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EX-32.1 - EX-32.1 - GreenHunter Resources, Inc. | d71917exv32w1.htm |
EX-31.2 - EX-31.2 - GreenHunter Resources, Inc. | d71917exv31w2.htm |
EX-21.1 - EX-21.1 - GreenHunter Resources, Inc. | d71917exv21w1.htm |
EX-32.2 - EX-32.2 - GreenHunter Resources, Inc. | d71917exv32w2.htm |
EX-31.1 - EX-31.1 - GreenHunter Resources, Inc. | d71917exv31w1.htm |
EX-10.12 - EX-10.12 - GreenHunter Resources, Inc. | d71917exv10w12.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one) |
þ | Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 2009 |
o | Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from ____________ to ___________. |
Commission File No. 001-33893
GREENHUNTER ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-4864036 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1048 Texan Trail, Grapevine, Texas 76051
Registrants telephone number, including area code: (972) 410-1044
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Name of each exchange on which registered | |
Common Stock ($.001 par value) | NYSE Amex |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15 (d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
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 during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer or
non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company þ |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act) Yes o No þ
As of June 30, 2009, the aggregate market value of voting stock held by non-affiliates was
$9,799,992 as computed by reference to the closing price on that date.
The number of shares outstanding of the registrants common stock at March 30, 2010 was 22,116,464.
TABLE OF CONTENTS
Table of Contents
Part I
Item 1. | Business |
Some of the information contained in this Description of Business may contain forward-looking
statements. Such statements can be identified by the use of forward-looking words such as may,
will, anticipate, expect, estimate, continue or other such words. These types of
statements discuss future expectations or contain projections or estimates. When considering such
forward-looking statements, investors should consider the risk factors set forth in the Risk
Factors section of this report. These risk factors and other unidentified factors could cause
actual results to differ materially from those contained in any forward-looking statement.
Website Access to Reports
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports pursuant to section 13(a) or 15(d) of the Securities
Exchange Act of 1934, available free of charge on or through our internet website,
www.greenhunterenergy.com, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC.
Incorporation and Organization
GreenHunter Energy, Inc. (GreenHunter) was incorporated under the laws of the Delaware
General Corporation Law (DCGL) in the State of Delaware on June 7, 2005 under the name BTHC IV,
Inc. We were formed for the purpose of reincorporating BTHC IV, LLC, a Texas limited liability
company, in the State of Delaware. BTHC IV, LLC was reincorporated in Delaware by means of a merger
into GreenHunter on April 11, 2006.
On December 6, 2006, GreenHunter Wind Energy, LLC (Wind Energy), a Wyoming limited liability
company, completed a reverse acquisition with us. In exchange for all of the membership interest
of Wind Energy, we issued 14,560,000 shares of Common Stock to the sole shareholder of Wind Energy,
or 97.1% of all of the issued and outstanding stock of GreenHunter. Simultaneous with the closing
of the transaction with Wind Energy, we changed our name to GreenHunter Energy, Inc. and increased
the number of authorized shares of Common Stock to 100,000,000, consisting of 90,000,000 shares of
Common Stock, having a par value of $.001 per share and 10,000,000 shares of preferred stock,
having a par value of $.001 per share.
GreenHunter was formed to be the first publicly traded renewable energy company based in the
U.S. that provides to investors a portfolio of diversified assets in the alternative energy sector.
Our corporate headquarters are located at 1048 Texan Trail, Grapevine, Texas 76051, and our phone
number is (972) 410-1044.
Business
GreenHunters business plan is to acquire businesses, develop projects and operate assets in
the renewable energy sectors of wind, solar, geothermal, biomass and biofuels. We intend to become
a leading provider of clean energy products offering residential, business and industrial customers
the opportunity to purchase and utilize clean energy generated from renewable sources.
Headquartered in Grapevine, Texas, we were formed with the aim of changing the way power and
renewable energy fuels are produced and ultimately distributed. Our goal is to be more efficient
and therefore provide more economic returns for our shareholders.
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We are currently focused on the renewable energy sectors of wind, biomass and biofuels. Our
assets consist of leases of real property for future development of wind energy projects located in
Montana, Texas, Wyoming and California, one of the nations largest biodiesel
refineries located in Houston, Texas, and a biomass power plant located in El Centro, California.
It is our intention in the future to expand our renewable portfolio to possibly include solar,
geothermal and ethanol (generated from sources other than corn). We believe a unique opportunity
exists at our El Centro, California holdings to possibly build a renewable energy campus that
could include some or all of these alternative energy businesses, including solar, geothermal and
sugarcane based ethanol.
The following is a description of renewable energy assets currently owned and recently
acquired by GreenHunter, including managements discussion of the competitive strengths of the
assets.
Biofuels
Unlike other renewable sources, biomass can be converted directly into liquid fuels called
biofuels to help meet transportation needs. The two most common types of biofuels are biodiesel
and ethanol.
Ernst & Young includes biofuels in its renewable energy index. The United States is at the top
of the All Biofuels Index due to its recent strength and scale of development, its high gasoline
and diesel consumption and its sophisticated financial markets.
The biodiesel market has grown significantly over the past several years with most consumption
concentrated in the federal, state and local government. According to the National Biodiesel Board,
U.S. biodiesel production was approximately 15 million gallons in 2002 and U.S. production has
grown to an estimated 690 million gallons in 2008. By comparison, the European biodiesel market is
more mature than the U.S. market, having consumed approximately 1 billion gallons of biodiesel in
2005. While current economic conditions and the recent EU tariff on U.S. produced biodiesel have
created extremely challenging conditions for the biodiesel market, we believe the following factors
will contribute to its ultimate recovery.
Drivers of the biodiesel market include:
| Beneficial government initiatives and incentives. Initiatives and incentives at the federal, state and local government levels enhance the economics and market demand for biodiesel production. These initiatives include tax credits as well as mandates for increased use of biodiesel and biodiesel blends. | ||
| Environmental benefits. Biodiesel is biodegradable, nontoxic and essentially free of sulfur and aromatics. Additionally, biodiesel reduces tailpipe exhaust emissions, greenhouse gas emissions and sulfur dioxide emissions (acid rain) and minimizes black smoke and smog-causing particulate matter. | ||
| Easy integration into existing infrastructure. As discussed above, biodiesel can be used in diesel engines with no modifications as B100 or mixed with petroleum diesel, such as the B20 and B5 blends. A blended biodiesel may enhance petroleum diesel because it has the ability to extend engine life and decrease operating expenses due to the increase in engine lubricity. |
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| Increased energy security. U.S. domestic oil production has continuously declined while demand has grown since the mid-1980s, increasing dramatically our nations import requirements of crude oil from third world countries. Use of biodiesel, which can be produced with a variety of feedstocks from both domestic and worldwide sources, can help reduce dependence on imported oil. Many of these feedstocks are normally unfit for human consumption. | ||
| Imbalance of supply and demand. We believe that the biodiesel industry lacks sufficient capacity for production of high quality B100 to meet anticipated demand for biodiesel as well as current biodiesel specifications mandated by the U.S. government. ASTM D-6751-08 requires a new Cold Soak Filtration test standard which will create problems for biodiesel producers who use animal fats and palm oil feedstock and lack distillation technologies that exist at our state-of-the-art refinery. |
Biodiesel basics
Biodiesel is a clean-burning, non-toxic and biodegradable renewable fuel that is an
alternative to petroleum diesel. Biodiesel is primarily used in blends with petroleum diesel as a
fuel for trucks and automobiles, but can also be used as heating oil and in a variety of other
applications, including marine transportation, electrical generation, farming equipment and mining
operations.
Biodiesel contains no petroleum and is a renewable fuel because it can be made from a variety
of renewable raw materials, or ''feedstocks, including vegetable oils, animal fats and recycled
cooking oils. Biodiesel performs comparably to petroleum diesel in terms of fuel economy,
horsepower and torque and offers many benefits over petroleum diesel. The use of biodiesel reduces
greenhouse gas emissions (both tailpipe emissions and emissions on a total lifecycle basis,
including emissions created in the production of biodiesel), as well as other emissions such as
particulate matter, carbon monoxide and unburned hydrocarbons. Biodiesel is more biodegradable than
petroleum diesel and is also safer to transport due to the higher temperature at which biodiesel
ignites, known as its flashpoint.
Biodiesel can be used in its pure form as a direct substitute for diesel fuel or can be mixed
at any level with petroleum diesel to create a biodiesel blend. This distinguishes biodiesel from
ethanol, which can be blended with gasoline at higher levels only for use in specially modified
engines and therefore is not generally used as a direct substitute for gasoline. A blended
biodiesel fuel may offer improvements over low-sulphur, unblended petroleum diesel because its
increased lubricity has the ability to extend engine life and reduce maintenance costs. In
addition, biodiesel has a significantly higher cetane rating, which is a measurement of diesel
ignition performance, than petroleum diesel. As a result, biodiesel can improve the ignition
performance of diesel engines when it is used in blended or pure form.
Biodiesel blends at various concentrations and can be used in diesel engines without
modifications. Biodiesel blends vary according to geographic region and climate, but the most
commonly-used blends generally range from a blend of 2% biodiesel and 98% petroleum diesel, or
(B2), up to a blend of 20% biodiesel and 80% petroleum diesel, or (B20). We believe that
worldwide usage of biodiesel will significantly increase in accordance with government instituted
renewable fuels standards and blending mandates, as well as a general increase in the use of
diesel.
Traditional Biodiesel Production Process
Biodiesel is produced through a process called transesterification, which involves taking
naturally-occurring carbon chain molecules, known as triglycerides, (found in items such as
vegetable oils and animal fats), and converting them into methyl esters, (the chemical term for
biodiesel.) This is achieved by reacting triglycerides with an alcohol such as methanol.
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GreenHunter BioFuels, Inc. shall produce biodiesel in a continuous combination process that
has three U.S. patents pending.
Triglycerides
Biodiesel is the common name given to liquid fuel made from blending methyl esters with #2
diesel fuel. #2 diesel fuel is commonly known as diesel and is a petroleum fuel that has been
available to consumers for decades. Methyl esters can be made from naturally-occurring, renewable
sources of fats and oils (non-petroleum oils). Non-petroleum fats and oils are liquid compounds
made up of glycerides that naturally occur in vegetable oil seeds (soybeans, corn, cotton, canola,
rapeseed, palm, jatropha, etc.) as well as in living animals such as cattle, poultry and hogs.
Glycerides are multi-part molecules that have a main body or core with one, two or three arms, or
branches. The main body or core of a glyceride is a glycerin molecule. The arms, or branches,
stemming from the glycerin core are special acid molecules called fatty-acids. Three fatty-acid
branches connected to a glycerin core make up a fat/oil molecule that is technically known as a
tri-glyceride. Two fatty-acid branches connected to a glycerin core make up a fat/oil known as a
di-glyceride and one fatty-acid branch connected to a glycerin core make up a mono-glyceride. When
fatty-acid branches break off a glyceride molecule and are present within an oil solution they are
referred to as Free Fatty Acids or (FFAs). Non-petroleum fats and oils are typically made up of
mostly triglycerides and FFAs.
Transesterification
Non-petroleum fats and oils can be made into methyl esters through a chemical reaction called
transesterification. To cause transesterification (or, to cause fats and oils to become methyl
esters), the fats and/or oils must be mixed with alcohol in the presence of a catalyst. A catalyst
is a chemical that helps a chemical reaction proceed more quickly and thoroughly. We will use
methanol as the alcohol for the transesterification of vegetable oils and animal fats. Although the
use of other alcohols is possible, they are not economically feasible at this time.
The separation of FFAs and other compounds from whole triglycerides is known as refining. In
its biodiesel process, we continuously refine fats and oils, and then use a continuous combination
process that transesterifies the fats and oils to methyl esters. The combination aspect of our
process also makes it possible to convert the separated FFAs and other compounds that were refined
out of the triglycerides to methyl esters. We use a chemical reaction/process known as
acid-esterification to convert FFAs and other compounds to methyl esters or to glyceride compounds
that can, in turn, be converted to methyl esters. Acid-esterification is a chemical reaction where
FFAs are mixed with a strong acid (sulfuric acid in our case) in the presence of methanol.
Acid-esterification changes FFAs into mono-glycerides, di-glycerides and methyl esters. The stream
of acid-esterified material then rejoins the triglyceride stream going to the transesterification
process. By recovering and converting the FFAs and other compounds to methyl esters, the
GreenHunter process is highly efficient, making the most methyl esters from every unit of fat/oil
entering our process.
The GreenHunter process will ultimately achieve feedstock conversion yields of approximately
99% for two reasons: First, the combination process allows recovery and conversion of FFAs and
other compounds to methyl esters. Second, GreenHunter will use a distillation process to polish or
purify its methyl esters. All but 1% (plus or minus) of the non-methyl ester compounds removed in
the distillation process shall be recycled to the front of the GreenHunter process for another
opportunity to be converted to desirable methyl ester product. The recycled material will consist
of mono-glycerides, di-glycerides and tri-glycerides that were not successfully converted in their
earlier exposure to the combination process.
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Glycerin
The by-product of biodiesel or methyl ester production is glycerin. Glycerin is used as an
ingredient in a wide range of products and applications, including pharmaceutical and personal care
products, foods and beverages, animal feed and plastics. Glycerin can be sold in an unrefined form,
in a partially processed form, or in a refined form. The GreenHunter process will not refine
glycerin, but it will add value to the crude glycerin it produces by neutralizing the glycerin.
Neutralizing glycerin makes it more fluid and pourable at cold temperatures. While dry,
un-neutralized, crude glycerin will solidify in the range of 80 to 120 degrees F; dry, neutralized
glycerin will remain liquid and pourable down to a range of 10 to 20 degrees F.
Methanol
The GreenHunter process includes the ability to recover and re-use all excess methanol used in
the combination process. Our refinery located in Houston, Texas has a methanol distillation
system/department that is five times larger than required to meet the direct needs of the 105
million gallon-per year biodiesel production capacity at the Houston site. As a result, we have the
ability and opportunity to source off-spec methanol from third-party sources, distill it and sell
it as a secondary business at the same location.
Biodiesel Quality Standards
GreenHunter methyl esters/biodiesel meets or exceeds American Society of Testing Materials, or
(ASTM), and European, or (EN), standards ASTM D6751-08 and EN 14214.
In the U.S, biodiesel quality is measured against the ASTM standard D6751-08, which specifies
the 18 required properties of B100 biodiesel for use as a blend component with petroleum diesel
fuel. This standard specifies, among other parameters, the maximum amounts of contents of certain
matter including acid, free glycerine, total glycerine, water and sediment content, sulfated ash,
total sulfur, copper corrosivity, carbon residue and phosphorous.
The standard also specifies minimum flash point and cetane numbers. The ASTM recently revised
the standard to include cold soak filtration specifications. The cold soak filtration test
subjects the biodiesel to a soak period at cold temperatures, re-warms the fuel, and then filters
the biodiesel through 0.7 micron filter. The test is a qualitative evaluation meant to replicate
performance of the biodiesel in cold climates. Compliance with these standards requires a process
that provides for complete transesterification and efficient and thorough separation and
purification processes.
In October 2008, ASTM International, published the biodiesel blend specifications for general
use. The new blend specifications included:
| ASTM D975-08a, Specification for Diesel Fuel Oils used for on- and off-road diesel applications; revised to include requirements for up to 5 percent biodiesel. | ||
| ASTM D396-08b, Specification for Fuel Oils used for home heating and boiler applications; revised to include requirements for up to 5 percent biodiesel. | ||
| ASTM D7467-08, Specification for Diesel Fuel Oil, Biodiesel Blend (B6 to 20) a completely new specification that covers finished fuel blends of between 6 (B6) and 20 (B20) percent biodiesel for on- and off-road diesel engine use. |
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The majority of Original Equipment Manufacturers (OEMs) viewed the adoption of the ASTM
blended fuel specification as a key component for full, universal acceptance of B20. Several OEMs
had requested this specification for years, and having it in place makes way for increased usage of
biodiesel. Even before the recent revisions, hundreds of major fleets are using B20 biodiesel,
including all branches of the U.S. military for administrative uses and more than 200 school
districts. The blended fuel specification Biodiesel blends are available to the public at more than
1,250 retail filling stations nationwide.
In order to be designated biodiesel, you must meet the technical standards of ASTM 06751-08.
The EN 14214 Standards are the European standards for biodiesel production. We would not be able to
receive the various tax credits and incentives if these standards were not met.
Feedstocks
A wide range of feedstocks may be used to produce biodiesel, including vegetable oils (such as
soybean and canola oils), palm oils, animal fats (such as tallows and lard), and yellow grease
(such as recycled cooking oil and tallows blended together). Historically, the majority of
biodiesel produced in North America has been made from soybean oil, whereas the majority of
biodiesel produced in the European Union (EU) has been made from rapeseed, or canola oil. This is
largely due to the proximity of supply of these two seed oils in these markets and the inability of
many technologies to efficiently and economically convert feedstocks with higher FFAs, such as
palm, animal fats and recycled oil, into biodiesel. Biodiesel producers choose which feedstock to
use based on compatibility with their process technology, as well as price and local availability.
Feedstock prices vary substantially over time and feedstocks themselves vary according to local
agriculture, weather and soil conditions. In addition to rapeseed oil and soybean oil, potential
feedstocks include palm oils and a wide variety of other vegetable oils, such as sunflower, corn
and cotton oils. Yellow grease is used in considerably smaller volumes than pure vegetable oils.
Our biodiesel production process will process a wide variety of these feedstocks at conversion
yields in excess of 98%.
Additional feedstocks may be used to produce biodiesel in the future. For example, we believe
that jatropha, an adaptable bush or tree that produces a toxic, inedible oil, has the potential to
become an important source of feedstock for biodiesel in the near future because it adapts well to
semi-arid, marginal soil locations where other higher-value food crops cannot be grown.
Substantial amounts of capital are being spent around the world planting jatropha, and we are
actively pursuing projects which would allow us to source this feedstock in the future. Another
potential feedstock is algae. Algae is comprised of approximately 40% triglycerides, and new
methods to grow and harvest it on a commercial basis are currently being developed. Governments
around the world have demonstrated a strong interest in each of these products as new, potentially
abundant sources of cash crops for their countries.
Biodiesel production costs are highly dependent on these feedstock costs. Typically, the costs
of fats, oils or greases used to make biodiesel constitute a majority of the finished product cost.
The economics of biodiesel production are primarily affected by the pricing of feedstocks, some of
which are commodities (such as seed oils and palm oil), the pricing for refined biodiesel of ASTM
or EN quality, and the pricing for petroleum diesel. To produce biodiesel economically, a producer
must seek to minimize feedstock and other production costs and maximize yield, which is the extent
to which feedstock is fully converted into methyl esters. The relative cost of the various
feedstocks depends largely on the content of free fatty acids (typically, the higher the FFA
content, the lower the cost) and whether the feedstock may be used in the edible food market.
Feedstock costs are also influenced by a number of other factors, including consumer demand for
food quality feedstocks, industrial demand for non-food quality feedstocks, weather conditions,
production levels, availability of feedstock export markets and government regulation including tax
incentives. In order to minimize feedstock costs, we believe the
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ability to utilize a wide variety of feedstocks efficiently and interchangeably, as our
Houston refinery has the ability to, is imperative to gaining a competitive advantage in the
biodiesel production market.
Our facility is able to process the following feedstocks: soybean oil (refined or crude), palm
oil (refined or crude), rapeseed oil, cotton seed oil, jatropha oil, animal fats (beef and
poultry), castrol oil and canola oil.
All of these feedstocks are currently available to us, both domestically and internationally,
throughout the year.
Government Initiatives
Tax Incentives. The primary federal government incentive intended to lower the effective cost
of biodiesel is the biodiesel blenders excise tax credit, which is available to registered blenders
of biodiesel and petroleum diesel. As an independent biodiesel producer and blender, we are a
direct recipient of the tax credit. Due to Congressional action signed into law in October 2008,
all biodiesel fuel, regardless of feedstock source, now qualifies for the $1.00 per gallon
biodiesel incentive as of January 1, 2009. The tax credit expired on December 31, 2009. On March
10, 2010, the U.S. Senate passed the American Workers, State, and Business Relief Act of 2010
(H.R. 4213) providing, among other provisions, a one year retroactive extension of the biodiesel
tax incentive. With passage of H.R. 4213, the U.S. House and U.S. Senate must reconcile the
differences between the two versions of the bill approved by the respective chambers. H.R. 4213 as
approved by the U.S. House in December, 2009 also provides for a one year retroactive extension of
the biodiesel tax incentive. Under the previous legislation, biodiesel produced from second use,
or non-virgin, feedstocks, such as yellow grease collected from restaurants, was eligible for a
reduced $0.50 per gallon tax incentive. The new legislation also closes the so-called splash and
dash loophole, which allowed foreign-produced biodiesel to be imported to the U.S., splash blended
to claim the tax incentive, and then exported to a third country for final use. In December 2007,
the Energy Independence and Security Act of 2007 established a renewable fuels standard for
biodiesel use in the United States of one billion gallons by 2012.
Use Mandates. A number of federal and state regulations mandate the use of biodiesel blends.
The Energy Independence and Security Act of 2007 requires a 36 billion gallons per year renewable
fuels standard (RFS) by 2022, to be administered by the U.S. Environmental Protection Agency. The
new RFS began in 2008 and requires 9 billion gallons of biofuels to be used in 2008 and 11 billion
gallons in the following year. The RFS contains the following sub-levels:
| 15 billion gallons of the ultimate 36 billion gallon requirement by 2022 will come from conventional biofuels and includes biodiesel; | ||
| 21 billion gallons of the overall 36 billion gallons mandate are to be advanced biofuels (defined as cellulosic ethanol, ethanol derived from sugar or starch, biogas, biomass-based diesel, butanol or other alcohols and other fuel derived from cellulosic biomass) by 2022; | ||
| 16 billion gallons of the advanced biofuels, under the same timeframe, are to come from cellulosic biofuel; and | ||
| 1 billion gallons by 2012 are required to be from biomass-based diesel. |
Benefits of Biodiesel
According to the National Biodiesel Board, environmental benefits in comparison to petroleum
based fuels include:
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| Biodiesel reduces by as much as 65% the emission of particulates, which are small particles of solid combustion products. This can reduce cancer risks by up to 94% according to testing sponsored by the Department of Energy. | ||
| Biodiesel does produce the same or slightly more (up to 7% more) nitrogen oxide (NOx) emissions than petrodiesel, but these emissions can be reduced through the use of catalytic converters. As biodiesel contains no nitrogen, the increase in NOx emissions may be due to the higher cetane rating of biodiesel as well as higher oxygen content, which allows it to convert nitrogen from the atmosphere into NOx more rapidly. Properly designed and tuned engines may eliminate this increase. | ||
| Biodiesel has higher cetane rating than petrodiesel, and therefore ignites more rapidly when injected into the engine. It also has the highest energy content (B100) of any alternative fuel in its pure form. | ||
| Biodiesel is twice as biodegradable as petroleum oils and is non-toxic. Tests sponsored by the United States Department of Agriculture confirm biodiesel is less toxic than table salt and biodegrades as quickly as sugar. | ||
| In the United States, biodiesel is the only alternative fuel to have successfully completed the Health Effects Testing requirements (Tier I and Tier II) of the Clean Air Act (1990). |
In addition, the National Biodiesel Board lists the following advantages of biodiesel over
other alternative fuels:
| Today, diesel engines can run most biodiesel blends with no modifications. | ||
| Biodiesel does not need investments into new infrastructure. It can use the current distribution and retail infrastructure. | ||
| Biodiesel can be blended in any percentage with petrodiesel . | ||
| Biodiesel has the highest energy content (BTU) of any alternative fuel . | ||
| Harmful emissions (carbon monoxide, particulate matter and hydrocarbons) are reduced by more than 50% compared with petrodiesel. | ||
| Biodiesel is the only alternative fuel to pass Tier 1 and Tier 2 health effects testing required by the Clean Air Act. | ||
| Biodiesel has a positive energy balance. |
Biodiesel can capitalize on existing infrastructure to quickly and efficiently satisfy a
portion of world energy needs.
Market Acceptance of Biodiesel
According to the National Biodiesel Board:
Domestic:
| 600 major fleets use biodiesel commercially. | ||
| More than 1,250 retail filling stations offer biodiesel to the public. | ||
| Our federal government has established a renewable fuel standard for biodiesel use in the United States of 1 billion gallons by 2012. |
International:
| Asia Pacific will overtake North America by 2010 | ||
| As economies mature, demand typically shifts from industrial use to transportation sectors | ||
| U.S. is gasoline focused regarding fuels whereas Asia is diesel-focused (gas oil) |
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| Biodiesel will have far greater impact on road diesel balances than ethanol will have on gasoline balances |
GreenHunter BioFuels, Inc. (formerly Channel Refining Corporation) Acquisition
GreenHunter BioFuels, Inc., (BioFuels) formerly known as Channel Refining Corporation, a
Texas corporation was formed in 1994 to develop a 20 acre industrial parcel located on the Houston
ship channel into a waste oil recycling facility. The property was acquired from private
individuals who manufactured troop marine transport vessels for the U.S. military. The predecessor,
Channel Refining Corporation, was the first processing operation located on this property. After
the waste oil recycling facility was put into operation, the market to purchase used waste oil was
dramatically affected by large utilities buying up the available market inventory at a higher price
than the Company was capable of economically paying. Channel decided to invest in more
sophisticated processing equipment to convert the waste oil recycling refinery into a specialty
chemical manufacturing process. Prior to our acquisition, Channel was manufacturing base oils,
lubricants, diesel fuels and naptha. Naptha is defined as an intermediate refined product distilled
from crude oil. GreenHunter Energy acquired Channel and renamed it GreenHunter BioFuels, Inc. on
April 13, 2007. The refinery did not produce any biodiesel, or associated products prior to our
acquisition.
Our site location has several key transportation and distribution attributes including:
| Feedstock can be delivered by either barge, truck, rail or ship (across the Channel) | ||
| Distribution of finished product can be either shipped by barge, delivered through an on-site truck terminal or possibly loaded onto bulk rail transport | ||
| An existing dock is capable of unloading 30 thousand barrels at any one time |
Prior to our acquisition, Channel did transport its finished products by barge and/or truck
but did not utilize the rail system located on the property. While it is our intention to
eventually utilize all three transportation methods once the plant has resumed commercial
operations and financing is available, BioFuels has only utilized trucking and barges to transport
its commercial grade product to date.
BioFuels also has key site and processing attributes relevant to its operation including:
| 638 thousand barrels of product storage | ||
| Adequate water and power supplies | ||
| Sophisticated chemical processing instrumentation and controls | ||
| Additional processing equipment for market inefficiencies | ||
| Ample expansion area for increased production capacity | ||
| Ample open acreage for additional storage capacity |
GreenHunter Strategy for the GreenHunter BioFuels Plant
We have converted the existing processing technology into one of the nations largest
commercial biodiesel refineries. Additionally, we have also constructed 638 thousand barrels of
additional storage facilities. We executed the following business strategies during 2008:
| Converted the existing facility to a 105 million gallons per year (mmgy) biodiesel refinery capable of utilizing multiple vegetable oil feedstocks and animal fats | ||
| Installed tankage for 638 thousand barrels of bulk storage capacity to provide the ability to acquire feedstock and sell finished product at opportune times, as well as to run terminal services as a secondary business unit when we are not using the storage for our own product |
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| Maintained an approximate $0.50 per installed capital cost per gallon. Management believes the current market for competitors ranges from $1.10 $1.25 per installed gallon | ||
| Maintained cost control by self-performing as the general contractor in this project; construction of the refinery is complete with additional components substantially complete | ||
| Produced biodiesel to ASTM specifications to allow us to take advantage of the following federal/state tax incentives: Federal Biodiesel Excise Tax Credit of $1.00/gallon for straight agri-biodiesel or $.01/percentage point of agri-biodiesel in a petroleum based diesel blend | ||
| Processed contaminated methanol into a commercial grade methanol product through use of a 45,000 bbl/month (capacity) methanol processing tower located on the site. This tower is unique in that methanol represents approximately 8-10% of the cost of goods sold in the manufacturing and refining of biodiesel. We would only utilize approximately 20% of the methanol towers total capacity. Therefore, it has the ability to contribute to lower operating costs by allowing us to purchase contaminated methanol and re-process it to a 99.85% methanol which can be used in the refining process at 40-50% below the cost of pure methanol. In addition, we will have additional methanol capacity to further process and sell to other biodiesel producers or support additional company-owned refineries in the future. Very few other biodiesel producers in the U.S. have their own on-site methanol distillation tower |
We completed construction and began commissioning of this facility during 2008. The refinery
construction was financed by using our existing capital, our credit facility with WestLB, and our
redeemable debenture offerings.
On December 20, 2007, BioFuels entered into a credit agreement with WestLB which provided a
$38.5 million term loan facility and a $5 million working capital facility in connection with
BioFuels development, construction and operation of a 105 million gallon per year diesel refinery,
together with glycerin and methanol, and terminal assets located in Houston, Texas. During the
first quarter of 2008, we amended this agreement to increase the working capital line to $10
million and to reduce the term loan portion to $33.5 million. The credit agreement allows for both
a base rate and a LIBOR interest option and includes customary covenants and funding conditions.
The credit agreement is secured by substantially all of BioFuels assets, excluding approximately
350 thousand barrels of bulk terminal storage facilities.
Even though not critical to our business, we are currently in the process of patenting up to
three of our concepts as they relate to the processing of biodiesel at the facility. We have
obtained all necessary permits including an air discharge permit at our biodiesel facility. We have
improved the foundations and containment areas surrounding our storage facilities which could be
affected by flooding. We do not anticipate any significant capital expenditures relating to
federal, state and local provisions concerning the environment in the foreseeable future. This
biodiesel production business is not seasonal in nature.
Competitive Strengths
When economic conditions substantially improve, we believe that we are well positioned to
achieve our primary business objectives and to execute our strategies due to the following
competitive strengths:
| We have substantially all of the necessary infrastructure in place | ||
| The transportation infrastructure of barge, rail and truck provides maximum flexibility to receive and ship products at the most economic cost | ||
| The ability to be both a producer and a terminal operator/blender provides opportunistic advantages for feedstock acquisition and finished product sales | ||
| Our management team has substantial experience in the oil and gas industry and have historically |
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been the lower-cost producers during their prior careers | |||
| The refinery location has transportation infrastructure that is unique in the biodiesel industry: |
a. | Ability to bring in by barge or ship all raw materials either domestically or internationally, | ||
b. | Rail service for raw materials and finished product shipping on-site, and | ||
c. | Major interstate within 5 miles. |
The multiple transportation options of truck, rail, barge on site and the ability to load
large ships nearby creates a competitive advantage over other biodiesel production locations within
the Midwest and other landlocked facilities. Additionally, future access to interstate pipelines in
the Houston Ship Channel area further defines our transportation abilities. In particular, our
location provides the following:
a. | Located in one of the largest U.S. cities (Houston) which also has one of the highest rates of diesel fuel use per capita in the United States; | ||
b. | Provides the ability to ship finished product by barge to either domestic or international destinations; and | ||
c. | Provides the ability to economically access interstate pipelines to transport finished product to major northeast U.S. markets. |
Sustainable Competitive Strategy
Raw materials and finished product transportation assets are an integral part of GreenHunter
Energys strategy to provide a sustainable competitive advantage. This combination of on-site and
in close proximity of transportation/distribution assets that will be available for biodiesel
transportation should enable maximum diversification of feedstock acquisition as well as maximum
transportation outlets. We believe the future is embedded in the present, which is why we
strategically used existing petroleum fuels-based transportation and distribution infrastructure
rather than build a new greenfield facility.
We believe most of our past product sales have ultimately been exported to Europe, but we plan
to sell our finished product to a variety of markets, including the wholesale transportation
market, the marine market, the military market and municipalities. We are registered and have been
approved by the Environmental Protection Agency to sell our biodiesel to the on-road market in the
United States. This approval by the EPA significantly improves our biodiesel distribution
capabilities in the United States, and further augments our strategy of diversifying risk by
distributing its products in multiple markets. We do not anticipate that we will be dependent on a
single or a few suppliers of feedstock or purchaser of our refined biodiesel, the loss of either
could have a material adverse impact on our operation.
Current Economic Conditions and Plant Status
We completed and began commissioning our Houston refinery during the third quarter of 2008.
Shortly after we had begun production, we were forced to shut down our facility as a result of
damages caused by a direct hit from Hurricane Ike. We completed the major repairs to our refinery
during September, October and November of 2008 and were able to resume biodiesel production during
the last week of November 2008.
As a result of poor biodiesel economics due to high feedstock prices and low finished product
prices, which has a direct correlation to the price of crude oil, we limited operations at the
refinery during calendar 2009 to terminal storage, toll processing and toll distillation services.
This limited operation has continued into calendar 2010. We generated $693,326 of total revenue
from the terminal storage operation in 2009 and anticipate an increase in revenue during 2010 as we
lease out additional tankage to third parties. Biodiesel economics in the United States require
support from federal subsidies in order to
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be competitive with petroleum products. Historically we have received a tax credit of up to
$1.00 per gallon from our biodiesel manufacturing and blending operations. Unfortunately for us
and the biodiesel industry as a whole here in the United States, this federal tax credit expired on
December 31, 2009. Additionally, we do not currently have the necessary capital resources to
purchase the large volumes of feedstocks required by our facility, and we believe we would face
difficult profit margins at best even if we were able to find the necessary financing. We estimate
that the terminal storage and distillation services will allow our facility to have a base level of
cash flow that will allow us to make the necessary debt service payments and fund a reduced
operation until the tax credit is extended by the U.S. government and the biodiesel markets
recover.
Biomass
Biomass power, is the use of biomass to generate electricity. Biomass is any organic matter
which is available on a renewable or recurring basis, including trees, plants and associated
residues; plant fiber; animal wastes; industrial waste; and the paper component of municipal solid
waste.
Biomass is considered to be a replenishable resource because it can be replaced fairly quickly
without permanently depleting the Earths natural resources. By comparison, fossil fuels such as
crude oil, natural gas and coal require millions of years of natural processes to be produced.
Therefore, mining coal and producing crude oil and natural gas depletes the Earths resources for
thousands of generations. Alternatively, biomass can easily be grown or collected, utilized and
replaced.
Energy crops involve a closed-loop process in that they are grown specifically for their
ability to generate energy. Crops such as switch grass, cottonwood and sugar cane are attractive
for fuel. Additionally, these crops are short rotation crops; they regrow after each harvest,
allowing multiple harvests without having to replant. Manure from cattle feedlots and dairies can
also be put to practical use as a renewable energy source and a biomass plant feedstock for certain
biomass facilities.
The use of biomass to create energy also has positive environmental implications. Carbon
dioxide is a naturally-occurring gas. Plants collect and store carbon dioxide to aid in the
photosynthesis process. As plants or other matter decompose, or natural fires occur, CO2 is
released. In the past 150 years, the period since the industrial revolution, carbon dioxide levels
in the atmosphere have risen from around 150 ppm to 330 ppm, and are expected to double again
before 2050.
