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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
For the quarterly period ended June 30, 2012 -OR-
For the transition period from to Commission file number 001-33893
GREENHUNTER ENERGY, INC. (Name of registrant as specified in its charter)
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 x 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 x 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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x As of August 13, 2012 there were 28,079,427 shares of the registrant’s common stock ($0.001 par value) outstanding
PART 1 – FINANCIAL STATEMENTS Item 1. Financial Statements GREENHUNTER ENERGY, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying notes to the condensed consolidated financial statements
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GREENHUNTER ENERGY, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
See accompanying notes to the condensed consolidated financial statements
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GREENHUNTER ENERGY, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
See accompanying notes to the condensed consolidated financial statements
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GREENHUNTER ENERGY, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE PERIOD FROM JANUARY 1, 2012 TO JUNE 30, 2012
See accompanying notes to the condensed consolidated financial statements
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NOTE SECTION NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS In this quarterly report on Form 10-Q, the words “GreenHunter Energy”, “company”, “we”, “our”, and “us” refer to GreenHunter Energy, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires. The condensed consolidated balance sheet of GreenHunter Energy, Inc. and subsidiaries as of June 30, 2012, the condensed consolidated statements of operations for the three and six months ended June 30, 2012 and 2011, the condensed consolidated statement of stockholders’ equity for the six months ended June 30, 2012, and the condensed consolidated statements of cash flows for the six months ended June 30, 2012 and 2011, are unaudited. The December 31, 2011 condensed consolidated balance sheet information is derived from audited financial statements. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position at June 30, 2012, and the results of operations for the three and six months periods ended June 30, 2012 and 2011, changes in stockholders’ equity for the six months ended June 30, 2012, and cash flows for the six month periods ended June 30, 2012 and 2011. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You should read these condensed consolidated financial statements in conjunction with the financial statements and notes thereto included in our December 31, 2011 Form 10-K. The results of operations for the three and six month periods ended June 30, 2012 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. Nature of Operations Our business plan is to acquire businesses, develop projects, and operate assets involved within the clean water business as it relates to the oil and gas industry in the unconventional oil and natural gas resource plays. We had previously structured our business to become a leading provider of clean energy products offering industrial, business, and residential customers the opportunity to purchase and utilize clean energy generated from renewable sources. Due to the economic downturn in 2008 and substantially reduced government support for renewable project in the U.S., we refocused our efforts during 2011 on clean water management systems and services. Management has identified a significant unmet need and market opportunity in the area of clean water management as it relates to unconventional oil and natural gas resource plays in the energy industry. The Company has has begun to generate significant revenues from operations and therefore is no longer a development stage company. The accompanying financial statements include the accounts of GreenHunter Energy, Inc. and our wholly-owned subsidiaries, Hunter Disposal, LLC, GreenHunter Water, LLC, GreenHunter Mesquite Lake, LLC (“Mesquite Lake”) Hunter Hauling, LLC (“Hunter Hauling”), Eagle Ford Water Hunter Joint Venture (“Eagle Ford Water”) and GreenHunter Wind Energy, LLC (“Wind”). All significant intercompany transactions and balances have been eliminated. Income or Loss Per 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 common stock underlying the following items were not included in dilutive weighted average shares outstanding for the six months periods ended June 30, 2012 and 2011, as their effects would have been anti-dilutive.
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NOTE 2. CURRENT PLAN OF OPERATIONS AND ABILITY TO OPERATE AS A GOING CONCERN Our financial position has been adversely affected by our lack of working capital and the overall deterioration across all capital markets, particularly those for renewable energy companies. The lack of consistent and meaningful governmental support with tax incentives and other credit enhancements has had a serious detrimental effect on our previously planned business operations. As of June 30, 2012, we had a working capital deficit of $14.8 million which includes $4.4 million related to earlier construction activities at our Mesquite Lake Biomass Plant, $2.6 million in redeemable debentures with recourse only against the equity interests of GreenHunter Mesquite Lake, LLC, which holds the Mesquite Lake Plant, and $1.9 million in promissory notes to our Chairman and Chief Executive Officer under a credit support agreement. We have continued to experience losses from ongoing operations. These factors raised doubt about our ability to continue as a going concern. We have begun to generate revenue from our water management activities. We have received a number of capital advances from our Chairman and Chief Executive Officer in exchange for promissory notes that have been consolidated and extended to December 31, 2012. On August 15, 2011, the letter of guarantee from the Chairman and Chief Executive Officer of the company was increased for up to $2.0 million of credit support if needed to fund future operations. The total amount loaned against this letter of guarantee was approximately $1.9 million resulting in a remaining guarantee of $0.1 million as of June 30, 2012. On July 31, 2012, we closed on a public offering of 425,000 shares of our non-convertible 10% Series C Cumulative Preferred Stock (“10% Series C Preferred Stock”) (liquidation preference of $25.00 per share) at a public offering price of $21.00 per share. Net proceeds to the Company were approximately $8.3 million, after fees and expenses. See Note 10 – Subsequent Events for additional information. This infusion of cash into our working capital will allow us greater flexibility in executing our business plan for the next twelve months. In addition, during the six months ended June 30, 2012, holders of $2,726,892 of our Series B Debentures elected to convert their principal and accrued interest into shares of our 10% Series C Preferred Stock. Additionally, we have received irrevocable agreements from other existing holders of our Series B Debentures to convert approximately $295 thousand of our Series B Debentures into our 10% Series C Preferred Stock subsequent to June 30, 2012. Execution of our business plan for the next twelve months requires the ability for us to generate cash to satisfy planned operating requirements. We expect to receive a minimum of $500 thousand in proceeds from the sale of our Ocotillo wind energy project after certain conditions are met which is estimated to be sometime during 2012. Along with the revenue generated from our water management activities, which includes the Hunter Disposal acquisition and the Blue Water acquisition discussed below, and letter of guarantee and credit support and proceeds from the sale of our 10% Series C Preferred Stock, we anticipate having sufficient cash reserves to meet all of our anticipated operating obligations for the next twelve months. Planned capital expenditures are wholly 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 development of our water management projects in order that we can generate positive cash flow to sustain operations. We continue to pursue numerous opportunities in the water resource management business as it specifically relates to the oil and gas industry. 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 $2.2 million in cash, 1,846,722 shares of the Company’s restricted common stock with a fair market value of $3.3 million, 22,000 shares of our 10% cumulative preferred stock with a stated value of $100 per share or $2.2 million, and a $2.2 million convertible promissory note due to the seller. On April 25, 2012, we changed the stated liquidation value of our 10% Series C Preferred Stock from $100 per share to $25 per share. As a result, the 22,000 shares of our 10% Series C Preferred Stock issued in connection with the acquisition of Hunter Disposal were converted to 88,000 shares of 10% Series C Preferred Stock. 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 future wastewater hauling and disposal capacity in the states of Kentucky, Ohio and West Virginia and a five-year tank rental agreement with GreenHunter Water, In fiscal year 2011, Hunter Disposal, had positive cashflow from operations which exceeded the Company’s deficit in cash flow from operations during 2011. Hunter Disposal entered into a significant service contract with a major oil & gas company during the second half of 2011 which further expanded our water management activities for 2012.
