GreenHunter Resources 10Q 2011 Q3 Quarterly report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011


-OR-


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-33893

GREENHUNTER ENERGY, INC.

(Name of registrant as specified in its charter)


Delaware		20-4864036

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1048 Texan Trail, Grapevine, TX 76051
(Address of principal executive offices)

(972) 410-1044
(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding twelve months, and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):


Large accelerated filero		Accelerated filero		Non-accelerated filero(Do not check if a smaller reporting company)		Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

As of November 14, 2011 there were 25,886,392 shares of the registrant’s common stock ($0.001 par value) outstanding

TABLE OF CONTENTS


PART 1 — FINANCIAL STATEMENTS
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits
	SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1 – FINANCIAL STATEMENTS

Item 1. Financial Statements

GREENHUNTER ENERGY, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Development Stage Company)


	September 30,			December 31,
	2011			2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	14,992		$	181,471
Related party accounts receivable		70,322			4,783
Deposits and other current assets		65,027			88,014
Prepaid expenses		69,272			182,079

Total current assets		219,613			456,347

FIXED ASSETS:
Land and improvements		3,243,687			3,243,687
Buildings		3,100,621			3,100,621
Plant and other equipment		2,621,262			2,626,140
Accumulated depreciation		(706,734	)		(566,525	)
Construction in progress		12,844,685			12,846,608

Net fixed assets		21,103,521			21,250,531

OTHER ASSETS:
Deferred financing costs		196,248			264,998
Other noncurrent assets		1,448,136			1,446,136

Total assets	$	22,967,518		$	23,418,012


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of notes payable	$	116,628		$	176,603
Note payable to related party		922,157			766,957
Redeemable debentures, net of discount of $21,675 and $0, respectively		5,280,132			—
Accounts payable		2,315,679			2,098,328
Dividends payable		—			172,056
Accrued liabilities		4,161,653			3,498,207
Convertible securities		23,857			1,001,622

Total current liabilities		12,820,106			7,713,773

NON-CURRENT LIABILITIES:
Redeemable debentures, net of discount of $0 and $29,558, respectively		—			5,272,249
Notes payable		2,821,338			2,886,947

Total liabilities		15,641,444			15,872,969

COMMITMENTS AND CONTINGENCIES (Note 12)

STOCKHOLDERS’ EQUITY:
Series A 8% convertible preferred stock, $.001 par value, $1,327 and $1,220 stated value, 5,978 and 6,750 issued and outstanding, and liquidation preference of $7,934,055 and $8,576,345, at September 30, 2011 and December 31, 2010, respectively		7,934,055			8,232,234
Series B convertible preferred stock, $.001 par value, $1,000 stated value, 9,802 and 10,575 issued and outstanding and liquidation preference of $9,802,000 and 10,575,000 at September 30, 2011 and December 31, 2010, respectively		9,802,000			10,575,000
Common stock, $.001par value, 90,000,000 authorized shares, 25,458,286 and 22,138,876 issued at September 30, 2011 and December 31, 2010, respectively and 25,924,004 and 22,576,504 outstanding at September 30, 2011 and December 31, 2010, respectively		25,458			22,139
Additional paid-in capital		93,972,787			88,968,889
Accumulated deficit prior to re-entering development stage		(126,670,716	)		(126,670,716	)
Retained earnings during development stage		22,824,688			26,979,695
Treasury stock, at cost, 22,412 shares		(336,285	)		(336,285	)
Unearned common stock in KSOP, at cost, 15,200 shares		(225,913	)		(225,913	)

Total stockholders’ equity		7,326,074			7,545,043

Total liabilities and stockholders’ equity	$	22,967,518		$	23,418,012

See accompanying notes to the condensed consolidated financial statements

-1-

GREENHUNTER ENERGY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
AND THE PERIOD FROM JULY 1, 2010 (RE-ENTERING DEVELOPMENT STAGE) THROUGH
SEPTEMBER 30, 2011
(Development Stage Company)


													From Re-entering
	For the three Months Ended						For the Nine Months Ended						Development State July
	September 30,						September 30,						1, 2010 through
	2011			2010			2011			2010			September 30, 2011
REVENUES:
Storage rental revenue — related party	$	221,800		$	—		$	221,800		$	—		$	221,800
Other revenue — related party		8,000			—			8,000			—			8,000

Total revenues		229,800			—			229,800			—			229,800


COST OF SERVICES PROVIDED:
Cost of storage services		203,500			—			203,500			—			203,500
Project costs		3,113			—			3,316			4,065			(11,379	)
Depreciation expense		47,762			47,298			142,242			141,803			237,495
Selling, general and administrative		661,686			1,592,241			2,777,681			3,376,541			6,074,149
Loss on asset impairments		—			—			—			160,824			—

Total costs and expenses		916,061			1,639,539			3,126,739			3,683,233			6,503,765


OPERATING LOSS		(686,261	)		(1,639,539	)		(2,896,939	)		(3,683,233	)		(6,273,965	)