Mesquite Lake Resource Recovery Plant Acquisition
We acquired Mesquite Lake Resource Recovery Plant (Mesquite Lake) during 2007. Mesquite
Lake is an 18.5 MW waste-to-energy facility located in El Centro, California. This Imperial County
facility was originally built in 1989 at a cost of approximately $68 million to process cow manure
into power and operated until December 1994, when its Power Purchase Agreement (PPA) was
repurchased by Southern California Edison. Several modifications were implemented during its
operating life to improve plant performance leading to a 95% on-line capacity factor during its
last year of operation. The plant has not operated since 1994.
Within a twenty mile radius of the plant, there are approximately 400 thousand head of feedlot
cattle which produce approximately 4 thousand tons a day of manure. In addition, 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. With
the increased pressure from California and the EPA on waste generators, the local cattle feedlot
industry has the potential to be an economic supplier of fuel for the plant.
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During 2008 we began refurbishing this facility. During the course of our air permit review,
we determined that the existing air permit was not sufficient to support our operations. We put
the project on hold during the fourth quarter of 2008 while we were implementing the re-permitting
process. Due to this process, we have been able to incorporate a planned expansion of up to 10 MW
and have executed a new PPA with significantly higher pricing than the one we acquired with the
plant. Prior to resuming construction at the plant, we must raise additional funding either
through bank financing, a loan with a governmental agency or the placement of additional
debentures. In March of 2010, the Imperial County California Board of Supervisors unanimously
approved one or more series of tax-exempt obligations by the California Enterprise Development
Authority for the Mesquite Lake facility. This approval opened up the opportunity for us to pursue
low-cost funding for the majority of the projected construction costs of Mesquite Lake. In March
2010, we submitted an application to the California Debt Limit Allocation Committee for allocation
of a $20 million award of the American Recovery and Reinvestment Act of 2009 (ARRA) Recovery Zone
Facility Bonds (RZFB). We hope to be able to resume construction of the facility during the
second half of 2010.
There are no patents or other intellectual property rights associated with this facility. The
business of producing electricity from biomass is not a seasonal business.
Mesquite Lake has a number of key project attributes:
| Mesquite Lake has executed an interconnect agreement with Imperial Irrigation District | ||
| The projects proximity to manure sourced from cattle yards in the Imperial Valley is excellent | ||
| The project qualifies for the Federal Production Tax Credit | ||
| The facility should be able to use multiple biomass fuel sources at a large variance of heat rates | ||
| The project will provide base load renewable power as opposed to intermittent power provided by other forms of renewable power projects |
GreenHunter Energy Strategy for the Mesquite Lake Plant
Our primary business objective is to re-power the facility using existing biomass processing
technology into a profitable electricity power plant. We intend to accomplish this by executing the
following business strategies:
| Find an optimal biomass fuel mix that will maximize profitability of the plant | ||
| Execute long term supply contracts with local biomass producers | ||
| Begin to produce our own biomass, investigate the possibility of planting a certain type of tree that will ultimately make the facility a closed-loop biomass facility | ||
| Evaluate the feasibility of building an energy campus that includes solar power, wind, a biodiesel refinery and possibly an ethanol plant around the existing site location |
The facility has or is currently pursuing all necessary permits required for operations.
Biomass consisting of wood and agricultural waste will be placed and burned in two circulating
fluidized bed boilers. The facility is expected to process approximately 623 tons per day (227,269
tons per year) of wood and agricultural waste. The fuel supply for the facility will be a blend of
dry wood and green wood which will produce approximately 5,000 Btu per pound on average. The steam
generated by the boilers will expand across a steam turbine to power a generator that will produce
28.5 MW of renewable electricity per hour. Two and one-half MWs of electricity will be used to
power the facility, and 26 MWs will be sold into the electricity marketplace.
The facilitys location in Southern California is strategic, not only because population
density is driving electricity demand, but also because of the excellent fuel supply and
transportation access. The
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facilitys new power purchase agreement (PPA) with Imperial Irrigation District is for Renewable
power, to meet the needs of Californias Renewable Power Standard. Biomass power, unlike wind and
solar power, is base-load generation, and has been used reliably in California for over 30 years.
The facility is also important to the stability of the Imperial Irrigation Districts system. It is
located in an area with little power generation, but a significant amount of load, and this results
in a circumstance whereby the electricity generated by the facility will assist with attaining the
minimum amount of power required to ensure the systems stability. The facility is also located in
an area of California that has experienced significant economic contraction during the last few
years and will benefit from the jobs to be created by the facility.
The renewable power incentives instituted in the past year have resulted in an economic
situation which makes the refurbishment of the facility economic. We estimate the total costs of
construction and refurbishment to be approximately $30 million for a total investment by it in the
facility of $51 million. Current costs to build a biomass facility of the same size would be
approximately $82-94 million, thereby making it much more cost effective to refurbish the existing
facility than build a new facility. In addition, the physical characteristics of the facility are
strong assets, the electrical infrastructure of the facility is in excellent operational shape and
the power generation and distribution infrastructure of the facility is in very good condition with
a limited amount of overhaul needed.
The facilitys PPA with the Imperial Irrigation District is to provide up to a maximum of 27
MW of net output for 20 years. We have also received interest from the market for additional
generation capacity.
The Mesquite Lake biomass plant will require an estimated $36.5 million to refurbish and begin
generating electricity; we have already completed approximately $12.7 million worth of these costs.
This project is currently finalizing engineering designs and final regulatory approval. We are
currently pursuing the placement of debentures as well as seeking a loan with a governmental agency
to finance the remaining construction and start up of the Mesquite Lake Resource Recovery Facility.
Wind Energy
Wind energy, the worlds fastest growing energy source, is a clean and renewable source of
energy that has been in use for centuries throughout Europe and, more recently, in the United
States and other nations, becoming an increasingly popular choice for new electricity generation
around the world. Wind turbines, both large and small, produce electricity for utilities and
homeowners and remote towns.
North America is expected to continue as the second largest regional market in terms of total
installed capacity, with anticipated average annual growth of approximately 25%.
Wind Energy Basics
We have been harnessing the winds energy for hundreds of years. From old Holland to farms in
the United States, windmills have been used for pumping water or grinding grain. Today, the
windmills modern equivalenta wind turbinecan use the winds energy to generate electricity.
Wind turbines, like windmills, are mounted on a tower to capture the most energy. At 197 feet
(60 meters) or more above ground, they can take advantage of the faster and less turbulent wind.
Turbines catch the winds energy with their propeller-like blades. Usually, two or three blades are
mounted on a shaft to form a rotor.
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A blade acts much like an airplane wing. When the wind blows, a pocket of low-pressure air
forms on the downwind side of the blade. The low-pressure air pocket then pulls the blade
toward it, causing the rotor to turn. This is called lift. The force of the lift is actually much
stronger than the winds force against the front side of the blade, which is called drag. The
combination of lift and drag causes the rotor to spin like a propeller, and the turning shaft spins
a generator to make electricity.
Wind turbines can be used as stand-alone applications, or they can be connected to a utility
power grid or even combined with a photovoltaic (solar cell) system. For utility-scale sources of
wind energy, a large number of wind turbines are usually built close together to form a wind plant
or wind farm. Several electricity providers today use wind plants to supply power to their
customers.
Stand-alone wind turbines are typically used for water pumping or communications. However,
homeowners, farmers, and ranchers in windy areas can also use wind turbines as a way to cut their
electric bills.
Small wind systems also have potential as distributed energy resources. Distributed energy
resources refer to a variety of small, modular power-generating technologies that can be combined
to improve the operation of the electricity delivery system.
Current GreenHunter Energy Wind Projects
We currently have three wind projects in which we are active and a number of other potential
opportunities. We have developed projects in Texas, California, Wyoming and Montana. Currently all
our wind projects are in various stages of environmental studies, meteorological evaluations and
power market evaluations. In light of todays difficult credit markets, it is managements current
intention to continue to explore projects in key markets. We will continue to focus on smaller
projects located near population centers in Texas.
Management intends to utilize its existing financing sources or attempt to access new capital
available in the market to fund our wind projects. The business of producing electricity from wind
energy is not a seasonal business. We may be required to enter into a power purchase agreement with
a utility to purchase the electricity generated by our properties in order to be successful in
developing our wind assets. We may also choose to sell our wind power into the merchant market.
Divestment of Equity Interest in MingYang
During 2009, GreenHunter sold its 3.6% equity interest and right to purchase an additional
2.38% equity interest in MingYang Wind Power Technology Co., Ltd, (MingYang) based in Guang Dong
Province, Peoples Republic of China (PRC) for approximately $9.1 million. We purchased these
interests in 2007 for approximately $7 million.
The following is a brief summary of each of our current wind projects:
California
Ocotillo Wind Project, Imperial County
| 6,280 acres under lease with the Bureau of Land Management | ||
| Seeking monitoring and testing ROW | ||
| Potential for 150 MW |
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The Company sold the Ocotillo wind power development project to Ocotillo Express, LLC, a
wholly-owned subsidiary of Pattern Renewables, LP, for an initial cash payment plus additional
required cash milestone payments that will be determined in the future based on the amount of
installed megawatts of power generation ultimately constructed at the project site.
Texas
Hilltop Wind Project, Palo Pinto County
| 1 Meteorological tower installed in June 2008 at 60 meter hub height | ||
| 1,200 acres under lease | ||
| Potential for 36 MW |
Snow Hill, Morris and Titus Counties
| 1 Meteorological tower installed in June 2008 at 60 meter hub height | ||
| Small tract leased for meteorological tower installation | ||
| Potential for 80 MW |
Wyoming
Wheatland Wind Project
| 3 Meteorological towers installed in October 2008 | ||
| Right-of-Way grant from BLM for 19,400 acres | ||
| Potential for 3-500 MW | ||
| GreenHunter is a minority owner |
Competition
We are currently competing with other producers of wind energy for leases, power purchase
agreements, equipment and access to transmission lines. We believe we can favorably compete in this
market based on our ability to identify viable prospects. We will continue to evaluate buying and
selling development projects.
Solar Energy
Solar energy, provided by the sun, is constantly replenished and will not produce harmful
pollution like fossil fuels. Solar energy may be used passively, such as to heat and light
buildings, or technology may be used to harness the suns energy by collecting it and transforming
it to generate electricity. Current technologies include photovoltaics, concentrating solar, solar
hot water, and more.
The basic economic difference between solar and conventional power is that a solar systems
cost is almost entirely fixed and paid for upfront, whereas conventional power is driven by
variable costs over time which could include coal, natural gas, etc.
GreenHunters current plan is to focus on utility scale solar prospects when a decision is
made by the management team to expand to the solar energy industry. We are exploring possible
investments in thin film photovoltaic (PV) manufacturing and concentrating solar power (CSP)
technologies such as parabolic trough solar power. Commerciality of solar power is currently
constrained by average prices that are considerably higher than that of conventional power.
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GreenHunter will also evaluate distributed generation components of solar power. Currently,
solar power is attractive due to the opportunity to invest in emerging technologies in the
distributed nature of PV. Distributed generation systems can provide savings through increased
reliability, reduced needs for distribution infrastructure upgrades and reduced line losses. We
currently have no concrete plans for developing our solar energy business.
Geothermal Energy
Geothermal energy is a form of renewable energy derived from heat deep in the earths crust.
This heat is brought to the near-surface by thermal conduction and by intrusion into the earths
crust of molten magma originating from great depth. As groundwater is heated, geothermal energy is
produced in the form of hot water and steam. The heated groundwater can be used for direct heating
of homes and greenhouses, for vegetable drying, and for a number of other uses. These are known as
direct uses of geothermal energy.
Geothermal energy is also used for electricity production. Geothermal power generation is used
today throughout the world where good geothermal resources exist, including many locations in the
western United States. The U.S. continues to be the world leader in capacity and a wave of new
development is underway that could double capacity within the next few years, helped by federal
production tax credits.
Three types of power plants are used to generate power from geothermal energy: dry steam,
flash, and binary. Dry steam plants take steam out of fractures in the ground and use it to
directly drive a turbine that spins a generator. Flash plants take hot water, usually at
temperatures over 200°C, out of the ground, and allows it to boil as it rises to the surface, then
separates the steam phase in steam/water separators, and then runs the steam through a turbine. In
binary plants, the hot water flows through heat exchangers, boiling an organic fluid that spins the
turbine. The condensed steam and remaining geothermal fluid from all three types of plants are
injected back into the hot rock to pick up more heat. This is why geothermal energy is viewed as
sustainable. The heat of the earth is so vast that there is no way to remove more than a small
fraction even if most of the worlds energy needs came from geothermal sources.
While we are actively looking for investments which relate to generating power with geothermal
energy, we currently have not delineated a budget to develop this renewable business.
Research and Development
We do not spend any funds on research and development at any of our business segments.
Employees
As of March 30, 2010, we had 13 employees working on behalf of the corporate office in
Grapevine, Texas. There were 11 employees working on behalf of GreenHunter BioFuels, Inc.
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Item 1A | Risk Factors |
An investment in our securities involves many risks. You should carefully consider the following
risks and all of the other information contained in this prospectus before making an investment
decision. Additional risks related to us and our securities may be included in the applicable
prospectus supplement related to an offering and in our other filings with the SEC pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, which we
refer to as the Exchange Act. In evaluating our company, the factors described below should be
considered carefully. The occurrence of one or more of these events could significantly and
adversely affect our business, prospects, financial condition, results of operations and cash
flows.
Risks Associated with our Business
We have a limited operating history, and our business may not be as successful as we envision.
We are currently in an early stage of our current business plan. We have limited operating
history with respect to the construction and operation of biodiesel refineries for our own use.
Our limited operating history makes it difficult for potential investors to evaluate our business.
Therefore, our proposed operations are subject to all of the risks inherent in the initial
expenses, challenges, complications and delays frequently encountered in connection with the
formation of any new business, as well as those risks that are specific to the biodiesel industry
in general. Investors should evaluate an investment in our company in light of the problems and
uncertainties frequently encountered by companies attempting to develop markets for new products,
services and technologies. Despite best efforts, we may never overcome these obstacles to achieve
financial success.
Our business is speculative and dependent upon the implementation of our business plan, as
well as our ability to enter into agreements with third parties for necessary financing, the
provision of necessary feedstock sources, engineering, procurement and construction services and
the sale and distribution of our biodiesel fuel on terms that will be commercially viable for us.
There can be no assurance that our efforts will be successful or result in revenue or profit. There
is no assurance that we will earn significant revenues or that our investors will not lose their
entire investment.
We have yet to attain profitable operations and we will need additional financing to fund our
activities.
We are dependent upon our ability to obtain sufficient financing to continue our development
and operational activities. The ability to achieve profitable operations is in direct correlation
to our ability to raise sufficient financing. It is important to note that even if the appropriate
financing is received, there is no guarantee that we will ever be able to operate profitably or
derive any significant revenues from our operation. We will be required to raise additional
financing to fully implement our entire business plan.
Our lack of diversification beyond the renewable energy industry may increase our risk.
We expect our primary source of revenue will come from renewable energy assets that generate
cash flow from the sale of biodiesel, methanol, wind and biomass-created energy. Any diminution in
the value of our assets or decrease in operating revenues could negatively affect our ability to
become profitable. Further, the illiquid nature of the assets we own and intend to purchase could
jeopardize our ability to satisfy our working capital needs or impair our ability to meet any debt
obligations that may become due.
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We may not be able to effectively manage our acquisition and construction costs.
We may suffer from increasing costs in retrofitting current acquisitions. For example, while
we have completed the acquisition of a biomass plant located in Mesquite Lake, California,
substantial costs will be incurred in retrofitting and repairing this plant in a manner that will
allow commercial operations. While we have attempted to project such costs, changes in engineering
scope, increases in construction, labor, or capital expenses could impair our ability to
successfully achieve our investment objectives.
We have significant debt that could adversely affect our financial health and prevent us from
fulfilling our obligations.
We have a relatively high amount of indebtedness. As of December 31, 2009, we had total
indebtedness of approximately $66 million. Because we must dedicate a substantial portion of our
cash flow from operations to the payment of interest on our debt, that portion of our cash flow is
not available for other purposes. In addition, our ability to obtain additional financing in the
future may be impaired by our leverage and existing debt covenants. Our indebtedness could:
| make it more difficult for us to satisfy our obligations; | ||
| increase our vulnerability to general adverse economic and industry conditions; | ||
| require us to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate expenditures; | ||
| force us to sell assets or seek additional capital to service our indebtedness, which we may be unable to do at all or on terms favorable to us; | ||
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; | ||
| place us at a disadvantage compared to our competitors that have less debt; | ||
| and limit our ability to borrow additional funds. |
We are dependent upon our key personnel.
Our operations and financial success will significantly depend on our managerial personnel.
Our managerial personnel have the right to make all decisions with respect to management and
operation of our business and affairs. We are dependent on the executive officers and key
personnel of GreenHunter and our ability to attract and retain qualified personnel. Our
profitability could be adversely affected if we lose members of our management team. We have not
entered into any employment agreements with any of our management personnel nor have we obtained
key man life insurance on any of their lives. Further, our officers and directors allocation
of their time to other business interests could have a negative impact on our ability to achieve
our business objectives. All of our officers are required to commit their full work hour time to
our business affairs, with the exception of Gary C. Evans, our Chief Executive Officer, and David
S. Krueger, our Chief Financial Officer, who maintain officer and director positions and
relationships with other companies. For a discussion regarding the potential conflicts of interest
that you should be aware of, see the risk factor below regarding conflicts of interest of our
officers and directors.
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We may not be able to meet our capital requirements.
Future construction and operation of biodiesel refineries, capital expenditures to build and
operate our biomass plants and wind projects, hiring qualified management and key employees,
complying with licensing, registration and other requirements, maintaining compliance with
applicable laws, production and marketing activities, administrative requirements, such as
salaries, insurance expenses and general overhead expenses, legal compliance costs and accounting
expenses will all require a substantial amount of additional capital and cash flow.
We will be required to pursue sources of additional capital through various means, including
joint venture projects, tolling arrangements, which may include a profit sharing component, debt
financing, equity financing or other means. There is no assurance that we will be successful in
locating a suitable financing or strategic business combination transaction in a timely fashion or
at all. In addition, there is no assurance that we will be successful in obtaining the capital we
require by any other means. Future financings through equity investments are likely, and these are
likely to be dilutive to the existing shareholders as we issue additional shares of common stock to
investors in future financing transactions and as these financings trigger anti-dilution
adjustments in existing equity-linked securities. Also, the terms of securities we issue in future
capital transactions may be more favorable for our new investors. Newly issued securities may
include preferences, superior voting rights, the issuance of warrants or other derivative
securities, and the issuances of incentive awards under employee equity incentive plans, which may
have additional dilutive effects. Further, we may incur substantial costs in pursuing future
capital or financing, including investment banking fees, legal fees, accounting fees, securities
law compliance fees, printing and distribution expenses and other costs. We may also be required to
recognize non-cash expenses in connection with certain securities we may issue, such as convertible
notes and warrants, which may adversely affect our financial results.
Our ability to obtain needed financing may be impaired by such factors as the capital markets,
both generally and specifically in the renewable energy industry, the fact that we are a new
enterprise without a proven operating history, the location of our biodiesel refineries in the
United States instead of Europe or other regions where biodiesel is more widely accepted, and the
price of biodiesel and oil on the commodities market. Furthermore, if petroleum or biodiesel
prices on the commodities markets remain depressed, then our revenues will likely decrease and
decreased revenues may increase our requirements for capital. Some of the contractual arrangements
governing our operations may require us to maintain minimum capital, and we may lose our contract
rights if we do not have the required minimum capital. If the amount of capital we are able to
raise from financing activities, together with our revenues from operations, are not sufficient to
satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be
required to cease operations.
Risks Related to the Renewable Energy Industry
We have not currently identified specific future investments or acquisitions within the
renewable energy industry and thus cannot evaluate their associated merits or risks.
Since we are not limited to any particular target business in the renewable energy industry
within which to operate or complete an acquisition or business combination, we are unable to
currently ascertain the merits or risks of any future business we may operate. We may complete a
business combination in the future with a company in any business we choose in the renewable energy
industry (e.g., wind, solar, geothermal, biomass and biofuels) or a vertical integration within the
fuels distribution business, and we are not limited to any particular type of business. While our
recent acquisitions are described in our filings with the SEC, there is minimal current information
for you to evaluate the possible merits or risks of any other target businesses which we may
acquire. To the extent we complete a business combination
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with a financially unstable company, a company with unknown or non-quantifiable risks or an
entity in its development stage, we may be affected by numerous risks inherent in the business
operations of such entity. Further acquisitions or business combinations with an entity in the
renewable energy industry would be characterized by a high level of risk, and we may be adversely
affected by currently unascertainable risks of that business. Although our management team will
endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that
we will properly ascertain or assess all of the significant risk factors.
The abundant competition and rapidly changing technology in the renewable energy industry may
impair our success.
The renewable energy marketplace is highly fragmented, competitive and subject to rapid
technological change, and we may be unable to successfully compete. Evolving industry standards,
rapid price changes and rapid product obsolescence also impact the market. We currently compete in
the market for renewable energy products and services and against companies that are better
capitalized than us. Our competitors include many domestic and foreign companies, many of which
have substantially greater financial, marketing, personnel and other resources than we do. Our
current competitors or new market entrants could introduce new or enhanced technologies, products
or services with features that could render our technologies, products or services obsolete or less
marketable. Our success will be dependent upon our ability to develop superior energy products in
a cost effective manner. In addition, we may be required to continually enhance any products that
are developed as well as introduce new products that keep pace with technological change and
address the increasingly sophisticated needs of the marketplace. There can be no assurance that we
will be able to keep pace with the technological demands of the marketplace or successfully develop
products that will succeed in the marketplace.
Changes to the currently favorable regulations and legislation within the renewable energy industry
may adversely impact our future revenues.
The favorable legislative and regulatory climate for the renewable energy industry may not
continue. The viability of our renewable energy projects will be in large part dependent upon the
continuation of a favorable legislative and regulatory climate with respect to the continuing
operations and the future growth and development of the renewable energy industry. Government
regulations, subsidies, incentives and the market design have a favorable impact on the
construction of renewable energy facilities. If the current government regulations, subsidy and
incentive programs or the design of the market are significantly modified or delayed, our projects
may be adversely affected, which may have a material adverse effect on the Company.
The Internal Revenue Code currently provides for income tax credits for biodiesel fuels and
for electricity produced and sold from qualified biomass and wind energy projects. These credits,
which were to expire for biodiesel fuels after December 31, 2008, and for qualified wind energy
projects placed in service on or after December 31, 2008, have been extended for one year as part
of the Emergency Economic Stabilization Act of 2008 (Public Law 110-343). The credits available
for biodiesel fuel and biomass and wind energy are discussed below. The elimination or significant
reduction in these tax credits could harm our business, financial condition and results of
operations.
The pricing of renewable energy may fluctuate significantly due to the price of oil and gas.
The market price of renewable energy fuels is volatile and subject to significant
fluctuations, which may cause our profitability to fluctuate significantly. The market price of
renewable energy fuels is dependent on many factors, including the price of gasoline, which is in
turn dependent on the price of
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crude oil. Petroleum prices are highly volatile and difficult to forecast due to frequent
changes in global politics and the world economy. The distribution of petroleum throughout the
world is affected by incidents in unstable political environments, such as Iraq, Iran, Kuwait,
Saudi Arabia, countries comprising the former U.S.S.R., Venezuela, Nigeria, and other countries and
regions. The industrialized world depends critically on oil from these areas, and any disruption
or other reduction in oil supply or other types of instability in these regions, such as an
escalation of conflicts, can cause significant fluctuations in the prices of oil and gasoline. We
cannot predict the future price of oil or gasoline. Unprofitable prices for the sale of renewable
energy fuels may result from the significant fluctuations in market prices. In recent years, the
price of crude oil, gasoline and renewable energy fuels all reached historically unprecedented high
levels, although prices for oil, gasoline and renewable energy fuels declined substantially in
2008. As the prices of gasoline and petroleum materially decline, we believe that the demand for
and price of renewable energy fuels may be adversely affected. Fluctuations in the market price of
renewable energy fuels will likely cause our profitability to fluctuate significantly.
The pricing of renewable energy may fluctuate due to the level of production of renewable energy.
We believe that the production of renewable energy fuels is expanding rapidly, especially in
the United States. There are a number of new plants under construction and planned for
construction. We expect existing renewable energy fuel and biopower plants to expand by increasing
production capacity and actual production. Increases in the demand for renewable energy fuels and
biopower may not be commensurate with increasing supplies of renewable energy fuels or power.
Thus, increased production of renewable energy fuels or power may lead to lower renewable energy
fuel prices. The increased production of renewable energy fuels and power could also have other
adverse effects. For example, increased renewable energy fuels production could lead to increased
supplies of co-products from the production of renewable energy fuels. Those increased supplies
could lead to lower prices for those co-products. Also, the increased production of renewable
energy fuels could result in increased demand for renewable energy fuel supplies. This could
result in higher prices for such supplies and cause higher renewable energy fuels production costs,
which would result in lower profits. We cannot predict the future price of renewable energy fuels
or biopower. Any material decline in the price of renewable energy fuels or power will adversely
affect our sales and profitability.
Construction and development delays or cost over-runs may adversely affect our business.
Absent a successful business combination, the ability of GreenHunter to generate revenues will
depend upon the successful completion of the restoration or development, construction and
operations of our existing biodiesel refinery, biomass plants, and wind assets. Such development
requires capital equipment being manufactured, shipped to our project sites, installed and tested.
In addition, we will be required to build or purchase and install on-site roads, substations,
interconnection facilities and other infrastructure. There is a risk that the construction phase
may not be completed, that construction may be substantially delayed, or that material cost
over-runs may be incurred, which may result in GreenHunter being unable to meet profit
expectations.
We would be liable for violations of environmental laws related to our ownership or operation of
our facilities.
Federal, state and local laws impose liability on a landowner for releases or the otherwise
improper presence on the premises of hazardous substances. This liability is without regard to
fault for, or knowledge of, the presence of such substances. A landowner may be held liable for
hazardous materials brought onto the property before it acquired title and for hazardous materials
that are not discovered until after it sells the property. Similar liability may occur under
applicable state law. In
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addition, we could face environmental liability for violations on or related to facilities we
lease or otherwise use unrelated to ownership. If any hazardous materials are found within the
operations of GreenHunter and are in violation of the law at any time, we may be liable for all
cleanup costs, fines, penalties and other costs. This potential liability will continue after we
sell or cease operations on any subject properties and may apply to hazardous materials present
within the properties before we acquired or commence use of them. If significant losses arise from
hazardous substance contamination, our financial viability may be substantially and adversely
affected.
Risks Related to the Biodiesel Industry
The biodiesel industry is highly dependent on a mix of legislation and regulation (including
tax incentives) and any changes in legislation or regulation could harm our business, results of
operations and financial condition.
The competitiveness of the biodiesel industry currently depends to a large extent on tax
incentives and renewable fuel standards. We blend our biodiesel in the United States at our
facilities in Houston, Texas. We are entitled to credits against the U.S. federal excise taxes
imposed on the removal of biodiesel from any refinery or terminal and sales of biodiesel to certain
persons. We cannot assure you that the biodiesel fuels credit or any other government incentive
programs will be renewed on similar terms, if at all. Any failure to renew such incentive programs
at all or on similar terms could harm our business, financial condition and results of operations.
In addition, the tax credit and other federal and state programs that benefit biodiesel generally
are subject to U.S. and other government obligations under international trade agreements,
including those under the World Trade Organization Agreement on Subsidies and Countervailing
Measures that might in the future be the subject of challenges.
In recent years, the U.S. federal government has sought to stimulate the production and use of
biodiesel fuel. The primary incentive is the biodiesel fuels credit, which was enacted as part of
the American Jobs Creation Act of 2004 (Public Law No. 108-357) and modified by Energy Tax
Incentive Act of 2005 (Public Law 109-58) and the Economic Emergency Stabilization Act of 2008
(Public Law No. 110-343). Under Section 40A of the Internal Revenue Code (26 U.S.C. 40A), the
biodiesel fuels credit is equal to the biodiesel mixture credit plus the biodiesel credit. The
biodiesel mixture credit is $0.50 per gallon, or for fuel produced or sold after December 31, 2008,
$1.00 per gallon. The biodiesel mixture credit is available for biodiesel (including
agri-biodiesel) used by the taxpayer in the production of a qualified biodiesel mixture (a mixture
of biodiesel and diesel fuel) which is sold by the taxpayer producing such fuel mixture to any
person for use as fuel or is used as a fuel by the taxpayer producing such mixture. The biodiesel
credit is U.S. $0.50 per gallon, or for fuel produced or sold after December 31, 2008, $1.00 per
gallon. The biodiesel credit is available for biodiesel (including agri-diesel) that is not in a
mixture with diesel fuel and that is either used by the taxpayer as fuel in a trade or business or
is sold by the taxpayer at retail to a person and placed in the fuel tank of such persons vehicle.
Agri-biodiesel is biodiesel produced from virgin oils such as soybean oil or derived from animal
fats. Finally, there is an additional U.S. $0.10 per gallon tax credit for small agri-biodiesel
producers for up to 15 million gallons of agri-biodiesel produced by small producers. The
biodiesel fuels credit is only available for biodiesel that meets both the registration
requirements for fuels and fuel additives established by the Environmental Protection Agency under
Section 211 of the Clean Air Act (42 U.S.C. 7545) and the ASTM D6751 standard.
Under the Economic Emergency Stabilization Act of 2008, these tax incentives expired at the
end of 2009. On March 10, 2010, the U.S. Senate passed the American Workers, State, and Business
Relief Act of 2010 (H.R. 4213) providing, among other provisions, a one year retroactive extension
of the biodiesel tax incentive. With passage of H.R. 4213, the U.S. House and U.S. Senate must
reconcile the differences between the two versions of the bill approved by the respective chambers.
H.R. 4213 as
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approved by the U.S. House in December, 2009 also provides for a one year retroactive
extension of the biodiesel tax incentive. The failure to renew the biodiesel tax credits
described above or other programs could harm our business, financial condition and results of
operations. In the United States, the Energy Policy Act of 2005 (Public Law No. 109-58), mandates
a minimum amount of renewable fuel (biodiesel, ethanol, and other renewable fuels) to be used by
petroleum refiners in the fuel supply market, increasing from 4.0 billion gallons in 2006 to 7.5
billion gallons by 2012. Under the final regulations, adopted pursuant to the Energy Independence
and Security Act of 2007, U.S. Congress established a renewable fuels standard intended to
encourage the use of 12.95 billion gallons of renewable fuels annually in 2010 and 36 billion
gallons of renewable fuels annually by 2022.
While these renewable fuel standards may stimulate demand for renewable fuels generally, we
cannot assure you that there will be specific demand for biodiesel. Any waiver of, or failure to
adopt, the renewable fuel standards could adversely impact the demand for biodiesel and may have a
material adverse effect on our business, financial condition and results of operations.
Our operations are subject to various regulatory schemes, including environmental regulations, and
failure to comply with such regulations could harm our business, results of operations and
financial condition.
All phases of designing, constructing and operating biodiesel production facilities present
environmental risks and hazards. We are subject to environmental regulation implemented or imposed
by a variety of federal, state and municipal laws and regulations as well as international
conventions. Among other things, environmental legislation provides for restrictions and
prohibitions on spills and discharges, as well as emissions of various substances produced in
association with biodiesel fuel operations. Legislation also requires that facility sites be
operated, maintained, abandoned and reclaimed in such a way that would satisfy applicable
regulatory authorities. Compliance with such legislation can require significant expenditures and
a breach may result in the imposition of fines and penalties, some of which may be material.
Environmental legislation is evolving in a manner we expect may result in stricter standards and
enforcement, larger fines, penalties and liability, as well as potentially increased capital
expenditures and operating costs. The discharge of pollutants into the air, soil or water may give
rise to liabilities to governments and third parties, and may require us to incur costs to remedy
such discharge.
Failure to comply with government regulations could subject us to civil and criminal
penalties, require us to forfeit property rights and may affect the value of our assets or our
ability to conduct our business. We may also be required to take corrective actions, including,
but not limited to, installing additional equipment, which could require us to make substantial
capital expenditures. We could also be required to indemnify our directors, officers and employees
in connection with any expenses or liabilities that they may incur individually in connection with
regulatory action against them. These could result in a material adverse effect on our business,
financial condition and results of operations.
Our results of operations, financial condition and business outlook are highly dependent on
commodity prices, which are subject to significant volatility and uncertainty, and the availability
of supplies.
Our financial results are substantially dependent on many different commodity prices,
especially prices for feedstock, biodiesel, petroleum diesel and materials used in the construction
of our production facilities. As a result of the volatility of the prices for these items, our
financial results may fluctuate substantially and we may experience periods of declining prices for
our products and increasing costs for our raw materials, which could result in operating losses.
Although we may attempt to offset a portion of the effects of fluctuations in prices by entering
into forward contracts to supply biodiesel or purchase
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feedstock or other items or by engaging in transactions involving exchange-traded futures
contracts, the ability to hedge against certain feedstock price fluctuations is limited, the amount
and duration of these hedging and other risk mitigation activities may vary substantially over time
and these activities also involve substantial costs and risks and may not be effective to mitigate
these fluctuations.
We depend on third parties for all of our feedstock supply. If such third parties are not
able to complete their feedstock supply services or default on their agreement to provide us with
feedstock or procure feedstock for us, we would be materially adversely affected. Irrespective of
whether third parties perform under feedstock contractual arrangements with us, we may be forced to
buy feedstock at uneconomic rates, or we may not have access to feedstock at all. Additionally, we
may have difficulty selling our biodiesel if third parties with whom we contract under our
off-taking agreements do not perform. These conditions may cause our operating results to suffer.
As feedstocks comprise the primary input in producing biodiesel, changes in the price of
feedstocks can significantly affect our business. The price of feedstock is influenced by market
demand, weather conditions, animal processing and rendering plant decisions, factors affecting crop
yields, farmer planting decisions and general economic, market and regulatory factors. These
factors include government policies and subsidies with respect to agriculture and international
trade, and global and local demand and supply. The significance and relative effect of these
factors on the price of feedstock is difficult to predict. Any event that tends to negatively
affect the supply of feedstock, such as increased demand, adverse weather or crop disease, could
increase feedstock prices and potentially harm our business. In addition, we may also have
difficulty, from time to time, in physically sourcing feedstock on economical terms due to supply
shortages. Such a shortage could require us to suspend operations until feedstock is available at
economical terms, which could have a material adverse effect on our business, results of operations
and financial condition. The price we pay for feedstock at a facility could increase if an
additional multi-feedstock biodiesel production facility is built in the same general vicinity or
if alternative uses are found for lower cost feedstocks.