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On April 27, 2012, we entered into an Option Agreement and a Pledge Agreement with Midwest Continent Holding, LLC (“Midwest”) for approximately $2.5 million to acquire 100% of Midwest’s membership interest in Blue Water Energy Solutions, LLC (“Blue Water”) on or before June 30, 2012. Blue Water owns three existing salt water disposal wells and related facilities located in Oklahoma. Midwest previously owned 100% of the membership interest of Blue Water until April 30, 2012. The price we paid for the option was $750,000, consisting of a cash payment of $250,000 and $500,000 of our 10% Series C Preferred Stock. Midwest had pledged its membership interest in Blue Water as security for the Option Agreement. On June 29, 2012, we paid $515,000 in cash and issued 242,471 shares of our common stock valued at $512 thousand under the option agreement and extended to extend our purchase option until July 31, 2012. On July 31, 2012, we exercised our option to acquire Blue Water (See Note 10 – Subsequent Events). We funded the option exercise with a portion of the proceeds from the sale of our 10% Series C Preferred Stock. Two of the water disposal wells are currently in commercial operations. The third well will require extensive rehabilitation expenditures, the viability of which has yet to be determined. On May 18, 2012, we entered into a definitive joint venture agreement to develop seven salt water disposal wells in Gonzalez, Karnes, DeWitt, Frio and La Salle counties in South Texas. These new wells will be strategically located in the heart of the Eagle Ford Shale Play. On May 21, 2012, we closed on the rights to two of the wells and on June 8, 2012, we closed on the rights to two more of the wells. The total acquisition cost of the rights to the four wells was $2.1 million, consisting of $1.2 million in cash, 16,000 shares of our 10% Series C Preferred Stock, and 247,876 shares of our common stock. On June 30, 2012, we also agreed to pay incurred a $150,000 obligation for drilling permits on the final three wells at June 30, 2012, which can be offset against our $1.5 million cost (on the same basis as the first four wells) to acquire rights to the remaining three joint venture wells should we decide to close on that part of the agreement. 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 management business, or that the operations of our water 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 management business, or if our water 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 a significant portion of 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. ACQUISITION Hunter Disposal On February 17, 2012, the Company, through its wholly owned subsidiary, GreenHunter Water, LLC, closed on the acquisition of 100% of the equity ownership interest of Hunter Disposal, LLC, a wholly owned subsidiary of Magnum Hunter Resources Corporation, an entity affiliated through common directors, officers and stockholders. Hunter Disposal fits in with our new focus of water management services and provided an entry point into the Appalachian region. 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 Company acquired three fully operational commercial salt water disposal (SWD) wells and associated facilities located in Washington County, Ohio and Lee County, Kentucky. The total consideration for this acquisition was approximately $9.9 million. The consideration paid consisted of $2.2 million in cash, 1,846,722 shares of the Company’s restricted common stock with a fair value of $3.3 million, 22,000 shares of our 10% Series C preferred stock with a stated value of $100 per share, or $2.2 million, and a $2.2 million convertible promissory note due to the seller. On April 25, 2012, we changed the stated liquidation value of our 10% Series C Preferred Stock from $100 per share to $25 per share. As a result, the 22,000 shares of our 10% Series C Preferred Stock issued in connection with the acquisition of Hunter Disposal were converted to 88,000 shares of 10% Series C Preferred Stock. In connection with the sale, Triad Hunter, LLC, a wholly owned subsidiary of Magnum Hunter Resources Corporation, entered into agreements with Hunter Disposal, LLC and GreenHunter Water, LLC 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, LLC. The fair value of the net assets acquired, based on management’s assessment, approximated the $9.9 million in consideration paid.
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The acquisition of Hunter Disposal was accounted for using the acquisition method of accounting, which requires the net assets acquired to be recorded at their fair values. The following table summarizes the purchase price and the preliminary estimate of the fair values of the net assets acquired at the date of acquisition as determined as of June 30, 2012:
On April 27, 2012, we entered into an Option Agreement and a Pledge Agreement with Midwest Continent Holding, LLC (“Midwest”) to acquire 100% of Midwest’s membership interest in Blue Water Energy Solutions, LLC (“Blue Water”) on or before June 30, 2012 for approximately $2.5 million. Blue Water owns three existing salt water disposal wells and related facilities located in Oklahoma. Midwest previously owned 100% of the membership interest of Blue Water until April 30, 2012. The price we paid for the option was $750,000, consisting of a cash payment of $250,000 and $500,000 of our 10% Series C Preferred Stock. Midwest had pledged its membership interest in Blue Water as security for the Option Agreement. On June 29, 2012, we paid $515,000 in cash and issued 242,471 shares of our common stock valued at $512 thousand under the option agreement to extend our purchase option until July 31, 2012. On July 31, 2012, we exercised our option to acquire Blue Water (See Note 10 – Subsequent Events). We funded the option exercise with a portion of the proceeds from the sale of our 10% Series C Preferred Stock. The Option Agreement contained other covenants during the option period, including naming us as the sole Manager of Blue Water, LLC during the option term. On May 18, 2012, we entered into a definitive joint venture agreement to develop seven salt water disposal wells in Gonzalez, Karnes, DeWitt, Frio and La Salle counties in South Texas. These new wells will be strategically located in the heart of the Eagle Ford Shale Play. On May 21, 2012, we closed on the rights to two of the wells and on June 8, 2012, we closed on the rights to two more of the wells. The total acquisition cost of the rights to the four wells was $2.1 million, consisting of $1.2 million in cash, 16,000 shares of our 10% Series C Preferred Stock valued at $400 thousand, and 247,876 shares of our common stock valued at $506 thousand. On June 30, 2012, we also agreed to pay $150,000 for drilling permits on the final three wells, which can be offset against our $1.5 million cost (on the same basis as the first four wells) to acquire rights to the remaining three joint venture wells should we decide to close on that part of the agreement. Acquisition costs of approximately $74 thousand are included in general and administrative expense for the six months ended June 30, 2012. The consolidated statement of operations includes Hunter Disposal’s revenue of $3.9 million and $5.7 million for the three and six months ended June 30, 2012, respectively, and Hunter Disposal’s operating income of $1.4 million and $2.0 million for the three and six months ended June 30, 2012, respectively.
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The following unaudited and unreviewed summary, prepared on a pro forma basis, presents the results of operations for the three and six months ended June 30, 2012 and 2011, as if the acquisition of Hunter Disposal, LLC, along with transactions necessary to finance the acquisition, had occurred on January 1, 2011. The pro forma information includes the effects of adjustments for interest expense and depreciation expense. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each period presented, nor are they necessarily indicative of future consolidated results.
NOTE 4. 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:
As of June 30, 2012 and December 31, 2011 there were no assets or liabilities measured at fair value on a nonrecurring basis. The following table shows assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 and the input categories associated with those assets and liabilities.
Fair value measurements on a recurring basis June 30, 2012
Fair value measurements on a recurring basis December 31, 2011
The Company has current derivative liabilities resulting from the antidilutive features on its common stock warrants, Series A Convertible Preferred Stock, and Series B Convertible Preferred Stock. The estimated fair value of the convertible securities liability is revalued at each balance sheet date, with changes in value recorded as other income or expense in the consolidated statements of operations.
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NOTE 5. NOTES PAYABLE Notes Payable at June 30, 2012 and December 31, 2011, consisted of the following:
Notes Payable On January 23, 2012, we entered into a note payable with a bank for the purchase of a water hauling truck in the amount of $179 thousand, bearing a fixed interest rate of 7.99% with principal and interest payable monthly over the term of the loan. The note payable has a final maturity date of January 24, 2015. On May 17, 2012, we entered into a note payable with a bank for the purchase of ten water hauling trucks and trailers in the amount of $1.7 million, bearing interest at a rate of one-month LIBOR plus 4.0% with principal and interest payable monthly over the term of the loan. The note payable has a final maturity date of August 17, 2017. On February 17, 2012, we entered into a note payable with a bank in the amount of $2.2 million, bearing a fixed interest rate of 5.5%, to finance a portion of the consideration paid in our acquisition of Hunter Disposal. The note is collateralized by the equipment acquired. See Note 3 – Acquisitions, for additional information. Note Payable to Related Party During the six months ended June 30, 2012, the Company borrowed an additional $1.3 million under a promissory note due to the Company’s Chairman and Chief Executive Officer, and the company repaid $300 thousand of the borrowings on that note during the quarter. The note was repaid subsequent to June 30, 2012. See Note 10 – Subsequent Events. Convertible Promissory Note Payable 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 will include accrued interest and principle payments of $137,500 per quarter. 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, for additional information. 9% Series B Senior Secured Redeemable Debentures The Company has not paid interest on the Series B debentures for the period March 2011 through June 2012. Therefore, we were technically in default on our Series B Debentures at June 30, 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 June 30, 2012. These debentures are secured by GreenHunter Energy’s interest in GreenHunter Mesquite Lake, LLC, and are otherwise non-recourse to GreenHunter Energy.
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On October 21, 2011, we offered the holders of the 9% Series B Redeemable Debentures the opportunity to convert the principal and accrued but unpaid interest on the debentures to shares of our 10% Series C Preferred Stock. The offer has been extended until August 31, 2012. During the six months ended June 30, 2012, holders of $2,726,892 of our Series B Debentures elected to convert their principal and accrued interest. Additionally, we have received irrevocable agreements from other holders of our Series B Debentures to convert approximately $295 thousand of our Series B Debentures into our 10% Series C Preferred Stock subsequent to June 30, 2012. Maturities The following table presents the approximate annual maturities of all of our debt as of June 30, 2012:
NOTE 6. STOCKHOLDERS’ EQUITY On April 25, 2012, we changed the stated liquidation value of our 10% Series C Preferred Stock from $100 per share to $25 per share. As a result, the 22,000 shares of our Series C Preferred Stock issued in connection with the acquisition of Hunter Disposal were converted to 88,000 shares of 10% Series C Preferred Stock. The following table reflects changes in shares of our outstanding common stock, preferred stock and warrants during the periods reflected in our financial statements from December 31, 2011 to June 30, 2012:
Preferred Stock We were not able to pay dividends on our Series A Preferred Stock for the quarters ending December 31, 2008 through June 30, 2012. In accordance with the terms of this preferred stock, accrued dividends of $2.3 million were added to the stated value of the preferred stock, resulting in a stated value per share of $1,384 at June 30, 2012. This additional $2.3 million in stated value will accrue dividends at a 10% rate. On February 17, 2012, we issued 22,000 shares of our 10% Series C Preferred Stock as partial consideration in our acquisition of Hunter Disposal. On April 25, 2012, we changed the stated liquidation value of our 10% Series C Preferred Stock from $100 per share to $25 per share. As a result, the 22,000 shares of our 10% Series C Preferred Stock issued in connection with the acquisition of Hunter Disposal were converted to 88,000 shares of 10% Series C Preferred Stock. See Note 3 – Acquisitions, for additional information. The Series C Cumulative Preferred Stock earns 10% dividends paid monthly and is not convertible into common shares of the company except for under certain circumstances in the event of a change of control.