OTHER INCOME (EXPENSE):
Interest and other income		6			729,910			4,866			2,865,688			863,371
Interest, accretion and other expense		(193,051	)		(167,025	)		(566,345	)		(499,702	)		(290,174	)
Unrealized gain (loss) on convertible securities		12,965			—			(185,944	)		—			(1,187,566	)

Total other income (expense)		(180,080	)		562,885			(747,423	)		2,365,986			(614,369	)


Loss from continuing operations		(866,341	)		(1,076,654	)		(3,644,362	)		(1,317,247	)		(6,888,334	)

Gain on disposal of discontinued operations		—			—			—			—			33,055,388
Loss from discontinued operations, net of taxes		—			(1,508,789	)		—			(7,946,214	)		(2,495,802	)


Net income (loss)		(866,341	)		(2,585,443	)		(3,644,362	)		(9,263,461	)		23,671,252

Preferred stock dividends		(159,997	)		(163,863	)		(510,645	)		(483,785	)		(846,564	)


Net income (loss) to common stockholders		(1,026,338	)		(2,749,306	)		(4,155,007	)		(9,747,246	)		22,824,688


Weighted average shares outstanding, basic and diluted		25,886,392			22,500,492			24,237,641			22,393,763			23,534,772

Basic and diluted earnings (loss) per share:
Continuing operations	$	(0.04	)	$	(0.06	)	$	(0.17	)	$	(0.08	)	$	(0.33	)

Discontinued operations	$	—		$	(0.06	)	$	—		$	(0.36	)	$	1.30

Net income (loss) per share	$	(0.04	)	$	(0.12	)	$	(0.17	)	$	(0.44	)	$	0.97

See accompanying notes to the condensed consolidated financial statements

-2-

GREENHUNTER ENERGY, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE PERIOD FROM JULY 1, 2010 TO SEPTEMBER 30, 2011
(Development Stage Company)


									Additional		Accumulated Deficit			Accumulated Deficit During						Unearned			Total
	Series A			Series B			Common		Paid in		Prior to Re-entering			Development Stage July 1,			Treasury			Shares in			Stockholders’
	Preferred Stock			Preferred Stock			Stock		Capital		Development Stage			2010 - September 30, 2011			Stock			KSOP			Equity (Deficit)
BALANCE, July 1, 2010	$	7,904,508		$	10,575,000		$	22,139	$	88,043,038	$	(126,670,716	)	$	—		$	(336,285	)	$	(225,913	)	$	(20,688,229	)
Transfer accumulated preferred dividends to stated value		327,726			—			—		—		—			—			—			—			327,726
Share based payments		—			—			—		925,851		—			—			—			—			925,851
Dividends on preferred stock		—			—			—		—		—			(335,919	)		—			—			(335,919	)
Net income		—			—			—		—		—			27,315,614			—			—			27,315,614

BALANCE, DECEMBER 31, 2010	$	8,232,234		$	10,575,000		$	22,139	$	88,968,889	$	(126,670,716	)	$	26,979,695		$	(336,285	)	$	(225,913	)	$	7,545,043
Transfer accumulated preferred dividends to stated value		682,700			—			—		—		—			—			—			—			682,700
Share based payments		—			—			—		345,059		—			—			—			—			345,059
Issued shares of common stock and warrants for cash		—			—			1,045		1,037,055		—			—			—			—			1,038,100
Issued shares of common stock for 401K matching contribution		—			—			229		206,241		—			—			—			—			206,470
Dividends on preferred stock		—			—			—		—		—			(510,645	)		—			—			(510,645	)
Issued shares of common stock and warrants upon conversion of shares of Series A Preferred Stock		(980,879	)		—			772		1,607,870		—			—			—			—			627,763
Issued shares of common stock and warrants upon conversion of shares of Series B Preferred Stock		—			(773,000	)		773		1,308,173		—			—			—			—			535,946
Issued shares of common stock and warrants upon conversion of $500,000 in principal of the promissory note payable with a related party		—			—			500		499,500		—			—			—			—			500,000
Net loss		—			—			—		—		—			(3,644,362	)		—			—			(3,644,362	)

BALANCE, SEPTEMBER 30, 2011	$	7,934,055		$	9,802,000		$	25,458	$	93,972,787	$	(126,670,716	)	$	22,824,688		$	(336,285	)	$	(225,913	)	$	7,326,074

See accompanying notes to the condensed consolidated financial statements

-3-

GREENHUNTER ENERGY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
AND THE PERIOD FROM JULY 1, 2010 (RE-ENTERING DEVELOPMENT STAGE) THROUGH
SEPTEMBER 30, 2011
(Development Stage Company)