Historically, the price of biodiesel has correlated closely to the price of petroleum diesel
which is directly correlated to the price of crude oil. The price of petroleum diesel fluctuates
substantially and is difficult to forecast due to factors such as political unrest, worldwide
economic conditions, supply and demand, seasonal weather conditions, changes in refining capacity,
fluctuations in exchange rates and natural disasters. Price fluctuations will have a significant
impact upon our revenue, the return on our investment in biodiesel production facilities and on our
general financial condition. Price fluctuations for biodiesel fuel may also impact the investment
market, and our ability to raise capital. Although market prices for biodiesel fuel rose to record
levels during 2007 and into 2008, the prices of crude oil and biodiesel fuel declined substantially
in the second half of 2008. Future decreases in the prices of biodiesel or petroleum diesel fuel
may have a material adverse effect on our business, financial condition and results of operations.
Biodiesel is marketed both as a pure and blended substitute for diesel, and as a result, a
decrease in petroleum diesel prices may reduce the price at which we can sell our biodiesel and
materially and adversely affect our business, financial condition and results of operations.
Cold weather can cause biodiesel, particularly biodiesel produced from animal fats, oils and
greases, to gel sooner than petroleum-based diesel, which has resulted in price discounts for
biodiesel produced from animal fats, oils and greases.
The cloud point for a fuel is the temperature at which the liquid becomes cloudy due to
formation of crystals and solidification of saturates. With decreasing temperature, more solids
form and the material approaches the pour point, the lowest temperature at which the material will
pour. A lower cloud
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point means the fuel will flow more readily in cold weather. No. 2 diesel and No. 1 diesel
are used extensively for automotive transportation. Although the cloud points for these products
vary depending on the origin refinery and the time of the year, an indicative range observed for
No.2 diesel is 14°C to -23°C. In contrast, the cloud points of soybean-based, yellow grease-based
and animal tallow-based pure biodiesel, or B100, are approximately 0°C, 5°C and 10°C, respectively.
Testing conducted in 2005 by the Biodiesel Cold Flow Consortium established by the National
Biodiesel Board demonstrated that the cloud points of soybean-based, yellow grease-based and animal
tallow-based 2% blended biodiesel, or B2, varied only a few degrees from the cloud point of No. 2
diesel. However, there exists a discount in the marketplace for B100 biodiesel with high cloud
points. This discount may range from $0.50 to $1.15 per gallon depending on the season, with a
lower discount during warmer months and a higher discount in the summer months.
In addition to the decline in price differential between biodiesel and petroleum-derived
diesel expected during the colder months, it is likely that the discount for biodiesel produced
from animal fats, oils and greases will increase during colder weather. This may also require us
to use particular feedstocks that customers believe are better suited for their climate, which
could require us to purchase more expensive feedstocks and increase our cost of sales. In
addition, the testing conducted by the Biodiesel Cold Flow Consortium showed that successful
blending of biodiesel with petroleum-based diesel would require the biodiesel to be heated to
approximately 10°C above its cloud point. This would necessitate the use of heated facilities in
order to produce a blended product, which may increase blending costs and the resulting cost of
biodiesel sold to the public. Further, at low temperatures, biodiesel may need to be stored in a
heated building or heated storage tanks, which would increase storage costs. Any reduction in the
demand for or pricing of, or increased costs of, our biodiesel will reduce our revenue and have an
adverse effect on our financial condition and results of operations.
The U.S. biodiesel industry is highly dependent upon a myriad of federal and state legislation and
regulation and any changes in legislation or regulation could materially and adversely affect our
results of operations and financial position.
The production of biodiesel is made significantly more competitive by federal and state tax
incentives. The federal excise tax incentive program for biodiesel was originally enacted as part
of the American Jobs Creation Act of 2004, but expired on December 31, 2009. Since January 1,
2009, this program provides fuel blenders, generally distributors, with a one-cent tax credit for
each percentage point of biodiesel blended with petroleum diesel. For example, distributors that
blend biodiesel with petroleum diesel into a B20 blend would receive a twenty cent per gallon
excise tax credit. These tax credits generally allow for B100 biodiesel to sell at a premium over
wholesale petroleum diesel, although the wholesale price paid by a blender to a producer may not
reflect the full amount of the tax credit and the amount of the premium, if any, is generally less
during colder months. On March 10, 2010, the U.S. Senate passed the American Workers, State, and
Business Relief Act of 2010 (H.R. 4213) providing, among other provisions, a one year retroactive
extension of the biodiesel tax incentive. With passage of H.R. 4213, the U.S. House and U.S. Senate
must reconcile the differences between the two versions of the bill approved by the respective
chambers. H.R. 4213 as approved by the U.S. House in December, 2009 also provides for a one year
retroactive extension of the biodiesel tax incentive.
In addition, approximately thirty-one states provide mandates, programs and other incentives
to increase biodiesel production and use, such as mandates for fleet use or for overall use within
the state, tax credits, financial grants, tax deductions, financial assistance, tax exemptions and
fuel rebate programs. These incentives are meant to lower the cost of biodiesel in comparison to
petroleum diesel. The elimination or significant reduction in the federal excise tax incentive
program or state incentive programs benefiting biodiesel production may have a material and adverse
effect on our results of operations and financial condition.
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Competition due to advances in alternative fuels may lessen the demand for biodiesel and negatively
impact our profitability.
Alternative fuels, gasoline oxygenates, ethanol and biodiesel production methods are
continually under development. A number of automotive, industrial and power generation
manufacturers are developing alternative clean power systems using fuel cells or clean-burning
gaseous fuels that, like biodiesel, may address increasing worldwide energy costs, the long-term
availability of petroleum reserves and environmental concerns. Additionally, there is significant
research and development being undertaken regarding the production of ethanol from cellulosic
biomass, the production of methane from anaerobic digestors, and the production of electricity from
wind and tidal energy systems, among other potential sources of renewable energy. If these
alternative fuels continue to expand and gain broad acceptance, we may not be able to compete
effectively. This additional competition could reduce the demand for biodiesel, which would
adversely affect our business, results of operations and financial condition.
Adverse public opinions concerning the biodiesel industry in general could harm our business.
The biodiesel industry is new, and general public acceptance of biodiesel is uncertain,
especially in the United States. Public acceptance of biodiesel as a reliable, high-quality
alternative to petroleum diesel may be limited or slower than anticipated due to several factors,
including:
| public perception of the food versus fuel debate; | ||
| public perception that biodiesel is produced from waste vegetable oil or other lower-quality feedstocks, thereby resulting in lower quality fuel; | ||
| public perception that the use of biodiesel will require excessive engine modifications, or that engines running biodiesel will not reliably start in cold conditions; | ||
| actual or perceived problems with biodiesel quality or performance; and | ||
| concern that using biodiesel will void engine warranties. |
Such public perceptions or concerns, whether substantiated or not, may adversely affect the
demand for our biodiesel, which in turn could decrease our sales, harm our business and adversely
affect our financial condition.
We need to negotiate extension of credit terms with our Lender.
Due to the current economic conditions related to the biodiesel industry, we cannot make
biodiesel at a profit at our Houston refinery. Our ability to repay indebtedness to our Lender is
dependent upon us achieving profitable operations at our facility. Until such time as we can
achieve and maintain profitable operations at our Houston facility, we need to negotiate terms with
our lender allowing us to maintain ownership and operation of the facility. Unless we negotiate
mutually agreeable terms with our lender regarding repayment of the credit facility secured by the
Houston refinery, our plant is subject to being foreclosed upon by the lender.
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Risks Relating to the Wind Energy Industry
One of our business segments depends on the availability of wind, which may not meet our
expectations if weather patterns vary greatly.
A portion of our business is dependent on the availability of the wind resource. The strength
and consistency of the wind resource at any of our wind projects will vary. Weather patterns are
unpredictable could change or the historical data could prove to be an inaccurate reflection of the
strength and consistency of the wind in the future. If there is insufficient wind resource, the
assumptions underlying the economic feasibility as to the amount of electricity to be generated by
any of our proposed wind projects will not be met and income and cash flows will be adversely
impacted. The future evaluation of our wind projects will be based on assumptions about certain
conditions that may exist and events that may occur in the future. A number of additional factors
may cause the wind resource and energy capture at any of our wind projects to differ, possibly
materially, from those initially assumed by management, including:
| the limited time period over which the site-specific wind data were collected; | ||
| the potential lack of close correlation between site-specific wind data and the longer-term regional wind data; | ||
| inaccurate assumptions related to wake losses and wind shear; | ||
| the limitations in the accuracy with which anemometers measure wind speed; | ||
| the inherent variability of wind speeds; | ||
| the lack of independent verification of the turbine power curve provided by the manufacturer; | ||
| the potential impact of climatic factors, including icing and soiling of wind turbines; | ||
| the potential impact of topographical variations, turbine placement and local conditions, including vegetation; | ||
| the power delivery schedule being subject to uncertainty; | ||
| the inherent uncertainty associated with the use of models, in particular future-oriented models; and | ||
| the potential for electricity losses to occur before delivery. |
Further, the wind resources may be insufficient for our wholly owned subsidiary, GreenHunter
Wind Energy, LLC, to become and remain profitable. Wind is naturally variable. The level of
electricity production at any of our wind projects, therefore, will also be variable. If there is
insufficient wind resource at a project site due to variability, the assumptions underlying
managements belief as to the amount of electricity to be generated by any of our wind projects
will not be met. Accordingly, there is no assurance that the wind resource will be sufficient for
GreenHunter Wind Energy to become or remain profitable.
The inherent volatility in the market price of electricity could impact our profitability.
Our potential revenues, income and cash flow are subject to volatility in the market price for
electricity. Our ability to generate revenue has exposure to movements in the market price of
electricity, as sales to the power market are likely to be made at prevailing market prices. The
market price of electricity is sensitive to cyclical changes in demand and capacity supply, and in
the economy, as well as
to regulatory trends and developments impacting electricity market rules and pricing,
transmission
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development and investment within the United States and to the power markets in other
jurisdictions via interconnects and other external factors outside of our control. Energy from
wind generating facilities must be taken as delivered which necessitates the use of other system
resources to keep the demand and supply of electric energy in balance. Accordingly, the potential
revenue, income and cash flow may be volatile and adversely affect our value.
Any inability or delay in updating or obtaining required licenses and permits could hinder
development and adversely affect profitability.
We may be unable to obtain all necessary licenses and permits to operate our business.
GreenHunter may not necessarily hold all of the licenses and permits required in connection with
the construction and operation of most of our biodiesel refinery, biomass plants, and wind
projects. The failure to obtain all necessary licenses or permits, including renewals or
modifications, could result in construction delays of any of our projects or could otherwise have a
material adverse effect on GreenHunter.
Our inability to enter interconnection agreements would restrict our ability to sell electricity.
We may be unable to enter into necessary interconnection agreements. GreenHunter will be
required to enter into certain interconnection agreements with electric utilities prior to selling
electricity. The failure to enter into such interconnection agreements on terms that are
acceptable to us could have a material adverse effect on GreenHunter.
The wind energy industry is highly dependent on tax incentives.
Section 45 of the Internal Revenue Code provides for a production tax credit of 1.5 cents
(adjusted annually for inflation) per kilowatt hours of electricity produced by the taxpayer from a
qualified facility during the 10-year period beginning on the date it was originally placed in
service, and sold to an unrelated person. The production tax credit is reduced under a formula for
any year in which the national average price of electricity produced from wind for the immediately
succeeding year, or the reference price, exceeds 8 cents a kilowatt hour adjusted for inflation
and is completely eliminated when the reference price exceeds 11 cents (adjusted for inflation) per
kilowatt hour. The reference price for 2009 was 2.1 cents.
The production tax credit which was scheduled to expire for qualified facilities placed in
service after December 31, 2008, was extended by the Emergency Economic Stabilization Act of 2008
(Public Law 110-343) to qualified facilities placed in service before January 1, 2010. Under the
American Recovery and Reinvestment Tax Act of 2009, the placed in service deadline for wind
facilities has been extended to December 31, 2012. The elimination or significant reduction in the
production tax credit described above could harm our business, financial condition and results of
operations.
Risks Relating to the Biomass Industry
The inherent volatility in the market price of electricity could impact our profitability.
Our potential revenues, income and cash flow are subject to volatility in the market price for
electricity. Our ability to generate revenue has exposure to movements in the market price of
electricity, as sales to the power market are likely to be made at prevailing market prices. The
market price of electricity is sensitive to cyclical changes in demand and capacity supply, and in
the economy, as well as
to regulatory trends and developments impacting electricity market rules and pricing,
transmission
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development and investment within the United States and to the power markets in other
jurisdictions via interconnects and other external factors outside of our control. Energy from
biomass facilities must be taken as delivered which necessitates the use of other system
resources to keep the demand and supply of electric energy in balance. Accordingly, the potential
revenue, income and cash flow may be volatile and adversely affect our value.
Any inability or delay in updating or obtaining required licenses and permits could hinder
development and adversely affect profitability.
We may be unable to obtain all necessary licenses and permits to operate our business.
GreenHunter may not necessarily hold all of the licenses and permits required in connection with
the construction and operation of most of our biodiesel refinery, biomass plants, and wind
projects. The failure to obtain all necessary licenses or permits, including renewals or
modifications, could result in construction delays of any of our projects or could otherwise have a
material adverse effect on GreenHunter.
Our inability to enter interconnection agreements would restrict our ability to sell electricity.
We may be unable to enter into necessary interconnection agreements. GreenHunter will be
required to enter into certain interconnection agreements with electric utilities prior to selling
electricity. The failure to enter into such interconnection agreements on terms that are
acceptable to us could have a material adverse effect on GreenHunter.
The biomass energy industry is highly dependent on tax incentives.
Production Tax Credit. Section 45 of the Internal Revenue Code generally provides a
production tax credit of 1.5 cents (the credit amount as adjusted annually for inflation) for
electricity produced by a taxpayer from a qualified energy resource at a qualified facility during
the 10-year period beginning on the date the facility was originally placed in service (the credit
period which is adjusted for certain facilities as noted below) and sold by the taxpayer to an
unrelated person. A qualified energy resource includes closed-loop biomass and open-loop
biomass.
The production tax credit is reduced under a formula for any year in which the national
average price of electricity from biomass, or the reference price, exceeds 8 cents a kilowatt
hour adjusted for inflation and is completely eliminated when the reference price exceeds 11 cents
(adjusted for inflation) per kilowatt hour. For 2009, the production tax credit is 2.1 cents per
kilowatt-hour for closed-loop biomass and 1.1 cents per kilowatt-hour for open-loop biomass.
For a facility using open-loop biomass to produce electricity, the term qualified facility
generally means any facility owned by the taxpayer which in the case of a facility using
agricultural livestock waste nutrients is originally placed in service before January 1, 2011 and
the nameplate capacity rating is not less than 150 kilowatts and in the case of any other facility
is originally placed in service before January 1, 2011. It also includes a new unit placed in
service after October 3, 2008, in connection with such facility but only to the extent of the
increased amount of electricity produced at the facility by such unit. The credit period for a
facility for open-loop biomass is shortened from a 10-year period to a 5-year period for any
facility placed in service before August 8, 2005, and for facilities other than using agricultural
livestock waste placed in service before October 22, 2004, is a 5-year period beginning on January
1, 2005. Also, the credit amount for electricity produced from a facility for open-loop biomass is
reduced by one-half.
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For a facility using closed-loop biomass to produce electricity, the term qualified facility
generally means any facility owned by the taxpayer which is originally placed in service after 1992
and before January 1, 2011 or owned by the taxpayer which before January 1, 2011 is originally
placed in service and modified to use closed-loop biomass to co-fire with coal, with other biomass,
or with both but only if certain modifications are approved under the Biomass Power for Rural
Development Programs or is part of a pilot project of the Commodity Credit Corporation. (The
amount of production tax credit attributable to a qualified facility under the immediately
preceding sentence is further adjusted based on the ratio of the thermal content of the closed-loop
biomass used in the facility to the thermal content of all fuels used in such facility.) It also
includes a new unit placed in service after October 3, 2008, in connection with such facility but
only to the extent of the increased amount of electricity produced at the facility by such unit.
With respect to either a closed-loop biomass facility or open-loop biomass facility, if the owner
of such facility is not the producer of the electricity, the person eligible for the credit is the
lessee or operator of such facility.
The production tax credit for qualified resources was scheduled to expire for qualified
facilities placed in service after December 31, 2008. However, the Emergency Economic
Stabilization Act of 2008 (Public Law 110-343) extended the production tax credit generally to
biomass facilities placed in service before January 1, 2011. Under the American Recovery and
Reinvestment Tax Act of 2009, the placed in service deadline for wind facilities has been extended
to December 31, 2013. The elimination or significant reduction in the production tax credit
described above could harm our business, financial condition and results of operations.
Bonus Depreciation. Finally, the Emergency Economic Stabilization Act of 2008
provides that an additional first year depreciation of 50% of the adjusted tax basis is available
for cellulosic biomass plant property. Cellulosic biomass means any liquid fuel which is produced
from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring
basis. Cellulosic biomass plant property means property of a character subject to the allowance
for depreciation which is used in the U.S. solely to produce cellulosic biomass, the original use
of which commences with the taxpayer and which is placed in service after October 3, 2008, in
taxable years ending after that date but before January 1, 2013, and which is acquired by the
taxpayer by purchase.
No Assurance of Continued Tax Incentives. The biomass industry is highly
dependent on tax incentives. The credit for producing fuels from nonconventional sources has
already expired, and there is no assurance that other tax incentives will be renewed or otherwise
continued on favorable terms.
Risks Relating to the Ownership of our Securities
Our common stock only has been publicly traded since January 2, 2008, and the price of our
common stock has fluctuated substantially since then and may fluctuate substantially in the future.
Our common stock has been publicly traded only since January 2008. The price of our common
stock has fluctuated significantly since then. From January 2, 2008, to March 30, 2010, the
trading price of our common stock ranged from a low of $0.91 per share to a high of $25.45 per
share and the closing trading price on March 26, 2010 was $1.34 per share. We expect our stock to
continue to be subject to fluctuations as a result of a variety of factors, including factors
beyond our control. These factors include:
| changing conditions in fuel markets; | ||
| changes in financial estimates by securities analysts; | ||
| changes in market valuations of comparable companies; | ||
| additions or departures of key personnel; |
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| future sales of our stock; | ||
| tax and other regulatory developments; | ||
| our ability to develop and complete facilities, and to introduce and market the energy created by such facilities to economically viable production volumes in a timely manner; and | ||
| other factors discussed in the Risk Factors section and elsewhere in this prospectus and in any prospectus supplement. |
We may fail to meet expectations of our stockholders or of securities analysts at some time in the
future, and our stock price could decline as a result.
If we issue additional shares in the future, it will result in dilution to our existing
stockholders.
Our amended and restated certificate of incorporation denies the holders of our common stock
the right to subscribe for additional shares of capital stock upon any issuance or increase
thereof. As a result, if we choose to issue additional shares of common stock or securities
convertible into common stock, our stockholders may be unable to maintain their pro rata ownership
of common stock. The issuance of additional securities will result in a reduction of the book
value and market price of the outstanding shares of our common stock. If we issue any such
additional shares or securities convertible into or exercisable for shares, such issuance will
cause a reduction in the proportionate ownership and voting power of all current stockholders who
do not purchase such shares. Further, such issuance may result in a change of control of our
company. There is no assurance that further dilution will not occur in the future.
We may issue shares of our capital stock or debt securities to complete a business combination or
acquire assets, which would dilute the equity interest of our stockholders and could cause a change
in control of our ownership.
Our certificate of incorporation authorizes the issuance of up to 90,000,000 shares of common
stock and 10,000,000 shares of preferred stock. As of March 30, 2010, there were 67,883,536
authorized but unissued shares of our common stock available for issuance and 9,976,825 shares of
preferred stock available for issuance. As of December 31, 2009, the number of shares of our
common stock subject to outstanding options, warrants, GreenHunters Series A convertible preferred
stock and GreenHunters Series B convertible preferred stock was 16,958,448. At March 30, 2010, we
had no commitments to issue additional shares of common stock and we will, in all likelihood,
issue a substantial number of additional shares of our common stock, preferred stock or convertible
securities, or a combination of common stock, preferred stock and convertible securities, to the
stockholders of a potential target or in connection with a related simultaneous financing to
complete a business combination or asset purchase. The issuance of additional common stock,
preferred stock or convertible securities may:
| significantly dilute the equity interest of current stockholders in our Company; | ||
| subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded to holders of our common stock; | ||
| cause a change in control if a substantial number of our shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and possibly result in the resignation or removal of some or all of our present officers and directors; and | ||
| adversely affect prevailing market prices for our common stock. |
Similarly, our issuance of additional debt securities could result in:
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| default and foreclosure on our assets if our operating revenues after a business combination or asset purchase are insufficient to pay our debt obligations; | ||
| acceleration of our obligations to repay the indebtedness, even if we have made all principal and interest payments when due, if the debt security contains covenants that require the maintenance of certain financial ratios or reserves, or change of control provisions, and any such covenant is breached without a waiver or renegotiation of that covenant; | ||
| our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; and | ||
| our inability to obtain additional financing, if necessary, if the debt security contains covenants restricting our ability to obtain additional financing while such security is outstanding. |
Our ability to successfully effect a business combination and to be successful afterwards will be
dependent upon the efforts of our key personnel, and others hired to manage the acquired business
and whom we would have only a limited ability to evaluate.
Our ability to successfully effect a business combination will be dependent upon the efforts
of our key personnel. However, we cannot presently ascertain the future role of our key personnel
in the target business. While we intend to closely scrutinize any individuals we engage in
connection with a business combination, we cannot assure you that our assessment of these
individuals will prove to be correct. These individuals may be unfamiliar with the requirements of
operating as part of a public company which could cause us to have to expend time and resources
familiarizing them with such requirements. This process could be expensive and time-consuming and
could lead to various regulatory issues which may adversely affect our operations.
Our officers and directors allocation of their time to other business interests could have a
negative impact.
All of our officers are required to commit their full work hour time to our business affairs,
with the exception of Mr. Evans and Mr. Krueger. Due to existing management and board of director
positions and other business interests that Mr. Evans maintains with other companies, Mr. Evans
cannot commit all of his work hours to GreenHunter. Mr. Krueger is also an officer with another
public company. However, subject to Board approval where appropriate, all material corporate,
strategic and financial decisions will be reviewed and ultimately decided by Mr. Evans.
Because of our limited resources and the significant competition for business combination
opportunities, we may not be able to consummate attractive business combinations.
We expect to encounter intense competition from other entities with business objectives
similar to ours, including venture capital funds, leveraged buyout funds and operating businesses
competing for acquisitions. Many of these entities are well-established and have extensive
experience in identifying and effecting business combinations directly or through affiliates. Many
of these competitors may possess greater technical, human and other resources than we do, and our
financial resources may be relatively limited when contrasted with those of many of these
competitors. While we believe that there are numerous potential target businesses that we could
acquire, our ability to compete in acquiring certain sizable target businesses will be limited by
our available financial resources. This inherent competitive limitation may give others an
advantage in pursuing the acquisition of certain target businesses. Any of these factors may place
us at a competitive disadvantage in successfully negotiating a business
combination. If we are unable to successfully complete an acquisition of a target business,
our business plan will be thwarted and investors may lose their entire investment.
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We may be unable to obtain additional financing, if required, to complete a business combination,
asset purchase or to fund the operations and growth of the target business, which could compel us
to restructure the transaction or abandon a particular business combination or asset purchase.
We cannot ascertain the capital requirements for any particular transaction. If the net
proceeds of any specific capital raise prove to be insufficient, either because of the size of the
business combination or asset purchase, we may be required to seek additional financing. We cannot
assure you that such financing would be available on acceptable terms, if at all. To the extent
that additional financing proves to be unavailable when needed to consummate a particular business
combination or asset purchase, we would be compelled to restructure the transaction or abandon that
particular business combination or asset purchase and seek an alternative target. In addition, if
we consummate a business combination or asset purchase, we may require additional financing to fund
the operations or growth of the target. The failure to secure additional financing could have a
material adverse effect on the continued development or growth of the target. None of our
officers, directors or stockholders is required to provide any financing to us in connection with
or after a business combination.
We are subject to credit market risk.
Distress in the credit and financial markets has reduced liquidity and credit availability.
The Company has a credit facility consisting of a fully utilized $33.5 million term loan facility
and a $10 million working capital facility with WestLB, which the bank may, in its sole discretion,
increase up to an aggregate of $150 million (including the $43.5 million commitment). As of March
30, 2010, approximately $38 million was outstanding under this credit facility, and the Company had
no borrowing availability. The lender has agreed to waive any events of default under the credit
facility until April 30, 2010. Credit market risk could negatively impact WestLBs ability and
willingness to fund the commitment amount of the credit facility and to increase the credit
facility up to $150.0 million or any lesser increased amount. Credit market risk could also
negatively impact the Companys suppliers being able to make deliveries in accordance with their
commitments.
In the event we cannot comply with the requirements of the Sarbanes-Oxley Act of 2002 or we acquire
a business that is unable to satisfy regulatory requirements relating to internal controls, or if
our internal controls over financial reporting are not effective, our business and our stock price
could suffer.
As a reporting public company, we are currently subject to the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002 and will need to have an audit of our managements assessment of
internal control beginning in fiscal year 2010. In addition, such statute also requires an
evaluation of any target business acquired by us. Section 404 of the Sarbanes-Oxley Act of 2002
requires companies to do a comprehensive evaluation of their internal controls, including an
evaluation of any target businesses acquired by a company. In the event the internal controls over
financial reporting of a target business cannot satisfy the regulatory requirements relating to
internal controls or if these internal controls over financial reporting are not effective, we may
not be able to complete a business combination with the target business without substantial cost or
significant risks to our company or our management may be unable to certify as to the effectiveness
of the internal controls and our auditor may be unable to publicly attest to this certification
following the completion of a business combination. Our efforts to comply with Section 404 and
related regulations regarding our managements required assessment of internal controls over
financial reporting and our independent auditors attestation of that assessment may require the
commitment of significant financial and managerial resources or may prevent a business combination
with certain target businesses. If we fail to timely complete our evaluation, if our management is
unable
to certify the effectiveness of the internal controls of our company or the acquired business
or if our auditors cannot attest to managements certification, we could be subject to regulatory
scrutiny and loss of public confidence, which could have an adverse effect on our business and our
stock price.
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Our outstanding options, warrants and convertible preferred stock may have an adverse effect on the
market price of common stock and make it more difficult to effect a business combination.
We have issued options to purchase 7,989,500 shares of common stock, warrants to purchase
6,208,948 shares of common stock, and preferred stock convertible into 2,760,000 shares of common
stock, as of December 31, 2009. To the extent we issue shares of common stock to effect a business
combination, the potential for the issuance of substantial numbers of additional shares upon
exercise of these options and warrants or conversion of the preferred stock could make us a less
attractive acquisition vehicle in the eyes of a target business as such securities, when exercised
or converted, will increase the number of issued and outstanding shares of our common stock and
reduce the value of the shares issued to complete the business combination. Accordingly, our
options, warrants and preferred stock may make it more difficult to effectuate a business
combination or increase the cost of the target business. Additionally, the sale, or even the
possibility of sale, of the shares underlying the options, warrants and preferred stock could have
an adverse effect on the market price for our securities or on our ability to obtain future public
financing. If, and to the extent, these options, warrants and preferred stock are exercised or
converted, respectively, you may experience dilution to your holdings.
We do not intend to pay dividends on our common stock and thus stockholders must look solely to
appreciation of our common stock to realize a gain on their investments.
Although we have paid cash dividends on our Series A Preferred Stock, we have never declared
or paid any cash dividends on our common stock. We currently intend to retain any future earnings
for funding growth and, therefore, do not expect to pay any dividends on our common stock in the
foreseeable future. Our future dividend policy is within the discretion of our board of directors
and will depend upon various factors, including our business, financial condition, results of
operations, capital requirements, and investment opportunities. Accordingly, stockholders must
look solely to appreciation of our common stock to realize a gain on their investment. This
appreciation may not occur.
Item 2. Properties
Through our acquisition of BioFuels in April 2007, we own a waste oil recycling facility on a
20 acre industrial parcel located on the Houston ship channel. Until July 2007, the facility was
manufacturing base oils, lubricants, diesel fuels and naptha. We have designed and converted the
existing facility into a 105 million gallon per year biodiesel refinery capable of utilizing
multiple vegetable feedstocks and animal fats. In addition, we are in the process of completing the
installation of 700 thousand barrels of bulk storage capacity on site.
Our Mesquite Lake Resource Recovery Plant is an 18.5 MW waste-to-energy facility located in El
Centro, California. This plant is owned by GreenHunter Mesquite Lake, Inc., a wholly-owned
subsidiary of GreenHunter. This Imperial County facility was originally built in 1989 to process
cow manure into electricity and operated until December 1994. Several modifications were
implemented during its operating life to improve plant performance leading to a 95% on-line
capacity factor during its last year of operation. Currently, Mesquite Lake is not generating
electricity and is in a dormant state. Our primary business objective is to re-power the facility
using existing biomass processing technology into a profitable electricity power plant.
On November 30, 2007, we purchased real estate including two office buildings comprising
approximately 20,200 usable square feet of space located in Grapevine, Texas for use as our
corporate headquarters.
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Item 3. Legal Proceedings
Bioversel, Inc. f/k/a Bioversel Trading, Inc., Plaintiff, vs. GreenHunter BioFuels, Inc.,
Defendant, in the District Court of Harris County, Texas, 55th Judicial District.
Plaintiff brought suit against the defendant on September 24, 2008 alleging that the defendant has
repudiated its biodiesel tolling agreement, as amended, with the plaintiff. The plaintiff has
alleged breach of contract, fraud and conversion regarding defendants ability to process feedstock
into biodiesel under the contract.
Defendant has been served with this lawsuit and has answered the lawsuit. Defendant
vigorously denies the allegations in the lawsuit and believes the lawsuit is completely without
merit. Defendant has filed a countersuit against plaintiff for failure to make payments to
defendant under the contract. The parties have exchanged discovery and the case is set for trial
in 2010.
Jacob Stern & Sons, Inc., Plaintiff vs. GreenHunter BioFuels, Inc., Defendant, in the District
Court of Harris County, Texas, 334th Judicial District. Plaintiff brought suit against
the defendant on February 19, 2009 alleging that the defendant breached two separate contracts for
the purchase of animal fat feedstock for its biodiesel refinery in Houston. Defendant has denied
that a contractual agreement ever existed or was entered into between the parties.
Defendant has been served and has answered the lawsuit. The parties have responded to initial
discovery requests. At this point in the litigation process the Company believes it is too early
to determine the ultimate outcome of this lawsuit.
Crown Engineering & Construction, Plaintiff vs. GreenHunter Energy, Inc., Defendant, Superior
Court, County of Imperial, El Centro District, CA., Case # ECU05117. Plaintiff brought suit
against the Defendant on April 1, 2009 alleging that the Defendant breached the contract for
services to refurbish the Companys biomass plant in California. Defendant has denied that the
alleged amount is due in full. The parties have settled this lawsuit.
In addition, GreenHunter Energy has been sued by various subcontractors of Crown Engineering
and Construction regarding the payment for services to refurbish the Companys biomass plant in
California. GreenHunter Energy is currently negotiating with all subcontractors to settle the
various amounts due with the subcontractors.
Item 4. Submission of Matters to a vote of Security Holders
On October 19, 2009, the Company conducted its annual shareholders meeting. The first item
of the meeting concerned the vote upon the proposal for the establishment of a classified board of
directors.
The results of the proxies voting for and the proxies voting against the proposal is as
follows:
13,864,244 shares or 100% of the outstanding shares represented at the meeting voted in
favor of the above-described proposal.
0 shares voted against the above-described proposal.
0 shares abstained from voting.
The next item of the meeting concerned the vote upon the proposal to elect the Board members.
The results of the proxies voting for and the proxies voting against the proposal is as
follows:
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For each director:
Gary C. Evans, Class III
13,864,244 shares, or 100% of the outstanding shares represented at the meeting voted in
favor of the nominee.
0 shares voted against the nominee.
0 shares abstained from voting.
Ronald H. Walker, Class I
13,864,244 share, or 100% of the outstanding shares represented at the meeting voted in
favor of the nominee.
0 shares voted against the nominee.
0 shares abstained from voting.
Ronald Ormand, Class II
13,864,244 shares or 100% of the outstanding shares represented at the meeting voted in
favor of the nominee.
0 shares voted against the nominee.
0 shares abstained from voting
The next item of the meeting concerned the vote upon the proposal to ratify the appointment of
Hein & Associates as the Corporations independent auditors.
The results of the proxies voting for and the proxies voting against the proposal is as
follows:
13,864,244 shares, or 100% of the outstanding shares represented at the meeting voted in
favor of the above-described proposal.
0 shares voted against the above-described proposal.
0 shares abstained from voting.
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Part II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock began trading on the American Stock Exchange (now known as NYSE Amex) on
January 2, 2008, under the symbol GRH. Prior to trading on the NYSE Amex, there was no public
market for our common stock. The reported high and low sales prices for our common stock from and
after January 2, 2008, as reported by the New York Stock Exchange, are shown below for the period
indicated.
Average | ||||||||||||
Daily | ||||||||||||
Trading | ||||||||||||
Volume | ||||||||||||
High | Low | (Shares) | ||||||||||
2008 |
||||||||||||
First Quarter |
$ | 20.50 | $ | 12.00 | 3,640 | |||||||
Second Quarter |
$ | 25.45 | $ | 11.81 | 26,642 | |||||||
Third Quarter |
$ | 19.25 | $ | 11.55 | 39,256 | |||||||
Fourth Quarter |
$ | 14.30 | $ | 3.28 | 36,287 | |||||||
2009 |
||||||||||||
First Quarter |
$ | 5.25 | $ | 1.16 | 30,429 | |||||||
Second Quarter |
$ | 4.32 | $ | 0.91 | 292,592 | |||||||
Third Quarter |
$ | 3.18 | $ | 1.40 | 295,976 | |||||||
Fourth Quarter |
$ | 2.08 | $ | 0.99 | 108,000 |
On March 26, 2010, the last reported closing price of our common stock on the NYSE Amex
was $1.34 per share. Our registrar and transfer agent is Securities Transfer Corporation, 2591
Dallas Parkway, Suite 102, Frisco, Texas 75034. As of March 26, 2010, there were 568 record
holders of our common stock.
We have not previously paid any cash dividends on our common stock and do not anticipate
paying dividends on our common stock in the foreseeable future. It is the present intention of
management to utilize all available funds for the development and growth of our business
activities.
Equity Compensation Plan Information | ||||||||||||
Number of securities | ||||||||||||
remaining available for | ||||||||||||
future issuance under | ||||||||||||
Number of securities to | Weighted-average | equity | ||||||||||
be issued upon exercise | exercise price of | compensation plans | ||||||||||
of outstanding options, | outstanding options, | (excluding securities | ||||||||||
Plan Category | warrants and rights | warrants and rights | reflected in column (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans approved by
security holders |
2,000,000 | $ | 6.17 | | ||||||||
Equity compensation plans not approved by
security holders |
5,989,500 | $ | 8.02 | | ||||||||
Total |
7,989,500 | $ | 7.56 | |
Item 6. Selected Financial Data
Not applicable.