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During the six months ended June 30, 2012, the Company issued 120,213 shares of our Series C Preferred Stock upon conversion of $2.7 million in principal along with accrued interest of $279 thousand on our Series B Debentures. On April 27, 2012, the Company issued 20,000 shares of our 10% Series C Preferred Stock as partial consideration in the closing of the Blue Water Acquisition. On June 29, 2012, the Company issued 16,000 shares of our 10% Series C Preferred Stock as partial consideration in the closing of four permitted disposal well sites for the Eagle Ford Water Hunter Joint Venture. Common Stock and Common Stock Warrants We have 90,000,000 authorized shares of common stock. We cannot pay any dividends on our common stock until all Series A cumulative preferred dividends have been satisfied. On February 17, 2012, the Company issued 1,846,722 shares of common stock with a fair market value of $3.3 million based on stock price of $1.79, as partial consideration in the acquisition of Hunter Disposal. See Note 3 – Acquisitions, for additional information. During the six months ended June 30, 2012, the Company issued 45,201 shares of common stock for payment of Board fees to nonemployee members of Board of Directors as payment of their fees for 2011 and first quarter of 2012. During the six months ended June 30, 2012, the Company issued 20,000 shares of common stock upon exercise of 20,000 of our $1.50 warrants. During the six months ended June 30, 2012, 459,057 of our $1.50 common stock warrants have expired. On June 27, 2012, the Company issued 242,471 shares of our common stock valued at $512 thousand (based on a closing price of $2.11 per share as of June 27, 2012) as partial consideration for entry into the joint venture agreement with Blue Water Energy Solutions. On June 29, 2012, the Company issued 247,876 shares of our common stock valued at $506 thousand, (based on a closing price of $2.04 per share as of June 29, 2012) as partial consideration for the acquisition of four permitted disposal well sites for the Eagle Ford Water Hunter Joint Venture. Treasury Stock During the six months ended June 30, 2012, the Company issued 13,984 shares of the Company’s common stock out of treasury, with a cost of $211 thousand, for payment of shares owed for fully vested share grants under our share based compensation plan. NOTE 7. SHARE-BASED COMPENSATION We account for our share-based compensation in accordance with ASC standards on Share-based Payments. The standards apply to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are to follow a fair value of those equity instruments. Under the ASC standards, we are required to follow a fair value approach using an option-pricing model, such as the Black-Scholes option valuation model, at the date of a stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. In September 2010, the Company adopted its 2010 Long-Term Incentive Compensation Plan (the “Incentive Plan”), which provides for equity incentives to be granted to employees, officers or directors of the Company, as well as key advisers or consultants. Equity incentives may be in the form of stock options with an exercise price not less than the fair market value of the underlying shares on the date of grant, stock appreciation rights, restricted stock awards, stock bonus awards, other stock-based awards, or any combination of the foregoing. A maximum of 5,000,000 shares of Common Stock were authorized for issuance under the Incentive Plan.
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Common Stock Options During the six months June 30, 2012, the Company granted 2,025,750 common stock options to members of management and employees of the Company at an average exercise price of $1.65 with an average estimated fair value of $0.98 per share. The options have a life of ten years and vest in equal amounts over a three year period beginning with the date of grant. We recorded share-based compensation expense of $1.2 million related to stock options for which the requisite service period elapsed during the six months ended June 30, 2012. These expenses are included in our selling, general and administrative expenses. No option exercises occurred during the six months ended June 30, 2012. As of June 30, 2012, there was $2.3 million of total unrecognized compensation cost related to unvested shares associated with stock options which will be recognized over a weighted-average period of 1.53 years. 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). We estimated the fair value of each stock based grant using the Black-Scholes option pricing method for service and performance based options, and the Lattice Model for market based awards. The weighted average values for options issued for the quarter ended June 30, 2012 was as follows:
The following is a summary of stock option activity during the six months ended June 30, 2012.
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The following is a summary of stock options outstanding at June 30, 2012:
Share Awards During the six months ended June 30, 2012, we granted 31,064 shares of common stock to the nonemployee members of the Board of Directors as payment for their fees for the first quarter of 2011 in lieu of receiving cash for their fees. These common shares vested immediately and were valued at weighted average price of $2.22 per share based on the quoted market value of the stock on the date of the grant. We recognized $69 thousand of expense in our selling, general, and administrative expenses for the six months ended June 30, 2012, related to these shares. These shares were not issued as of June 30, 2012, but are included in weighted average basic shares outstanding as of June 30, 2012. At June 30, 2012, there were 58,139 shares owed to the non-employee members of the Board of Directors that were not issued, but are included in weighted average basic shares outstanding as of June 30, 2012. On February 13, 2012, we granted 3,500 restricted shares to employees. These common shares vested immediately and were valued at a weighted average of $1.65 per share, based on the quoted market value of the stock on the date of the grant. We recognized $6 thousand of expense in our selling, general, and administrative expenses for the six months ended June 30, 2012, related to these shares. These shares were issued out of treasury. On April 2, 2012, we granted 10,484 restricted shares to members of the board of directors as payment of their fees. These common shares vested immediately and were valued at a weighted average of $2.35 per share, based on the quoted market value of the stock on the date of the grant. We recognized $25 thousand of expense in our selling, general, and administrative expenses for the six months ended June 30, 2012, related to these shares. These shares were issued out of treasury. During April 2011, the compensation committee approved the grant of shares of the Company’s common stock to be valued at $1.0 million or 1,111,111 shares of common stock based on the per share price of $0.90, the closing price on April 5, 2011, to the Company’s Chairman and Chief Executive Officer, pending shareholder approval. These shares are not included in shares outstanding, weighted average shares outstanding, and potentially dilutive securities, since the grant has not yet been approved by shareholders.
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The following is a summary of unvested share awards for the six month ended June 30, 2012:
NOTE 8. RELATED PARTY TRANSACTIONS During the six months ended June 30, 2012, we earned storage rental revenue for providing water storage tanks and equipment for lease to Eagle Ford Hunter, LLC, and Triad Hunter, LLC, both wholly owned subsidiaries of Magnum Hunter Resources Corporation, an entity for which our Chairman and Chief Executive Officer is an officer and significant shareholder. Storage and other revenue totaled $899 thousand and $1.5 million for three and six months ended June 30, 2012 and none for three and six months ended June 30, 2011, respectively. Accounts receivable related to that revenue totaled $764 thousand and none as of June 30, 2012 and 2011, respectively. During the six months ended June 30, 2012, we obtained accounting services for a fee from Magnum Hunter Resources Corporation, an entity for which our Chairman and Chief Executive Officer is an officer and significant shareholder. Professional services expense totaled $25 thousand and $50 thousand for the three and six months ended June 30, 2012 and $22 thousand and $40 thousand for the three and six months ended June 30, 2011, respectively. The Company has promissory notes outstanding to the Chairman and Chief Executive Officer. The balance under these promissory notes was $1.9 million at June 30, 2012, and $889 thousand at December 31, 2011. The notes are convertible into common stock at the holder’s option based on the closing price of the company’s common stock on the day prior to the election to convert. See Note 6, Stockholders’ Equity, for more information. As of August 9, 2012, the balances on these promissory notes have been repaid. See Note 10, Subsequent Events, for more information. 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 party. The total consideration for this acquisition was approximately $9.9 million. The consideration paid consisted of $2.2 million in cash, 1,846,722 shares of the Company’s restricted common stock with a fair value of $3.3 million, 22,000 shares of our 10% Series C Preferred Stock with a stated value of $100 per share, or $2.2 million, and a $2.2 million convertible promissory note due to the seller. On April 25, 2012, we changed the stated liquidation value of our 10% Series C Preferred Stock from $100 per share to $25 per share. As a result, the 22,000 shares of our 10% Series C Preferred Stock issued in connection with the acquisition of Hunter Disposal were converted to 88,000 shares of 10% Series C Preferred Stock. 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. NOTE 9. COMMITMENTS AND CONTINGENCIES On March 29, 2012, GreenHunter Water entered into a five year commercial lease agreement for an existing truck and barge transloading and water storage facility located in Washington County, Ohio. The facility is located on approximately 10 acres of land and contains 70,000 barrels (BBL) of functional bulk liquids storage tank capacity, a barge transloading station, a covered loading station with multiple truck servicing bays and office space. The lease commitment is for five years with monthly payments of $8 thousand for the first year, $10 thousand for the second year and $12 thousand for years three through five of the lease. Additionally, we are required to pay an additional fee of $0.04 per barrel for all wastewater delivered for and stored on the leased premises.