							From Re-entering
	For the Nine Months Ended						Development Stage July 1,
	September 30,						2010 through September
	2011			2010			30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(3,644,362	)	$	(9,263,461	)	$	23,671,252
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense		142,242			1,721,785			237,495
Noncash stock compensation		345,059			1,180,256			1,270,910
Issue warrants on letter of guarantee		—			69,111			—
Amortization of deferred financing costs		68,750			1,394,637			620,291
Loss on asset impairments		—			160,824			—
Loss (gain) on sale of assets		1,967			—			(33,053,421	)
Accretion of discount		7,883			300,249			175,563
Unrealized loss (gain) from change in fair value of convertible securities		185,944			—			1,187,566
Changes in certain assets and liabilities:
Accounts receivable		(121,332	)		(212,060	)		(120,424	)
Inventory		—			179,322			—
Prepaid expenses		135,794			543,168			103,693
Accounts payable		226,127			(7,037,977	)		2,029,158
Accrued liabilities		911,822			4,627,292			2,174,672
Deposits and other current assets		—			110			110

Net cash used in operating activities		(1,740,106	)		(6,336,744	)		(1,703,135	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash		—			2,018,765			48
Proceeds from sale of assets		—			9,775			—
Additions to fixed assets		(6,853	)		(1,287,132	)		(1,806,001	)
Decrease (increase) in other assets		(2,000	)		(1,246,136	)		48,000

Net cash used in investing activities		(8,853	)		(504,728	)		(1,757,953	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants		1,038,100			—			1,038,100
Increase in notes payable		701,690			666,340			1,666,682
Payment of notes payable		(157,310	)		(198,473	)		(280,511	)
Payment of deferred financing costs		—			(180,644	)		(275,802	)

Net cash provided by financing activities		1,582,480			287,223			2,148,469


CHANGE IN CASH		(166,479	)		(6,554,249	)		(1,312,619	)


CASH, beginning of period		181,471			6,914,381			1,327,611


CASH,end of period	$	14,992		$	360,132		$	14,992


Cash paid for interest	$	208,989		$	893,774		$	1,029,661


NONCASH TRANSACTIONS:
Issued shares of common stock for 401K matching contribution	$	206,470		$	—		$	206,470

Accrued dividends converted to additional stated value of Series A Preferred Stock	$	682,700		$	639,845		$	1,010,425

Shares of common stock and warrants issued upon conversion of shares of Series A Preferred Stock and Series B Preferred Stock	$	1,753,879		$	—		$	1,753,879

Shares of common stock and warrants issued upon conversion of principal on promissory note with a related party	$	500,000		$	—		$	500,000

See accompanying notes to condensed consolidated financial statements

-4-

GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Nature of Operations

In this quarterly report on Form 10-Q, the words “GreenHunter Energy”, “company”, “we”, “our”, and “us” refer to GreenHunter Energy, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires. The condensed consolidated balance sheet of GreenHunter Energy, Inc. and subsidiaries as of September 30, 2011, the condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010, the condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2011, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010, are unaudited. The December 31, 2010 condensed consolidated balance sheet information is derived from audited financial statements. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position at September 30, 2011, and the results of operations for the three and nine month periods ended September 30, 2011 and 2010, changes in stockholders’ equity for the nine months ended September 30, 2011, and cash flows for the nine month periods ended September 30, 2011 and 2010.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You should read these condensed consolidated financial statements in conjunction with the financial statements and notes thereto included in our December 31, 2010 Form 10-K. The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the operating results that will occur for the full year.

The accompanying condensed consolidated financial statements include the accounts of the company and our subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain items have been reclassified to conform with the current presentation.

Development Stage Company

The Company has not earned significant revenue from planned principal operations since the second quarter of 2010. Accordingly, effective July 1, 2010, the Company’s activities have been accounted for as those of a “Development Stage Enterprise” as set forth by FASB ASC 915. Among the disclosures required are that the Company’s financial statements be identified as those of a development stage company, and the statements of operations, stockholders’ equity and cash flows disclose activity since the date of the Company’s inception of development stage.

Nature of Operations

Our business plan is to acquire businesses, develop projects, and operate assets involved within the of clean water business as it relates to the oil and gas industry in the unconventional oil and natural gas resource plays. We had previously structured our business to become a leading provider of clean energy products offering industrial, business, and residential customers the opportunity to purchase and utilize clean energy generated from renewable sources. We have refocused our efforts in 2011 on clean water management systems and services. Management has identified a significant unmet need and market opportunity in the area of clean water management as it relates to unconventional oil and natural gas resource plays in the energy industry.

The accompanying financial statements include the accounts of GreenHunter Energy, Inc. and our wholly-owned subsidiaries, GreenHunter Mesquite Lake, LLC (“Mesquite Lake”), GreenHunter Wind Energy, LLC (“Wind”), and GreenHunter Water, LLC. All significant intercompany transactions and balances have been eliminated.

Income or Loss Per Share

Basic income or loss per common share is net income or loss applicable to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted income or loss per common share is calculated in the same manner, but also considers the impact to net income or loss and common shares outstanding for the potential dilution from stock options, warrants, convertible debentures and preferred stock.