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which management believes is
relevant to an assessment and understanding of our financial condition and results of operations.
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. The discussion should be read in conjunction with the
financial statements and accompanying notes included herewith. 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 start up company in the development stage. Our plan is to
acquire and operate assets in the renewable energy sectors of wind, solar, geothermal, biomass and
biofuels. We currently have ongoing business initiatives at GreenHunter in wind through
GreenHunter Wind Energy, LLC (Wind Energy) and Wheatland Wind Power, LLC (Wheatland), in
biodiesel and methanol through GreenHunter BioFuels, Inc. (BioFuels), and in biomass through
GreenHunter Mesquite Lake, Inc, (Mesquite Lake). It is our goal to become a leading provider of
clean energy products.
We believe that our ability to successfully compete in the renewable energy industry depends
on many factors, including the location and low cost construction of our planned facilities,
development of strategic relationships, achievement of our anticipated low cost production model,
access to adequate debt and equity capital, and recruitment of experienced management.
BioFuels
We completed building and began operating a 105 million gallon per year (nameplate capacity)
biodiesel refinery at our Houston BioFuels campus during 2008 as well as 638 thousand barrels of
product bulk storage for our terminal operations. We also have the ability to process up to 18
million gallons per year of contaminated methanol (a chemical used in biodiesel production). We
also plan to construct a 20 million gallon per year capacity glycerin (a byproduct of biodiesel
manufacturing) refinery on site if additional financing can be obtained.
The overhaul of an existing distillation process on the site was begun in April 2007. This
process was commissioned and began processing contaminated methanol in September 2007.
Commissioning of the biodiesel process was begun in mid September 2008, and commercial production
of biodiesel began during August 2008. However, our refinery was almost immediately shut down as a
result of Hurricane Ike on September 13, 2008. The refinery remained down for repairs through
November 2008 and the facility resumed biodiesel production and the commissioning process the last
week of that month.
If capital is available, we expect a technical grade glycerin project production unit to be
completed and commissioned in 2011, and to have a glycerin distillation project which will produce
US Pharmaceutical Grade Glycerin Non Certified, in 2011 also pending availability of funding
for the glycerin project. All 638 thousand barrels of the Houston Terminal Project bulk storage
tanks are presently erected. There remains some minor piping, pumps, instruments, containment and
lighting repairs yet to be completed for final completion of the Houston terminal project.
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We do not expect to operate at a profit before our biodiesel and glycerin refineries are
completely constructed and operational. Due to current economic conditions of both available
capital and the biodiesel markets overall, we made the decision during January 2009 to suspend
operations of the biodiesel refinery until the biodiesel market conditions recover. Until the
refinery resumes operations, we plan to continue to provide terminal services at the refinery to
provide some operating cash flow to cover overhead costs and interest on the non-recourse debt.
BioMass
In May 2007 we acquired Mesquite Lake, an inactive 18.5 megawatt (nameplate capacity) biomass
plant located in El Centro, California, which we began refurbishing 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. We expect to obtain the new air permit during first quarter 2010 and
executed a new power purchase agreement in October 2009. We plan to resume construction on the
possible expansion of up to 7 megawatt (MW) sometime during the first or second quarter of 2010,
assuming additional sources of funding are obtained. In March of 2010, the Imperial County
California Board of Supervisors unanimously approved one or more series of tax-exempt obligations
by the California Enterprise Development Authority for the Mesquite Lake facility. This approval
opened up the opportunity for us to pursue low-cost funding for the majority of the projected
construction costs of Mesquite Lake. In March 2010, we submitted an application to the California
Debt Limit Allocation Committee for allocation of a $20 million award of the American Recovery and
Reinvestment Act of 2009 (ARRA) Recovery Zone Facility Bonds (RZFB).
Wind Energy
Until April, 2007, our primary business was the investment in and development of wind energy
farms. We continue to own rights to potential wind energy farm locations in Wyoming, Texas,
California, and Montana and continue to operate and gather data produced from wind measurement
equipment located on these sites. We also continue to seek additional potential development sites,
particularly those that would be near our other renewable energy projects. The nature of these
wind energy projects necessitates a longer term horizon than our other projects before they become
operational, if ever.
Results of Operations
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008:
BioFuels Revenues
For the year ended December 31, 2009, we had total revenues of $5.8 million, consisting of
$4.9 million in biodiesel sales, terminal services of $693 thousand, including storage and material
handling charges, and biodiesel toll distillation revenues of $166 thousand, including storage and
material handling charges. Revenues in the prior year consisted of product sales of $4.6 million,
comprised of $621 thousand in methanol sales, $4.0 million in biodiesel sales, and $18 thousand
sales of raw materials, and revenue from terminal operations, including storage and material
handling charges, of $373 thousand.
BioFuels Costs of Sales and Services
For the year ended December 31, 2009, we had costs of sales and services of $8.7 million
compared to $14.2 million during the year ended December 31, 2008. Our 2008 costs included $10.6
million of costs related to our inventory consumption and losses which includes a lower of cost or
market impairment of $4.6 million related to the large decrease in both the value of our raw
materials on hand
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and the biodiesel produced at the plant and $6 million in costs, including feedstock and
chemicals, which are directly related to the production of our methanol and biodiesel. The
remaining $3.6 million in costs of sales and services were related to our terminal operations and
excess capacity while our refinery was operating, including utilities, direct labor and other
production costs.
Wind Energy Project Costs
We incurred project costs associated with our wind energy projects of $67 thousand in 2009
compared to $542 thousand in 2008. The decrease is the result of the expiration of the projects in
Montana during second quarter of 2009 that were not renewed.
Biomass Project Costs
We incurred project costs associated with our biomass projects of $38 thousand in the 2009
period compared to $238 thousand in the 2008 period. These costs were associated with consulting
and travel costs associated with the refurbishment of our Mesquite Lake plant.
Hurricane repairs and losses
In 2009, we recorded a credit of $10.9 million to hurricane repairs and losses, due to the
settlement and accrual of insurance proceeds from casualty and environmental claims as a result of
Hurricane Ike. During 2008, we incurred a total of $5.6 million in hurricane losses, net of
anticipated insurance recoveries, as a result of our Houston BioFuels campus being hit by Hurricane
Ike during September of that year. Our corporate hurricane loss of $558 thousand was related to
power cogeneration equipment which was stored at our BioFuels site and was damaged due to the high
water, and is net of anticipated insurance recoveries. Our BioFuels hurricane loss during fiscal
2008 of $5.0 million was due to $2.3 million in inventory losses and contamination, $974 thousand
in environmental clean-up work, and $6.1 million in repairs and equipment replacements at our
plant; these losses were partially offset by anticipated recoveries of $4.4 million.
Depreciation Expense
Depreciation expense was $4.3 million during the 2009 period compared to $2.7 million during
the 2008 period; the increase was due primarily to depreciation on our biodiesel refinery and
terminal which began during August 2008.
Loss on Asset Impairments
Our loss on asset impairment was $4.8 million during 2009, compared to $21.8 million during
2008. For 2009, impairments of $1.5 million were related to our Port Sutton lease option which
expired during April 2009 while impairments of $170 thousand were related to a decline in the value
of our cogen equipment. We also recorded an additional $3.2 million in impairments related to our
BioFuels campus due to significant doubt regarding the recoverability of our plant investment given
our liquidity and time constraints and the current condition of the biodiesel market. In 2008, we
recorded impairments of $2.6 million related to a terminated power purchase agreement and invalid
air permits that were acquired at our Mesquite Lake project, and we recorded an additional $19.1
million in impairments related to our BioFuels campus.
General and Administrative Expense
General and administrative expense (G&A) was $11.4 million during the 2009 period versus
$22.4 million during the 2008 period, a decrease of $11 million.
Unallocated corporate SG&A decreased approximately $10.5 million between the two periods,
decreasing from $15.9 million down to $5.4 million. The decrease is due to decreases in salaries
and personnel-related costs, excluding stock compensation, office related costs, travel and
marketing, professional fees, and taxes and permits, all as a result of managements efforts to
reduce operating costs,
which were offset by an increase in stock compensation.
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BioFuels SG&A decreased $123 thousand, to $4.3 million during 2009, as compared to $4.4
million during 2008. This decrease was primarily due to decreased operations at our BioFuels
campus during the current year.
BioMass SG&A was approximately $1.1 million during the 2009 period versus approximately $1.1
million during the 2008 period.
Wind Energy SG&A decreased approximately $541 thousand, down to $639 thousand resulting from
decreased new project related costs compared to 2008.
Operating Loss
Our operating loss was $13 million in the 2009 period versus a loss of $63 million in the 2008
period. The reduction was due principally to hurricane losses and impairment incurred in 2008,
reductions in corporate compensation expense, and reductions in plant operating costs at our
Houston plant in 2009.
Our BioFuels segment generated operating loss of $4.1 million and loss of $40.2 million,
during 2009 and 2008 respectively. The reduction was due to hurricane losses and impairment in 2008
and decreases in plant operating costs in 2009 compared to 2008.
Our Wind Energy segment generated an operating loss of $752 thousand during 2009 as compared
to an operating loss of $1.5 million during 2008 due to decreased project related costs as a result
of fewer active projects in 2009.
Our BioMass segment generated operating losses of $1.2 million during 2009 and $3.5 million
during 2008; the decrease was due to decreased SG&A costs related to the Mesquite Lake project.
Our unallocated corporate operating loss was $6.8 million for the 2009 period, compared to an
operating loss of $16.7 million during the 2008 period. The decrease was primarily due to
decreases in our SG&A as a result of lower salary and related personnel costs and insurance
proceeds received in the 2009 period for assets damaged in Hurricane Ike.
Interest and Other Revenues
Interest and other revenues were $4.7 million during the 2009 period and $652 thousand during
the 2008 period. The increase of $4 million was primarily due to $2.8 million in forgiveness of
indebtedness on trade payables and a $1.1 million gain on the sale of our equity interest in
MingYang.
Interest, Accretion and Other Expense
Interest, accretion and other expense increased from $4.0 million during the 2008 period up to
$7.1 million during the 2009 period. The increase is due to increased interest expense related to
our fully borrowed construction loan and redeemable debentures.
Discontinued Operations
We recorded gains of $563 thousand from discontinued operations related to our Telogia plant
which was sold during the first quarter of 2009. This resulted from insurance proceeds of $725
thousand per the purchase agreement, offset by operating costs composed of payroll and utility
expenses at the plant prior to its sale. We recorded a loss of $49 thousand due to the abandonment
of our Haining City wind farm interests, and a loss of $26 thousand related to the discontinuance
of the Wheatland Wind Project.
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Preferred Stock Dividends
Dividends on our preferred stock were $1.0 million in the 2008 period versus $776 thousand in
the 2009 period. The decrease was the result of the conversion of 5,750 shares of Series A
Preferred Stock into 1,150,000 shares of common stock between March and September of 2009.
Deemed Preferred Stock Dividends
In the 2008 period, we recorded non-cash deemed preferred dividends of $13.9 million in
relation to the Series B preferred stock issuance to reflect the excess of the fair value of the
securities issued in the transaction over the carrying value of the warrants cancelled in
connection with the transaction.
Additionally, in association with our September 15, 2008 dividend, we recorded non-cash
dividends on both series of our preferred stocks of $599 thousand which was equal to the fair value
of the warrants issued on that date.
Net Loss to Common Shareholders
We realized a net loss of $16.2 million in the 2009 period compared to a net loss of $66.2
million in the 2008 period, primarily due to the deemed preferred dividends and Hurricane losses
and impairment in 2008, as well as decreased operating costs at our Houston plant, and increase in
other income in the 2009 period.
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007:
Due to the acquisition of our BioFuels business unit on April 13, 2007, our operating results
in the 2007 period included approximately nine months of BioFuels operating results, while the
2008 period contains a full twelve months of operating results for 2008.
BioFuels Revenues
For the year ended December 31, 2008, we had product sales of $4.6 million, consisting of $621
thousand in methanol sales, $4.0 million in biodiesel sales, and $18 thousand sales of raw
materials. We also had revenue from terminal operations, including storage and material handling
charges of $373 thousand. Revenues in the prior year period consisted of $616 thousand in fuel oil
sales related to the acquired plants prior operations, $96 thousand in processing revenues, and
$341 thousand in methanol sales. Of these prior year revenue streams, only the methanol sales were
continued during 2008.
BioFuels Costs of Sales and Services
For the year ended December 31, 2008, we had costs of sales and services of $14.2 million
compared to $759 thousand during the year ended December 31, 2007. Our 2008 costs included $10.6
million of costs related to our inventory consumption and losses which includes a lower of cost or
market impairment of $4.6 million related to the large decrease in both the value of our raw
materials on hand and the biodiesel produced at the plant and $6 million in costs, including
feedstock and chemicals, which are directly related to the production of our methanol and
biodiesel. The remaining $3.6 million in costs of sales and services were related to our terminal
operations and excess capacity while our refinery was operating, including utilities, direct labor
and other production costs. The prior year cost of sales and services consisted of $307 thousand
in material and freight costs and $452 thousand in operating expenses.
Wind Energy Project Costs
We incurred project costs associated with our wind energy projects of $542 thousand in the
2008 period compared to $277 thousand in the 2007 period. The increase was due to the acquisition
of additional wind projects in Shanghai, China, Texas, and Wyoming during 2008.
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Biomass Project Costs
We incurred project costs associated with our biomass projects of $238 thousand in the 2008
period. These costs were associated with consulting and travel costs associated with the
refurbishment of our Mesquite Lake plant.
Hurricane repairs and losses
We incurred a total of $5.6 million in hurricane losses, net of anticipated insurance
recoveries, during 2008 as a result of our Houston BioFuels campus being hit by Hurricane Ike
during September. Our corporate hurricane loss of $558 thousand was related to power cogeneration
equipment which was stored at our BioFuels site and was damaged due to the high water, and is net
of anticipated insurance recoveries. Our BioFuels hurricane loss of $5.0 million was due to $2.3
million in inventory losses and contamination, $974 thousand in environmental clean-up work, and
$6.1 million in repairs and equipment replacements at our plant; these losses were partially offset
by anticipated recoveries of $4.4 million.
Depreciation Expense
Depreciation expense was $2.7 million during the 2008 period compared to $119 thousand during
the 2007 period; the increase was due primarily to depreciation on our biodiesel refinery and
terminal which began during August 2008.
Loss on Asset Impairments
Our loss on asset impairment was $21.8 million during 2008. We recorded impairments of $2.6
million related to a terminated power purchase agreement and invalid air permits that were acquired
at our Mesquite Lake project, and we recorded an additional $19.1 million in impairments related to
our BioFuels campus due to significant doubt regarding the recoverability of our plant investment
given our liquidity and time constraints and the current condition of the biodiesel market.
General and Administrative Expense
General and administrative expense (G&A) was $22.4 million during the 2008 period versus
$11.8 million during the 2007 period, an increase of $10.6 million.
Unallocated corporate G&A increased $5.3 million between the two periods, increasing from
$10.7 million up to $15.9 million. Approximately $1.9 million of this increase was due to employee
stock option expense which increased to $8.2 million from $6.3 million. Salaries and
personnel-related costs decreased $673 thousand; although we added staff at our corporate
headquarters to address the increased scope of operations and our public reporting requirements, we
had significant decreases in incentive compensation during 2008. Professional fees increased $2.5
million as a result of public reporting requirements and litigation, office and related costs
increased $670 thousand and travel and marketing increased $547 thousand, both as a result of added
staff and our increased scope of operations.
BioFuels G&A increased $4.0 million, up from $641 thousand during 2007 to $4.7 million during
2008. This increase was due to the addition of administrative and marketing personnel at the
plant.
Biomass G&A was approximately $624 thousand during the 2008 period versus approximately $98
thousand during the 2007 period due to construction and planning of the Mesquite Lake biomass
plant.
Wind Energy G&A increased approximately $832 thousand, up to $1.2 million as we added
personnel, opened two offices, and incurred additional professional fees as a result of the
increased number of projects for this segment during 2008.
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Operating Loss
Our operating loss was $62.4 million in the 2008 period versus a loss of $11.9 million in the
2007 period, due principally to the increase in cost of sales and services due to our BioFuels
plant beginning production during 2008 as well as our asset impairments and increased G&A related
to our increased scope of operations and public reporting requirements.
Our BioFuels segment generated operating losses of $40.5 million and $422 thousand,
respectively, during 2008 and 2007 due to their start-up operations during 2008 as well as
hurricane damage sustained during the third quarter of 2008 and impairment charges to their Houston
campus.
Our Wind Energy segment generated an operating loss of $1.8 million during 2008 as compared to
an operating loss of $697 thousand during 2007 due to additional projects entered into during the
year.
Our Biomass segment generated operating losses of $3.5 million during 2008 and $98 thousand
during 2007; the increase was due to increased operations due to the construction of Mesquite Lake
and the acquisition of Telogia and the write off of acquisition values assigned to invalid air
permits and a terminated power purchase agreement.
Our unallocated corporate operating losses were $16.7 million and $10.7 million during 2008
and 2007, respectively, due to increases in our G&A as a result of our public company filing
requirements and increased scope of operations. Non-cash stock compensation of $8.2 million and
$6.3 million was included in our unallocated operating losses during the 2008 and 2007 periods,
respectively.
Interest and Other Revenues
Interest and other revenues were $644 thousand during the 2008 period and $373 thousand during
the 2007 period primarily due to higher cash balances on hand during 2008 as a result of our
financing activities.
Interest, Accretion and Other Expense
Interest, accretion and other expense increased from $523 thousand during the 2007 period up
to $4.0 million during the 2008 period. The 2008 period was primarily comprised of interest
expense related to our construction loan and redeemable debentures.
Discontinued Operations
We recorded losses from discontinued operations related to four months of operating costs of
our Telogia plant which was sold during the first quarter of 2009. These costs were primarily
composed of payroll and utility expenses at the plant.
Net Loss
We realized a net loss of $66.2 million in the 2008 period compared to a net loss of $12
million during the 2007 period due to the increases in our operating loss and interest expense as
well as impairment charges at our Houston BioFuels campus which were partially offset by the
increase in interest income in the current period.
Net Loss to Common Shareholders
Dividends on our preferred stock were $1.7 million in the 2007 period versus $16.2 million in
the 2008 period. The 2008 amount includes deemed dividends of $15.2 million which were related to
the issuance of our Series B preferred stock and a warrant dividend which was distributed to all
common and preferred shareholders during as well as $1.0 million in dividends paid and accrued on
our Series A 8% Preferred Stock. The 2007 period included $708 thousand in cash payments and $950
thousand in deemed dividends which were based on the value of the warrants issued in connection
with the issuance of our Series A Preferred Stock.
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Our net loss to common stockholders was $82.4 million in the 2008 period versus $13.7 million
in the 2007 period, primarily due to increased operating losses due to the increased scope of our
operations as well as asset impairments and the dividend expense of $16.2 million recorded in the
2008 period. Our net loss per share increased to $4.08 in the 2008 period, up from $0.80 in the
2007 period.
Liquidity and Capital Resources
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. A substantial drop in market prices of both biodiesel and our feedstock inventories
previously adversely impacted our inventory values and resulting working capital positions. We
also were unable to make the interest payments due on our Series A Redeemable Debentures for the
periods of April through December 2009. These debentures are secured by GreenHunter Energys
ownership interest in GreenHunter BioFuels common stock and are otherwise non-recourse to
GreenHunter Energy.
As of December 31, 2009, we had a
working capital deficit of $45 million which includes a
$37.7 million non-recourse note payable due by a wholly-owned subsidiary. This note payable is
non-recourse to the parent, GreenHunter Energy, and is included in
current liabilities due to the fact that the bank has extended the
due date of the loan to April 30, 2010. If we do not close on a sale or other transaction to repay the note by that
date, the bank has the right to seize BioFuels cash on hand at that date and foreclose on the
BioFuels refinery in Houston. We are negotiating with the bank about extending the current
deadline to allow more time as we are in discussions with potential buyers. We have continued to
experience substantial losses from operations. These factors raise some doubt about our ability to
continue as a going concern. In October 2009, we sold our equity ownership interests in Guangdong
Ming Yang Wing Power Technology Co., Ltd for $9.1 million resulting in cash proceeds of $8.5
million, net of selling costs. We also have received a letter of guarantee from a principle
stockholder of the company for up to an additional $1 million if needed to fund operations. The
cash received, along with the letter of guarantee, improved our working capital position and has
provided cash required to fund operations for the next twelve months.
Since December 31, 2009, we have negotiated reductions in liabilities
owed to creditors of approximately $2.2 million.
Execution of our business plan for the next twelve months requires the ability to generate
cash to satisfy planned operating requirements. We believe we currently have sufficient cash reserves to meet
all of our anticipated operating obligations for the next twelve months. Planned capital
expenditures are dependant on the Companys 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 return of operations at
our Houston biodiesel refinery and development of our Mesquite Lake biomass plant.
On December 16, 2009, the Credit Agreement for the non-recourse construction and working
capital loans was amended. These loans are non recourse to GreenHunter Energy. Pursuant to the
terms and conditions of the amendment, the lender has agreed to waive any claims of events of
default until March 31, 2010. The agreement was further amended
on March 30, 2010 to extend such date to
April 30, 2010. Additionally, due to the settlement of certain business interruption and property
damage insurance claims with various underwriters related to damages sustained at GreenHunter
BioFuels from Hurricane Ike in September, 2008, the lender received a significant paydown of
approximately $4.5 million on its non-recourse construction and working capital loans in July 2009.
If we do not close on a sale or other transaction to repay the note by April 30, 2010, the bank
has the right to seize BioFuels cash on hand at that date and foreclose on the BioFuels refinery
in Houston. We are in discussions with the bank about extending the current deadline to allow more time
and we are continuing to talk with potential buyers.
We were unable to bring the biodiesel refinery through demonstration of final completion
standards to the satisfaction of the project lender, causing technical default on one of the
covenants of our construction note. If we are able to obtain adequate financing, we intend to make
capital improvements intended to improve reliability, product yield and operating efficiency as
well as to construct a glycerin refinery that should allow for additional profit margins at the
plant.
Cash Flow and Working Capital
As of December 31, 2009, we had cash and cash equivalents of approximately $6.9 million and a
working capital deficit of $45.4 million as compared to cash and cash equivalents of $677 thousand
and working capital deficit of $18.4 million in the prior period. These decreases in cash and
working capital were due to the activities described below.
Operating Activities
During 2009, operating activities provided $334 thousand versus used $29.1 million during
2008. A significant component of our working capital deficit at December 31, 2009 was $37.7
million in non-recourse debt at our BioFuels location. This debt is non-recourse to GreenHunter
Energy (parent company) and is secured by certain assets at our biodiesel refinery. Changes in our
cash and working capital during the quarter ended December 31, 2009 are described below.
We continue to have no operating sources of income with which to pay our operating costs other
than those revenues generated at our biodiesel refinery, and the use of those revenues are
restricted under our credit agreement with a bank. As a consequence, we are required to use cash
provided by financing or investing activities to fund a significant portion of our operating
activities.
Financing Activities
During the year ended December 31, 2009, we used cash of $4.7 million in our financing
activities. These activities included issuing $1.7 million in redeemable debentures, payment of
$175 thousand in deferred financing costs related to these debentures, $298 thousand in borrowing
on notes payable, and repayment of approximately $6.5 million under our notes payable. Details of
these activities are described below:
Notes Payable
During 2008, we financed our annual insurance premiums in the amount of $1.6 million. This
note bore interest at a fixed rate of approximately 3.84% and is payable in monthly installments
through March 15, 2009. We paid the remaining balance of this note of approximately $421 thousand
during the first quarter of 2009.
During May 2009, we financed a portion of our annual insurance premiums in the amount of $222
thousand. This note bears interest at a fixed rate of 6.1% and is payable in monthly installments
through February 2, 2010.
During September 2009, we financed a portion of our annual insurance premiums in the amount of
$77 thousand. This note bears interest at a fixed rate of 7.0% and is payable in monthly
installments through June 17, 2010.
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9% Series B Senior Secured Redeemable Debentures
During July 2008, we announced the offering of our 9% Series B Senior Secured Redeemable
Debentures. These notes have a term of five years. These debentures are non-recourse to GreenHunter
Energy (parent company) and are secured by a second lien on our ownership interest in GreenHunter
Mesquite Lake, LLC. During the first quarter of 2009, we raised $1.6 million, net of selling
expenses, under this program.
Nonrecourse Term Loan and Working Capital Loan
BioFuels has a credit agreement with a bank which provides for a $33.5 million
construction/term loan facility and a $10 million working capital facility in connection with the
development, construction and operation of our BioFuels campus. The construction/term loan portion
of the facility is for a term of nine years and the working capital facility revolves annually upon
conversion of the construction loan to a term loan. Both facilities have prime (prime plus 3%) and
LIBOR (LIBOR plus 4%) based interest rate options. During 2009, we made repayments of $4.9 million
under the construction/term loan facility. During March 2009, we determined that we were not in
compliance with certain covenants of the credit agreement and have accordingly classified the
entire balance due as a current liability. On June 25, 2009, December 17, 2009 and March 30, 2010,
the Credit Agreement for the non-recourse construction and working capital loans was amended.
Pursuant to the terms and conditions of the amendments, the lender agreed to waive any claims of
events of default until April 30, 2010. Additionally, due to the settlement of certain business
interruption and property damage insurance claims with various underwriters related to damages
sustained at GreenHunter BioFuels from Hurricane Ike in September, 2008, the lender received a
significant paydown of approximately $4.5 million on its non-recourse construction and working
capital loans in July 2009, escrowed an additional $500 thousand principal payment for its future
scheduled payment date, escrowed all interest due on the loan through December 16, 2009, and
postponed the repayment of the balance of its loans until April 30, 2010. If we do not close on a
sale or other transaction to repay the note by that date, the bank has the right to seize BioFuels
cash on hand at that date and foreclose on the BioFuels refinery in Houston. We are currently in
discussions with the bank on matters pertaining to this deadline but the outcome of those
discussions is uncertain at this time.
Investing Activities and Future Requirements
Capital Expenditures
During 2009, we invested approximately $790 thousand in capital expenditures, which was
primarily comprised of a glycerin desalting project at our BioFuels campus.
Forecast
For 2010, we have not adopted a formal corporate capital expenditure budget due to our current
lack of capital resources. We have formulated specific project budgets and will adopt a formal
corporate capital expenditure budget upon securing necessary financing commitments.
BioFuels |
While we do not have a formal capital expenditure budget in place, we plan to seek financing
for approximately $1.8 million in capital projects at our Houston campus. These projects would
consist of $500 thousand for glycerin desalting, $360 thousand for a water wash system, $580
thousand for improvements to our process, and $330 thousand for other upgrades. If sufficient
capital is available, we would also pursue completion of our glycerin refinery for a total cost of
approximately $4 million. Currently, due to lack of operating capital and the current biodiesel
market, we have temporarily shut-down biodiesel production and methanol processing, and laid off
most of our BioFuels employees. We estimate that our Houston campus will be restricted to terminal
storage activities for most of 2010.
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BioMass
BioMass is seeking financing for approximately $24 million in capital expenditures in 2009 for
refurbishment and expansion costs at the Mesquite Lake biomass facility in El Centro, California.
In March of 2010, the Imperial County California Board of Supervisors unanimously approved one or
more series of tax-exempt obligations by the California Enterprise Development Authority for the
Mesquite Lake facility. This approval opened up the opportunity for us to pursue low-cost funding
for the majority of the projected construction costs of Mesquite Lake. In March 2010, we submitted
an application to the California Debt Limit Allocation Committee for allocation of a $20 million
award of the American Recovery and Reinvestment Act of 2009 (ARRA) Recovery Zone Facility Bonds
(RZFB).
Wind Energy
Wind Energy is not currently planning on any capital expenditures in 2009 due to adverse
economic conditions for wind projects.
On October 28, 2009 we sold our equity ownership interest in Guangdong MingYang Wind Power
Technology Co., Ltd. for $9.1 million, resulting in a gain of $1.0 million.
Obligations Under Material Contracts
Below is a brief summary of the payment obligations under material contracts to which we are a
party, other than the debt and convertible debt obligations described above.
Consulting Agreement with former owner of Mesquite Lake
We previously granted the former owner of Mesquite Lake the non-exclusive right to represent
us in the location and development of renewable energy projects. This entity was to be responsible
for locating, analyzing and delineating the business viability, as well as providing an adequate
development strategy for these projects in exchange for a quarterly fee of $98 thousand. The
quarterly payments began June 30, 2007 and were scheduled to continue every quarter thereafter
until the last payment was due on June 30, 2012. During the fourth quarter of 2008, we suspended
these payments to this entity pending resolution of a significant contractual dispute regarding the
validity of certain air permits that were represented to be in place at Mesquite Lake on the date
of our acquisition. As of December 31, 2009, we have accrued $588 thousand in fees related to this
contract.
Port Sutton
In association with our purchase of the Port Sutton lease option, we agreed to issue
restricted shares to the Seller worth $2 million, subject to a floor price of $14.25 and a ceiling
of $25. These shares were to be issued the sooner of 18 months from the October 2008 close date or
upon the first biodiesel production or storage at the site. Accordingly, we were to issue an
additional minimum number of 80,000 shares up to a maximum number of 140,351 shares. This lease
option expired during April 2009.
Mesquite Lake Power Purchase Agreement
In August, 2009 we entered into a new 20 year Power Purchase Agreement with a major public
utility based in Southern California for 100% of the net output of our Mesquite Lake biomass power
plant located in Southern California. Under this Power Purchase Agreement we are required to begin
power sales in 2011. Pursuant to the related brokerage agreement with a third party that assisted
in the negotiations of this agreement, we were required to pay commissions of $300 thousand within
30 days of execution of the contract and an additional sum of $1.1 million on various dates
subsequent to commercial operations of the plant for a total obligation of $1.4 million.
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Critical Accounting Policies and Other
The accompanying financial statements include the accounts of GreenHunter Energy, Inc.
(GreenHunter) and our wholly-owned subsidiaries, GreenHunter Wind Energy, LLC (Wind Energy),
GreenHunter Mesquite Lake, LLC (Mesquite Lake), and GreenHunter BioFuels, Inc. (BioFuels). All
significant intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
period. Our estimates and assumptions are based on historical experience, industry conditions and
various other factors which we believe are appropriate. The reported financial results and
disclosures were determined using the significant accounting policies, practices and estimates
described below. We believe the reported financial results are reliable and that the ultimate
actual results will not differ significantly from those reported.
Restricted Cash
Restricted cash consists of cash deposits related to our BioFuels business that are legally
restricted as to their use by the lending bank.
Inventories
Raw material inventories consist of processed methanol, contaminated methanol, vegetable oil,
animal fat, and process chemical feedstocks to be processed in our Houston refinery. Inventory
also includes biodiesel finished product and work-in-process for our glycerin and biodiesel lines.
Inventories are stated at the lower of cost or market. Cost is determined using the average
method. See Note 7 to the financial statements for additional information on our inventories.
Property, Plant and Equipment
Property plant and equipment are stated at cost. Depreciation is computed using the
straight-line method based on the following useful lives:
Automobiles |
5 years | |||
Computer and office equipment |
5 to 7 years | |||
Plant equipment |
7 to 30 years | |||
Land improvements |
15 years | |||
Buildings |
31 years |
Deferred Financing Costs
Costs incurred in connection with issuing debt are capitalized and amortized as an adjustment
to interest expense over the term of the debt instrument using the interest method.
Impairments
We periodically evaluate whether events and circumstances have occurred that may warrant
revision of the estimated useful life of long-term assets or whether the remaining balance of
long-term assets should be evaluated for possible impairment. We compare the estimate of the
related undiscounted cash
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flows over the remaining useful lives of the applicable assets to the assets carrying values
in measuring their recoverability. When the future cash flows are not sufficient to recover an
assets carrying value, an impairment charge is recorded for the difference between the assets
fair value and its carrying value. During 2009 we recorded impairments of $1.5 million related to
our inability to pay the final lease option extension for our Port Sutton lease, $218 thousand
related to a deposit on a wind project that was cancelled, and impairment of $170 thousand on
equipment due to a reduction in value. We recorded additional impairments of $3.2 million and
$19.1 million in 2009 and 2008, respectively, related to our Biofuels campus due to significant
doubt regarding the recoverability of our plant investment given our liquidity and time constraints
and the current economics of the biodiesel market. Additionally, during 2008, we recorded
impairments of $2.6 million related to the permits and power purchase agreement acquired in our
Mesquite Lake acquisition as the permits were determined to not be sufficient for our planned
operation of the plant and the power purchase agreement was terminated to allow us to pursue a more
valuable agreement with other utilities interested in the electricity output of the plant. There
were no impairments in 2007.
Revenue recognition
We record revenues when the product has been delivered or the services have been provided to
the customer, the sales price is fixed or determinable, and collectability is reasonably assured.
Transportation, shipping and handling costs incurred on shipments to customers are included in
selling, general and administrative costs. Excise and other taxes collected from customers and
remitted to governmental authorities are not included in revenue.
Stock-Based Compensation
The Company accounts for share-based compensation in accordance with the provisions of the ASC
standards which require companies to estimate the fair value of share-based payment awards made to
employees and directors, including stock options, restricted stock and employee stock purchases
related to employee stock purchase plans, on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense
ratably over the requisite service periods. We estimate the fair value of each share-based award
using the Black-Scholes option pricing model. Certain of our grants have performance-based vesting
terms. We amortize the fair value of these awards over their estimated vesting terms which are
based on both the probability and estimated timing of the achievement of these performance goals.
See Note 11 to the financial statements for additional information on our stock-based compensation.
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Income Taxes
We account for income taxes under the liability method. Deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. We measure and record income tax contingency accruals in
accordance with ASC 740, Income Taxes.
We recognize liabilities for uncertain income tax positions based on a two-step process. The
first step is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and subjective to
estimate such amounts, as we must determine the probability of various possible outcomes. We
reevaluate these uncertain tax positions on a quarterly basis or when new information becomes
available to management. These reevaluations are based on factors including, but not limited to,
changes in facts or circumstances, changes in tax law, successfully settled issues under audit,
expirations due to statutes, and new audit activity. Such a change in recognition or measurement
could result in the recognition of a tax benefit or an increase to the tax accrual.
We classify interest related to income tax liabilities as income tax expense, and if
applicable, penalties are recognized as a component of income tax expense. The income tax
liabilities and accrued interest and penalties that are anticipated to be due within one year of
the balance sheet date are presented as current liabilities in our consolidated balance sheets.
Income or Loss Per Common Share
Basic net income or loss per common share is computed by dividing the net income or loss
attributable to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income or loss per common share is calculated in the
same manner, but also considers the impact to net income and common shares for the potential
dilution from stock options, stock warrants and any other outstanding convertible securities.