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ABB, Inc. vs. GreenHunter Energy, Inc. In the Superior Court of California, County of Imperial, Case No. ECU07002. ABB, Inc. was a subcontractor to Crown Engineering for certain construction work performed at our Mesquite Lake plant in Imperial County, California several years ago. GreenHunter Energy, Inc. only had a construction contract directly with Crown Engineering and not with any of its subcontractors. 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. Plaintiff is attempting to enforce payment of its claim, approximately $327,555 by asserting it is a third party beneficiary under the Company’s settlement agreement with Crown Engineering. GreenHunter will challenge the complaint by way of a demurrer, challenging the Plaintiff’s right to claim it is an intended beneficiary of the settlement agreement. We believe the plaintiff’s claims are wholly without merit and accordingly have not recorded a liability for this matter. Heckmann Water Resources, Plaintiff v. Hunter Disposal LLC and GreenHunter Energy, Inc., Defendants, In the Court of Common Pleas, Washington County, Ohio, Case No. 120T233. Heckmann Water Resources, the Plaintiff, alleges a breach of contract against Hunter Disposal, LLC, for failure to pay for certain transportation services on behalf of Hunter Disposal. The Plaintiff alleges the Company made representations to Plaintiff that the Company would make any payments on Hunter Disposal’s behalf. The complaint alleges that Hunter Disposal and the Company currently owe the Plaintiff approximately $1.5 million for services rendered and not paid for, and is seeking damages for all amounts owed to the Plaintiff. The Company has hired legal counsel and is currently preparing its answer to this lawsuit, including countersuing the Plaintiff for tortuous interference with an existing contract and defamation. As of July 25, 2012, Hunter Disposal partially has paid the amounts owed to Plaintiff, and has reduced the amount outstanding to the Plaintiff to approximately $587 thousand. All amounts owed to Plaintiff have already been recorded in our financial statements and have been reported in all of our periodic reports, so no additional financial reserves are required. NOTE 10. SUBSEQUENT EVENTS Issuance of Preferred Stock On July 31, 2012, the Company closed a public offering of 425,000 shares of its non-convertible 10% Series C Preferred Stock (liquidation preference of $25.00 per share) at a public offering price of $21.00 per share. The net proceeds to the Company from the offering were approximately $8.3 million, net of underwriter discounts, commissions and estimated offering expenses. Blue Water Acquisition On July 31, 2012, we exercised our option to acquire Blue Water and paid $675 thousand in cash. We funded the option exercise with a portion of the proceeds from the sale of our 10% Series C Preferred Stock. We had previously paid $765 thousand in cash, issued $500 thousand of our 10% Series C Preferred Stock, 242,471 shares of our common stock valued at $512 thousand, and assumed net liabilities of the previous owner of the wells totaled $75 thousand as payments on the option. Additionally, we spent approximately $157 thousand in repair and cleanup of the well sites prior to exercising the option. Conversion of Series B Debentures Since June 30, 2012, approximately $295 thousand of our Series B Debentures have been converted into 13,273 shares of our 10% Series C Preferred Stock. Conversion of Executive Accrued Payroll On July 10, 2012, our Chairman and Chief Executive Officer converted $50 thousand of accrued and unpaid payroll into 27,322 shares of our common stock.
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Repayment of Note Payable to Related Party On July 17, 2012 and on July 31, 2012, the company repaid $30 thousand and $500 thousand of the borrowings on promissory notes due to our Chairman and Chief Executive Officer. On August 9, 2012, the company repaid the remaining $1.3 million of the borrowings on the promissory note due to our Chairman and Chief Executive Officer.
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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, 2011 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 (see “Forward-Looking Statements” above). Actual events or results may differ materially from those indicated in such forward-looking statements. Overview Prior to April 13, 2007, we were a startup company in the development stage and we have reentered the development stage effective July 1, 2010. Our previous business plan was to acquire and operate assets in the renewable energy sectors of, biomass, solar, wind, and geothermal. We refocused our efforts and currently have ongoing business initiatives in water management through GreenHunter Water, LLC and our recently acquired Hunter Disposal LLC, and biomass through GreenHunter Mesquite Lake, LLC, (“Mesquite Lake”). The Company has earned significant revenue from planned principal operations since the first quarter of 2012. Accordingly, effective January 1, 2012, the Company’s activities no longer required to be accounted for as those of a “Development Stage Enterprise” as set forth by FASB ASC 915. It is our goal to become a leading provider of water management solutions and clean energy products as it relates to the oil and gas industry. As part of this new strategic initiative, we have recently closed and entered into definitive agreements to acquire or lease acreage in the Marcellus, Utica, Mississippian, Eagle Ford, and Bakken Shale areas located in Appalachia, Oklahoma, South Texas and Eastern Montana, respectively. We presently own and operate commercial water service facilities in Appalachia, Oklahoma, and Texas. We have the intention of developing additional commercial water service facilities on the aforementioned properties. In addition, we have deployed a modular above-ground temporary water storage system in the Marcellus Shale and have installed and operated an onsite semi-portable water treatment facility the Appalachian region. In response to requests from current and prospective customers, we have designed and engineered and are fabricating a 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. We believe that our ability to successfully compete in the clean water and renewable energy industries 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 debt and equity capital, proper and meaningful governmental support including 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 Our financial position has been adversely affected by our lack of working capital and the overall deterioration across all capital markets, particularly those for renewable energy companies. The lack of consistent and meaningful governmental support with tax incentives and other credit enhancements has had a serious detrimental effect on our previously planned business operations. As of June 30, 2012, we had a working capital deficit of $14.8 million which includes $4.4 million related to earlier construction activities at our Mesquite Lake Biomass Plant, $2.6 million in redeemable debentures with recourse only against the equity interests of GreenHunter Mesquite Lake, LLC, which holds the Mesquite Lake Plant, and $1.9 million in promissory notes to our Chairman and Chief Executive Officer under a credit support agreement. We have continued to experience losses from ongoing operations. These factors raised doubt about our ability to continue as a going concern. We have begun to generate revenue from our water management activities. We have received a number of capital advances from our Chairman and Chief Executive Officer in exchange for promissory notes that have been consolidated and extended to December 31, 2012. On August 15, 2011, the letter of guarantee from the Chairman and Chief Executive Officer of the company was increased for up to $2.0 million of credit support if needed to fund future operations. The total amount loaned against this letter of guarantee is approximately $1.9 million resulting in a remaining guarantee of $0.1 million as of June 30, 2012. On July 31, 2012, we closed on a public offering of 425,000 shares of our non-convertible 10% Series C
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Cumulative Preferred Stock (“10% Series C Preferred Stock”) (liquidation preference of $25.00 per share) at a public offering price of $21.00 per share. Net proceeds to the Company were approximately $8.3 million, after fees and expenses. This infusion of cash into our working capital will allow us greater flexibility in executing our business plan for the next twelve months. In addition, during the six months ended June 30, 2012, holders of $2,726,892 of our Series B Debentures elected to convert their principal and accrued interest into shares of our 10% Series C Preferred Stock. The exchange offer has been extended until August 31, 2012. Preferred Stock. Additionally, we have received irrevocable agreements from other existing holders of our Series B Debentures to convert approximately $295 thousand of our Series B Debentures into our 10% Series C Preferred Stock subsequent to June 30, 2012. The exchange offer has been extended until August 31, 2012. The following unaudited and unreviewed summary, prepared on a pro forma basis, presents selected data from the condensed consolidated balance sheet as of June 30, 2012, as if the issuance of the 425,000 shares of 10% Series C Preferred Stock had occurred on June 30, 2012. The pro forma information includes adjustments for net proceeds from the offering.