-5-

GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Shares of common stock underlying the following items were not included in dilutive weighted average shares outstanding for the three and nine month periods ended September 30, 2011 and 2010, as their effects would have been anti-dilutive.


	Nine months ended
	September 30,
	2011		2010
Stock options		6,776,500		7,076,500
Warrants		3,638,794		6,351,745
Convertible debentures		5,625,970		31,283,251
Preferred Stock		2,893,744		3,056,447

Total		18,935,008		47,767,943

Note 2. Current Plan of Operations and Ability To Operate as a Going Concern

Our financial position has been adversely affected by our lack of working capital and the overall deterioration across all capital markets, particularly those for renewable energy companies. The lack of consistent and meaningful governmental support with tax incentives and other credit enhancements has had a serious detrimental effect on our previously planned business operations.

As of September 30, 2011, we had a working capital deficit of $12.6 million which includes $4.3 million related to earlier construction activities at our Mesquite Lake Biomass Plant.

We have continued to experience losses from ongoing operations. These factors raise doubt about our ability to continue as a going concern. We have begun to generate revenue from our water management activities. We have received a number of capital advances from our Chairman and Chief Executive Officer in exchange for promissory notes that have been consolidated and extended to December 31, 2011. On August 15, 2011, the letter of guarantee from the Chairman and Chief Executive Officer of the company was increased for up to $2.0 million of credit support if needed to fund future operations. The total amount loaned against this letter of guarantee is approximately $922 thousand resulting in a remaining guarantee of $1.1 million as of September 30, 2011.

Execution of our business plan for the next twelve months requires the ability to generate cash to satisfy planned operating requirements. We expect to receive $500 thousand in proceeds from the sale of our Ocotillo wind energy project after certain conditions are met which is estimated to be during the first quarter of 2012. Along with the revenue generated from our water management activities and letter of guarantee and credit support, we anticipate having sufficient cash reserves to meet all of our anticipated operating obligations for the next twelve months. Planned capital expenditures are wholly dependent on the Company’s ability to secure additional capital. As a result, we are in the process of seeking additional capital through a number of different alternatives, and particularly with respect to procuring working capital sufficient for the development of our water management projects in order that we have a business segment that can generate positive cash flow to sustain operations. We continue to pursue numerous opportunities in the water resource management business as it relates to the oil and gas industry.

Note 3. New Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amended guidance changes several aspects of the fair value measurement guidance in ASC 820, Fair Value Measurement, further clarifying how to measure and disclose fair value. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. The amendment is effective for the Company at the beginning of

-6-

GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

January 2012, with early adoption prohibited. The adoption of this amendment is not expected to materially affect the Company’s financial statements.

Note 4. Fair Value of Financial Instruments

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standards also establish a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains three levels:

	•		Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets

	•		Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable

	•		Level 3 — Significant inputs to the valuation model are unobservable

As of September 30, 2011 and December 31, 2010 there were no transactions measured at fair value on a nonrecurring basis. The following table shows assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 and the input categories associated with those assets and liabilities.


Fair value measurements on a recurring basis
September 30, 2011
	Level 1		Level 2		Level 3
Convertible securities	$	—	$	—	$	23,857

Total liabilities at fair value	$	—	$	—	$	23,857


Fair value measurements on a recurring basis
December 31, 2010
	Level 1		Level 2		Level 3
Convertible securities	$	—	$	—	$	1,001,622

Total liabilities at fair value	$	—	$	—	$	1,001,622

The following schedule shows the changes in fair value measurements during the nine months ended September 30, 2011:


Fair market value as of December 31, 2010	$	(1,001,622	)
Unrealized loss from change in fair market value		(185,944	)
Fair market value of derivatives settled upon conversion of Preferred Stock to common shares		1,163,709

Fair market value as of September 30, 2011	$	(23,857	)

The Company had current derivative liabilities resulting from the antidilutive features on its common stock warrants, Series A Convertible Preferred Stock, and Series B Convertible Preferred Stock. The estimated fair value of the convertible securities liability is revalued at each balance sheet date, with changes in value recorded as other income or expense in the consolidated statements of operations. As discussed in Note 8, Stockholders’ Equity, on June 21, 2011, pursuant to the agreement with the holder of our Series A and Series B Preferred Stock outstanding, the holder converted 772 shares of Series A Preferred and 773 shares of Series B Preferred with combined stated value of $1.8 million into 772,500 units under a private placement of common stock and warrants. The fair value of the antidilutive provision for those shares on June 21, 2011, of $1.2 million was reclassed to additional paid in capital upon the conversion of the preferred shares.

-7-

GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Discontinued Operations

During June 2010, the assets of GreenHunter BioFuels, Inc. were placed into receivership. On November 26, 2010, the Company transferred all of its common stock in BioFuels to an irrevocable trust for the benefit of the holders of the Series A Debentures and their respective successors, assigns, heirs and devisees in full and final satisfaction of any obligation the Company might have to the holders of the Series A Debentures, based on the terms of the debenture agreements. These debentures were secured by GreenHunter Energy’s ownership interest in GreenHunter BioFuels common stock and are otherwise non-recourse to GreenHunter Energy. The divestiture of our interests in GreenHunter BioFuels resulted in a gain of $33.1 million.