We have issued potentially dilutive instruments in the form of our convertible note payable, 8%
Series A Preferred Stock, Series B Preferred Stock, common stock warrants and common stock options
granted to our employees. There were 37,469,761, 15,748,448, and 10,576,194 potentially dilutive
securities outstanding at December 31, 2009, 2008, and 2007, respectively. We did not include any
of these instruments in our calculation of diluted loss per share during the period because to
include them would be anti-dilutive due to our net loss during the periods.
Recent Accounting Pronouncements
In December 2007, FASB issued guidance related to Business Combinations under ASC 805,
Business Combinations, and guidance related to the accounting and reporting of noncontrolling
interest under ASC 810-10-65-1, Consolidation. This guidance significantly changes the accounting
for and reporting of business combination transactions and noncontrolling (minority) interests in
consolidated financial statements. This guidance became effective January 1, 2009. It did not have
a material impact on our financial statements.
In March 2008, the FASB issued guidance related to the disclosures about derivative
instruments and hedging activities under FASB ASC 815-10-50, Derivatives and Hedging. This
guidance requires
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companies to provide enhanced disclosures about (a) how and why they use derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under
applicable guidance, and (c) how derivative instruments and related hedged items affect a companys
financial position, financial performance, and cash flows. These disclosure requirements are
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Our adoption of ASC 815-10-50 on January 1, 2009 did not have a material impact
on our consolidated financial statements.
In June 2008, the FASB issued guidance to evaluate whether an instrument (or embedded feature)
is indexed to an entitys own stock under ASC 815-40-15, Derivatives and Hedging. The guidance
requires entities to evaluate whether an equity-linked financial instrument (or embedded feature)
is indexed to its own stock in order to determine if the instrument should be accounted for as a
derivative under the scope of ASC 815-10-15. This guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal
years. We adopted ASC 815-40-15 beginning January 1, 2009. The adoption of this guidance did not
have a material impact on our financial statements.
In May 2009, the FASB issued guidance related to subsequent events under ASC 855-10,
Subsequent Events. This guidance sets forth the period after the balance sheet date during which
management or a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet date. It requires
disclosure that an entity has evaluated subsequent events through the date the financial statements
were issued or were available to be issued. This guidance is effective for interim and annual
periods ending after June 15, 2009. We adopted ASC 855-10 beginning June 30, 2009 and have included
the required disclosures in our consolidated financial statements. See Note 16 Subsequent
Events in the Notes to Consolidated Financial Statements for additional information.
In June 2009, the FASB issued an amendment to ASC 810-10, Consolidation. As a result, in
December 2009, the FASB issued ASC 2009-17, Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities. This guidance amends ASC 810-10-15 to replace the
quantitative-based risks and rewards calculation for determining which enterprise has a controlling
financial interest in a VIE with a primarily qualitative approach focused on identifying which
enterprise has the power to direct the activities of a VIE that most significantly impact the
entitys economic performance. It also requires ongoing assessments of whether an enterprise is the
primary beneficiary of a VIE and requires additional disclosures about an enterprises involvement
in VIEs. This guidance is effective as of the beginning of the reporting entitys first annual
reporting period that begins after November 15, 2009 and earlier adoption is not permitted. We are
currently evaluating the potential impact, if any, of the adoption of ASC 2009-17 on our
consolidated financial statements.
In June 2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC 105,
Generally Accepted Accounting Principles. This guidance states that the ASC will become the source
of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Once
effective, the Codifications content will carry the same level of authority. Thus, the U.S. GAAP
hierarchy will be modified to include only two levels of U.S. GAAP: authoritative and
non-authoritative. This is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. We adopted ASC 105 as of September 30, 2009 and thus have
incorporated the new Codification citations in place of the corresponding references to legacy
accounting pronouncements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities
at Fair Value, which amends ASC 820, Fair Value Measurements and Disclosures. This Update provides
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clarification that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure the fair value
using one or more of the following techniques: a valuation technique that uses the quoted price of
the identical liability or similar liabilities when traded as an asset, which would be considered a
Level 1 input, or another valuation technique that is consistent with ASC 820. This Update is
effective for the first reporting period (including interim periods) beginning after issuance.
Thus, we adopted this guidance as of December 31, 2009, which did not have a material impact on our
consolidated financial statements.
Contractual Obligations and Commercial Commitments
We have the following contractual obligations as of December 31, 2009.
Payments Due by Period (in thousands) | ||||||||||||||||||||
Less than | After | |||||||||||||||||||
Total | 1 year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Fixed-rate long-term debt(a) |
$ | 3,072,766 | $ | 89,720 | $ | 298,832 | $ | 232,253 | $ | 2,451,961 | ||||||||||
Fixed-rate interest payments(a) |
1,219,236 | 160,269 | 493,417 | 297,627 | 267,923 | |||||||||||||||
Nonrecourse Variable-rate long-term debt(b) |
37,679,833 | 37,679,833 | | | | |||||||||||||||
10% Series A Secured Redeemable Debentures(c) |
29,243,966 | 3,680,978 | 25,562,988 | | | |||||||||||||||
Consulting agreement(e) |
1,274,000 | 784,000 | 490,000 | | | |||||||||||||||
9% Series B Secured Redeemable Debentures(d) |
7,202,806 | 516,926 | 4,965,380 | 1,720,499 | | |||||||||||||||
Total Contractual Obligations |
$ | 79,692,607 | $ | 42,911,727 | $ | 31,810,617 | $ | 2,250,379 | $ | 2,719,884 |
(a) | Assumes 5.7% interest over the life of the note with principal payments, amortized on 25 year schedule, beginning January 20, 2009 and the remainder of the balance of the loan ballooning November 30, 2017. | |
(b) | Assumes quarterly payments at 5.0% interest. | |
(c) | Assumes 10% interest payments over their 5 year term. | |
(d) | Assumes 9% interest payments over their 5 year term. | |
(e) | Payments under consulting agreements have been suspended. |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, unconsolidated variable interest entities,
or financing partnerships. We previously provided certain trade guarantees on behalf of our 100%
owned subsidiary BioFuels only.
Item 7A. 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 December 31, 2009.
Commodity Price Risk
Our biodiesel production will be dependent upon feedstock oils, which are derived from
agricultural commodities such as soybeans, and animal fats. Significant reductions in the harvest
of these commodities due to a number of factors, including adverse weather conditions, domestic and
foreign government farm programs and policies, and farmer planting decisions as well as changes in
global demand and supply could result in increased feedstock oil costs which could increase our
costs to produce biodiesel. In the future, we may decide to address these risks through the use of
fixed price supply contracts as well as commodity derivatives.
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Foreign Currency Exchange Risk
In future activity, certain of our long-term purchase and sales contracts in the global market
may have fixed price terms in currencies other than the U.S. Dollar. Any substantial fluctuations
in these exchange rates as compared to the U.S. Dollar could negatively impact our financial
condition. In the future, we may address these risks through the use of foreign currency
derivatives or other financial derivatives.
Interest Rate Risk
We are exposed to interest rate risk on our variable rate debt. In the future we may enter
into interest rate derivatives to change portions of our debt from floating to fixed or from fixed
to floating. At December 31, 2009, we carried approximately $36.7 million in variable rate debt.
Item 8. Financial Statements and Supplementary Data
See Item 15.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Management, under the general direction of the principal executive officer and the principal
financial officer, has performed an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934) as
of the end of the period covered by this report. This evaluation included consideration of the
controls and procedures that are designed to ensure that information required to be disclosed by us
in reports that we file or submit under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms, and that information required to be disclosed in reports filed by us under the
Securities Exchange Act is accumulated and communicated to management, including the principal
executive officer and the principal financial officer, in such a manner as to allow timely
decisions regarding the required disclosure. Based on this evaluation, the principal executive
officer and the principal financial officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this annual report. Due to transition rules
for newly reporting companies, we are not required to have an attestation report on our assessment
by our registered public accounting firm until fiscal year 2010.
Changes in Internal Control over Financial Reporting.
There have been no significant changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
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Managements Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control over financial reporting is designed, under the supervision of our chief executive
and chief financial officers, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America (GAAP). Our internal
control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2009. This evaluation was based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP.
Based on our evaluation under the framework in Internal Control Integrated Framework, our
Chief Executive Officer and Chief Financial Officer concluded that internal control over financial
reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of the companys registered public
accounting firm due to a transition period established by rules of the Securities and Exchange
Commission for newly public companies.
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
GreenHunter Energys directors and executive officers, including their ages and current
positions with us and/or certain additional information, are set forth below.
Name | Age | Positions and Offices Held | ||||
Gary C. Evans
|
52 | Chairman and Chief Executive Officer | ||||
Ronald D. Ormand
|
51 | Director | ||||
Ronald H. Walker
|
72 | Director | ||||
Jonathan D. Hoopes
|
42 | Director, President and Chief Operating Officer | ||||
Morgan F. Johnston
|
49 | Senior Vice President, General Counsel, and Secretary | ||||
David S. Krueger
|
60 | Vice President and Chief Financial Officer |
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Gary C. Evans Chairman and Chief Executive Officer
Gary C. Evans is the Chairman and Chief Executive Officer and founder of GreenHunter Energy.
Mr. Evans served as the Companys President from inception until October 1, 2009. Mr. Evans has
been Chairman and Chief Executive Officer of Magnum Hunter Resources Corporation (NYSE Amex: MHR)
since May 2009. Mr. Evans is also a principal in Global Hunter Holdings, L.P., the parent of Global
Hunter Securities, LLC., entities active in both direct capital investments and investment banking
activities for numerous high growth Chinese based enterprises.
During twenty years ending in April 2005, Mr. Evans served as Chairman, President and Chief
Executive Officer of Magnum Hunter Resources, Inc. (a New York Stock Exchange listed company) and
Chairman and Chief Executive Officer of all of the Magnum Hunter subsidiaries since their formation
or acquisition dating back to 1985. Mr. Evans founded the predecessor company, Hunter Resources,
Inc., that was merged into and formed Magnum Hunter Resources, Inc. until its merger with Cimarex
Energy, Inc. (NYSE: XEC) during June 2005 in a $2.2 billion transaction. Magnum Hunter Resources,
Inc. was in the business of exploration and production of crude oil and natural gas. From 1978 to
1985, Mr. Evans was employed in the banking profession and was associated with the Mercantile Bank
of Canada, where he held various positions including Vice President and Manager of the Energy
Division of the Southwestern United States, and BancTexas, N.A. f/k/a/ National Bank of Commerce.
Mr. Evans currently serves as the Lead Director of Novavax, Inc., a NASDAQ listed
pharmaceutical company. Mr. Evans serves as an Individual Trustee of TEL Offshore Trust, a NASDAQ
listed oil and gas trust. Mr. Evans also serves on the Board of Advisors of the Maguire Energy
Institute at Southern Methodist University. Mr. Evans was recognized by Ernst and Young as the
Southwest Area 2004 Entrepreneur of the Year for the Energy Sector and was subsequently inducted
into the World Hall of Fame for Ernst & Young Entrepreneurs.
Ronald D. Ormand Director
Mr. Ormand has been a director of the Company since June 5, 2009. Mr. Ormand has been the
Executive Vice President and Chief Financial Officer of Magnum Hunter Resources Corporation (NYSE
Amex: MHR) since May 2009. Mr. Ormand has over twenty five years of investment and commercial
banking experience in the energy industry. Currently, Mr. Ormand serves as Executive Vice
President and Chief Financial Officer for Petro Resources Corporation (NYSE Amex: PRC) and
previously served as President of Perugia Advisors, Inc, a financial advisory and private
investment firm focused on the energy industry. Mr. Ormand served as President, Chief Financial
Officer and member of the Board of Directors of Tremisis Energy Acquisition II, Corp., (Tremisis
II) a special purpose acquisition company focused on energy and environmental projects until the
sale of a majority interest in Tremisis II to a Korean Investment group in March 2009. Mr. Ormand
remains as a member of the Board of Directors of Tremisis II. From 2005 to 2007, he served as
Managing Director and Head of the North American Oil and Gas Investment Banking group at West LB
AG. From 1988 until December 2004, Mr. Ormand was with CIBC World Markets and Oppenheimer & Co.,
and served as Managing Director and Head of CIBC World Markets U.S. Oil and Gas Investment Banking
Group. Mr. Ormand received his B.A. in Economics in 1980 and his M.B.A. in Finance and Accounting
in 1982 from the University of California Los Angeles, and studied Economics at Cambridge
University, England in 1979.
Ronald H. Walker Director
Ronald H. Walker has been a director of the company since November 1, 2007. Mr. Walker
currently serves as the President of the Richard Nixon Foundation. Prior to his retirement in
2001, Mr. Walker was a senior partner with Korn/Ferry International, the worlds largest executive
search firm, for
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over 20 years. At Korn/Ferry, Mr. Walkers client base included the Fortune 100 companies. Mr.
Walkers extensive record of government services includes Special Assistant to the President of the
United States from 1969 to 1972 where he was the founder and first director of the White House
Advance Office. In this position, he was responsible for planning and coordinating all Presidential
travel both domestic and international. Those visits included all 50 states and 25 countries. He
personally directed the preparations for the Presidents historic trips to the Peoples Republic of
China and Russia.
President Nixon appointed Mr. Walker the 8th Director of the National Park Service in December
1972 where he served until 1975. In this position, he was charged with the preservation and care of
the countrys 300 National Park System areas encompassing 300 million acres of land. He
administered a budget of $350 million and managed 15,000 employees who served the 230 million
people that visit Americas parklands annually.
Mr. Walker previously served as a consultant to the White House Personnel Office. He has also
served as a senior advisor to four Presidents and on Special Diplomatic assignments abroad. In
addition, he has served as a senior advisor to nine Republican Conventions, highlighted by his
Chairmanship and position of CEO of the 1984 Republican National Convention held in Dallas, Texas.
At the request of President Ronald Reagan, he also chaired the 50th Presidential Inauguration.
Mr. Walker has served on numerous Boards, both public and private, including being a public
sector member of the United States Olympic Committee (USOC), the National Collegiate Athletic
Association (NCAA), Kennedy Center, Vice Chair of the Presidents Council on Physical Fitness and
Sports, past chairman of the Freedoms Foundation at Valley Forge, the National Park Foundation,
Grand Teton National Park Foundation, Fords Theatre, and Vice Chairman of the Bicentennial of the
U.S. Constitution.
Mr. Walker is a distinguished graduate from the University of Arizona with a BA in Government
and American History. He also served in the US Army reaching the rank of captain.
Jonathan D. Hoopes Director, President and Chief Operating Officer
Mr Hoopes has served as a Director, President and Chief Operating Officer of the Company since
October 1, 2009. Mr. Hoopes is a fifteen-year veteran of Wall Street who has spent most of his
professional career in the investment banking and financial services industry with a focus on the
traditional and renewable energy sectors as well as the information technology sector. He has
served in various capital markets, investment banking, and equity research roles at Goldman Sachs,
Deutsche Bank, and UBS in London, Hong Kong and New York. Most recently, Mr. Hoopes served as
Managing Director at Think Equity, LLC where he led two teams of research analysts in the
alternative energy and technology sectors. Mr. Hoopes has also provided cross-border strategic
advisory services to clients in the energy technology and renewable energy sectors. He holds an
MBA in International Finance from the Wharton School and an MA in East Asian Studies from the
University of Pennsylvania.
Morgan F. Johnston Senior Vice President, General Counsel, and Secretary
Morgan F. Johnston has served as Senior Vice President, General Counsel and Secretary of the
company since March 1, 2007. From June 2005 until March 1, 2007, Mr. Johnston was a sole
practitioner representing clients in corporate and securities law. He previously served as the
Senior Vice President, General Counsel and Secretary of Magnum Hunter Resources, Inc. (MHR), a NYSE
listed company, from January 1, 2003 to June of 2005. He served as MHRs Vice President and General
Counsel since April 1997 and also served as MHRs Secretary since May 1996. Magnum Hunter
Resources, Inc. was in the business of exploration and production of crude oil and natural gas.
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Mr. Johnston was in private practice as a sole practitioner from May 1996 to April 1997,
specializing in corporate and securities law. From February 1994 to May 1996, Mr. Johnston served
as general counsel for Millennia, Inc. and Digital Communications Technology Corporation, two AMEX
listed companies. He also previously served as securities counsel for Motel 6 L.P., a NYSE listed
company. Mr. Johnston graduated cum laude from Texas Tech Law School in May 1986 and was also a
member of the Texas Tech Law Review. He is licensed to practice law in the State of Texas.
David S. Krueger Vice President and Chief Financial Officer
David S. Krueger has served as Vice President and Chief Financial Officer of GreenHunter since
May 2006. Mr. Krueger has served as Chief Accounting Officer of Magnum Hunter Resources Corporation
since October 2009. From June 2005 to May 2006, Mr. Krueger was Vice President and Chief Financial
Officer for Sulphur River Exploration, Inc. in Dallas, Texas. Sulphur River Exploration, Inc. is an
independent oil and gas exploration, production, and operating company.
Mr. Krueger served as Vice President and Chief Accounting Officer of Magnum Hunter Resources,
Inc. from January 1997 to June 2005. Magnum Hunter Resources, Inc. was in the business of
exploration and production of crude oil and natural gas. Mr. Krueger acted as Vice
President-Finance of Cimarron Gas Holding Co., a gas processing and natural gas liquids marketing
company in Tulsa, Oklahoma, from April 1992 until January 1997. Mr. Krueger served as Vice
President/Controller of American Central Gas Companies, Inc., a gas gathering, processing and
marketing company from May 1988 until April 1992. From 1974 to 1986, Mr. Krueger served in various
managerial capacities for Southland Energy Corporation. Mr. Krueger, a certified public accountant,
graduated from the University of Arkansas with a B.S. degree in Business Administration and earned
his M.B.A. from the University of Tulsa.
Corporate Governance.
The business, property and affairs of the Company are managed by the Chief Executive Officer
under the direction of the Board of Directors. The Board has responsibility for establishing broad
corporate policies and for overall performance and direction of the Company, but is not involved in
the day-to-day operations. Members of the Board keep informed of the companys business by
participating in Board and committee meetings, by reviewing analyses and reports sent to them
regularly, and through discussions with the Chief Executive Officer and other officers.
The Board has adopted corporate governance guidelines that addresses significant issues of
corporate governance and set forth the procedures by which the Board carries out its
responsibilities. Among the areas addressed by the guidelines are director qualifications and
responsibilities, Board committee responsibilities, selection and election of directors, director
compensation and tenure, director orientation and continuing education, access to management and
independent advisors, succession planning and management development, board meetings and board and
committee performance evaluations. The Boards Nominating/Corporate Governance committee is
responsible for assessing and periodically reviewing the adequacy of these guidelines.
The guidelines provide that at least a majority of the members of the Board must be
independent as required by NYSE Amex corporate governance listing standards. The Board has
affirmatively determined that all directors, with the exception of Mr. Gary C. Evans, Chairman and
CEO, and Mr. Jonathan D. Hoopes, President and COO, qualify as independent directors under these
standards based on its review of all relevant facts and circumstances.
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The company also has an audit committee established in accordance with the requirements of the
NYSE Amex and the Securities Exchange Act of 1934, as amended. As the Company qualifies as a
smaller reporting company, the audit committee is currently comprised of two independent directors:
Mr. Ronald D. Ormand, Chairman, and Mr. Ronald H. Walker.
Code of Conduct and Ethics
We have a code of conduct and ethics that applies to its officers, employees and directors.
This code assists employees in resolving ethical issues that may arise in complying with our
policies. Our senior financial officers are also subject to the code of ethics for senior
financial officers. The purpose of these codes is to promote, among other things:
| ethical handling of actual or apparent conflicts of interest; | ||
| full fair and accurate and timely disclosure in filings with the Securities and Exchange Commission and other public disclosures; | ||
| compliance with the law and other regulations; | ||
| protection of the Companys assets; | ||
| insider trading policies; and | ||
| prompt internal reporting of violations of the codes. |
Both of these codes are available on our website at www.greenhunterenergy.com. We will
provide these codes free of charge to stockholders who request them. Any waiver of these codes
with respect to officers and directors of the company may be made only by the Board of Directors
and will be disclosed to stockholders on our website, along with any amendments to these codes.
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Item 11. Executive Compensation
Summary Compensation Table.
The following table sets forth all compensation for the fiscal years ended 2009 and 2008
awarded to, earned by or paid to executive officers of GreenHunter.
All Other | ||||||||||||||||||||||||||||
Name and Principal | Salary | Bonus | Stock Awards | Option Awards | Compensation | Total | ||||||||||||||||||||||
Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
Gary C. Evans President |
2009 | 200,000 | | | 125,028 | ** | 12,000 | 3,847,870 | ||||||||||||||||||||
and CEO* |
2008 | 199,230 | 200,000 | 200,000 | 3,236,640 | *** | 12,000 | |||||||||||||||||||||
Jonathan D. Hoopes |
2009 | 59,615 | | 38,309 | **** | 25,872 | ** | 50,000 | 173,796 | |||||||||||||||||||
President and COO* |
||||||||||||||||||||||||||||
David S. Krueger Vice |
2009 | 200,000 | | | 37,508 | ** | 9,000 | 246,508 | ||||||||||||||||||||
President and CFO |
2008 | 199,230 | 150,000 | 150,000 | 1,011,450 | *** | 9,000 | 1,519,680 | ||||||||||||||||||||
Morgan F. Johnston Sr. |
2009 | 200,000 | | | 37,508 | ** | 9,000 | 246,508 | ||||||||||||||||||||
Vice President, General |
2008 | 199,230 | 175,000 | 175,000 | 1,011,450 | *** | 9,000 | 1,569,680 | ||||||||||||||||||||
Counsel and Secretary * |
* | Mr. Evans acted as the Companys President and CEO during all of 2008 and the first nine months of 2009. On October 1, 2009, Mr. Jonathan D. Hoopes was hired as the Companys President and COO. Mr. Hoopes received $50,000 as a relocation expense. | |
** | Mr. Evans received a stock option grant for 1,000,000 shares, vesting over a three year period at an exercise price of $1.96 on August 26, 2009. Mr. Hoopes received a stock option grant for 500,000 shares, vesting both over time and achieving specific performance goals at an exercise price of $1.41 on December 11, 2009. Mr. Krueger received a stock option grant for 300,000 shares, vesting over a three year period at an exercise price of $1.96 on August 26, 2009. Mr. Johnston received a stock option grant for 300,000 shares, vesting over a three year period at an exercise price of $1.96 on August 26, 2009. | |
*** | Mr. Evans received a stock option grant for 880,000 shares, vesting both over time and achieving specific performance goals at an exercise price of $18.91 on February 13, 2008. As of December 31, 2008, 352,000 options have been forfeited. Mr. Krueger received a stock option grant for 275,000 shares, vesting both over time and achieving specific performance goals at an exercise price of $18.91 on February 13, 2008. As of December 31, 2008, 110,000 options have been forfeited. Mr. Johnston received a stock option grant for 275,000 shares, vesting both over time and achieving specific performance goals at an exercise price of $18.91 on February 13, 2008. As of December 31, 2008, 110,000 options have been forfeited. | |
**** | Mr. Hoopes received a restricted stock grant for 100,000 shares, vesting both over time and achieving specific performance goals on October 1, 2009. |
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Outstanding Equity Awards at Fiscal Year-End.
The following non-incentive stock options were outstanding to the below named executives at
December 31, 2009:
Number of Securities | Number of Securities | |||||||||||||||
underlying unexercised | underlying unexercised | Exercise | ||||||||||||||
Name | options exercisable | options unexercisable | Price ($/sh) | Expiration Date | ||||||||||||
Gary C. Evans, CEO |
| 1,000,000 | 1.96 | August 26, 2019 | ||||||||||||
293,334 | 234,666 | 18.91 | February 13, 2018 | |||||||||||||
Jonathan D. Hoopes, President and COO |
| 500,000 | 1.41 | December 11, 2019 | ||||||||||||
David S. Krueger , Vice President |
| 300,000 | 1.96 | August 26, 2019 | ||||||||||||
and CFO |
91,666 | 73,334 | 18.91 | February 13, 2018 | ||||||||||||
550,000 | | 5.00 | * | May 5, 2017 | ||||||||||||
Morgan F. Johnston, Sr. Vice |
| 300,000 | 1.96 | August 26, 2019 | ||||||||||||
President, General Counsel and |
91,666 | 73,334 | 18.91 | February 13, 2018 | ||||||||||||
Secretary |
500,000 | | 5.00 | * | May 5, 2017 |
* | There was no public market for our common shares on the date of grant of the option. Accordingly, the amounts set out in this column are based upon the fair market value per common share as estimated by us as at the date of grant of the option, which was $5.00. |
Director Compensation
The following compensation was paid to our independent members of the board of directors for
the year ended December 31, 2009:
Fees Earned or Paid | ||||||||||||||||
in Cash | Stock Awards | Option Awards | Total | |||||||||||||
Name | ($) | ($) | ($) | ($) | ||||||||||||
Ronald D. Ormand |
* | | 10,131 | 10,131 | ||||||||||||
Ronald H. Walker |
* | | 12,502 | 12,502 | ||||||||||||
Renato T. Bertani** |
* | | | | ||||||||||||
James R. Sasser** |
* | | | | ||||||||||||
Robert Zahradnik** |
* | | | |
* | The Board of Directors has deferred any compensation payments for acting as a Board member until the Companys performance has improved. | |
** | Mr. Robert Zahradnik resigned from the Board of Directors on March 18, 2009. Mr. James R. Sasser resigned from the Board of Directors on April 3, 2009. Mr. Bertani resigned from the Board of Directors on June 3, 2009. |
For fiscal 2010, our directors (other than members of our management) will be entitled to
receive an annual retainer of $50,000, payable quarterly, plus $1,000 per meeting of our board of
directors, $500 per meeting of a committee of the board attended or $250 if such board member
attends a board or committee meeting by telephone. These directors will also be reimbursed for all
out-of-pocket expenses incurred in their capacities as members of the board. We will also grant
new independent directors 100,000 stock options at an exercise price equal to the then market value
vesting over a three year period. We currently maintain directors and officers liability insurance
coverage with an aggregate policy limit of $5,000,000.
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Table of Contents
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The following table sets forth information regarding beneficial ownership of GreenHunters
common stock as of March 30, 2010 held by (i) each of GreenHunters directors and named executive
officers; (ii) all directors and named executive officers as a group; and (iii) any person (or
group) who is known to GreenHunter to be the beneficial owner of more than 5% of any class of its
common stock.
Unless otherwise specified, the address of each of the persons set forth is in care of
GreenHunter Energy, Inc., 1048 Texan Trail, Grapevine, Texas 76051.
Name of Beneficial | Amount and Nature of | |||||||||||
Title of Class | Owner | Beneficial Ownership(1) | Percent of Class(9) | |||||||||
Common Stock |
Gary C. Evans | 15,981,111 | (2) | 67.0 | ||||||||
Common Stock |
Ronald D. Ormand | 0 | * | |||||||||
Common Stock |
Ronald H. Walker | 66,667 | (3) | * | ||||||||
Common Stock |
Jonathan D. Hoopes | 150 | * | |||||||||
Common Stock |
Morgan F. Johnston | 596,059 | (4) | 2.6 | ||||||||
Common Stock |
David S. Krueger | 646,535 | (5) | 2.8 | ||||||||
Common Stock |
Investment Hunter, LLC | 15,675,401 | (6) | 66.0 | ||||||||
Common Stock |
West Coast Opportunity Fund, LLC | 2,457,142 | (7) | 9.9 | ||||||||
Common Stock |
Southern Ute Growth Fund | 1,875,000 | (8) | 8.4 | ||||||||
Common Stock |
All officers and directors as a group (6 persons named above) | 17,290,522 | 69.0 |
* | Less than 1%. | |
1 | Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed below has direct ownership of and sole voting power and investment power with respect to the shares of GreenHunters common stock. | |
2 | Includes 14,160,000 shares and 1,515,401 common stock purchase warrants held directly by Investment Hunter, LLC, and 293,334 common stock purchase options at an exercise price of $18.91 per share. Also includes 1,800 shares held by Mr. Evans as custodian for his children. Gary C. Evans owns 100% of the capital stock of Investment Hunter, LLC. | |
3 | Consists of 66,667 common stock purchase options at an exercise price of $10.00 per share. | |
4 | Includes 500,000 common stock purchase options at an exercise price of $5.00 per share, 91,666 common stock purchase options at an exercise price of $18.91 per share and 399 common stock purchase warrants at an exercise price of $27.50 per share. | |
5 | Includes 550,000 common stock purchase options at an exercise price of $5.00 per share, 91,666 common stock purchase options at an exercise price of $18.91 per share and 442 common stock purchase warrants at an exercise price of $27.50 per share. | |
6 | Includes 1,515,401 common stock purchase warrants at an exercise price of $27.50 per share. | |
7 | Consists of 6,750 shares of Series A Preferred Stock convertible into 1,350,000 shares of common stock and 10,575 shares of Series B Preferred Stock convertible into 1,410,000 shares of common stock and 1,823,500 shares of common stock exercisable pursuant to common stock purchase warrants. By agreement, West Coast Opportunity Fund, LLC cannot convert or exercise any securities that cause it to own 10% or more of the common stock of the Company. Paul J. Orfalea, Lance W. Helfert and R. Atticus Lowe have shared voting and investment control over the securities held by West Coast Opportunity Fund, LLC. | |
8 | Includes 625,000 common stock purchase warrants at an exercise price of $27.50 per share. | |
9 | A total of 22,116,464 shares of GreenHunter Energys Common Stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner below, any options exercisable or securities convertible into common within 60 days have been included in the denominator. |
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Table of Contents
Item 13. Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons.
On January 2, 2007, GreenHunter issued a promissory note in the principal amount of $2.8
million in favor of Investment Hunter, LLC, an entity controlled and 100% owned by Mr. Gary Evans,
Chairman and CEO. The note bore interest at the rate of ten percent (10%) per annum simple
interest until the outstanding principal balance and any accrued interest are paid in full.
Accrued interest was due and payable on December 31, 2007. In December 2007, the note was amended
to allow interest due at December 31, 2007 to be added to the principal balance of the note rather
than be paid. On January 1, 2008 the note plus accrued interest was renewed and extended through
the issuance of a GreenHunter subordinated convertible note in the amount of $3.1 million with
interest at an annual rate of 10% first due on December 31, 2008. The note was convertible at the
option of the holder into our common stock at a conversion price of $5.00 per share for the
original principal balance of $2.8 million and at a conversion price of $12.00 for the $285
thousand of accrued interest rolled into the note. On August 28, 2008, Investment Hunter converted
the principal amount of the note into 594,011 shares of GreenHunter common stock and we paid
accrued interest in cash.
Our loan from Investment Hunter, LLC described above was unanimously approved by our Board of
Directors, with Mr. Evans abstaining.
During 2008, GreenHunter rented an airplane for business use at various times from Pilatus
Hunter, LLC, an entity 100% owned by Mr. Evans. Airplane rental expenses totaled $158 thousand for
the 2009 year and $409 thousand for the 2008 year.
During the year ended December 31, 2008, we leased excess office space to Gruy Petroleum
Management, LLC, an entity owned 100% by Mr. Evans for $48 thousand.
The Company currently does not have a written, stand-alone policy for evaluating related party
transactions. The Boards review procedures include evaluating the following:
| the nature of the relationships among the parties; | ||
| the materiality of the transaction to the company; | ||
| the related persons interest in the transaction; and | ||
| the benefit of the transaction to the related person and to the company. |
Additionally, in cases of transactions in which a director or executive officer may have an
interest, the Board also will evaluate the effect of the transaction on such individuals
willingness or ability to properly perform his or her duties at the company.
Item 14. Principal Accounting Fees and Services
For the Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Audit (a) |
$ | 121,190 | $ | 177,382 | $ | 74,501 | ||||||
Tax preparation fees |
| 26,133 | 10,576 | |||||||||
All other fees (b) |
4,000 | 11,976 | 45,078 | |||||||||
TOTAL |
$ | 125,190 | $ | 215,491 | $ | 130,155 | ||||||
(a) | Includes fees paid to Hein & Associates for our annual audit and quarterly reviews and services in connection with our filing of registration statements. |
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(b) | Includes fees paid to Hein & Associates for the agreed upon procedures related to an EPA report for BioFuels. |
The Audit Committee generally makes recommendations to the Board regarding the selection
of the independent registered accounting firm, reviews the independence of such accountants,
approves the scope of the annual audit, approves the rendering of any material non-audit services
by the independent accountants, approves the fee payable to the independent accountants and reviews
the audit results. The Audit Committee approves all fees paid to our principal accountants.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) Index to Financial Statements
Page | ||||
Audited Consolidated Financial Statements of GreenHunter Energy, Inc. |
||||
F-1 | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
Notes to Financial Statements |
F-6 |
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders
GreenHunter Energy, Inc.
Grapevine, Texas
GreenHunter Energy, Inc.
Grapevine, Texas
We have audited the accompanying balance sheets of GreenHunter Energy, Inc. (the Company) as of
December 31, 2009 and 2008 and the related statements of operations, changes in stockholders deficit, and cash flows for the years ended December 31, 2009, 2008 and 2007.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States), which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of GreenHunter Energy, Inc. as of December 31, 2009 and 2008 and
the results of its operations and cash flows for the years ended December 31, 2009, 2008 and 2007,
in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine managements assertion about the effectiveness of GreenHunter
Energy, Inc.s internal control over financial reporting as of December 31, 2009 included in
Managements Report on Internal Control over Financial Reporting, and accordingly, we do not
express an opinion thereon.