The consolidated statement of operations includes Hunter Disposal’s revenue of $3.9 million and $5.7 million for the three and six months ended June 30, 2012, respectively, and Hunter Disposal’s operating income of $1.4 million and $2.0 million for the three and six months ended June 30, 2012, respectively. The following unaudited and unreviewed summary, prepared on a pro forma basis, presents the results of operations for the three and six months ended June 30, 2012 and 2011, as if the issuance of the 425,000 shares of 10% Series C Cumulative Preferred Stock and the acquisition of Hunter Disposal, LLC, along with transactions necessary to finance the acquisition, had occurred on January 1, 2011. The pro forma information includes the effects of adjustments for interest expense and depreciation expense. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each period presented, nor are they necessarily indicative of future consolidated results.
Execution of our business plan for the next twelve months requires the ability to generate cash to satisfy planned operating requirements. We expect to receive a minimum of $500 thousand in proceeds from the sale of our Ocotillo wind energy project after certain conditions are met which is estimated to be sometime during 2012. Along with the revenue generated from our water management activities, which includes the Hunter Disposal acquisition and the Blue Water acquisition discussed below, and letter of guarantee and credit support and proceeds from the sale of our 10% Series C Preferred Stock, we anticipate having
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sufficient cash reserves to meet all of our anticipated operating obligations for the next twelve months. Planned capital expenditures are wholly 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 alternative sources, and particularly with respect to procuring working capital sufficient for the development of our water management projects in order that we can generate positive cash flow to sustain operations. We continue to pursue numerous opportunities in the water resource management business as it specifically relates to the oil and gas industry. 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 $2.2 million in cash, 1,846,722 shares of the Company’s restricted common stock with a fair market value of $3.3 million, 22,000 shares of our 10% cumulative preferred stock with a stated value of $100 per share, or $2.2 million, and a $2.2 million convertible promissory note due to the seller. On April 25, 2012, we changed the stated liquidation value of our 10% Series C Preferred Stock from $100 per share to $25 per share. As a result, the 22,000 shares of our 10% Series C Preferred Stock issued in connection with the acquisition of Hunter Disposal were converted to 88,000 shares of 10% Series C Preferred Stock. In connection with the sale, Triad Hunter, LLC, a wholly owned subsidiary of Magnum Hunter Resources, Corporation, entered into agreements with Hunter Disposal, LLC and GreenHunter Water, LLC 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, LLC. During the year ended December 31, 2011, Hunter Disposal, LLC had positive cash flow from operations which exceeded the Company’s deficit in cash flow from operations for the same period. Hunter Disposal entered into a significant service contract with a major oil & gas company during the second half of 2011 which further expands our water management activities for 2012. On April 27, 2012, we entered into an Option Agreement and a Pledge Agreement with Midwest Continent Holding, LLC (“Midwest”) to acquire 100% of Midwest’s membership interest in Blue Water Energy Solutions, LLC (“Blue Water”) on or before June 30, 2012 for approximately $2.5 million. Blue Water owns three existing salt water disposal wells and related facilities located in Oklahoma. Midwest previously owned 100% of the membership interest of Blue Water until April 30, 2012. The price we paid for the option was $750,000, consisting of a cash payment of $250,000 and $500,000 of our 10% Series C Preferred Stock. Midwest had pledged its membership interest in Blue Water as security for the Option Agreement. On June 29, 2012, we paid $515,000 in cash and issued 242,741 of our common stock valued at $512 thousand under the option agreement to extend our purchase option until July 31, 2012. On July 31, 2012, we exercised our option to acquire Blue Water (See Note 10 – Subsequent Events). We funded the option exercise with a portion of the proceeds from the sale of our 10% Series C Preferred Stock. Two of the water disposal wells are currently operational. The third well will require extensive rehabilitation expenditures, the commercial viability of which is being studied. On May 21, 2012, we entered into a definitive joint venture agreement to develop seven salt water disposal wells in Gonzalez, Karnes, DeWitt, Frio and La Salle counties in South Texas. These new wells will be strategically located in the heart of the Eagle Ford Shale Play. On May 21, 2012, we closed on the rights to two of the wells and on June 8, 2012, we closed on the rights to two more of the wells. The total acquisition cost of the rights to the four wells was $2.1 million, consisting of $1.2 million in cash, 16,000 shares of our 10% Series C Preferred Stock valued at $400 thousand, and 247,876 shares of our common stock valued at $506 thousand. On June 30, 2012, we also agreed to pay $150,000 for drilling permits on the final three wells, which can be offset against our $1.5 million cost (on the same basis as the first four wells) to acquire rights to the remaining three joint venture wells should we decide to close on that part of the agreement. 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 management business, or that the operations of our water 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 management business, or if our water 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. BioMass In May 2007, we acquired Mesquite Lake, an inactive 18.5 megawatt (nameplate capacity) biomass waste-to-energy electricity facility located on a 40-acre site in unincorporated Imperial County, California. We began refurbishing the plant during 2008. During 2008, we found that the existing air permit for the plant was not sufficient to support our planned operations, and we put this project on hold during the fourth quarter of 2008 while we went through the re-permitting process.
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We executed a new power purchase agreement for this facility in October 2009 and we obtained the air permit in July 2010. The renewable power incentives instituted in the past year have resulted in a situation which makes the refurbishment of the facility economic. Phase I of the facility consists of the construction, refurbishment, installation and equipping of the facility to generate (on a net basis) a total of 15.6 MW of electric power. Phase II of the facility consists of the construction, refurbishment, installation and equipping of the facility to generate (on an aggregate net basis) a total of 23.4 MW of electric power. GreenHunter Mesquite Lake estimates total cost of remaining construction and refurbishment to be approximately $52 million for which management is in the process of seeking additional capital through a number of different alternatives. California has an abundance of wood waste to be disposed of on an annual basis. Wood waste haulers typically dispose of wood waste in landfills, or the waste is taken to other sources such as a biomass plant. Mesquite Lake is located in a region that the U.S. Bureau of Labor Statistics registers as having the highest unemployment rate in the United States of 27.3 percent, and the Imperial Valley Economic Development Corporation estimates that approximately 642 jobs will be directly or indirectly created as a result of the project development. We had no significant revenues or operating expenses related to Mesquite Lake during the six months ended June 30, 2012 and 2011. Wind Energy Until April 2007, our primary business was the investment in and development of wind energy farms. We continue to own rights to a potential wind energy farm located in southern California. The significant decrease in natural gas prices over the past several years has caused a similar decline in wholesale electric prices which has caused our ability to develop new wind projects to be commercially uneconomical. Other than the expected receipt of $500 thousand and $4.3 million from the sale of our interests in the Ocotillo wind project in 2012, we do not intend to continue operations in wind energy. We had no significant revenues or operating expenses related to wind energy during the three months ended March 31, 2012 and 2011. Solar Energy According to the National Renewable Energy Laboratory (NREL), average annual irradiance per square meter in the Imperial County is 6.23 kilowatt hours per day. Our Mesquite Lake biomass facility is located on a 40-acre parcel of which 30 acres could be utilized for the biomass operation leaving 10 to 15 acres for the development of additional renewable energy projects. During the first quarter of 2010, we formed a new subsidiary to explore the development of a solar energy farm on our Mesquite Lake project site and completed a generator interconnection request with the Imperial Irrigation District (IID). On March 16, 2010 we were notified that IID had preserved an interconnection queue position for our solar project. Subject to regulatory and permitting approvals, we believe there are unique economic and operational advantages to building a solar farm on this site most significant being the ability to share existing interconnection infrastructure with the biomass facility. We had no revenues or operating expenses related to solar energy during the six months ended June 30, 2012 and 2011.