The following table provides summarized income statement information related to GreenHunter BioFuel’s discontinued operations for the three and nine months ended September 30, 2010:


	Three months ended			Nine months ended
	September 30, 2010			September 30, 2010
Sales and other revenues from discontinued operations	$	—		$	319,170
Operating expenses from discontinued operations		(298,009	)		(4,127,513	)
Other income (expense) from discontinued operations		(1,210,780	)		(4,137,871	)

Income (loss) from discontinued operations	$	(1,508,789	)	$	(7,946,214	)

Note 6. 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 asset’s carrying value, an impairment charge is recorded for the difference between the asset’s fair value and its carrying value. During the nine months ended September 30, 2011, we recorded no impairments. We recorded $161 thousand of impairments for the nine months ended September 30, 2010, on assets related to wind projects that had expired.

Note 7. Notes Payable

Notes Payable at September 30, 2011 and December 31, 2010, consisted of the following:


	September 30,			December 31,
	2011			2010
Long-Term Debt:
Note payable due November 30, 2017, 5.7% (See Note 13, Subsequent Events)	$	2,920,119		$	2,982,051
Notes payable to related party due December 31, 2011, 10% and 14%		922,157			766,957
Notes payable due between July 1, 2011 and March 2, 2012, rates from 7.0% to 8.25%		17,847			81,499
9% Series B Senior Secured Redeemable Debentures due on various dates ranging from September 30, 2013 to February 28, 2014, net of discount of $21,675 and $29,558 at September 30, 2011 and December 31, 2010, respectively		5,280,132			5,272,249

		9,140,255			9,102,756
Less: current portion		(6,318,917	)		(943,560	)

Total Long-Term Debt	$	2,821,338		$	8,159,196

Note Payable to Related Party

During the nine months ended September 30, 2011, the Company has borrowed an additional $100 thousand under a promissory note due to the Company’s Chairman and Chief Executive Officer. On May 6, 2011, the maturity date was extended to December 31, 2011 and accrued interest of $42 thousand was added to the principle balance. During the nine

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GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

months ended September, 30, 2011, the Company borrowed an additional $570 thousand under a new promissory note at an interest rate of 14% from the Chairman and Chief Executive Officer. During the nine months ended September 30, 2011, related party receivable balances of approximately $57 thousand were offset against the promissory note.

On June 21, 2011, principal in the amount of $500,000 from the 10% Promissory Note was converted to 250,000 units which were offered under our private placement of common stock and warrants. See Note 8, Stockholders Equity, for more information.

The balance under these promissory notes was $922,157 at September 30, 2011, and $766,957 at December 31, 2010.

Series B Debentures

The Company has not paid interest on the Series B debentures for the period March 2011 through September 2011. Therefore, we were in default on our Series B Debentures at September 30, 2011. Upon an event of default, the debentures become due and payable upon demand, so we have classified the debentures as a current liability as of September 30, 2011. These debentures are secured by GreenHunter Energy’s equity interest in GreenHunter Mesquite Lake, LLC and are otherwise non-recourse to GreenHunter Energy.

Note 8. Stockholders’ Equity

The following table reflects changes in our outstanding common stock, preferred stock and warrants during the periods reflected in our financial statements from December 31, 2010 to September 30, 2011:


	Preferred			Common		Treasury
	Stock			Stock		Stock		KSOP		Warrants
December 31, 2010		17,325			22,576,504		22,412		15,200		5,443,911
Issue common stock and warrants for cash		—			1,045,000		—		—		1,045,000
Issue common stock and warrants upon conversion of $500,000 in principal on promissory notes		—			500,000		—		—		500,000
Issue common stock and warrants upon conversion of 1,545 shares of preferred stock		(1,545	)		1,545,000		—		—		1,545,000
Common shares granted to non-employee Board Members		—			28,090		—		—		—
Common shares granted as 401k matching contribution		—			229,410		—		—		—
Warrants expired during the period		—			—		—		—		(4,895,117	)

September 30, 2011		15,780			25,924,004		22,412		15,200		3,638,794

Preferred Stock

We were not able to pay dividends on our Series A Preferred Stock for the quarters ending December 31, 2010, March 31, 2011, June 30, 2011, and September 30, 2011. In accordance with the terms of this preferred stock, accrued dividends of $344 thousand and $339 thousand on March, 31, 2011 and September 30, 2011, respectively, were added to the stated value of the preferred stock. This additional $683 thousand in stated value will accrue dividends at a 10% rate per annum.

In January of 2011 we entered into an agreement with the holder of our Series A and Series B Preferred Stock where by the holder waived their right under the Series A and Series B Certificate of Designations as it pertains to the adjustment of the conversion price caused by the Company’s private placement to certain accredited investors for consideration of the ability to convert shares of the Series A Preferred having an aggregate stated value equal to 50% and shares of the Series B Preferred having an aggregate stated value equal to 50% of the gross proceeds received by the Company from investors after the closing of the offering into shares of common stock of the Company at the same price which the Company sells the unit shares to investors.

