Skim oil, or hydrocarbon liquids, a by-product of the disposal process, is oil that is mixed with the water and is hauled to our disposal tanks. The oil floats to the top of the tank and is "skimmed" off and ultimately sold. Skim oil sales are determined by the quantity of oil in the waste water delivered to our facilities, over which we have no control.

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

. . .

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