/s/ HEIN & ASSOCIATES LLP
Dallas, Texas
March 31, 2010
March 31, 2010
F-1
Table of Contents
GREENHUNTER ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2009 | December 31, 2008 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 6,915,514 | $ | 676,636 | ||||
Restricted cash |
2,018,717 | 342,653 | ||||||
Accounts receivable, net of allowance of $282,585 and $542,965, respectively |
127,373 | 4,475,670 | ||||||
Inventory |
179,322 | 6,137,780 | ||||||
Deposits and other current assets |
57,186 | | ||||||
Prepaid expenses and other current assets |
644,328 | 943,135 | ||||||
Assets held for sale current |
| 53,555 | ||||||
Total current assets |
9,942,440 | 12,629,429 | ||||||
FIXED ASSETS: |
||||||||
Land and improvements |
4,732,095 | 5,394,866 | ||||||
Buildings |
3,100,621 | 3,100,621 | ||||||
Plant and other equipment |
44,477,263 | 45,521,460 | ||||||
Accumulated depreciation |
(7,101,399 | ) | (2,855,250 | ) | ||||
Construction in progress |
10,750,089 | 11,934,854 | ||||||
Net fixed assets |
55,958,669 | 63,096,551 | ||||||
OTHER ASSETS: |
||||||||
Assets held for sale |
| 4,887,945 | ||||||
Deferred financing costs |
2,617,060 | 3,720,893 | ||||||
Other noncurrent assets |
300,110 | 9,404,152 | ||||||
Total assets |
$ | 68,818,279 | $ | 93,738,970 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Current portion of notes payable |
$ | 169,541 | $ | 507,102 | ||||
Current portion of notes payable, nonrecourse |
37,679,834 | 6,761,417 | ||||||
Accounts payable |
9,596,732 | 16,020,538 | ||||||
Dividends payable |
156,060 | 250,000 | ||||||
Accrued liabilities |
7,716,289 | 5,254,965 | ||||||
Liabilities associated with assets held for sale |
| 2,224,447 | ||||||
Total current liabilities |
55,318,456 | 31,018,469 | ||||||
NON-CURRENT LIABILITIES: |
||||||||
Notes payable |
2,983,045 | 3,062,642 | ||||||
Notes payable, nonrecourse, less current portion |
| 36,738,583 | ||||||
Redeemable debentures, net of discount of $1,047,108 and $1,485,006,
respectively |
25,288,848 | 23,139,057 | ||||||
Liabilities associated with assets held for sale, non-current |
| 74,319 | ||||||
Total long-term liabilities |
28,271,893 | 63,014,601 | ||||||
COMMITMENTS AND CONTINGENCIES (Notes 6 and 12) |
||||||||
STOCKHOLDERS DEFICIT: |
||||||||
Series A 8% convertible preferred stock, $.001 par value, $1,125 and $1,000
stated value, respectively, 6,750 and 12,500 issued and outstanding,
respectively |
7,592,389 | 12,500,000 | ||||||
Series B convertible preferred stock, $.001 par value, $1,000 stated value,
10,575 issued and outstanding |
10,575,000 | 10,575,000 | ||||||
Common stock, $.001par value, 90,000,000 authorized shares, 22,138,876 and
20,988,876 issued, respectively |
22,139 | 20,989 | ||||||
Additional paid-in capital |
87,273,376 | 81,100,216 | ||||||
Accumulated deficit |
(119,672,776 | ) | (103,478,564 | ) | ||||
Treasury stock, at cost, 22,412 and 44,436 shares, respectively |
(336,285 | ) | (678,538 | ) | ||||
Unearned common stock in KSOP, at cost, 15,200 shares |
(225,913 | ) | (225,913 | ) | ||||
Total GreenHunter Energy, Inc. stockholders equity |
(14,772,070 | ) | (186,810 | ) | ||||
Noncontrolling interest in consolidated subsidiaries |
| (107,290 | ) | |||||
Total stockholders deficit |
(14,772,070 | ) | (294,100 | ) | ||||
Total liabilities and stockholders deficit |
$ | 68,818,279 | $ | 93,738,970 | ||||
F-2
Table of Contents
GREENHUNTER ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
REVENUE: |
||||||||||||
Product sales |
$ | 4,932,510 | $ | 4,628,108 | $ | 957,174 | ||||||
Terminal revenues |
693,326 | 373,473 | | |||||||||
Processing revenue |
165,697 | | ||||||||||
Total revenue |
5,791,533 | 5,001,581 | 1,052,743 | |||||||||
COSTS AND EXPENSES: |
||||||||||||
Cost of sales and services |
8,665,846 | 14,150,681 | 758,799 | |||||||||
Hurricane repairs and losses (insurance proceeds) |
(10,887,690 | ) | 5,631,158 | | ||||||||
Project costs |
105,445 | 502,263 | 276,505 | |||||||||
Depreciation expense |
4,270,444 | 2,703,104 | 118,627 | |||||||||
Selling, general and administrative |
11,569,622 | 22,089,936 | 11,783,113 | |||||||||
Loss on asset impairments |
5,046,090 | 21,768,886 | | |||||||||
Total costs and expenses |
18,769,757 | 67,106,459 | 12,937,044 | |||||||||
OPERATING LOSS FROM CONTINUING OPERATIONS |
(12,978,224 | ) | (62,104,878 | ) | (11,884,301 | ) | ||||||
OTHER INCOME (EXPENSE): |
||||||||||||
Interest and other income |
4,743,451 | 644,156 | 373,027 | |||||||||
Interest, accretion and other expense |
(7,055,014 | ) | (4,010,684 | ) | (523,068 | ) | ||||||
Total other income (expense) |
(2,311,563 | ) | (3,366,528 | ) | (150,041 | ) | ||||||
Loss from continuing operations |
(15,289,788 | ) | (65,471,406 | ) | (12,034,342 | ) | ||||||
Loss on sale of discontinued operations |
(563,388 | ) | | | ||||||||
Gain (loss) from discontinued operations, net of taxes |
434,746 | (744,365 | ) | | ||||||||
Net Loss |
(15,418,430 | ) | (66,534,744 | ) | (12,034,342 | ) | ||||||
Less: Net loss attributable to noncontrolling interest |
| | | |||||||||
Net loss attributable to GreenHunter Energy, Inc. |
(15,418,430 | ) | (66,534,744 | ) | (12,034,342 | ) | ||||||
Preferred stock dividends |
(775,782 | ) | (1,000,000 | ) | (707,671 | ) | ||||||
Deemed preferred stock dividends |
| (15,188,219 | ) | (950,000 | ) | |||||||
Net loss to common stockholders |
$ | | $ | (82,403,990 | ) | $ | (13,692,013 | ) | ||||
Weighted average shares outstanding, basic and diluted |
21,612,172 | 20,216,032 | 17,082,684 | |||||||||
Net loss per share from continuing operations |
$ | (0.77 | ) | $ | (4.05 | ) | $ | (0.80 | ) | |||
Net earnings (loss) per share from discontinued operations |
$ | 0.02 | $ | (0.03 | ) | $ | | |||||
Net loss per share |
$ | (0.75 | ) | $ | (4.08 | ) | $ | (0.80 | ) | |||
F-3
Table of Contents
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE PERIOD FROM JANUARY 1, 2007 TO DECEMBER 31, 2009
FOR THE PERIOD FROM JANUARY 1, 2007 TO DECEMBER 31, 2009
Additional | Unearned | Total | ||||||||||||||||||||||||||||||||||
Series A | Series B | Common | Paid in | Noncontrolling | Accumulated | Treasury | Shares in | Equity | ||||||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Stock | Capital | Interest | Deficit | Stock | KSOP | (Deficit) | ||||||||||||||||||||||||||||
BALANCE, January 1, 2007 |
$ | | $ | | $ | 15,000 | $ | 1,549,163 | $ | | $ | (4,199,360 | ) | $ | | $ | | $ | (2,635,197 | ) | ||||||||||||||||
Issue 12,500 preferred shares in private placement |
12,500,000 | | | | | | | | 12,500,000 | |||||||||||||||||||||||||||
Issue 450,000 common shares to acquire GreenHunter BioFuels, Inc. |
| | 450 | 2,078,550 | | | | | 2,079,000 | |||||||||||||||||||||||||||
Issue 500,000 common shares to acquire power purchase agreement |
| | 500 | 2,309,500 | | | | | 2,310,000 | |||||||||||||||||||||||||||
Issue 300,000 common shares for fees on biomass plant acquisition |
| | 300 | 1,385,700 | | | | | 1,386,000 | |||||||||||||||||||||||||||
Issue 2,807,834 common stock warrants in private placement of
preferred and common stock |
| | | 3,717,308 | | (950,000 | ) | | | 2,767,308 | ||||||||||||||||||||||||||
Issue 4,131,500 common stock options to employees |
| | | 6,321,321 | | | | | 6,321,321 | |||||||||||||||||||||||||||
Issue 3,509,118 common shares in private placement |
| | 3,509 | 27,942,210 | | | | | 27,945,719 | |||||||||||||||||||||||||||
Commission and fees paid on private placement of common shares |
| | | (1,532,044 | ) | | | | | (1,532,044 | ) | |||||||||||||||||||||||||
Cash dividends on preferred stock |
| | | | | (707,671 | ) | | | (707,671 | ) | |||||||||||||||||||||||||
Net loss |
| | | | | (12,034,342 | ) | | | (12,034,342 | ) | |||||||||||||||||||||||||
BALANCE, December 31, 2007 |
12,500,000 | | 19,759 | 43,771,708 | | (17,891,373 | ) | | | 38,400,094 | ||||||||||||||||||||||||||
Registration fees on stock |
| | | (3,045 | ) | | | | | (3,045 | ) | |||||||||||||||||||||||||
Issue 117,998 shares for note payable exchange |
| | 118 | 1,874,871 | | | | | 1,874,989 | |||||||||||||||||||||||||||
Issue 841,363 warrants on the 10% Series A Redeemable Debentures |
| | | 1,677,622 | | | | | 1,677,622 | |||||||||||||||||||||||||||
Issue 89,747 warrants on the 9% Series B Redeemable Debentures |
| | | 51,610 | | | | | 51,610 | |||||||||||||||||||||||||||
Issue 594,011 shares upon note conversion |
| | 594 | 3,135,781 | 3,136,375 | |||||||||||||||||||||||||||||||
Issue 426,750 shares on warrant exercises |
| | 427 | 2,360,116 | | | | | 2,360,543 | |||||||||||||||||||||||||||
Issue 10,575 Series B Preferred Shares in private placement |
| 10,575,000 | 14,564,550 | | (14,589,550 | ) | | | 10,550,000 | |||||||||||||||||||||||||||
Issue 162,250 warrants for stock option exercise inducment |
| | | 207,599 | | | | | 207,599 | |||||||||||||||||||||||||||
Employer match of 5,512 shares to KSOP |
| | 6 | 104,226 | | | | | 104,232 | |||||||||||||||||||||||||||
Issue 58,246 shares for Port Sutton lease option acquisition |
| | 58 | 366,892 | | | | | 366,950 | |||||||||||||||||||||||||||
Issue share-based payment for Port Sutton lease option acquisition |
| | | 884,211 | | | | | 884,211 | |||||||||||||||||||||||||||
Issue 44,964 treasury shares for Wheatland acquisition |
| | | (356,785 | ) | 671,983 | 315,198 | |||||||||||||||||||||||||||||
Loan of 15,200 shares to KSOP |
| | | | | | | (225,913 | ) | (225,913 | ) | |||||||||||||||||||||||||
Purchase 89,400 shares for treasury |
| | | | | | (1,350,521 | ) | (1,350,521 | ) | ||||||||||||||||||||||||||
Stock compensation |
| | 27 | 8,678,990 | | | | | 8,679,017 | |||||||||||||||||||||||||||
Issue 2,470,004 warrants for stock dividend to common and preferred |
| | | 3,781,870 | | (3,781,870 | ) | | ||||||||||||||||||||||||||||
Dividends on preferred stock |
| | | | | (1,000,000 | ) | | | (1,000,000 | ) | |||||||||||||||||||||||||
Haining City interests |
| | | | (31,635 | ) | | | | (31,635 | ) | |||||||||||||||||||||||||
Wheatland interests |
| | | | (75,655 | ) | | | | (75,655 | ) | |||||||||||||||||||||||||
Net loss |
| | | | | (66,215,771 | ) | | | (66,215,771 | ) | |||||||||||||||||||||||||
BALANCE, December 31, 2008 |
12,500,000 | 10,575,000 | 20,989 | 81,100,216 | (107,290 | ) | (103,478,564 | ) | (678,538 | ) | (225,913 | ) | (294,100 | ) | ||||||||||||||||||||||
Transfer accumulated preferred dividends to stated value |
856,389 | | | | | | | | 856,389 | |||||||||||||||||||||||||||
Issue 42,797 warrants on Series B Debentures |
| | | 942 | | | | | 942 | |||||||||||||||||||||||||||
Stock compensation |
| | | 701,728 | | | | | 701,728 | |||||||||||||||||||||||||||
Conversion of 5,750 preferred shares into 1,150,000 common shares |
(5,764,000 | ) | | 1,150 | 5,776,183 | | | | | 13,333 | ||||||||||||||||||||||||||
Issue 22,024 treasury shares for services provided |
(305,693 | ) | 342,253 | 36,560 | ||||||||||||||||||||||||||||||||
Dividends on preferred stock |
| | | | | (775,782 | ) | | | (775,782 | ) | |||||||||||||||||||||||||
Abandonment of Haining City interests |
31,635 | 31,635 | ||||||||||||||||||||||||||||||||||
Abandonment of Wheatland interests |
75,655 | 75,655 | ||||||||||||||||||||||||||||||||||
Net loss |
| | | | | (15,418,430 | ) | | | (15,418,430 | ) | |||||||||||||||||||||||||
BALANCE, December 31, 2009 |
$ | 7,592,389 | $ | 10,575,000 | $ | 22,139 | $ | 87,273,376 | $ | | $ | (119,672,776 | ) | $ | (336,285 | ) | $ | (225,913 | ) | $ | (14,772,070 | ) | ||||||||||||||
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Table of Contents
GREENHUNTER ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net loss |
$ | (15,418,430 | ) | $ | (66,215,771 | ) | $ | (12,034,342 | ) | |||
Adjustments to reconcile net loss to net cash used
in operating activities: |
||||||||||||
Depreciation expense |
4,270,444 | 2,713,142 | 118,627 | |||||||||
Stock based compensation |
701,728 | 8,196,453 | 6,321,321 | |||||||||
Amortization of deferred financing costs |
1,279,284 | 706,062 | | |||||||||
Non-cash asset impairment |
5,046,090 | 22,068,886 | | |||||||||
Hurricane property losses |
| 3,351,299 | ||||||||||
Noncontrolling interest |
| (107,290 | ) | | ||||||||
Gain on sale of assets |
(1,267,564 | ) | (99,923 | ) | | |||||||
Accretion of discount |
438,841 | 255,143 | 77,809 | |||||||||
Forgiveness of trade payable |
(2,757,311 | ) | | | ||||||||
Changes in certain assets and liabilities: |
||||||||||||
Accounts receivable |
4,348,297 | (4,365,299 | ) | (54,153 | ) | |||||||
Inventory |
5,958,458 | (8,417,217 | ) | 129,615 | ||||||||
Prepaid and other expense |
228,704 | (1,095,799 | ) | (252,511 | ) | |||||||
Accounts payable |
(5,004,795 | ) | 14,997,453 | 1,571,373 | ||||||||
Accrued liabilities |
2,510,214 | (1,086,453 | ) | 1,878,635 | ||||||||
Net cash provided by (used in) operating activities |
333,960 | (29,099,314 | ) | (2,243,626 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Change in restricted cash |
(1,676,064 | ) | (342,653 | ) | | |||||||
Acquisition of Telogia |
| (2,500,000 | ) | | ||||||||
Acquisition of CRC, net of cash acquired |
| | (6,648,071 | ) | ||||||||
Acquisition of Mesquite Lake |
| | (1,426,566 | ) | ||||||||
Proceeds from sale of assets |
13,425,994 | 112,763 | 40,000 | |||||||||
Additions to fixed assets |
(790,362 | ) | (52,905,892 | ) | (19,256,314 | ) | ||||||
Increase in other assets |
(348,270 | ) | (1,682,308 | ) | (1,543,375 | ) | ||||||
Net cash used in investing activities |
10,611,298 | (57,318,090 | ) | (28,834,326 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Gross proceeds from stock and warrant issuance |
| 2,568,126 | 42,713,016 | |||||||||
Net proceeds from Series B preferred stock issuance |
| 10,550,000 | ||||||||||
Loan common stock to KSOP |
| (225,913 | ) | |||||||||
Commissions and fees paid on stock issuance |
| (3,045 | ) | (1,532,033 | ) | |||||||
Gross proceeds from redeemable debenture issuance |
1,711,892 | 17,295,773 | 7,328,290 | |||||||||
Purchase treasury shares |
| (1,350,521 | ) | |||||||||
Increase in notes payable |
298,323 | 50,673,639 | 4,826,406 | |||||||||
Payment of notes payable |
(6,541,144 | ) | (8,444,137 | ) | (205,000 | ) | ||||||
Payment of buyout obligation |
| | (180,000 | ) | ||||||||
Increase in convertible notes payable |
| | 285,126 | |||||||||
Payment of advance from previous affiliate |
| | (35,459 | ) | ||||||||
Payment of deferred financing costs |
(175,451 | ) | (1,970,276 | ) | (2,729,115 | ) | ||||||
Preferred dividends paid in cash |
| (750,000 | ) | (707,671 | ) | |||||||
Net cash provided by (used in) financing activities |
(4,706,380 | ) | 68,343,646 | 49,763,560 | ||||||||
CHANGE IN CASH |
6,238,878 | (18,073,758 | ) | 18,685,608 | ||||||||
CASH, beginning of period |
676,636 | 18,750,394 | 64,786 | |||||||||
CASH, end of period |
$ | 6,915,514 | 676,636 | 18,750,394 | ||||||||
` |
||||||||||||
Cash paid for interest |
$ | 2,994,959 | 4,513,302 | 199,514 | ||||||||
NONCASH TRANSACTIONS: |
||||||||||||
KSOP company match in stock |
| 104,232 | | |||||||||
Lease option acquisitioned for stock |
| 366,950 | | |||||||||
Membership interest acquired for treasury shares |
| 315,198 | | |||||||||
Bonus paid in stock |
| 482,564 | | |||||||||
Noncash common dividends |
| 3,183,350 | | |||||||||
Noncash preferred dividends |
| 15,188,219 | $ | 950,000 | ||||||||
Property acquired for stock |
| | 3,465,000 | |||||||||
Property acquired for notes payable, net of discount |
| | 1,639,738 | |||||||||
Power purchase agreement acquired for stock |
| | 2,310,000 | |||||||||
Commissions paid in common stock |
| | 500,000 |
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NOTE 1. Organization And Nature Of Operations
GreenHunter Energy, Inc. (GreenHunter) was incorporated in the State of Delaware on June 7,
2005 under the name BTHC IV, Inc. We were formed for the purpose of reincorporating BTHC IV, LLC,
a Texas limited liability company, in the State of Delaware. BTHC IV, LLC was reincorporated in
Delaware by means of a merger into our company on April 11, 2006.
On December 6, 2006, GreenHunter Wind Energy LLC (Wind Energy), completed a reverse
acquisition with GreenHunter. In exchange for all of the membership interest of Wind Energy, we
issued 14,560,000 shares of Common Stock to the sole shareholder of Wind Energy, or 97.1% of all of
the issued and outstanding stock of the company. Simultaneous with the closing of the transaction
with Wind Energy, we changed our name to GreenHunter Energy, Inc. and increased the number of
authorized shares of common stock to 100,000,000, consisting of 90,000,000 shares of common stock,
having a par value of $.001 per share and 10,000,000 shares of preferred stock, having a par value
of $.001 per share.
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. A substantial drop in market prices of both biodiesel and our feedstock inventories
previously adversely impacted our inventory values and resulting working capital positions. We
also were unable to make the interest payments due on our Series A Redeemable Debentures for the
periods of April through December 2009. These debentures are secured by GreenHunter Energys
ownership interest in GreenHunter BioFuels common stock and are otherwise non-recourse to
GreenHunter Energy.
As of December 31, 2009, we had a working capital
deficit of $45 million which includes a
$37.7 million non-recourse note payable due by a wholly-owned subsidiary. This note payable is
non-recourse to the parent, GreenHunter Energy, and is included in
current liabilities due to the fact that the bank has extended the
due date of the loan to April 30, 2010. If we do not close on a sale or other transaction to repay the note by that
date, the bank has the right to seize BioFuels cash on hand at that date and foreclose on the
BioFuels refinery in Houston. We are negotiating with the bank about extending the current
deadline to allow more time as we are in discussions with potential buyers. We have continued to
experience substantial losses from operations. These factors raise some doubt about our ability to
continue as a going concern. In October 2009, we sold our equity ownership interests in Guangdong
Ming Yang Wing Power Technology Co., Ltd for $9.1 million resulting in cash proceeds of $8.5
million, net of selling costs. We also have received a letter of guarantee from a principle
stockholder of the company for up to an additional $1 million if needed to fund operations. The
cash received, along with the letter of guarantee, improved our working capital position and has
provided cash required to fund operations for the next twelve months.
Since December 31, 2009, we have negotiated reductions in liabilities
owed to creditors of approximately $2.2 million.
Execution of our business plan for the next twelve months requires the ability to generate
cash to satisfy planned operating requirements. We currently have sufficient cash reserves to meet
all of our anticipated operating obligations for the next twelve months. Planned capital
expenditures are dependant on the Companys 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 return of operations at
our Houston biodiesel refinery and development of our Mesquite Lake biomass plant.
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Table of Contents
On December 16, 2009, the Credit Agreement for the non-recourse construction and working
capital loans was amended. These loans are non recourse to GreenHunter Energy. Pursuant to the
terms and conditions of the amendment, the lender has agreed to waive any claims of events of
default until March 31, 2010. The agreement was further amended
on March 30, 2010 to extend such date to
April 30, 2010. Additionally, due to the settlement of certain business interruption and property
damage insurance claims with various underwriters related to damages sustained at GreenHunter
BioFuels from Hurricane Ike in September, 2008, the lender received paydown of
approximately $4.5 million on its non-recourse construction and working capital loans in July 2009.
If we do not close on a sale or other transaction to repay the note by April 30, 2010, the bank
has the right to seize BioFuels cash on hand at that date and foreclose on the BioFuels refinery
in Houston. We are in discussions with the bank about extending the current deadline to allow more time
and we are continuing to talk with potential buyers.
We were unable to bring the biodiesel refinery through demonstration of final completion
standards to the satisfaction of the project lender, causing technical default on one of the
covenants of our construction note. If we are able to obtain adequate financing, we intend to make
capital improvements intended to improve reliability, product yield and operating efficiency as
well as to construct a glycerin refinery that should allow for additional profit margins at the
plant.
Nature of Operations
Our business plan is to acquire and operate assets in the renewable energy sectors of wind,
solar, geothermal, biomass and biofuels. Our plan is to become a leading provider of clean energy
products offering residential, business and industrial customers the opportunity to purchase and
utilize clean energy generated from renewable sources.
We currently have ongoing business initiatives at GreenHunter in wind through GreenHunter Wind
Energy, LLC (Wind Energy), in biodiesel, methanol, and terminalling operations through
GreenHunter BioFuels, Inc. (BioFuels), and in biomass through GreenHunter Mesquite Lake, Inc,
(Mesquite Lake).
During 2007 we acquired Channel Refining Corporation (CRC), which we subsequently renamed
GreenHunter BioFuels, Inc. (BioFuels). We completed the construction of a 105 million gallon per
year intended nameplate capacity biodiesel refinery during 2008 and began production at this
facility during August of the same year. The biodiesel refinery built on this site also includes
terminal operations, product bulk storage, as well as the ability to process contaminated methanol
(a chemical used in biodiesel production). We generated revenues during 2008 and 2009 from
biodiesel sales, methanol processing and terminal storage at this site.
On May 14, 2007, we acquired an inactive 18.5 megawatt (MW) (nameplate capacity) biomass
plant located in Southern California. The plant is owned by our wholly-owned subsidiary,
GreenHunter Mesquite Lake, Inc. (Mesquite Lake), which was formed for the purpose of operating
and owning
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assets which convert waste material to electricity. We began refurbishing this bio-mass plant
during July 2008 but ceased work during the fourth quarter of 2008 when we were informed that
certain required permits at the facility were not in place. On August 19, 2009 we entered into a
power purchase agreement with a major public utility based in Southern California.
On August 29, 2008, we acquired an existing 14 MW (nameplate capacity) wood waste-fired
biomass power plant located in Telogia, Florida. The biomass power plant, Telogia Power, LLC, and
an associated entity, Telogia Power Unit #2, LLC, (collectively, Telogia), were acquired from a
privately-held power plant operator. Due to financial constraints, as a result of hurricane damage
at our BioFuels facility and the global capital market deterioration, we began marketing our
Telogia plant for resale during the fourth quarter of 2008 and completed the divestiture during
February 2009 which resulted in a gain of $549 thousand.
Our Wind Energy segment remains in the development stage. We continue to hold existing rights
to potential wind energy farm locations in Texas, Wyoming, California, and Montana and to operate
and gather data produced from wind measurement equipment located on these sites.
Note 2. Principles of Consolidation and Basis of Presentation
The accompanying financial statements include the accounts of GreenHunter Energy, Inc. and our
wholly-owned subsidiaries, GreenHunter Wind Energy, LLC, GreenHunter BioFuels, Inc., GreenHunter
Mesquite Lake, LLC, and Telogia Power, LLC. We have also consolidated our 30% controlling interest
in Wheatland Wind Power, LLC, with noncontrolling interests recorded for the outside interests in
this entity. We wrote off our interests in Haining City Wind Energy, LLC at September 30, 2009 and
Wheatland Wind Power, LLC at December 31, 2009, resulting in a loss of $88 thousand and $918
thousand. All significant intercompany transactions and balances have been eliminated.
Note 3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
reported amounts. These estimates are based on information available at the date of the financial
statements. Therefore, actual results could differ materially from those estimates. Significant
estimates include the allocation of purchase price to assets and liabilities acquired and the
assessment of assets for impairment.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current year
presentation.
Cash and Cash Equivalents
Cash and cash equivalents include securities with maturities of 90 days or less at the date of
purchase. We have cash deposits in excess of federally insured limits.
Restricted Cash
Restricted cash consists of cash deposits related to our BioFuels business that are legally
restricted as to their use by the lending bank.
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Table of Contents
Accounts Receivable
Our accounts receivable balance at December 31, 2009 primarily consisted of accrued storage
revenue from our Houston plant.
Inventories
Raw material inventories consist of processed methanol, contaminated methanol, vegetable oil,
animal fat, and process chemical feedstocks to be processed in our Houston refinery. Inventory
also includes biodiesel finished product and work-in-process for our glycerin and biodiesel lines.
Inventories are stated at the lower of cost or market. Cost is determined using the average
method. See Note 7 for additional information on our inventories.
Property, Plant and Equipment
Property plant and equipment are stated at cost. Depreciation is computed using the
straight-line method based on the following useful lives:
Automobiles |
5 years | |||
Computer and office equipment |
5 to 7 years | |||
Plant equipment |
7 to 30 years | |||
Land improvements |
15 years | |||
Buildings |
31 years |
Depreciation expense of $4.3 million, $2.7 million, and $119 thousand was recorded for the
years ending December 31, 2009, 2008, and 2007, respectively. As described in Note 6, fair value
increases of $8.5 million were made to equipment and infrastructure purchased from CRC. These
costs did not begin depreciating until August 2008 as they were associated with the construction of
our biodiesel refinery. During construction of the plant, we capitalized interest of $1.1
million during the twelve months ended December 31, 2008. Material expenditures which increase the
life of an asset are capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of equipment sold, or otherwise disposed of, and the related accumulated
depreciation or amortization is removed from the accounts, and any gains or losses are reflected in
current operations.
Construction in progress totaling $10.8 million within Plant and other Equipment on our
balance sheet were assets not being depreciated at December 31, 2009, as they were not in use.
They will be placed in use and subject to depreciation once construction is completed on the
Mesquite Lake biomass plant. Items in Construction in Progress are not subject to depreciation
while they are under construction.
Deferred Financing Costs
Costs incurred in connection with issuing debt are capitalized and amortized as an adjustment
to interest expense over the term of the debt instrument using the interest method.
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Other Non-Current Assets
Other non-current assets at December 31, 2009 and 2008 included the following (in thousands):
2009 | 2008 | |||||||
Power Purchase Agreement |
$ | 300 | $ | | ||||
Investment in Ming Yang, at
cost |
| 7,016 | ||||||
Transmission service deposits |
| 222 | ||||||
Wheatland right of way |
| 735 | ||||||
Port Sutton lease option |
| 1,431 | ||||||
Total |
$ | 300 | $ | 9,404 | ||||
See Note 6 for additional information on the acquisitions of Ming Yang, Wheatland and the Port
Sutton options.
Noncontrolling Interest
Our noncontrolling interest is related to interests held in our Haining and Wheatland subsidiaries.
Our interests in these entities was abandoned during 2009 but for 2008, we consolidated our 85%
investment in Haining as a result of holding the majority of the voting rights, and we consolidated
our 30% investment in Wheatland, a variable interest entity, under ASC 810 as a result of being the
chief operating decision maker as well as being the primary beneficiary of this entity. Please see
Note 6 for additional information on these investments.
Impairments
We periodically evaluate whether events and circumstances have occurred that may warrant
revision of the estimated useful life of long-term assets or whether the remaining balance of
long-term assets should be evaluated for possible impairment. We compare the estimate of the
related undiscounted cash flows over the remaining useful lives of the applicable assets to the
assets carrying values in measuring their recoverability. When the future cash flows are not
sufficient to recover an assets carrying value, an impairment charge is recorded for the
difference between the assets fair value and its carrying value. During 2009 we recorded
impairments of $1.5 million related to our inability to pay the final lease option extension for
our Port Sutton lease, $218 thousand related to a deposit on a wind project that was cancelled, and
impairment of $170 thousand on equipment due to a reduction in value. We recorded an additional
$3.2 million and $19.1 million in 2009 and 2008, respectively, in impairments related to our
Biofuels campus due to significant doubt regarding the recoverability of our plant investment given
our liquidity and time constraints and the current economics of the biodiesel market.
Additionally, during 2008, we recorded impairments of $2.6 million related to the permits and power
purchase agreement acquired in our Mesquite Lake acquisition as the permits were determined to not
be sufficient for our planned operation of the plant and the power purchase agreement was
terminated to allow us to pursue a more valuable agreement with other utilities in the area of the
plant. There were no impairments in 2007.
Asset Retirement Obligations
The Company accounts for asset retirement obligations based on the guidance of ASC 410 which
addresses accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. ASC 410 requires that the fair value
of a liability for an assets retirement obligation be recorded in the period in which it is
incurred and the corresponding cost
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capitalized by increasing the carrying amount of the related long-lived asset. The liability
is accreted to its then present value each period, and the capitalized cost is depreciated over the
estimated useful life of the related asset. We have not recorded any asset retirement obligations
because we will conduct refinery operations and power generation predominately from waste
materials, and plan to continue to do so in the future. We never intend to cease operations or
retire all of our assets, and we cannot estimate costs that we do not intend to incur. We do not
believe we are subject to any reclamation obligations either now or in the future.
Repairs and Maintenance
We charge the cost of repairs and maintenance, including the cost of replacing minor items not
constituting substantial betterment, to selling, general and administrative expenses as these costs
are incurred.
Revenue recognition
We record revenues when the product has been delivered or the services have been provided to
the customer, the sales price is fixed or determinable, and collectability is reasonably assured.
Transportation, shipping and handling costs incurred on shipments to customers are included in
selling, general and administrative costs. Excise and other taxes collected from customers and
remitted to governmental authorities are not included in revenue.
Stock-Based Compensation
The Company accounts for share-based compensation in accordance with the provisions of the ASC
standards which require companies to estimate the fair value of share-based payment awards made to
employees and directors, including stock options, restricted stock and employee stock purchases
related to employee stock purchase plans, on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense
ratably over the requisite service periods. We estimate the fair value of each share-based award
using the Black-Scholes option pricing model. Certain of our grants have performance-based vesting
terms. We amortize the fair value of these awards over their estimated vesting terms which are
based on both the probability and estimated timing of the achievement of these performance goals.
See Note 11 for additional information on our stock-based compensation.
Income Taxes
We account for income taxes under the liability method. Deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. We measure and record income tax contingency accruals in
accordance with ASC 740, Income Taxes.
We recognize liabilities for uncertain income tax positions based on a two-step process. The
first step is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. It is inherently difficult and subjective to
estimate such amounts, as we must determine the probability of various possible outcomes. We
reevaluate these uncertain tax positions on a quarterly basis or when new information becomes
available to management. These reevaluations are based on factors including, but
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not limited to, changes in facts or circumstances, changes in tax law, successfully settled
issues under audit, expirations due to statutes, and new audit activity. Such a change in
recognition or measurement could result in the recognition of a tax benefit or an increase to the
tax accrual.
We classify interest related to income tax liabilities as income tax expense, and if
applicable, penalties are recognized as a component of income tax expense. The income tax
liabilities and accrued interest and penalties that are anticipated to be due within one year of
the balance sheet date are presented as current liabilities in our consolidated balance sheets.
Income or Loss Per Common Share
Basic net income or loss per common share is computed by dividing the net income or loss
attributable to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income or loss per common share is calculated in the
same manner, but also considers the impact to net income and common shares for the potential
dilution from stock options, stock warrants and any other outstanding convertible securities.
We have issued potentially dilutive instruments in the form of our convertible note payable,
8% Series A Preferred Stock, Series B Preferred Stock, common stock warrants and common stock
options granted to our employees. There were 37,469,761, 15,748,448, and 10,576,194 dilutive
securities outstanding at December 31, 2009, 2008, and 2007, respectively. We did not include any
of these instruments in our calculation of diluted loss per share during the period because to
include them would be anti-dilutive due to our net loss during the periods.
Note 4. Recently Issued Accounting Standards
In December 2007, FASB issued guidance related to Business Combinations under ASC 805,
Business Combinations, and guidance related to the accounting and reporting of noncontrolling
interest under ASC 810-10-65-1, Consolidation. This guidance significantly changes the accounting
for and reporting of business combination transactions and noncontrolling (minority) interests in
consolidated financial statements. This guidance became effective January 1, 2009 and did not have
a material impact on our financial statements.
In March 2008, the FASB issued guidance related to the disclosures about derivative
instruments and hedging activities under FASB ASC 815-10-50, Derivatives and Hedging. This
guidance requires companies to provide enhanced disclosures about (a) how and why they use
derivative instruments, (b) how derivative instruments and related hedged items are accounted for
under applicable guidance, and (c) how derivative instruments and related hedged items affect a
companys financial position, financial performance, and cash flows. These disclosure requirements
are effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Our adoption of ASC 815-10-50 on January 1, 2009 did not have a material impact
on our consolidated financial statements.
In June 2008, the FASB issued guidance to evaluate whether an instrument (or embedded feature)
is indexed to an entitys own stock under ASC 815-40-15, Derivatives and Hedging. The guidance
requires entities to evaluate whether an equity-linked financial instrument (or embedded feature)
is indexed to its own stock in order to determine if the instrument should be accounted for as a
derivative under the scope of ASC 815-10-15. This guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal
years. We adopted ASC 815-40-15 beginning January 1, 2009. The adoption of this guidance did not
have a material impact on our financial statements.
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Table of Contents
In May 2009, the FASB issued guidance related to subsequent events under ASC 855-10,
Subsequent Events. This guidance sets forth the period after the balance sheet date during which
management or a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet date. It requires
disclosure of the date through which an entity has evaluated subsequent events and the basis for
that date, whether that date represents the date the financial statements were issued or were
available to be issued. This guidance is effective for interim and annual periods ending after June
15, 2009. We adopted ASC 855-10 beginning June 30, 2009 and have included the required disclosures
in our consolidated financial statements. See Note 16 Subsequent Events in the Notes to
Consolidated Financial Statements for additional information.