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Results of Operations Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011: Total Revenues Our total revenue for the 2012 three month period ended June 30, 2012 was approximately $4.2 million versus none during the similar 2011 period. The increase is due to revenue generated from our water management operations which began in late 2011 and has increased significantly upon the acquisition of Hunter Disposal on February 17, 2012. $4.0 million of the revenues were from Hunter Disposal which included $1.6 million in water disposal revenue, $2.2 million in transportation revenue, and $223 thousand in water storage and other revenue. We generated storage rental income through GreenHunter Water in South Texas and Appalachia of approximately $144 thousand in the 2012 period versus none in the 2011 period. We expect our revenues, at a minimum, to continue at this level and grow as we complete new disposal locations which will further expand our revenue base. Operating Costs Our operating costs were approximately $2.4 million for the three months ended June 30, 2012 and none for the three months ended June 30, 2011. The increase is due to operating costs incurred our water management operations during the period for Hunter Disposal and GreenHunter Water. We expect our costs, including transportation costs to decline in relation to revenue as we use more of our Company owned trucks to haul water and provide services. Depreciation Expense Our depreciation expense for the three months ended June 30, 2012 was approximately $272 thousand, including $186 thousand for Hunter Disposal. For the same period in 2011, our depreciation expense was approximately $47 thousand. The increase is due to Hunter Disposal and GreenHunter Water. Selling, General and Administrative Expense Selling, general and administrative expenses (“SG&A”) were approximately $2.0 million and $990 thousand during the three months ended June 30, 2012 and 2011, respectively. The increase is due to higher share based compensation expense during the 2012 period of $729 thousand versus a credit for stock compensation expense of $69 thousand in the 2011 period, and other increases due to the expansion of our business activity. Operating Loss Our operating loss was approximately $429 thousand in the 2012 period versus a loss of approximately $1.0 million in the 2011 period. The decrease in the operating loss is due to operating income generated by our water management operations. Hunter Disposal generated operating income was $1.4 million during the period. Other Income and Expense Interest expense was approximately $272 thousand in the 2012 period compared to $188 thousand for the 2011 period. The increase in interest expense was due to the increases in notes payable for the acquisition of Hunter Disposal and on equipment purchases for GreenHunter Water. In the three months ended June 30, 2011, we had an unrealized loss on convertible securities of approximately $251 thousand versus none in the same period in 2012. Preferred Stock Dividends Dividends on our preferred stock were approximately $304 thousand in the 2012 period versus approximately $179 thousand in the 2011 period. The increase in preferred dividends is the result of dividends for 10% Series C Preferred Stock as well as increased stated value of our Series A Preferred Stock resulting from accrued dividends transferred to additional stated value. The increase in dividends on the 10% Series C Preferred Stock issued in the acquisition of Hunter Disposal was $55 thousand.
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Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011: Total Revenues Our total revenue for the six months ended June 30, 2012 was approximately $6.4 million versus none during the similar 2011 period. The increase is due to revenue generated from our water management operations which began in late 2011 and has increased significantly upon the acquisition of Hunter Disposal on February 17, 2012. $6.0 million of the revenues were from Hunter Disposal which included approximately $2.4 million in water disposal revenue, approximately $3.3 million in transportation revenue, and approximately $310 thousand in water storage and other revenue. We generated storage rental income of approximately $463 thousand through GreenHunter Water in South Texas and Appalachia in the 2012 period versus none in the 2011 period. We expect our revenues, at a minimum, to remain consistent and grow in future periods as we complete new disposal locations which will further expand our revenue potential. Operating Costs Our operating costs were approximately $3.7 million for the six months ended June 30, 2012 and $203 for the six months ended June 30, 2011. The increase is due to operating costs incurred from our water management operations during the period for Hunter Disposal and GreenHunter Water. We expect our costs, including transportation costs to decline in relation to revenue as we use more of our Company owned trucks to haul water and provide services. Depreciation Expense Depreciation expense was approximately $465 thousand and approximately $94 thousand during the six months ended June 30, 2012 and 2011, respectively. The increase is due to Hunter Disposal and GreenHunter Water. Selling, General and Administrative Expense Selling, general and administrative expenses (“SG&A”) were approximately $3.2 million and $2.1 million during the six months ended June 30, 2012 and 2011, respectively, which included $1.1 million and $162 thousand, respectively, in non-cash stock compensation expense. Operating Loss Our operating loss was approximately $876 thousand and $2.2 million for the six months ended June 30, 2012 and 2011, respectively. The decrease in operating loss is due to operating income generated by our water management operations. Hunter Disposal generated operating income of approximately $2.0 million for the 2012 period versus none in 2011 period. Other Income and Expense Interest expense was approximately $478 thousand in the 2012 period compared to approximately $373 thousand for the 2011 period. During the six months ended June 30, 2011, the Company recorded a loss on convertible securities of approximately $199 thousand which the Company did not incur during the six months ended June 30, 2012. Preferred Stock Dividends Dividends on our preferred stock were $499 thousand in the 2012 period versus $351 thousand in the 2011 period. The increase is due to the issuance of 10% Series C Preferred Stock in the period. Liquidity and Capital Resources Cash Flow and Working Capital As of June 30, 2012, we had cash and cash equivalents of approximately $257 thousand and a working capital deficit of approximately $14.8 million as compared to cash and cash equivalents of $13 thousand and working capital deficit of $12.3 million as of June 30, 2011. Our working capital deficit as of June 30, 2012 included $4.4 million related to earlier construction activities at our Mesquite Lake Biomass Plant and $2.6 million in redeemable debentures with recourse only against the equity interests of GreenHunter Mesquite Lake, LLC, which holds the Mesquite Lake Plant.
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Operating Activities During the six months ended June 30, 2012, operating activities provided $1.6 million in cash, while for the six months ended June 30, 2011 operating activities used $1.6 million in cash. Since we acquired Hunter Disposal on February 17, 2012, our cash flows from operating activities have significantly increased. During the one hundred thirty-five day period we have owned this entity through June 30, 2012, Hunter Disposal provided $2.5 million of cash flows from operating activities, which included changes in working capital items of $244 thousand. We expect cash flows from operating activities for the next twelve months will be sufficient to meet our operating needs. Investing Activities During the six months ended June 30, 2012, we used approximately $5.9 million in cash in investing activities, principally for the acquisition of Hunter Disposal of approximately $909 thousand, Blue Water of approximately $981 thousand, and the Eagle Ford Hunter Water Joint Venture of $1.2 million. We also used cash for capital expenditures of approximately $2.8 million which includes approximately $2.1 million for transportation equipment and approximately $733 thousand on water disposal and storage projects. In the 2011 period, our capital expenditures were approximately $5 thousand. Financing Activities During the six months ended June 30, 2012, our financing activities provided $4.5 million compared to $1.5 million for the six months ended June 30, 2011. The cash provided during the 2012 period resulted from proceeds of $30 thousand from the exercise of warrants and proceeds from borrowing on notes payable of approximately $5.6 million. We made payments of notes payable of $746 thousand paid approximately $160 thousand of commissions and fees on stock issuances, paid approximately $150 thousand of dividends on our 10% Series C Preferred Stock, and paid $2 thousand in deferred financing costs during the six months ended June 30, 2012. In the 2011 period, the cash provided by financing activities was due to proceeds from the issuance of common stock and warrants under our private placement offering of approximately $1.0 million and proceeds of notes payable of $574 thousand net of repayment of notes payable of $141 thousand. It will be necessary for us to obtain additional financing to fund our anticipated investing activities. This funding may come from a variety of sources, including debt, issuance of our 10% Series C Preferred Stock, and issuance of common stock. On July 31, 2012, we closed a public offering of 425,000 shares of our 10% Series C Preferred Stock which provided proceeds of approximately $8.3 million, net of expenses. This infusion of cash into our working capital will allow us greater flexibility in exercising our business plan for the next twelve months. Investing Activities and Future Requirements Capital Expenditures During the first six months of 2012, we had capital expenditures of approximately $2.8 million, including $2.1 million for transportation equipment, $586 thousand to make improvements at a water injection well, and $147 thousand for water management facilities that are in process of completion. See the discussion below for our future requirements related to investing activities. BioMass BioMass is seeking financing for a minimum of $24 million and a maximum of $54 million in capital expenditures in 2012 for refurbishment and expansion costs at the Mesquite Lake biomass facility in El Centro, California. Water Resource Management Recent improvements in drilling and completion technologies have unlocked large reserves of hydrocarbons in multiple unconventional resources plays in North America. These new drilling methods often involve a procedure called hydraulic fracturing or hydrofracking. This process involves the injection of large amounts of water, sand and chemicals under high pressures into rock formations to stimulate production. Unconventional wells can require more than four million gallons of water to complete a hydrofracking procedure. Some portion of the water used in production process will return to the surface as a by-product or waste stream; this water is commonly referred to by operators in the oil and gas industry as frac-flowback. In addition to frac-flowback, oil and natural gas wells also generate produced salt water, or brine, which is water from underground formations that is brought to the surface during the normal course of oil or gas production. Because the water has been in contact with hydrocarbon-bearing formations, it contains some of the chemical characteristics of the formations and the hydrocarbons. The physical and chemical properties of produced water vary considerably depending on the geographic location of the field, the geologic formation, and the type of hydrocarbon product being produced.