On June 21, 2011, pursuant to the agreement with the holder of our Series A and Series B Preferred Stock outstanding, the holder converted 772 shares of Series A Preferred and 773 shares of Series B Preferred with combined stated value of $1.8 million into 772,500 units which were sold under our private placement of common stock and warrants. The fair value of the antidilutive provision for those shares on June 21, 2011, of $1.2 million was reclassed to additional paid in capital upon the conversion of the preferred shares.

-9-

GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Common Stock and Common Stock Warrants

We have 90,000,000 authorized shares of common stock. We cannot pay any dividends on our common stock until all Series A cumulative preferred dividends have been satisfied.

On January 28, 2011, the Company entered into a private placement of common equity securities with accredited investors. The equity securities sold consisted of units comprised of two shares of common stock and two common stock warrants, one with an exercise price of $1.50 and another with an exercise price of $2.50 per share for $2.00 per unit. The sale of these units resulted in new proceeds of $1.0 million to the Company. The warrants are exercisable immediately and expire on January 31, 2014.

The Company’s private placement entered into on January 28, 2011, triggered the antidilutive provision on 4,602,548 common stock warrants outstanding at that time, which adjusted the exercise price for the warrants to $1.50.

On April 6, 2011, the Company’s Board of Directors approved the 2010 fiscal year 401k matching contribution of $206 thousand to be paid in shares of common stock of the company based on the closing price on that date.

On June 21, 2011, the Company issued 1,545,000 shares of common stock, 772,500 warrants with an exercise price of $1.50, and 772,500 warrants with an exercise price of $2.50 upon the conversion of shares of preferred stock with a stated value of $1.8 million. The fair value of the antidilutive provision on the converted preferred shares on June 21, 2011, of $1.2 million was reclassed to additional paid in capital upon the conversion of the preferred shares.

On June 21, 2011, the Company issued 500,000 shares of common stock, 250,000 common stock warrants with an exercise price of $1.50, and 250,000 common stock warrants with an exercise price of $2.50 upon the conversion of $500 thousand in principal of our promissory notes with a related party.

During the nine months ended September 30, 2011, 4,895,117 of our $1.50 common stock warrants have expired.

Note 9. Share-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.

In September 2010, the Company adopted its 2010 Long-Term Incentive Compensation Plan (the “Incentive Plan”), which provides for equity incentives to be granted to employees, officers or directors of the Company, as well as key advisers or consultants. Equity incentives may be in the form of stock options with an exercise price not less than the fair market value of the underlying shares on the date of grant, stock appreciation rights, restricted stock awards, stock bonus awards, other stock-based awards, or any combination of the foregoing. A maximum of 5,000,000 shares of Common Stock were authorized for issuance under the Incentive Plan.

Common Stock Options

The company did not grant any stock options during the nine months ended September 30, 2011.

We recorded share-based compensation expense of $345 thousand related to stock options for which the requisite service period elapsed during the nine months ended September 30, 2011. These expenses are included in our selling, general and administrative expenses. No option exercises occurred during the nine months ended September 30, 2011.

-10-

GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2011, there was $645 thousand of total unrecognized compensation cost related to unvested shares associated with stock options which will be recognized over a weighted-average period of .99 years. We recognize compensation expense for our stock options on a straight-line basis over their vesting term. We are required to issue new shares of common stock upon the exercise of the stock options by such holder(s).

We estimated the fair value of each stock based grant using the Black-Scholes option pricing method for service and performance based options, and the Lattice Model for market based awards.

The following is a summary of stock option activity during the nine months ended September 30, 2011.


			Weighted		Aggregate
	Number of		average Exercise		Intrinsic Value*
	Shares		Price		($000’s)
Outstanding — Beginning of Period		7,076,500	$	5.95	$	—
Granted		—		—		—
Exercised		—		—		—
Cancelled		300,000		1.41		—

Outstanding — End of Period		6,776,500	$	6.77	$	—

Exercisable — End of Period		6,067,328	$	7.35	$	—


^*		The Aggregate Intrinsic Value was calculated using the September 30, 2011stock price of $0.72.