In June 2009, the FASB issued an amendment to ASC 810-10, Consolidation. As a result, in
December 2009, the FASB issued ASC 2009-17, Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities. This guidance amends ASC 810-10-15 to replace the
quantitative-based risks and rewards calculation for determining which enterprise has a controlling
financial interest in a VIE with a primarily qualitative approach focused on identifying which
enterprise has the power to direct the activities of a VIE that most significantly impact the
entitys economic performance. It also requires ongoing assessments of whether an enterprise is the
primary beneficiary of a VIE and requires additional disclosures about an enterprises involvement
in VIEs. This guidance is effective as of the beginning of the reporting entitys first annual
reporting period that begins after November 15, 2009 and earlier adoption is not permitted. We are
currently evaluating the potential impact, if any, of the adoption of ASC 2009-17 on our
consolidated financial statements.
In June 2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC 105,
Generally Accepted Accounting Principles. This guidance states that the ASC will become the source
of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Once
effective, the Codifications content will carry the same level of authority. Thus, the U.S. GAAP
hierarchy will be modified to include only two levels of U.S. GAAP: authoritative and
non-authoritative. This is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. We adopted ASC 105 as of September 30, 2009 and thus have
incorporated the new Codification citations in place of the corresponding references to legacy
accounting pronouncements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities
at Fair Value, which amends ASC 820, Fair Value Measurements and Disclosures. This Update provides
clarification that in circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure the fair value using one or
more of the following techniques: a valuation technique that uses the quoted price of the identical
liability or similar liabilities when traded as an asset, which would be considered a Level 1
input, or another valuation technique that is consistent with ASC 820. This Update is effective for
the first reporting period (including interim periods) beginning after issuance. Thus, we adopted
this guidance as of December 31, 2009, which did not have a material impact on our consolidated
financial statements.
Note 5. Discontinued Operations
We completed the sale of the Telogia plant during February 2009 for total proceeds of
approximately $4.5 million cash received. We recorded a gain of approximately $443 thousand on the
disposal net of post closing adjustments.
The following table provides summarized income statement information related to Telogias
discontinued operations for the year ended December 31, 2009 and 2008:
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2009 | 2008 | |||||||
Sales and other revenues from discontinued operations |
$ | | $ | | ||||
Operating expenses from discontinued operations |
(215,832 | ) | (536,545 | ) | ||||
Other income from discontinued operations |
725,348 | 3,863 | ||||||
Net loss from discontinued operations |
$ | 509,516 | $ | (532,682 | ) | |||
During September 2009, we abandoned the assets and our interests in Haining City Wind
Energy, LLC (Haining City) resulting in a loss on asset abandonment of $88 thousand.
The following table provides summarized income statement information related to Haining Citys
discontinued operations for the year ended December 31, 2009 and 2008:
2009 | 2008 | |||||||
Sales and other revenues from discontinued operations |
$ | | $ | | ||||
Operating expenses from discontinued operations |
(61,080 | ) | (210,894 | ) | ||||
Other income from discontinued operations |
12,474 | 31,634 | ||||||
Net loss from discontinued operations |
$ | (48,606 | ) | $ | (179,260 | ) | ||
During December 2009, we abandoned the assets and our interests in Wheatland Wind Power,
LLC (Wheatland) resulting in a loss on asset abandonment of $918 thousand.
The following table provides summarized income statement information related to Wheatlands
discontinued operations for the year ended December 31, 2009 and 2008:
2009 | 2008 | |||||||
Sales and other revenues from discontinued operations |
$ | | $ | | ||||
Operating expenses from discontinued operations |
(87,211 | ) | (103,079 | ) | ||||
Other income from discontinued operations |
61,047 | 75,656 | ||||||
Net loss from discontinued operations |
$ | (26,164 | ) | $ | (32,423 | ) | ||
Note 6. Acquisitions and Divestitures
BioFuels
On April 13, 2007 we acquired all of the outstanding shares of CRC for $10.8 million. Our
purchase price consisted of $7.1 million in cash, $1.6 million in notes payable (net of discount of
$360 thousand), and 450 thousand shares of our common stock valued at $4.62 per share. The
acquisition was treated as a purchase of CRC in accordance with the provisions of ASC 805, Business
Combinations. The agreement provided for an adjustment to the cash portion of the purchase price
for working capital on hand to be settled within 60 days of closing, which reduced the cash portion
of the closing price to $6.8 million and reduced the total purchase price to $10.7 million. Please
see Note 8 for additional information on the notes issued in this transaction.
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The purchase price was allocated to the fair value of the net assets acquired. The following
table summarizes the purchase price and related allocation to the net assets acquired at April 13,
2007:
Total Purchase Price: |
||||
Fair value of 450,000 shares of GreenHunter common stock |
$ | 2,079,000 | ||
Cash consideration |
6,772,342 | |||
Fair value of 117,998 shares of GreenHunter
common stock exchanged for notes payable
originally issued at acquisition |
1,875,000 | |||
Total |
$ | 10,726,342 | ||
Net Preliminary Purchase Price Allocation: |
||||
Net purchase price |
$ | 10,726,342 | ||
Historical net assets acquired |
(419,146 | ) | ||
Excess purchase price |
10,307,196 | |||
Adjustment of land to fair market value |
(1,656,924 | ) | ||
Adjustment of inventory to fair market value |
(136,361 | ) | ||
Adjustment of equipment and infrastructure to fair market value |
(8,452,341 | ) | ||
Amortization of discount on notes payable to
interest expense |
(61,570 | ) | ||
Excess purchase price |
$ | | ||
Historical net assets acquired were as follows: |
||||
Current assets |
$ | 162,746 | ||
Property, plant and equipment, net |
981,915 | |||
Current liabilities |
(576,765 | ) | ||
Liabilities owed to GreenHunter |
(148,750 | ) | ||
Historical net assets acquired |
$ | 419,146 | ||
CRC, a Texas corporation, was established in 1994 to develop a 20.62 acre industrial
parcel of land located on the Houston ship channel into a waste oil recycling facility.
Subsequently, CRC decided to invest in more sophisticated processing equipment to convert the waste
oil recycling refinery into a specialty chemical manufacturing operation. CRC manufactured base
oils, lubricants, diesel fuels and naphtha through July 2007. CRCs operations were included in
our consolidated financial statements beginning April 14, 2007.
Port Sutton Acquisition
During October 2008, we issued 58,246 common shares with a value of $367 thousand and paid
$130 thousand in cash to acquire a lease option with three three-month option extension periods,
for a total of nine months, for twenty-two acres of waterfront acreage in Port Sutton, Florida.
The lease calls for $50 thousand to be paid for each of the first two option periods with a third
payment of $75 thousand to be made upon election of the third and final extension period. We paid
$100 thousand for the first and second option extensions.
In association with our purchase of the Port Sutton lease option, we agreed to issue
restricted shares to the Seller worth $2 million, subject to a floor price of $14.25 and ceiling of
$25. These shares were to be issued the sooner of 18 months from the October 2008 close date or
upon the first biodiesel production or storage at the site. Accordingly, we were to issue an
additional 80,000 to 140,351 shares.
During April 2009, the Company determined we were unable to make the final lease option
extension and as a result we abandoned the project and recorded an asset impairment to remove the
lease option deposits of $1.5 million from our balance sheet.
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Biomass
Mesquite Lake
During May 2007, we acquired an inactive 18.5 MW (nameplate capacity) biomass plant located in
El Centro, California, Mesquite Lake, for cash consideration of $1.4 million. We also acquired the
existing power purchase agreement between the former owner of the facility and an electric utility
company for 500 thousand shares of our common stock valued at $4.62 per share, or $2.3 million.
We entered separately into a five year consulting agreement with the former owner that allows
us the right to any deals developed by the consultant over the term of the agreement. The payment
terms of the consulting agreement included an initial payment of 300 thousand shares of our common
stock valued at $4.62 per share, or $1.4 million, which was allocated to the inactive 18.5 megawatt
plant acquired, along with quarterly cash payments for the duration of the consulting agreement of
$98 thousand per quarter beginning June 30, 2007. These quarterly cash payments are expensed to
general and administrative expenses as incurred. We suspended these payments during the fourth
quarter of 2008 pending the resolution of a dispute (as discussed below) with the former owner over
the validity of certain air permits that were in place at the plant at the time of acquisition.
We allocated the total consideration of $4.9 million as follows:
Land |
$ | 2,526,029 | ||
Machinery and Equipment |
98,582 | |||
Power Purchase Agreement |
1,652,704 | |||
Permits and Fees |
643,685 | |||
Total Purchase Price |
$ | 4,921,000 | ||
We began refurbishment of this plant during July 2008, but have temporarily halted
construction on this project due to liquidity restraints as well as a source review of the site by
the Environmental Protection Agency. During the source review, we determined that the existing air
permits were not sufficient to support the operation of the plant as we intend, which led us to
record an impairment on these permits of $644 thousand. We also decided to cancel the power
purchase agreement acquired in order to pursue a new agreement with another utility in the area of
the plant which management believes will result in higher pricing for power generated at the
Mesquite Lake facility. As a result, we also recorded an impairment of $1.7 million for the value
of the terminated power purchase agreement. Both of these impairments are included in loss on
asset impairments on our 2008 consolidated statement of operations.
Telogia
On August 29, 2008, we acquired 100% of the membership interests of Telogia BioPower for cash
consideration of $1.9 million and cancellation of a promissory note we issued to the seller of $600
thousand. The acquisition was treated as a purchase of Telogia in accordance with the provisions
of ASC 805, Business Combinations.
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The purchase price was allocated to the fair value of the net assets acquired. The following
table summarizes the purchase price and related allocation to the net assets acquired at August 28,
2008:
Total Purchase Price: |
||||
Cash consideration |
$ | 1,900,000 | ||
Debt assumed in transaction |
170,459 | |||
Cancellation of seller promissory note |
600,000 | |||
Total |
$ | 2,670,459 | ||
Net Purchase Price Allocation: |
||||
Net purchase price |
$ | 2,670,459 | ||
Land, Property, and Equipment |
(2,670,459 | ) | ||
Excess purchase price |
$ | | ||
The Company completed the sale of the Telogia plant during February 2009. See Note 5
Discontinued Operations for additional information.
Wind Energy
Ming Yang
On November 28, 2007 we entered into two separate definitive agreements with Guandong MingYang
Wind Power Technology Co., LTD (MingYang), a Chinese company which is a manufacturer of wind
turbines. The first was a subscription agreement for us to acquire a 6.3% equity interest in
MingYang for 75 million RMB. As of December 31, 2008, we had funded 45 million RMB of the
subscription agreement for approximately $7 million (including fees and commissions), and we held
an equity ownership of approximately 3.6%. The remaining 30 million RMB of the subscription
agreement was to be funded once certain conditions were met by MingYang and provided that we
obtained adequate funding for the investment.
The second agreement was a master turbine supply agreement executed by Wind Energy and
MingYang which allowed Wind Energy to potentially purchase more than 900 megawatts in capacity of
wind turbines manufactured by MingYang for use in wind projects to be developed between 2009 and
2012 in North America.
We issued 50 thousand shares of our common stock valued at $500 thousand for fees related to
these two agreements on December 20, 2007.
On October 28, 2009 we sold our equity ownership interest in Guangdong MingYang Wind Power
Technology Co., Ltd. for $9.1 million, resulting in a gain of $1.5 million.
Wheatland Wind Acquisition
During October 2008, we completed the acquisition of an initial 30% membership interest in a
wind development project in southeastern Wyoming (Wheatland). We issued 44,964 treasury shares
with a value of $315 thousand and paid cash of $420 thousand to complete the acquisition.
During December 2009, we abandoned the assets and our interests in Wheatland Wind Power, LLC
(Wheatland) resulting in a loss on asset abandonment of $918 thousand.
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Ocotillo Wind Project
On July 30, 2009 we sold our interest in the Ocotillo Wind Project for $250 thousand plus
future consideration of $750 thousand with an additional $25 thousand per MW of the nameplate
capacity of the
WTGs installed less the amount previously paid. The $250 thousand was subject to and
contingent upon the receipt of regulatory approval, which was granted on October, 2009. The future
consideration is contingent upon the project developer achieving success with the development, and
any future sale proceeds will be recognized at that time.
Pro Forma Financial Information
The following summary, prepared on a pro forma basis, presents the results of operations for
the year ended December 31, 2007, as if the acquisitions of CRC and Mesquite Lake as well as the
private placement of preferred stock described in Note 9 had occurred at the beginning of 2007.
The pro-forma information includes the effect of adjustments for general and administrative
expense, interest income, interest expense and preferred dividends. 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 2007, nor are they necessarily indicative of future consolidated results.
PRO FORMA RESULTS OF OPERATIONS
(Unaudited)
(Unaudited)
Year Ended | ||||
December 31, | ||||
2007 | ||||
Total operating revenues |
$ | 1,597,637 | ||
Operating costs and expenses |
7,519,711 | |||
Employee stock option expense |
6,321,321 | |||
Total operating costs and expenses |
13,841,032 | |||
Operating loss |
(12,243,395 | ) | ||
Other income and (expense) |
(121,116 | ) | ||
Net loss |
(12,364,511 | ) | ||
Dividends on preferred stock |
(1,949,671 | ) | ||
Net loss to common stockholders |
$ | (14,314,182 | ) | |
Net loss per common share, basic and diluted |
$ | (0.77 | ) | |
Note 7. Inventories
Our finished goods inventories consist of processed methanol and biodiesel, and our raw
materials inventory includes contaminated methanol, animal fat, process chemicals, and vegetable
oil feedstocks to be processed by our Houston facility. Our inventories at December 31, 2009 and
2008 consisted of the following:
2009 | 2008 | |||||||
Finished goods |
$ | | $ | 3,262,873 | ||||
Work in process |
| 520,571 | ||||||
Raw materials |
179,322 | 2,354,336 | ||||||
$ | 179,322 | $ | 6,137,780 | |||||
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We recorded a lower of cost or market adjustment related to our inventories during the year
ended December 31, 2008 of $4,549,262. This adjustment is reflected in costs of sales and services
in our 2008 consolidated statement of operations.
NOTE 8. NOTES PAYABLE
Notes Payable at December 31, 2008 and 2007 consisted of the following:
2009 | 2008 | |||||||
Note payable due June 17, 2010, 7.0% |
$ | 79,820 | $ | | ||||
Note payable due February 2, 2010, 6.1% |
79,820 | | ||||||
Note payable due November 31, 2017, 5.7% |
3,072,766 | 3,147,927 | ||||||
Note payable due March 15, 2009, 3.84% |
| 421,817 | ||||||
Non-recourse construction facility, 4.26%
and 4.47% at December 31, 2009 and 2008,
respectively |
28,633,780 | 33,500,000 | ||||||
Working capital line of credit, 4.26% and
4.47% at December 31, 2009 and 2008,
respectively |
9,046,054 | 10,000,000 | ||||||
10% Series A Senior Secured Redeemable
Debentures, net of $1,007,039 and
$1,435,378 discount, respectively |
20,027,109 | 19,598,770 | ||||||
9% Series B Senior Secured Redeemable
Debentures, net of $40,069 and $49,628
discount, respectively |
5,261,739 | 3,540,287 | ||||||
66,121,267 | 70,208,801 | |||||||
Less: current portion |
(37,849,374 | ) | (7,268,519 | ) | ||||
Total Long-Term Debt |
$ | 28,271,893 | $ | 62,940,282 | ||||
The following table presents the approximate annual maturities of debt as of December 31, 2009:
2010 |
$ | 37,849,374 | ||
2011 |
92,322 | |||
2012 |
100,049 | |||
2013 |
7,437,534 | |||
Thereafter |
20,641,988 | |||
$ | 66,121,267 | |||
Notes Payable
In connection with the acquisition of CRC, we issued $2 million principal value in notes
payable to the former owners. The notes carried a term of seven years and bear an annual interest
rate of 5% payable quarterly, with interest only payable for the first two years and equal
quarterly amortization of principal plus interest over the remaining five years. We recorded these
notes at a value of $1.6 million, with a discount of $360 thousand based upon its estimated
risk-adjusted interest rate of 10% which was amortized to interest expense over the term of the
notes. On January 18, 2008, the remaining balance of these notes payable issued in connection with
the acquisition of CRC in the face amount of $1.875 million was exchanged for 117,998 shares of our
common stock valued at $15.89 per share.
This value was determined by averaging the closing prices for the ten day trading period
ending on January 18, 2008. Due to the short amount of time that our stock was listed on the
American Stock Exchange at the time of the exchange, we and the note holders did not believe the
closing price on January 18, 2008 represented an accurate fair market value of the stock. Our
listing in early January, 2008 caused abnormal volatilities in our trading volume and pricing, so
the ten day average was used to reduce the volatility in the price of the stock. We believe that
this price reflects a more reasonable
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estimate of the fair value of our stock at the time of the exchange. Because we did not use
the closing quoted price of our stock on the date of the exchange, we moved to a Level II input as
defined by ASC 820. The remaining unamortized discount of $272 thousand on the notes was applied
to the purchase price of CRC.
On November 30, 2007, we purchased real estate which included two office buildings for use as
our corporate headquarters. The purchase price of the real estate was approximately $3.7 million.
We obtained a bank loan of approximately $3.1 million in connection with this purchase. The
terms of the loan include monthly payments of interest only at prime minus 85 basis points (.85%)
for one year and monthly principal and interest payments thereafter amortized on a 25 year basis,
with all remaining principal becoming due on November 30, 2017. In July 2008, the terms of the
note were amended to a fixed interest rate of 5.70%.
During May 2008, we financed our annual insurance premiums for our Houston refinery in the
amount of $1.2 million. During July 2008, we added builders risk insurance premiums for the
construction related to the Mesquite Lake biomass plant in the amount of $147 thousand, and we also
added builders risk insurance premiums for the construction related to the Telogia plant in the
amount of $186 thousand during August. The total amended note in the amount of $1.6 million
incurred interest at a fixed rate of approximately 3.84% and was paid off in March 2009.
During May 2009, we financed a portion of our annual insurance premiums for our Houston
refinery in the amount of $221,560. The note bears interest at a fixed rate of 6.1% and is payable
in monthly installments through February 2, 2010.
During September 2009, we financed a portion of our annual corporate insurance premiums in the
amount of $76,762. The note bears interest at a fixed rate of 7.0% and is payable in monthly
installments through June 17, 2010.
In connection with our Telogia acquisition, we acquired three capital leases for equipment at
the plant site. During the fourth quarter 2008, we began actively marketing our Telogia plant and
all related assets and liabilities. Accordingly, these capital leases are included in our current
and non-current liabilities associated with assets held for sale at December 31, 2008. Please see
Note 6 Acquisitions and Divestitures for additional information on our Telogia plant.
Notes Payable Nonrecourse
On December 20, 2007, BioFuels entered into a credit agreement with a bank which provided for
a $38.5 million construction/term loan facility and a $5 million working capital facility in
connection with our development, construction and operation of a 105 million gallon per year
biodiesel refinery, as well as glycerin and methanol, and terminal assets located in Houston,
Texas. During the first quarter of 2008, we amended the credit agreement to reduce the
construction/term loan portion of the facility to $33.5 million and to increase the working capital
portion of the facility up to $10 million. The construction/term loan portion of the facility is
for a term of six years and the working capital facility revolves annually upon conversion of the
construction loan to a term loan. Both facilities have prime (prime plus 3%) and LIBOR (LIBOR plus
4%) based interest rate options.
During March 2009, we determined we were not in compliance with certain covenants of our
non-recourse construction loan and non-recourse working capital line of credit at BioFuels.
Accordingly, we have classified the entire amounts due under both of these agreements as current
liabilities at December 31, 2009. On December 16, 2009, the Credit Agreement for the non-recourse
construction and working capital loans was amended. Pursuant to the terms and conditions of the
amendment, the lender
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has agreed to waive any claims of events of default until March 31, 2010.
The agreement was further amended on March 30, 2010 to extend until April 30, 2010. Additionally,
due to the settlement of certain business interruption and property damage insurance claims with
various underwriters related to damages sustained at GreenHunter BioFuels from Hurricane Ike in
September, 2008, the lender received a significant paydown of approximately $4.5 million on its
non-recourse construction and working capital loans in July 2009. If we do not close on a sale or
other transaction to repay the note by April 30, 2010, the bank has the right to seize BioFuels
cash on hand at that date and foreclose on the BioFuels refinery
in Houston. We are talking with the bank about extending the current deadline to allow more
time and we are talking with potential buyers.
These loans are non-recourse to GreenHunter Energy and are fully secured by certain assets at
our BioFuels refinery.
Subordinated Convertible Note Payable to Related Party
On January 1, 2008, the note plus accrued interest on our Convertible Note Payable to
Investment Hunter, LLC (a related party) was renewed and extended through the issuance of a
GreenHunter subordinated convertible note in the amount of $3.1 million with interest at an annual
rate of 10%. The note is a general, unsecured obligation of GreenHunter and is subordinate to any
and all of our secured loans. The note is convertible at the option of the holder into our common
stock at a conversion price of $5.00 per share for the original principal balance of $2.8 million
and at a conversion price of $12.00 for the $285 thousand of accrued interest previously rolled
into the note at the renewal. The notes may be converted at any time by the holder up to the
payment due date. On August 29, 2008, the holder elected to convert the entire note per the
agreement. Accrued interest of $208 thousand was paid to the holder upon conversion. Please see
Note 10 Stockholders Equity for additional information.
10% Series A Senior Secured Redeemable Debentures
Approximately $13.7 million of our 10% Series A Senior Redeemable Debentures (Series A
Debentures) were issued during the year ended December 31, 2008. Since inception of this series,
we have issued approximately $21 million of these debentures, resulting in net proceeds of
approximately $18.9 million. These debentures are non-recourse to GreenHunter Energy, and are
secured by our GreenHunter BioFuels, Inc. common stock. This offering was cancelled during April
of 2008, and all proceeds were received by June 30, 2008.
The Series A Debentures were offered in a private placement and have not been registered. The
debentures have a term of five years from the date of issue and may be exchangeable at our option
into freely tradable shares of our common stock. We have the right to call for redemption at any
time. If redeemed, we would be required to pay a redemption price, in cash and/or common stock,
equal to the following percentage of the principal amount depending on the year after issuance:
105% during the first year, 104% during the second year, 103% during the third year, and 102%
during the fourth year and continuing through maturity.
During April through December 2009, we were unable to make the interest payments on these
debentures. These debentures are secured by GreenHunter Energys ownership interest in GreenHunter
BioFuels common stock and are otherwise non-recourse to GreenHunter Energy.
9% Series B Senior Secured Redeemable Debentures
During July 2008, we announced the offering of a 9% Series B Senior Secured Redeemable
Debentures (Series B Debentures). These debentures have a term of five years and may be
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exchangeable into shares of our common stock after one year, at our option. These debentures are
non-recourse to GreenHunter Energy, and are secured by our GreenHunter Mesquite Lake, Inc. common
stock. Since inception of this series, we have issued approximately $5.3 million of these
debentures, resulting in net proceeds of approximately $4.9 million. This offering was cancelled
during April of 2009.
NOTE 9. INCOME TAXES
At December 31, 2009, we had available for U.S. federal income tax reporting purposes, a
net operating loss (NOL) carry forward for regular tax purposes of approximately $75 million which
expires in varying amounts during the tax years 2010 through 2029. No provision for federal income
tax expense or benefit is reflected on the statement of operations for the year ended December 31,
2009 because we are uncertain as to our ability to utilize our NOL in the future.
The following is a reconciliation of the reported amount of income tax expense (benefit) for
the years ended December 31, 2009, 2008 and 2007 to the amount of income tax expense that would
result from applying domestic federal statutory tax rates to pretax income:
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Statutory tax expense (benefit) |
$ | (5,242 | ) | $ | (22,513 | ) | $ | (4,092 | ) | |||
Change in valuation allowance |
4,245 | 21,753 | 4,076 | |||||||||
Interest expense disallowed for tax |
995 | 745 | | |||||||||
Effect of other permanent differences |
2 | 15 | 16 | |||||||||
Total Tax Expense |
$ | | $ | | $ | | ||||||
The components of our deferred income taxes were as follows for the years ended December 31,
2009 and 2008:
2009 | 2008 | |||||||
(in thousands) | ||||||||
Deferred tax assets: |
||||||||
Domestic net operating loss |
$ | 25,560 | $ | 15,802 | ||||
Capital loss carryforward |
77 | 61 | ||||||
Stock options |
4,193 | 3,954 | ||||||
Property, equipment & project costs |
| 4,605 | ||||||
Deferred tax liability: |
||||||||
Property, equipment & project costs |
(1,467 | ) | | |||||
Net deferred tax assets |
28,363 | 24,422 | ||||||
Less valuation allowances |
(28,363 | ) | (24,422 | ) | ||||
Net deferred tax |
$ | | $ | | ||||
In June 2006, the FASB issued ASC 740 Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109. We adopted ASC 740 on January 1, 2007. Under ASC 740,
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tax benefits are recognized only for tax positions that are more likely than not to be sustained
upon examination by tax authorities. The amount recognized is measured as the largest amount of
benefit that is greater than fifty percent likely to be realized upon ultimate settlement.
Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these
recognition and measurement standards.
Upon the adoption of ASC 740, we had no liabilities for unrecognized tax benefits, and, as
such, the adoption had no impact on our financial statements, and we have recorded no additional
interest or penalties. The adoption of ASC 740 did not impact our effective tax rates.
Our policy is to recognize potential interest and penalties accrued related to unrecognized
tax benefits within income tax expense. For the years ended December 31, 2009, 2008, and 2007, we
did not recognize any interest or penalties in our consolidated condensed statement of operations,
nor did we have any interest or penalties accrued in our consolidated condensed balance sheet at
December 31, 2009 and 2008 relating to unrecognized tax benefits.
In May 2006, the Governor of Texas signed into law a Texas margin tax (H.B. No. 3) which
restructures the state business tax by replacing the taxable capital and earned surplus components
of the current franchise tax with a new taxable margin component. Specifically, we are subject
to a new entity level tax on the portion of our total revenue (as that term is defined in the
legislation) that is generated in Texas beginning in our tax year ending December 31, 2008.
Specifically, the Texas margin tax is imposed at a maximum effective rate of 0.7% of our total
revenue that is apportioned to Texas. The new tax had no material impact on our financial
statements.
The tax years 2006-2009 remain open to examination for federal income tax purposes and by the other
major taxing jurisdictions to which we are subject. The tax years 2005-2009 remain open for the
Texas Franchise tax.
Note 10. Stockholders Equity
The following table reflects changes in our outstanding common stock, preferred stock and
warrants during the periods reflected in our financial statements:
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Table of Contents
Preferred | Common | Treasury | ||||||||||||||||||
Stock | Stock | Stock | KSOP | Warrants | ||||||||||||||||
December 31, 2006 |
| 15,000,055 | | | - | |||||||||||||||
Issue preferred shares in private placement |
12,500 | |||||||||||||||||||
Issue common shares to acquire GreenHunter BioFuels, Inc. |
450,000 | |||||||||||||||||||
Issue common shares to acquire power purchase agreement |
500,000 | |||||||||||||||||||
Issue common shares for fees on biomass plant acquisition |
300,000 | |||||||||||||||||||
Issue common shares in private placement |
3,448,168 | |||||||||||||||||||
Issue common shares for commissions on investments and private
placements of common stock |
60,950 | |||||||||||||||||||
Issue common stock warrants in private placement of preferred and
common stock |
2,807,834 | |||||||||||||||||||
December 31, 2007 |
12,500 | 19,759,173 | | | 2,807,834 | |||||||||||||||
Issue 117,998 shares for note payable exchange |
117,998 | |||||||||||||||||||
Issue 841,363 warrants on the 10% Series A Redeemable Debentures |
841,363 | |||||||||||||||||||
Issue 89,747 warrants on the 9% Series B Redeemable Debentures |
89,747 | |||||||||||||||||||
Issue 594,011 shares upon note conversion |
594,011 | |||||||||||||||||||
Issue 173,750 shares on warrant exercises |
173,750 | (173,750 | ) | |||||||||||||||||
Issue 253,000 on option exercises |
253,000 | |||||||||||||||||||
Cancellation of 1,410,000 warrants surrendered |
(1,410,000 | ) | ||||||||||||||||||
Issue 1,410,000 warrants on series B preferred stock |
1,410,000 | |||||||||||||||||||
Issue 10,575 Series B Preferred Shares in private placement |
10,575 | |||||||||||||||||||
Issue 173,750 warrants for stock option exercise inducement |
173,750 | |||||||||||||||||||
Employer match of 5,512 shares to KSOP |
5,512 | |||||||||||||||||||
Issue 58,246 shares for Port Sutton lease option acquisition |
58,246 | |||||||||||||||||||
Issue 27,186 shares for executive compensation |
27,186 | |||||||||||||||||||
Issue 44,964 treasury shares for Wheatland acquisition |
(44,964 | ) | ||||||||||||||||||
Loan of 15,200 shares to KSOP |
15,200 | |||||||||||||||||||
Purchase 89,400 shares for treasury |
89,400 | |||||||||||||||||||
Issue 2,470,004 warrants for stock dividend to common and preferred |
2,470,004 | |||||||||||||||||||
December 31, 2008 |
23,075 | 20,988,876 | 44,436 | 15,200 | 6,208,948 | |||||||||||||||
Conversion of Series A Preferred Shares |
(5,750 | ) | 1,150,000 | |||||||||||||||||
Issue warrants on 9% Series B Redeemable Debentures issuances |
42,797 | |||||||||||||||||||
Issue 22,024 treasury shares for services provided |
(22,024 | ) | ||||||||||||||||||
December 31, 2009 |
17,325 | 22,138,876 | 22,412 | 15,200 | 8,721,749 | |||||||||||||||
Preferred Stock
Series A Preferred
On March 9, 2007, we authorized and established a series of preferred stock that was
designated as 2007 Series A 8% Convertible Preferred Stock (Series A Preferred). This series
was constituted as 12,500 shares with a stated value per share initially set equal to $1,000. On
March 12, 2007, we executed a securities purchase agreement with institutional investors whereby we
agreed to issue to such institutional investors the following securities of the company for an
aggregate consideration of $15 million: $12.5 million in principal amount of our Series A
Preferred, 500 thousand shares of our common stock at $5.00 per share and 1.5 million common stock
purchase warrants at an exercise price of $7.50 per warrant (of which 1,250,000 warrants were
allocable to the holders of the Series A Preferred).
We allocated $4.62 to each share of common stock and $0.76 to each common stock warrant in
establishing the fair value of these securities. Gross proceeds of $15 million ($14.95 million net
of expenses) were received by us thereafter through May 15, 2007 from the issuance of the preferred
and common stock and the common stock warrants to these institutional investors. The warrants are
described further below.
The Series A Preferred provides for a cumulative dividend that may be payable at our option in
cash or shares of common stock at 115% of the cash dividend payable and using the 10-day average
price per share of common stock. A holder of the Series A Preferred has the right to convert these
shares at any time into shares of common stock at a conversion price of $5.00 per common share. We
may force conversion at any time subject to the following conditions: (i) the closing price of our
common stock exceeds $20.00 for thirty-one trading days, and (ii) the average trading volume of the
shares over the
F-24
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same 31-day period equals or exceeds 65,000 shares. After five years, we may
redeem the preferred stock for cash. Other provisions of the this series of preferred stock
include a liquidation preference, anti-dilution provisions, voting rights equal to the common
shareholders and other protective provisions.
During March 2009, the holders of 400 shares of our Series A Preferred Stock elected to
convert their preferred shares into common shares. We issued 80,000 shares of common stock upon
the conversion.
During April 2009, the holders of 350 shares of our Series A Preferred Stock elected to
convert their preferred shares into common shares. We issued 70,000 shares of common stock upon
the conversion.
During June 2009, the holders of 5,000 shares of our Series A Preferred Stock elected to
convert their preferred shares into common shares. We issued 1,000,000 shares of common stock upon
the conversion.
We were not able to pay dividends on our Series A Preferred Stock for the quarters ending
December 31, 2008, March 31, 2009, June 30, 2009, and September 30, 2009. In accordance with the
terms of this preferred stock, accrued dividends of $484 thousand on June 30, 2009 and $372
thousand on September 30, 2009, were added to the stated value of the preferred stock. This
additional $856 thousand in stated value will accrue dividends at a 10% rate. For the year ended
December 31, 2008, we paid cash dividends of $750 thousand on this preferred stock and had $250
thousand in dividends payable on our balance sheet.
Series B Preferred
On August 21, 2008, we authorized and established a series of preferred stock that was
designated as 2008 Series B Convertible Preferred Stock (Series B Preferred). This series was
constituted as 10,575 shares with a stated value per share equal to $1,000. We executed a
securities purchase agreement with the buyer at this time whereby the buyer returned 1,410,000
their existing $7.50 common stock warrants and paid $10.6 million in cash (net of expenses) to
GreenHunter, and we issued 10,575 shares of the Series B Preferred and 1,410,000 common stock
warrants with an exercise price of $25.00. We cancelled the $7.50 common stock warrants which were
returned to us in this transaction.
The Series B Preferred does not provide for any preferential dividends. A holder of the
Series B Preferred has the right to convert these shares at any time into shares of common stock at
a conversion price of $7.50 per common share. We may force conversion at any time subject to the
following conditions: (i) the closing price of our common stock exceeds $20.00 for thirty-one
trading days, and (ii) the average trading volume of the shares over the same 31-day period equals
or exceeds 65,000 shares. After five years, we may redeem the preferred stock for cash. Other
provisions of the this series of preferred stock include a liquidation preference, anti-dilution
provisions, voting rights equal to the common shareholders and other protective provisions.
We recorded a deemed preferred dividend of $13.9 million in relation to the Series B Preferred
which reflects the excess of the fair value of the securities issued in the transaction over the
carrying value of the warrants cancelled. We also recorded a deemed dividend of $666 thousand
related to the beneficial conversion feature of the stock at the time of the placement.
Common Stock
We have 90,000,000 authorized shares of common stock. We may not pay any dividends on our
common stock until all Series A cumulative preferred dividends have been satisfied.
During March 2007, in association with our Series A Preferred private placement described
above, we issued 500,000 shares of our common stock at $5.00 per share.
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Table of Contents
During April 2007 we issued one million shares of our common stock at $5.00 per share along
with 500,000 common stock purchase warrants in a private placement exempt from registration under
the Securities Act of 1933. Total proceeds from the issue were $5.0 million before selling and
other expenses. We allocated $4.62 to each share of common stock and $0.76 to each common stock
warrant in establishing the fair value of these securities.
During October and November 2007, we issued 200,000 and 30,000 shares, respectively, of our
common stock in private placements of securities. During December 2007, we closed on two private
placements of securities with accredited investors. We issued 1,615,668 shares of our common stock
along with 807,834 warrants in one private placement and issued 102,500 shares of our common stock
in the other. Proceeds from these fourth quarter private placements were approximately $22.7
million net of selling costs. We allocated $10.64 to each share of common stock and $2.72 to each
common stock warrant in establishing the fair value of these securities.