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Produced water properties and volume also vary through the lifetime of a reservoir. Produced water is the largest volume by-product or waste stream associated with oil and gas exploration and production. Although the details on generation and management of produced water are not well understood on a national scale, the U.S. Department of Energy’s National Energy Technology Laboratory (NETL) estimates that the total volume of produced water generated by U.S. onshore and offshore oil and gas production activities in 2007 was nearly 21 billion barrels, or 882 billion gallons. While produced water (also known as oil field brine, or brine, due to its high salinity content) can be reused if certain water quality conditions are met, over two billion gallons of brine water generated by the oil and gas industry is injected every day into approximately 144,000 Class II wells that are in operation in the United States according to the United States Environmental Protection Agency. After treatment, oilfield brine water is also discharged under National Pollutant Discharge Elimination System (NPDES) permits. The remaining 5 percent is managed through beneficial reuse or disposed through other methods including evaporation, percolation pits, and publicly owned treatment works. Federal and state legislation and regulatory initiatives relating to hydraulic fracturing are expected to result in increased costs and additional operating restrictions for oil and gas explorers and producers in the future. Congress is currently considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process. Sponsors of two companion bills, which are currently pending in the House Energy and Commerce Committee and the Senate Committee on Environment and Public Works Committee, have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, this legislation, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays or increased operating costs and could result in additional regulatory burdens for oil and natural gas operators. Several states are also considering implementing, or in some instances, have implemented, new regulations pertaining to hydraulic fracturing, including the disclosure of chemicals used in connection therewith and the disclosure of cradle-to-grave tracking of the byproducts therefrom. The adoption of any future federal or state laws or implementing regulations imposing reporting obligations on, or otherwise limiting the hydraulic fracturing process, would make it more difficult and more expensive to complete new wells in the unconventional shale resource formations and increase costs of compliance and doing business for oil and natural gas operators. Our management, which has significant backgrounds in the oil and natural gas industry, has identified water reuse and water management opportunities in the energy industry as a potentially high growth opportunity and is exploring various ways to reposition us to serve this growing segment through joint ventures, targeted acquisitions and development of water management technologies including facilities for underground injection for disposal, accelerated evaporation, pre-treatment of water for underground injection for increasing oil recovery, offsite commercial disposal, onsite remediation and beneficial reuse. GreenHunter Water, LLC, or GreenHunter Water, our wholly owned subsidiary, is focused on water resource management specifically as it pertains to the unconventional oil and natural gas shale resource plays with current business operations in the Appalachian, Oklahoma and South Texas basins. GreenHunter Water is committed to providing a full range of solutions to address producers’ current needs and is built upon an identified need in the oilfield, to deliver a Total Water Management Solution™ to our customer base through long term agreements. Our Total Water Management Solutions™ are custom developed to meet producers’ water resource planning needs. These solutions include owning and operating saltwater disposal facilities, fluids handling and hauling and logistics services, frac tank and next-generation modular above-ground tank rentals, mobile water treatment technologies and remote asset tracking to provide as value added services to our customers. Disposal Wells In April 2012 we received approval from the Railroad Commission of Texas to inject non-hazardous oil and gas waste into an Underground Injection Control (UIC) permitted SWD well to be located near Helena in Karnes County, Texas. The disposal well is scheduled to be drilled during the third quarter of 2012 with commercial operations also targeted for the third quarter of 2012. The Class II Helena SWD well is permitted to accept up to 10,000 BBL/D of oilfield production brine and frac flowback fluid and will inject into the Middle Wilcox disposal formation at an interval depth from 6,840 to 7,650 feet. The well will be located on a six acre parcel that is held under a 10 year extendable property lease. Management is budgeting capital expenditures of approximately $2 million over the near term to bring the facility into full operating condition.
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On May 18, 2012, we entered into a definitive joint venture agreement to develop seven salt water disposal wells in Gonzalez, Karnes, DeWitt, Frio and La Salle counties in South Texas. These new wells will be strategically located in the heart of the Eagle Ford Shale Play. On May 21, 2012, we closed on the rights to two of the wells and on June 8, 2012, we closed on the rights to two more of the wells. The total acquisition cost of the rights to the four wells was $2.1 million, consisting of $1.2 million in cash, 16,000 shares of our 10% Series C Preferred Stock, and 247,876 shares of our common stock. On June 30, 2012, we also incurred $150,000 for drilling permits on the final three wells at June 30, 2012, which can be offset against our $1.5 million cost (on the same basis as the first four wells) to acquire rights to the remaining three joint venture wells should we decide to close on that part of the agreement. We have identified additional locations for water service and disposal facilities in the Appalachia, Texas, Oklahoma and Williston Basin regions and are in various stages of negotiations with the owners of these properties for purchase or lease. At locations where we have secured leases or purchase agreements on real property, we have begun the process of permitting, well drilling or recompletion and surface facility development. Fluids Handling, Hauling and Logistics Produced water and frac-flowback is hauled via truck transport or is pumped through pipelines from its origin at the oilfield tank battery or drilling pad to the disposal location. Truck operators are required to possess commercial driver licenses (CDL) and the trucks are registered with the U.S. Department of Transportation (DOT) and respective State agencies in which the trucks will operate. Depending on the state and contents of the load, trucks are labeled with placards that read “Residual Waste” or “Brine” and may be required to display a DOT-407 placard if the contents are flammable or combustible as may occur when hydrocarbons are withdrawn from the tank battery alongside the water. Trucks typically used for hauling waste brine range in capacity from 80 barrel “bobcats” to 130 barrel “tankers” that are equipped with vacuum pumps. Producers of the waste product are charged for hauling at pre-determined hourly rates which vary depending on truck size and often include an accounting of the return “dead-head” trip. In addition to hauling fluids by truck, we are exploring various alternative means of water transport that include temporary and permanent above-ground or below-ground pipeline systems, and the use of rail and barge transport. The primary objectives are reducing road traffic while maintaining adherence to current and expected future environmental regulations, improving safety for the neighboring communities, our employees and the employees of our customers, and ultimately reducing our customers’ total cost of water management while generating improved returns on our deployed capital. GreenHunter Water has identified water hauling capacity as a constrained resource in our target areas of operation and we are actively pursuing contracts for traditional hauling and advanced logistics services as part of our Total Water Management Solutions™ portfolio offering. In April 2012 we entered into a five year lease for an existing truck and barge transloading and water storage facility located in Washington County, Ohio. The existing facility and infrastructure is ideally positioned on the Ohio River in the heart of the Marcellus and evolving Utica Shale resource plays and will serve as a strategic operating base for GreenHunter’s Appalachia water management businesses. Originally constructed in 1966 by Mobil Oil, the approximate 10 acre facility contains 70,000 barrels (BBL) of functional bulk liquids storage tank capacity, a barge transloading station, a covered loading station with multiple truck servicing bays and office space. The two 20,000 BBL tanks and one 30,000 BBL tank were originally used for gasoline storage until they were decommissioned in 1990 and will now serve as temporary fluids storage of fresh water and production water. The barge terminal assets located on the Ohio River will enable GreenHunter Water to significantly increase the Company’s current logistics. Bulk water storage and transloading operations commenced at this facility in July of 2012. Equipment and Tank Rentals and MAG Tank GreenHunter Water has a large variety of equipment and tanks for rental. GreenHunter Water recently purchased new equipment to be used to service a new long term contract to haul and dispose produced water for several major oil companies that control significant mineral leasehold acreage positions in the Marcellus and Utica Shale plays located in Pennsylvania, West Virginia and Ohio. We have contracted with an engineering firm to finalize the design of and modifications to our proprietary modular above ground MAG Tank™ product line and we are in the process of fabricating our first full-sized tank. Based on feedback from our customer base, we understand that a single tank size is not adequate, so we have worked with multiple consultants and engineering groups to design a flexible footprint for the MAG Tank™ allowing a larger variety of storage capacities and tank lay outs.