The following is a summary of stock options outstanding at September 30, 2011:


				Weighted Average
		Number of		Remaining
		Options		Contractual Life		Number of
Exercise Price		Outstanding		(Years)		Exercisable Options
$	0.97		100,000		7.68		66,666
$	1.41		200,000		8.21		100,000
$	1.96		1,725,000		7.91		1,149,997
$	5.00		3,247,000		5.63		3,247,000
$	7.50		33,333		6.01		33,333
$	10.00		243,333		6.16		243,333
$	10.12		2,500		7.03		1,666
$	12.00		6,500		6.24		6,500
$	13.66		3,000		6.76		3,000
$	17.76		40,000		6.37		40,000
$	18.00		16,667		6.45		16,667
$	18.91		1,099,167		6.38		1,099,166
$	19.75		13,333		6.55		13,333
$	20.64		25,000		6.69		25,000
$	22.75		21,667		6.62		21,667

			6,776,500				6,067,328

Share Awards

During the nine months ended September 30, 2011, we granted 28,090 shares of common stock to the nonemployee members of the Board of Directors as payment for their fees for the first quarter of 2011 in lieu of receiving cash for their fees. These common shares vest immediately and were valued at weighted average of $0.89 per share, based on the quoted market value of the stock on the date of the grant. We recognized $25 thousand of expense in our selling, general, and administrative expenses as of September 30, 2011, related to these shares. These shares were not issued as of September 30, 2011 but are included in weighted average basic shares outstanding as of September 30, 2011. At September 30, 2011, there were 198,690 shares owed to the non-employee members of the Board of Directors that were not issued but are included in weighted average basic shares outstanding as of September 30, 2011.

-11-

GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Related Party Transactions

During the nine months ended September 30, 2011, we earned storage revenue for providing water storage tanks for lease to Triad Hunter, LLC, a wholly owned subsidiary of Magnum Hunter Resources Corporation, an entity for which our Chairman and Chief Executive Officer is an officer and significant shareholder. Storage and other revenue totaled $230 thousand for the three and nine months ended September 30, 2011 and $0 for the three and nine months ended September 30, 2010.

During the nine months ended September 30, 2011, we obtained accounting services for a fee and provided office space and services for a fee to Magnum Hunter Resources Corporation, an entity for which our Chairman and Chief Executive Officer is an officer and significant shareholder. Office related services revenues net of professional services expense totaled $66 thousand and $107 thousand for the three and nine months ended September 30, 2011 and $30 thousand and $90 thousand for the three and nine months ended September 30, 2010.

During the nine months ended September 30, 2011, the Company has borrowed an additional $100,000 under a promissory note due to the Company’s Chairman and Chief Executive Officer. On May 6, 2011, the maturity date was extended to December 31, 2011. The Company also borrowed an additional $570,000 under a new promissory note at an interest rate of 14% from the Chairman and Chief Executive Officer. On June 21, 2011, principal in the amount of $500,000 from the 10% Promissory Note was converted to 250,000 units which were offered under our private placement of common stock and warrants. See Note 8, Stockholders’ Equity, for more information.

Note 11. Segment Data

We currently have three reportable segments: Water Management, 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. All of our segments are still in development stages with no significant operations.

The accounting policies for our segments are the same as those described in our Form 10-K for the year ended December 31, 2010. There are no intersegment revenues or expenses.

Segment data for the three and nine month periods ended September 30, 2011 and 2010 are as follows:


	For the Three Months Ended September 30, 2011
	Unallocated			Water
	Corporate			Management		BioMass			Wind Energy			TOTAL

Total Revenues	$	—		$	229,800	$	—		$	—		$	229,800
Total Operating Costs (recoveries)		—			203,500		—			3,113			206,613
Depreciation expense		47,762			—		—			—			47,762
Selling, general and administrative		645,972			20,951		(5,555	)		318			661,686

Operating income (loss)		(693,734	)		5,349		5,555			(3,431	)		(686,261	)
Other income and (expense)		(180,080	)		—		—			—			(180,080	)

Income (loss) from continuing operations	$	(873,814	)	$	5,349	$	5,555		$	(3,431	)	$	(866,341	)


Total Assets	$	3,983,980		$	3,805	$	18,980,209		$	(476	)	$	22,967,518

Capital Expenditures	$	—		$	2,306	$	—		$	—		$	2,306

-12-

GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	For the Three Months Ended September 30, 2010
	Unallocated			Water
	Corporate			Management		BioMass			Wind Energy			TOTAL

Depreciation expense	$	47,298		$	—	$	—		$	—		$	47,298
Selling, general and administrative		1,202,487			—		386,854			2,900			1,592,241

Operating loss		(1,249,785	)		—		(386,854	)		(2,900	)		(1,639,539	)
Other income and (expense)		(132,352	)		—		445,237			250,000			562,885

Income (loss) from continuing operations	$	(1,382,137	)	$	—	$	58,383		$	247,100		$	(1,076,654	)


Total Assets	$	5,702,782		$	—	$	18,295,087		$	290,290		$	24,288,159

Capital Expenditures	$	—		$	—	$	958,986		$	—		$	958,986


	For the Nine Months Ended September 30, 2011
	Unallocated			Water
	Corporate			Management		BioMass			Wind Energy			TOTAL

Total Revenues	$	—		$	229,800	$	—		$	—		$	229,800
Total Operating Costs		—			203,500		—			3,316			206,816
Depreciation expense		142,242			—		—			—			142,242
Selling, general and administrative		2,481,469			20,951		273,973			1,288			2,777,681