Also during December 2007, we issued 10,950 shares of our common stock, in lieu of cash,
valued at $120 thousand for commissions paid on the private placement, and we also issued 50
thousand shares of our common stock valued at $500 thousand for fees related to two separate
definitive agreements with MingYang. See Note 6 Acquisitions and Divestitures for further
discussions on the agreements with MingYang.
During February 2008, we issued 117,998 shares, valued at $15.89 per shares, of our common
stock in a debt extinguishment transaction that retired the original notes issued in connection
with the acquisition of CRC. See Note 8 Notes Payable for further discussions on the
transaction.
During August 2008, we issued 594,011 shares of our common stock in a debt extinguishment
transaction that retired the subordinated convertible note payable to related party. Please see
Note 8 Notes Payable for further discussions on the transaction.
During October 2008, we issued 58,246 shares, valued at $6.30 a share to acquire a lease
option for property in Port Sutton, Florida. Please see Note 6 Acquisitions and Divestitures
for additional information on this purchase.
During 2008, we issued 5,512 shares at $18.91 per share of our common stock to the GreenHunter
Energy, Inc 401(k) Employee Stock Ownership Plan (KSOP) as a voluntary employer match for the
2007 plan year and issued 1,667 shares at $19.19 per share as an employment inducement grant.
During 2008, we also issued 426,750 shares of our common stock at an average price of $5.53
per share and pursuant to the exercise of 426,750 of our outstanding warrants and options. We
received proceeds of $2.4 million.
During the year ended December 31, 2008, we issued 27,186 shares of our common stock at $18.91
per share for executive compensation.
During 2009, we issued 1,150,000 shares of our common stock to holders of our Series A
Preferred Stock in association with the conversion of 5,750 shares of the preferred as described
above.
Treasury Stock
During 2008, we bought back 89,400 shares of our common stock as treasury for $1.4 million.
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Table of Contents
During October 2008, we issued 44,864 shares of our treasury shares valued at $316 thousand to
complete the acquisition of our interests in Wheatland Wind Power, LLC. Please see Note 6
Acquisitions and Divestitures for additional information on this purchase.
During July 2009, we issued 22,024 shares of our treasury stock with a value of $37 thousand
for payment of services provided.
Common Stock Warrants
In association with the Series A placement, we issued 1.5 million common stock warrants. Each
of these warrants entitle the holder thereof to purchase one share of our common stock at $7.50 per
share until the expiration date of five years after issuance. We can cause the warrant to be
exercised after one year from March 12, 2007, if our common stock is trading at an average price
over the prior 10 consecutive days of at least $12.50 per share. The warrants contain customary
anti-dilution provisions. Additionally, the warrants issued in connection with the preferred stock
were treated as a dividend paid on the preferred stock upon their issuance, with a fair value of
$950 thousand. In association with our Series B Preferred issuance, we cancelled 1.4 million of
these warrants when they were returned to the company.
In association with our April 2007 common stock placement, we issued 500 thousand common stock
warrants. Each common stock purchase warrant entitles the holder thereof to purchase one
share of our common stock at $7.50 per share at any time prior to the expiration date of April 5,
2012. We can cause the warrants to be exercised after April 5, 2008 if our common stock is trading
at an average price over the prior ten consecutive days of at least $12.50 per share. The warrants
contain customary anti-dilution provisions.
We estimated the fair value of the warrants issued in March and April of 2007 using the
Black-Scholes option pricing method and the following assumptions:
Risk Free Interest Rate |
4.01 | % | ||
Expected Life (a) |
2 years | |||
Expected volatility (b) |
52 | % | ||
Dividend yield |
| |||
Weighted average fair value of each warrant |
$ | 0.76 |
(a) | The warrants have a life of five years, but we expect to be able to force the exercise of the warrants in two years. | |
(b) | The expected volatility of our common stock was estimated using an average of volatilities of publicly traded companies in similar renewable energy businesses. |
In association with our December 2007 common stock placement, we issued 807,834 common stock
warrants. Each of these warrants entitles the holder to purchase a share of our common stock for
$18.00 per share. These warrants are exercisable immediately and expire three years from the issue
date. The warrants are callable by us if our common stock trades at an average price at or above
$24.00 per share for the previous ten trading days.
We estimated the fair value of these warrants using the Black-Scholes option pricing method
and the following assumptions:
Risk Free Interest Rate |
3.2 | % | ||
Expected Life |
3 years |
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Expected volatility (a) |
58 | % | ||
Dividend yield |
| |||
Weighted average fair value of each warrant |
$ | 2.72 |
(a) | The expected volatility of our common stock was estimated using an average of volatilities of publicly traded companies in similar renewable energy businesses. |
During the second quarter of 2008, we issued warrants to our 10% Debenture holders (Debenture
Warrants) after the close of the Debenture program. We issued one Debenture Warrant for each $25
of Debentures purchased through April 30, 2008. These warrants have a three-year term beginning
April 30, 2008 and will entitle the holder to purchase one common share of our stock at an exercise
price of $25. The Debenture Warrants will be callable by GreenHunter if our common stock trades
over $30 per share over a 10-day trading period, beginning two years after issuance. Upon the
issuance of these warrants, we recorded a discount on our debentures of $1.7 million which will be
amortized to expense over the contractual term of the related debenture. The discount was
determined based on the relative fair values of the warrants (as determined by the Black-Scholes
options pricing model) and the Debentures.
During the third quarter of 2008, we issued 2,470,004 warrants with a strike price of $27.50
to our common stock and preferred stock holders as dividends. We issued an additional 173,750
warrants with a
strike price of $25.00 for exercise inducements. We recorded a common dividend of $3.2 million and
deemed preferred dividends of $599 thousand on our warrant dividends.
During the fourth quarter of 2008, we issued 89,747 warrants upon the issuance of our Series B
Debentures. Under our Series B Debenture offering, subscribers are entitled to 125 warrants for
each $5,000 in principal issued. Warrant pricing was $25 for units acquired prior to October 15,
2008, $27.50 for units acquired after October 15, 2008 but prior to November 15, 2008, and $30.00
for units acquired after November 15, 2008. These warrants are exercisable immediately upon
issuance and have a three-year life. We can require the warrant be exercised after one year of
issuance if our common stock is trading at an average price of at least $35.00 per share over the
prior 10 consecutive days of trading. These warrants contain customary anti-dilution provisions.
We allocated the proceeds from our Series B Debentures issued based on the relative fair
values of the debentures and warrants. We estimated the fair value at the Series B warrants using
the Black-Scholes option pricing model and the following weighted-average assumptions:
Risk-Free Interest Rate |
1.63 | % | ||
Expected Life |
3 years | |||
Expected Volatility(a) |
54.21 | % | ||
Dividend Yield |
| |||
Weighted-average fair value per warrant |
$ | 0.59 |
(a) | The expected volatility of our common stock was estimated leased on an average of volatilities of publicly traded companies in similar renewable energy businesses. |
During the first quarter of 2009, we issued an additional 42,797 warrants upon the
issuance of our Series B Debentures.
The following is a summary of warrant activity for the three years ended December 31, 2009.
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Table of Contents
2009 | 2008 | 2007 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Number of | Exercise | Number of | Exercise | Number of | Exercise | |||||||||||||||||||
Warrants | Price | Warrants | Price | Warrants | Price | |||||||||||||||||||
Outstanding Beginning of Year |
6,208,948 | $ | 10.52 | 2,807,834 | $ | 10.52 | | $ | | |||||||||||||||
Granted |
42,797 | 30.00 | 4,984,864 | 26.28 | 2,807,834 | 10.52 | ||||||||||||||||||
Exercised |
| | (173,750 | ) | 7.50 | | | |||||||||||||||||
Cancelled |
| | (1,410,000 | ) | 7.50 | | | |||||||||||||||||
Outstanding End of Year |
6,251,745 | $ | 23.98 | 6,208,948 | $ | 23.94 | 2,807,834 | $ | 10.52 | |||||||||||||||
Exercisable End of Year |
6,251,745 | $ | 23.98 | 6,208,948 | $ | 23.94 | 2,807,834 | $ | 10.52 |
Note 11. Stock-Based Compensation
We account for our stock-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.
Common Stock Options
During May 2007, the Board of Directors authorized the issuance of 3.5 million stock options
to current employees. The options were issued with an exercise price of $5.00 per share, which was
in excess of the estimated fair value per share of $4.62 on that date. The options have a life of
ten years and vested immediately upon issuance.
Also during 2007, the Board of Directors authorized the issuance of 131,500 shares of stock
options to current employees. The options were issued at exercise prices ranging from $10.00 to
$12.50 per share with estimated fair values ranging from $10.00 to $10.64 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 grate. Also during 2007, as compensation for joining the Board, 400,000 shares of stock options
were granted to the Board of Directors at prices ranging from $7.50 to $10.00 with an estimated
fair value of $10.64 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.
During 2008, the Board of Directors authorized the issuance of 3,290,000 shares of stock
options to current employees. The options were issued at exercise prices ranging from $10.00 to
$22.75 per share with fair values ranging from $10.12 to $22.75 per share. Of these options
issued, 474,000 have a life of ten years and vested immediately, 1,742,000 vest upon performance
conditions being met, 946,000 have a life of 10 years and vest in equal amounts over a three year
period beginning with the date of grant, and 28,000 have a life of 10 years and vest two years from
the date of grant. Also during 2008, as compensation for joining the Board, 100,000 shares of
stock options were granted to a Board of Director at a price of $10.00 and a fair value of $18.91
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.
During June, 2009 as compensation for joining the Board 100,000 shares of stock options were
granted to a Board Member at a strike price of $.97 with an estimated fair value of $.52 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.
F-29
Table of Contents
During August, 2009, the Board of Directors authorized the issuance of 1,961,000 shares of
stock options to current employees. The options were issued at an exercise price of $1.96 with an
estimated fair value of $1.13 per share. The options have a life of 10 years and vest in equal
amounts over a three year period beginning with the date of grant.
During August, 2009 as compensation for continued service on the Board, 100,000 shares of
stock options were granted to a Board Member at a strike price of $1.96 with an estimated fair
value of $1.13 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.
During December, 2009 the Board of Directors authorized the grant of 500,000 shares of stock
options to current employees. The options have a strike price of $1.41, an estimated fair value of
$0.82 per share and a term of 10 years. Of these options, 100,000 vest after 1 year of service and
400,000 vest upon performance conditions being met.
We recorded share-based compensation expense of $702 thousand, $8.2 million, and $6.3 million
during 2009, 2008, and 2007, respectively. These expenses are included in our selling, general and
administrative expenses.
Cash received from option exercises under all share-based payment arrangements for the year
ended December 31, 2008 was approximately $1.3 million. No option exercises occurred in 2009 and
prior to 2008. The tax benefit realized for the tax deductions from option exercise of the
share-based payment arrangements in 2008 was $982 thousand. This benefit has been fully reserved
under a valuation allowance.
As of December 31, 2009, there was $3.5 million of total unrecognized compensation cost
related to unvested shares associated with stock options which will be recognized over a
weighted-average period of 2.07 years. We recognize compensation expense for our stock options on
a straight-line basis over their vesting term. We will issue new shares upon the exercise of the
stock options.
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 years ended December 31, 2009, 2008, and 2007
were as follows:
2009 | 2008 | 2007 | ||||||||||
Number of options issued |
2,661,000 | 3,290,000 | 4,031,500 | |||||||||
Weighted average stock price |
$ | 1.81 | $ | 18.99 | $ | 5.38 | ||||||
Weighted average exercise price |
$ | 1.52 | $ | 18.44 | $ | 5.60 | ||||||
Weighted average expected life of options(a) |
5.00 | 5.53 | 5.13 | |||||||||
Weighted average expected volatility (b) |
67.2 | % | 30.1 | % | 37.7 | % | ||||||
Weighted average risk-free interest rate |
2.4 | % | 2.9 | % | 4.8 | % | ||||||
Expected annual dividend per share |
| | | |||||||||
Weighted average fair value of each option |
$ | 1.05 | $ | 6.65 | $ | 2.17 |
(a) | As determined by the simplified method under Staff Accounting Bulletin 107. The options have a life of ten years. | |
(b) | The expected volatility of our common stock was estimated using an average of volatilities of publicly traded companies in similar energy businesses. |
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The following is a summary of stock option activity during the years ended December 31, 2009, 2008 and 2007. There were no stock options issued prior to January 1, 2007. | ||
* | The Aggregate Intrinsic Value was calculated using the December 31, 2009, 2008, 2007 stock price of $1.15, $4.92, and $10.64. |
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||||||||||||||
Average | Aggregate | Average | Aggregate | Average | Aggregate | |||||||||||||||||||||||||||||||
Exercise | Intrinsic | Exercise | Intrinsic | Exercise | Intrinsic | |||||||||||||||||||||||||||||||
Shares | Price | Value* | Shares | Price | Value* | Shares | Price | Value* | ||||||||||||||||||||||||||||
Outstanding Beginning of Year |
5,629,500 | $ | 9.88 | 4,031,500 | $ | 5.60 | ||||||||||||||||||||||||||||||
Granted |
2,661,000 | $ | 1.52 | 97,000 | 3,290,000 | $ | 18.44 | 4,031,500 | $ | 5.60 | ||||||||||||||||||||||||||
Exercised |
| (253,000 | ) | $ | 5.00 | 2,719,900 | ||||||||||||||||||||||||||||||
Cancelled |
(890,668 | ) | $ | 14.40 | (1,439,000 | ) | $ | 18.34 | ||||||||||||||||||||||||||||
Outstanding End of Year |
7,399,832 | $ | 5.93 | 97,000 | 5,629,500 | $ | 9.88 | | 4,031,500 | $ | 5.60 | 20,318,760 | ||||||||||||||||||||||||
Exercisable End of Year |
4,499,663 | $ | 8.38 | | 3,906,498 | $ | 7.00 | | 3,500,000 | $ | 5.00 | 20,302,160 | ||||||||||||||||||||||||
The following is a summary of stock options outstanding at December 31, 2009:
Weighted Average | ||||||||||||
Remaining | ||||||||||||
Number of Options | Number of | Contractual Life | ||||||||||
Exercise Price | Outstanding | Exercisable Options | (Years) | |||||||||
$0.97 |
100,000 | | 9.43 | |||||||||
$1.41 |
500,000 | | 9.95 | |||||||||
$1.96 |
1,960,000 | | 9.66 | |||||||||
$5.00 |
3,247,000 | 3,247,000 | 7.38 | |||||||||
$7.50 |
33,333 | 33,333 | 7.76 | |||||||||
$10.00 |
248,333 | 205,000 | 7.91 | |||||||||
$10.12 |
2,500 | 833 | 8.78 | |||||||||
$12.00 |
6,500 | 6,000 | 7.99 | |||||||||
$13.66 |
3,000 | 3,000 | 8.50 | |||||||||
$17.76 |
40,000 | 40,000 | 8.12 | |||||||||
$18.00 |
16,667 | 16,667 | 8.20 | |||||||||
$18.91 |
1,107,499 | 887,830 | 8.13 | |||||||||
$19.75 |
13,333 | 13,333 | 8.30 | |||||||||
$20.02 |
25,000 | | 8.46 | |||||||||
$20.64 |
75,000 | 25,000 | 8.44 | |||||||||
$22.75 |
21,667 | 21,667 | 8.36 |
Restricted Shares
On October 1, 2009, we granted 100,000 shares of restricted common stock to a new executive of
the company. These common shares vest at 25,000 after one year of service, 25,000 vest after two
years of service, and 50,000 shares vest upon performance conditions being met. These shares were
valued at $1.87 per share, based on the quoted market value of the stock on the date of grant, and $38,309 of
expense was recognized as of December 31, 2009. The remaining $148,691 will be recognized over the
remaining vesting term.
Note 12. Commitments and Contingencies
During 2007, we entered into an agreement which grants Chateau, the entity from whom we
purchased the Mesquite Lake plant, the non-exclusive right to represent us in the location and
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development of renewable energy projects. In exchange for a quarterly fee of $98 thousand, Chateau
will be responsible for locating, analyzing and delineating the business viability, as well as
providing an adequate development strategy for these projects. We paid first quarterly payment of
$98 thousand during June 2007, and these payments are scheduled to continue each quarter until the
final payment in March 31, 2012. During the fourth quarter of 2008, we suspended all payments to
Chateau pending resolution of a dispute regarding the validity of certain air permits that were in
place at Mesquite Lake at the date of our acquisition. As of December 31, 2009 we have accrued
$588 thousand in fees related to this agreement.
In association with our purchase of the Port Sutton lease option, we agreed to issue
restricted shares to the Seller worth $2 million, subject to a floor price of $14.25 and ceiling of
$25. These shares were to be issued the sooner of 18 months from the October 2008 close date or
upon the first biodiesel production or storage at the site. Accordingly, we were to issue an
additional minimum number of 80,000 shares up to a maximum number of 140,351 shares related to this
acquisition.
In August, 2009 we entered into a 20 year Power Purchase Agreement with a major public utility
based in Southern California for 100% of the net output of our Mesquite Lake biomass power plant
located in Southern California. Under this power purchase agreement we are required to begin power
sales in 2011. Pursuant to the related brokerage agreement, we are required to pay commissions of
$300
thousand within 30 days of execution of the contract and an additional sum of $1.1 million on
various dates subsequent to commercial operations of the plant for a total obligation of $1.4
million. The future obligation is contingent upon us finding financing for capital improvements
and completing the required development of the plant for it to be in operations. The remaining
obligation will be recognized at the time plant operations becomes probable.
We have an outstanding employment agreement with an executive officer for a term of two years.
Our maximum commitment under the employment agreement, which would apply if the employee covered by
the agreement was terminated without cause, was $500 thousand at December 31, 2009.
Orion
On September 16, 2008, Orion Ethanol, Inc (Orion), brought suit against GreenHunter Energy,
Inc., GreenHunter BioFuels, Inc., Gary C. Evans, et al, (Defendants), in the United
States District Court for the District of Kansas. Orion brought suit against the defendants
alleging that GreenHunter Energy and GreenHunter BioFuels entered into a conspiracy with the other
defendants to weaken Orion, acquire or divert its assets and opportunities and ultimately gain
control and ownership of Orion. Specifically, Orion alleges that GreenHunter Energy and
GreenHunter BioFuels, as well as one of GreenHunters significant institutional shareholders,
tortiously interfered with Orions opportunities and expectancies in acquiring certain assets and
interfered with Orions ability to complete financing with a banking institution. The lawsuit also
alleges claims against Mr. Evans, a former officer and director of Orion, for conflicts of interest
and breaches of fiduciary duties in connection with his actions as such an officer and director.
The Judge on this case has entered an order dismissing all of the GreenHunter entities from
the lawsuit for lack of jurisdiction on July 29, 2009. No amounts have been accrued as no losses
are expected as a result of this claim.
Bioversel
On September 24, 2008, Bioversel, Inc. (Bioversel) brought suit against GreenHunter
BioFuels, Inc. alleging that BioFuels has repudiated its biodiesel tolling agreement, as amended,
with Bioversel. Bioversel has alleged breach of contract, fraud and conversion regarding our
ability to process feedstock into biodiesel under the contract.
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We have been served with this lawsuit and we have responded to Bioversels first set of
discovery requests and have requested our own sets of discovery. We vigorously deny the
allegations in the lawsuit and believe the lawsuit is completely without merit and have filed a
countersuit against plaintiff for failure to make payments to us under the contract. No amounts
have been accrued as no losses are expected as a result of this claim.
Jacob Stern
Jacob Stern & Sons, Inc. (Jacob Stern) brought suit against GreenHunter BioFuels, Inc. on
February 19, 2009 alleging that we breached two separate contracts for the purchase of animal fat
feedstock for our biodiesel refinery in Houston. We deny that a contractual agreement was ever
entered into between the parties.
We have been served with this lawsuit and we have responded. At this point in the litigation
process, we believe it is too early to determine the ultimate outcome of this lawsuit.
Accordingly, no amounts have been accrued.
Crown Engineering
Crown Engineering and Construction brought suit against GreenHunter Energy, Inc. on April 1,
2009 alleging that we breached our contract for services to refurbish our biomass plant in
California. At
December 31, 2009, $6.1 million was recorded in accounts
payable for amount due Crown. We have
subsequently settled for $1.8 million, for approximately 50% of
the $6.1 million owed. We are currently negotiating settlements
with subcontractors for the balance. Please see Note 16 Subsequent Events for additional
information on this settlement.
Gavilon
Gavilon brought an arbitration claim against GreenHunter BioFuels, Inc. during May 2009
alleging that we breached a contract for the purchase of animal fat feedstock for our biodiesel
refinery in Houston. On January 31, 2010 Gavilon was awarded $382 thousand in arbitration settlement.
We have accrued the $381 thousand but, the Company plans to dispute the award by the arbitration
pursuant to appropriate legal proceedings.
Steel Painters
Steel Painters has brought suit against GreenHunter BioFuels and GHE for failure to pay for
goods and services rendered. GreenHunter Energy is seeking a dismissal for lack of a claim against
it. At this point in the litigation process, we believe it is too early to determine the ultimate
outcome of these lawsuits. Accordingly, no amounts have been accrued.
Note 13. Related Party Transactions
During 2008, we converted a convertible note payable to Investment Hunter, LLC, an entity
controlled and owned by Mr. Gary C. Evans, Chairman, President and CEO. We issued 594,011 shares
upon the conversion of the note and paid $208 thousand in accrued interest. Please see Note 8
Notes Payable for additional information on this convertible note.
During 2009, we rented an airplane for business use at various times from Pilatus Hunter, LLC,
an entity 100% owned by Mr. Evans. Airplane rental expenses totaled $158 thousand, $409 thousand,
and $182 thousand during 2009, 2008, and 2007, respectively.
During the year ended December 31, 2008, we leased excess office space to Gruy Petroleum
Management, LLC, an entity 100% owned by Mr. Evans, for $48 thousand.
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Note 14. Quarterly Financial Data
The following tables set forth unaudited summary financial results on a quarterly basis for
the three most recent years.
2009 | ||||||||||||||||||||
First | Second | Third | Fourth | Total Year | ||||||||||||||||
Sales |
$ | 3,189,618 | $ | 1,717,475 | $ | 403,686 | $ | 480,754 | $ | 5,791,533 | ||||||||||
Operating income (loss) |
$ | (7,773,863 | ) | $ | 6,455,402 | $ | (3,382,270 | ) | $ | (8,277,513 | ) | $ | (12,978,244 | ) | ||||||
Net income (loss) to
common stockholders |
$ | (8,746,889 | ) | $ | 4,449,187 | $ | (3,522,968 | ) | $ | (8,373,542 | ) | $ | (16,194,212 | ) | ||||||
Net income (loss) per share |
$ | (0.42 | ) | $ | 0.21 | $ | (0.16 | ) | $ | (0.38 | ) | $ | (0.75 | ) | ||||||
Weighted average shares |
20,935,018 | 21,296,822 | 22,097,434 | 22,101,264 | 21,612,172 |
2008 | ||||||||||||||||||||
First | Second | Third | Fourth | Total Year | ||||||||||||||||
Sales |
$ | 177,777 | $ | 468,108 | $ | 331,487 | $ | 4,024,209 | $ | 5,001,581 | ||||||||||
Operating loss |
$ | ( 7,953,449 | ) | $ | ( 6,638,030 | ) | $ | ( 10,647,264 | ) | $ | ( 37,185,108 | ) | $ | ( 62,423,851 | ) | |||||
Net loss to common
stockholders |
$ | ( 8,279,660 | ) | $ | ( 7,322,647 | ) | $ | ( 26,663,596 | ) | $ | ( 40,138,087 | ) | $ | ( 82,403,990 | ) | |||||
Net loss per share |
$ | (0.42 | ) | $ | (0.37 | ) | $ | (1.32 | ) | $ | (1.92 | ) | $ | (4.08 | ) | |||||
Weighted average shares |
19,823,254 | 19,885,486 | 20,202,531 | 20,906,545 | 20,216,032 |
2007 | ||||||||||||||||||||
First | Second | Third | Fourth | Total Year | ||||||||||||||||
Sales |
$ | | $ | 554,254 | $ | 157,773 | $ | 340,716 | $ | 1,052,743 | ||||||||||
Operating loss |
$ | ( 462,729 | ) | $ | ( 6,911,193 | ) | $ | (98,546 | ) | $ | ( 4,411,833 | ) | $ | ( 11,884,301 | ) | |||||
Net loss to common
stockholders |
$ | ( 721,902 | ) | $ | ( 7,881,811 | ) | $ | ( 1,284,500 | ) | $ | ( 3,803,800 | ) | $ | ( 13,692,013 | ) | |||||
Net loss per share |
$ | (0.05 | ) | $ | (0.46 | ) | $ | (0.07 | ) | $ | (0.21 | ) | $ | (0.80 | ) | |||||
Weighted average shares |
15,111,166 | 17,268,736 | 17,750,055 | 18,159,940 | 17,082,684 |
Note 15. Segment Data
We currently have three reportable segments: BioFuels, Wind Energy, and Biomass. Each of our
segments is a strategic business that offers different products and services. They are managed
separately because each business unit requires different technology, marketing strategies and
personnel. With the exception of our BioFuels segments, all of our segments are still in
development stages with no significant operations.
During 2008, we completed building and began commissioning a biodiesel refinery at our
renewable fuels campus located in Houston, Texas. This segment had revenues from methanol
processing, biodiesel sales and terminal storage during 2008. Due to plant construction during the
first part of the year and damage caused by Hurricane Ike during the third quarter, we did not
complete any biodiesel sales until the fourth quarter of 2008. During 2007, this segment continued
activities of its predecessor for a short time and had revenues and costs associated with specialty
chemical and waste oil operations.
Our Wind Energy segment is currently in the development stage. We have six wind projects that
we are developing which are located in Montana, California, Texas, and New Mexico. All of these
projects are currently in various stages of environmental impact studies, meteorological
evaluations, permit requests and various other regulatory approvals and processes.
Our Biomass segment is also in the development stage. We have purchased an inactive 18.5 MW
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(nameplate capacity) biomass power plant located in California, Mesquite Lake, and an inactive 14
MW (nameplate capacity) biomass power plant located in Telogia, Florida which was sold during the
first quarter of 2009. We began refurbishing these plants during the third quarter in 2008. Our
Biomass segment will produce energy from organic matter available at or near the plant sites.
The accounting policies for our segments are the same as those described in Note 3. There are
no intersegment revenues or expenses.
Segment data for the three years ended December 31, 2009, 2008 and 2007 follows:
2009 | ||||||||||||||||||||
Unallocated | ||||||||||||||||||||
Corporate | BioMass | Wind Energy | BioFuels | TOTAL | ||||||||||||||||
Total Revenues |
$ | | $ | | $ | | $ | 5,791,533 | $ | 5,791,533 | ||||||||||
Total Operating Costs
(recoveries) |
(449,941 | ) | 38,309 | 67,136 | (1,771,903 | ) | (2,116,399 | ) | ||||||||||||
Depreciation expense |
182,405 | | 46,291 | 4,041,748 | 4,270,444 | |||||||||||||||
Loss on asset impairments |
1,651,161 | | | 3,177,179 | 4,828,340 | |||||||||||||||
Selling, general and
administrative |
5,384,799 | 1,139,979 | 639,028 | 4,405,816 | 11,569,622 | |||||||||||||||
Operating income (loss) |
(6,768,424 | ) | (1,178,288 | ) | (752,455 | ) | (4,061,307 | ) | (12,760,474 | ) | ||||||||||
Other income and (expense) |
(858,093 | ) | 7,878 | (941,111 | ) | (737,988 | ) | (2,529,314 | ) | |||||||||||
Income (loss) from continuing
operations |
$ | (7,626,517 | ) | $ | (1,170,410 | ) | $ | (1,693,566 | ) | $ | (4,799,295 | ) | $ | (15,289,788 | ) | |||||
Total Assets |
$ | 12,753,524 | $ | 15,704,951 | $ | 229,484 | $ | 40,130,320 | $ | 68,818,279 | ||||||||||
Capital Expenditures |
$ | 6,748 | $ | 40,865 | $ | | $ | 742,749 | $ | 790,362 |
2008 | ||||||||||||||||||||
Unallocated | ||||||||||||||||||||
Corporate | BioPower | Wind Energy | BioFuels | TOTAL | ||||||||||||||||
Total Revenues |
$ | | $ | | $ | | $ | 5,001,581 | $ | 5,001,581 | ||||||||||
Total Operating Costs |
558,165 | 237,527 | 264,736 | 19,223,674 | 20,284,102 | |||||||||||||||
Depreciation expense |
175,852 | | 51,717 | 2,475,535 | 2,703,104 | |||||||||||||||
Loss on asset impairments |
| 2,629,256 | | 19,139,630 | 21,768,886 | |||||||||||||||
Selling, general and
administrative |
15,928,197 | 623,658 | 1,179,600 | 4,650,912 | 22,382,367 | |||||||||||||||
Operating loss |
(16,662,214 | ) | (3,490,441 | ) | (1,496,053 | ) | (40,488,170 | ) | (62,136,878 | ) | ||||||||||
Other income and expense |
(1,993,634 | ) | 5,175 | 29,836 | (1,407,905 | ) | (3,366,528 | ) | ||||||||||||
Net loss from continuing
operations |
$ | (18,655,848 | ) | $ | (3,485,266 | ) | $ | (1,466,217 | ) | $ | (41,896,075 | ) | $ | (65,503,406 | ) | |||||
Total Assets |
$ | 15,993,774 | $ | 20,683,669 | $ | 1,393,779 | $ | 55,667,733 | $ | 93,738,955 | ||||||||||
Capital Expenditures |
$ | 552,521 | $ | 17,221,513 | $ | 326,775 | $ | 37,305,082 | $ | 55,405,891 |
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2007 | ||||||||||||||||||||
Unallocated | ||||||||||||||||||||
Corporate | Biomass | Wind Energy | BioFuels | TOTAL | ||||||||||||||||
Total Revenues |
$ | | $ | | $ | | $ | 1,052,743 | 1,052,743 | |||||||||||
Total Operating Costs |
| | 276,505 | 758,799 | 1,035,304 | |||||||||||||||
Depreciation expense |
11,535 | | 32,128 | 74,964 | 118,627 | |||||||||||||||
Selling, general and
administrative |
10,655,019 | 98,000 | 388,761 | 641,333 | 11,783,113 | |||||||||||||||
Operating income (loss) |
(10,666,554 | ) | (98,000 | ) | (697,394 | ) | (422,353 | ) | (11,884,301 | ) | ||||||||||
Other income and expense |
(120,374 | ) | | 53,498 | (83,165 | ) | (150,041 | ) | ||||||||||||
Net Income (Loss) from
continuing operations |
$ | (10,786,928 | ) | $ | (98,000 | ) | $ | (643,896 | ) | $ | (505,518 | ) | (12,034,342 | ) | ||||||
Total Assets |
$ | 27,126,618 | $ | 5,103,566 | $ | 593,264 | $ | 26,673,837 | 59,497,285 | |||||||||||
Capital Expenditures |
$ | 4,796,448 | $ | 1,426,566 | $ | 5,431 | $ | 21,102,506 | 27,330,951 |
Note 16. Subsequent Events
On January 18, 2010, a settlement was reach in the lawsuit with Crown Engineering for $1.8
million. The Company and Crown are finalizing the documentation
dismissing the claims against each other in state court and the
related release of mechanics liens. See Note 12.
The
Company has evaluated subsequent events through the date of filing
this 10-K.
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Table of Contents
(b) Exhibits
Exhibit | ||
Number | Exhibit Title | |
3.1*
|
Certificate of Incorporation | |
3.2*
|
Amendment to the Certificate of Incorporation | |
3.3*
|
Bylaws | |
4.1***
|
Amended and Restated Certificate of Designations of 2007 Series A 8% Convertible Preferred Stock | |
4.2***
|
Form of Warrant Agreement by and between GreenHunter Energy, Inc. and West Coast Opportunity Fund, LLC | |
4.3*
|
Form of Warrant Agreement by and between GreenHunter Energy, Inc. and certain accredited investors | |
4.4***
|
Certificate of Designations of 2008 Series B Convertible Preferred Stock | |
10.1*
|
Stock Purchase Agreement dated February 2007 among Channel Refining Corporation, GreenHunter Energy, Inc. and certain selling shareholders | |
10.2*
|
Amendment No. 1 to Stock Purchase Agreement dated February 2007 among Channel Refining Corporation, GreenHunter Energy, Inc. and certain selling shareholders | |
10.3*
|
Purchase and Sale Agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. regarding acquisition of power purchase agreement | |
10.4*
|
Purchase and Sale Agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. regarding acquisition of Mesquite Lake Resource Recovery Facility | |
10.5*
|
Consulting Agreement dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. | |
10.6*
|
Registration rights agreement, dated March 9, 2007 between GreenHunter Energy, Inc. and certain institutional investors | |
10.7*
|
Registration rights agreement, dated April 13, 2007 between GreenHunter Energy, Inc. and certain selling shareholders | |
10.8*
|
Investor rights agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. | |
10.9*
|
Form of subordinated promissory note of GreenHunter BioFuels, Inc. | |
10.10**
|
Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | |
10.11****
|
First Amendment to Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | |
10.12
|
Second amendment to Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | |
10.13*****
|
Third amendment to Second Amended and Restated Credit Agreement dated as of March 7, 2008 among GreenHunter BioFuels Inc., WestLB AG New York Branch as the administrative agent, WestLB New York Branch as the LC Issuing Bank and the Lenders Party to the Amended and Restated Credit Agreement from time to time | |
21.1
|
List of Subsidiaries | |
31.1
|
Certifications of the Chief Executive Officer. | |
31.2
|
Certifications of the Chief Financial Officer. | |
32.1
|
Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Incorporated by reference to the Companys Form 10, dated October 19, 2007 | |
** | Incorporated by reference to the Companys Form 10-Q, dated May 15, 2008 | |
*** | Incorporated by reference to the Companys Form 8-K, dated August 21, 2008 | |
**** | Incorporated by reference to the Companys Form 8-K, dated June 25, 2009 | |
***** | Incorporated by reference to the Companys Form 8-K, dated March 30, 2010 | |
| Filed herewith |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
||||
Date: March 31, 2010 | By: | /s/ Gary C. Evans | ||
Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacity and on the dates
indicated.
Signature | Title | Date | ||
/s/ Gary C. Evans
|
Chairman and | March 31, 2010 | ||
Gary C. Evans
|
Chief Executive Officer | |||
/s/ Jonathan D. Hoopes
|
President and COO | March 31, 2010 | ||
Jonathan D. Hoopes |
||||
/s/ Morgan F. Johnston
|
Sr. Vice President, General Counsel | March 31, 2010 | ||
Morgan F. Johnston
|
and Secretary | |||
/s/ David S. Krueger
|
Vice President and | March 31, 2010 | ||
David S. Krueger
|
Chief Financial Officer | |||
/s/ Ronald D. Ormand
|
Director | March 31, 2010 | ||
Ronald D. Ormand |
||||
/s/ Ronald H. Walker
|
Director | March 31, 2010 | ||
Ronald H. Walker |
66