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Frac-Cycle Frac-Cycle™ is the general name for our water treatment service. We use a technology agnostic and vendor neutral approach to treat produced oilfield water. Due to the unique characteristics of water from different shale plays, unique flow-back within a single basin and differing objectives between operators due to company-specific initiatives, GreenHunter Water, in consultation with operators, has determined that no one water reuse system is ideal for all areas. We have evaluated and continue to evaluate multiple technologies and will select those that provide cost-effective solutions for the desired level of treatment for the operator’s needs. While most operators are targeting a clean brine output, Frac-Cycle’s flexible approach and design allows the user to take in flow-back or produced water and recycle to either clean brine or fresh water. Recycled water can be used in subsequent frac jobs and in some cases, an NPDES permit can be obtained to discharge fresh water into a stream. RAMCAT RAMCAT™ (Remote Access Management Compliance Asset Tracking) by GreenHunter Water is a cutting-edge, well-head management system and compliance tool that bundles a unique combination of proprietary software, advanced hardware and industry-standard communications technologies to provide an extremely powerful, effective and user-friendly method for remote activity observation via a web-based portal for management of well-head fluids. RAMCAT includes online data monitoring which provides oil and natural gas producers near real-time dynamic information on fluid levels, tank temperature, recent transactions, date and time of on-load and off-load, truck and driver identification, H2S and critical condition alarms, battery voltage, and more. The RAMCAT system enables closed-loop accountability of all well-head produced water and offers best-in-class environmental and regulatory compliance. RAMCAT revenues are comprised of hardware sales (realized at installation) and communications services (realized on a recurring basis over the term of the contract). In addition to margins associated with these revenues, we believe our “inside the fence” presence with an operator will provide a basis from which to offer other products and services. When coupled with our state-of-the-art fluids transportation fleet and Class II Underground Injection Control compliant salt water disposal facilities, RAMCAT ensures cradle-to-grave monitoring of oilfield fluid waste streams that exceeds U.S. EPA standards. According to the Ohio Department of Natural Resources, new standards for transporting, monitoring and disposing of oilfield brine by-products in Ohio, will include:
Each of these safety features was addressed during 2011 by GreenHunter Water in the original design specification of our products and are provided as basic features of RAMCAT which are currently deployed and operational on existing properties located in Ohio. Marketplace Opportunity Unconventional hydrocarbon production continues to grow as a percentage of all domestic onshore production in the United States. In almost all cases, water disposal will be an associated by-product of this production. Currently, producers can either manage their own water disposal and facilities, or they can contract with third party service providers. Based upon our industry research, we do not believe that there is any one, third party water pure-play company that would account for meaningful market share in any of the basins in which we are currently operating or targeting to provide our services. Furthermore, given the smaller independent nature of most third-party service providers, we believe that they may face more obstacles in meeting ever-changing regulatory requirements. In addition, most producers view water disposal for what it is, a by-product of their primary business of producing hydro-carbons. As a result, we believe that if we can demonstrate a complete water management/disposal product offering in multiple basins, we could position GreenHunter to become a true service provider to larger producers operating across multiple basins as a one-stop solution.
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Customers and Contracts The amount of water that can be disposed of in any one facility is dependent upon both regulatory permits, as well as the ability of the underground geologic formation to accept or absorb the waste water. As a result, the amount of waste water that GreenHunter will be able to dispose of at any one time will be finite. We expect as a result, that we will enter into long-term disposal contracts with producers whereby we will assure them a certain amount of disposal capacity for their utilization. Our goal, when feasible, would be to enter into take-or-pay contracts whereby we provide a certain amount of disposal capacity that is paid for by the producer, whether they actually utilize that capacity or not. As a result, we believe that we could enter into long-term contracts that will generate a certain level of assured revenue in addition to sales of our products and services in the spot market. In addition, based upon limited current disposal capacity versus demand for our services, we anticipate that we could enter into contracts subject to us being able to increase our disposal capacity through additional acquisition, or disposal well drilling. In this scenario, we would have a comfort level as to the potential revenue and profit to be recognized prior to undertaking any capital expenditure, thereby reducing our growth risk. As a customer base is secured with long-term disposal and fluids logistics contracts, we anticipate that we will be able to broaden our product offering to increase our net revenue per barrel of water hauled, treated or disposed through the various other services that we provide Our ability to generate revenues in this market is dependent on our ability to source capital for expansion, hire and train operating personnel and maintain our disposal wells, our fluids handling hauling and logistics fleet of equipment, our proprietary water recycling and cradle-to-grave tracking services and products so they are available when needed. Related Party Transactions During six months ended June 30, 2012, we earned storage rental revenue for providing water storage tanks and equipment for lease to Eagle Ford Hunter and Triad Hunter, LLC, both wholly owned subsidiaries of Magnum Hunter Resources Corporation, an entity for which our Chairman and Chief Executive Officer is an officer and significant shareholder. Storage and other revenue totaled $899 thousand and $1.5 million for three and six months ended June 30, 2012 and none for three and six months ended June 30, 2011, respectively. Accounts receivable related to that revenue totaled $764 thousand and none as of June 30, 2012 and 2011, respectively. During the six months ended June 30, 2012, we obtained accounting services for a fee from Magnum Hunter Resources Corporation, an entity for which our Chairman and Chief Executive Officer is an officer and significant shareholder. Professional services expense totaled $25 thousand and $50 thousand for the three and six months ended June 30, 2012 and $22 thousand and $40 thousand for the three and six months ended June 30, 2011, respectively. The Company has promissory notes outstanding to the Chairman and Chief Executive Officer. The balance under these promissory notes was $1.9 million at June 30, 2012, and $889 thousand at December 31, 2011. The notes are convertible into common stock at the holder’s option based on the closing price of the company’s common stock on the day prior to the election to convert. As of August 9, 2012, the promissory notes balance has been repaid. 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 party. The total consideration for this acquisition was approximately $9.9 million. The consideration paid consisted of $2.2 million in cash, 1,846,722 shares of the Company’s restricted common stock with a fair value of $3.3 million, 22,000 shares of our 10% Series C Preferred Stock with a stated value of $100 per share, or $2.2 million, and a $2.2 million convertible promissory note due to the seller. On April 25, 2012, we changed the stated liquidation value of our 10% Series C Preferred Stock from $100 per share to $25 per share. As a result, the 22,000 shares of our 10% Series C Preferred Stock issued in connection with the acquisition of Hunter Disposal were converted to 88,000 shares of 10% Series C Preferred Stock. In connection with the sale, Triad Hunter, LLC, a wholly owned subsidiary of Magnum Hunter Resources Corporation, entered into agreements with Hunter Disposal, LLC and GreenHunter Water, LLC 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, LLC.
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Off-Balance Sheet Arrangements None. Item 3. Quantitative and Qualitative Disclosures About Market Risks Our operations may expose us to market risks in the areas of commodity price risk, foreign currency exchange risk, and interest rate risk. We do not have formal policies in place at this stage of our business to address these risks, but we may develop strategies in the future to deal with the volatilities inherent in each of these areas. We have not entered into any derivative positions through June 30, 2012. Commodity Price Risk Our Mesquite Lake facility will consume woody biomass as fuel to generate electricity when it becomes operational. The woody biomass will be made up of any organic material not derived from fossil fuels, such as agriculture crop residue, orchard prunings and removals, stone fruit pits, nut shells, vineyard prunings, cull logs, eucalyptus logs, bark, lawn clippings, yard and garden clippings, leaves, silvicultural residue, tree and brush prunings, wood and wood chips and wood waste. We have performed a fuel availability study and believe there is ample woody biomass available at economically feasible prices in the geographic area surrounding Mesquite Lake. However, a number of factors including continued decline in economic activity, adverse weather conditions and competition from other consumers of woody biomass could result in reduced supply or higher prices for woody biomass which could increase our costs to produce electricity. In the future, we may decide to address these risks through the use of fixed price supply contracts as well as commodity derivatives. Item 4. Controls and Procedures Disclosure Controls and Procedures The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective. Changes in Internal Control Over Financial Reporting There have been no significant changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II — OTHER INFORMATION Item 1. Legal Proceedings 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 certain construction work performed at our Mesquite Lake plant in Imperial County, California. GreenHunter Energy, Inc. only had a construction contract directly with Crown Engineering and not with any of its subcontractors. 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. Plaintiff is attempting to enforce payment of its claim, approximately $327,555 by asserting it is a third party beneficiary under the Company’s settlement agreement with Crown Engineering. GreenHunter will challenge the complaint by way of a demurrer, challenging the Plaintiff’s right to claim it is an intended beneficiary of the settlement agreement. We believe the plaintiff’s claims are wholly without merit and accordingly have not recorded a liability for this matter.
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Heckmann Water Resources, Plaintiff v. Hunter Disposal LLC and GreenHunter Energy, Inc., Defendants, In the Court of Common Pleas, Washington County, Ohio, Case No. 120T233. Heckmann Water Resources, the Plaintiff, alleges a breach of contract against Hunter Disposal, LLC, for failure to pay for certain transportation services on behalf of Hunter Disposal. The Plaintiff alleges the Company made representations to Plaintiff that the Company would make any payments on Hunter Disposal’s behalf. The complaint alleges the Hunter Disposal and the Company currently owe the Plaintiff approximately $1.5 million for services rendered and not paid for, and is seeking damages for all amounts owed to the Plaintiff. The Company is has hired legal counsel and currently preparing its answer to this lawsuit, including countersuing the Plaintiff for tortuous interference with an existing contract and defamation. As of July 25, 2012, Hunter Disposal partially has paid the amounts owed to Plaintiff, and has reduced the amount outstanding to the Plaintiff to approximately $587 thousand. All amounts owed to Plaintiff have already been recorded in our financial statements and have been reported in all of our periodic reports, and thus, no additional financial reserves are required.
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Item 6. Exhibits
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized GreenHunter Energy, Inc. SIGNATURES
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