Operating income (loss)		(2,623,711	)		5,349		(273,973	)		(4,604	)		(2,896,939	)
Other income and (expense)		(747,423	)		—		—			—			(747,423	)

Income (loss) from continuing operations	$	(3,371,134	)	$	5,349	$	(273,973	)	$	(4,604	)	$	(3,644,362	)


Total Assets	$	3,983,980		$	3,805	$	18,980,209		$	(476	)	$	22,967,518

Capital Expenditures	$	—		$	2,306	$	4,547		$	—		$	6,853


	For the Nine Months Ended September 30, 2010
	Unallocated			Water
	Corporate			Management		BioMass			Wind Energy			TOTAL

Total Operating Costs	$	—		$	—	$	—		$	4,065		$	4,065
Depreciation expense		141,803			—		—			—			141,803
Loss on asset impairments		—			—		—			160,824			160,824
Selling, general and administrative		3,326,696			—		34,477			15,368			3,376,541

Operating loss		(3,468,499	)		—		(34,477	)		(180,257	)		(3,683,233	)
Other income and (expense)		(189,543	)		—		2,305,527			250,002			2,365,986

Income (loss) from continuing operations	$	(3,658,042	)	$	—	$	2,271,050		$	69,745		$	(1,317,247	)


Total Assets	$	5,702,782		$	—	$	18,295,087		$	290,290		$	24,288,159

Capital Expenditures	$	7,474		$	—	$	1,279,209		$	—		$	1,286,683

Note 12. Commitments and Contingencies

Bioversel, Inc

Bioversel brought suit against the Company on September 24, 2008, alleging that the Company has repudiated its biodiesel tolling agreement, as amended with the plaintiff. The plaintiff alleged breach of contract, fraud, and conversion regarding defendant’s ability to process feedstock into biodiesel under the contract. The Company filed a countersuit against Bioversel, Inc. for failure to make payments to defendant under the contract.

On October 11, 2011, the Court dismissed all claims against the Company under this lawsuit, with no right to appeal on the part of the Plaintiff.

-13-

GREENHUNTER ENERGY, INC.
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Series A Debenture Holders, et al.

On or about June 29, 2007, GreenHunter issued a Private Placement Memorandum to potential investors for 10% Series A Secured Redeemable Debentures. The plaintiffs allege that the defendants fraudulently made representations to the plaintiffs that the debentures were collaterally backed by the biodiesel refinery, when in fact the only collateral for the Debentures was security in GreenHunter’s previously wholly owned subsidiary, GreenHunter BioFuels, Inc.

Plaintiffs refiled an arbitration case for this matter to be heard in Houston, Texas. The parties have since conducted a preliminary hearing. There will be no discovery conducted between the parties and an arbitration hearing has now been set for January 2012. No amounts have been accrued as no losses are anticipated as a result of this claim. GreenHunter’s insurance carrier has been covering the cost of this litigation.

Note 13. Subsequent Events

On October 13, 2011, the Company entered into an agreement to sell one of our office buildings in Grapevine, Texas, for $1.7 million to Magnum Hunter Resources Corporation, an entity for which our Chairman and Chief Executive Officer is an officer and significant shareholder. The Company recognized a gain of $458 thousand on the sale of the building. A portion of the proceeds from the sale were used to reduce our note payable due November 30, 2017 by $1.4 million on the closing date.

-14-


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes associated with them contained in ourForm 10-K for the year ended December 31, 2010 and with the financial statements and accompanying notes included herein. The discussion should not be construed to imply that the results contained herein will necessarily continue into the future or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our management. The discussion contains forward-looking statements that involve risks and uncertainties (see “Forward-Looking Statements” above). Actual events or results may differ materially from those indicated in such forward-looking statements.

Overview

Prior to April 13, 2007, we were a startup company in the development stage and we have reentered the development stage effective July 1, 2010. Our previous business plan was to acquire and operate assets in the renewable energy sectors of, biomass, solar, wind, and geothermal. We refocused our efforts and currently have ongoing business initiatives in water management through GreenHunter Water, LLC and biomass through GreenHunter Mesquite Lake, LLC, (“Mesquite Lake”). It is our goal to become a leading provider of water management solutions and clean energy products as it relates to the oil and gas industry.

We believe that our ability to successfully compete in the clean water and renewable energy industries depends on many factors, including the location and low cost construction of our planned facilities, execution of our acquisition strategy, development of strategic relationships, achievement of our anticipated low cost production model, access to adequate debt and equity capital, proper and meaningful governmental support including tax incentives and credit enhancements, and recruitment and retention of experienced management.

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

As of September 30, 2011, we had a working capital deficit of $12.6 million which includes $4.3 million related to earlier construction activities at our Mesquite Lake Biomass Plant.

-15-

Water Resource Management

Recent improvements in drilling and completion technologies have unlocked large reserves of hydrocarbons in multiple unconventional resources plays in North America. These new drilling methods often involve a procedure called hydraulic fracturing or hydrofracking. This process involves the injection of large amounts of water, sand and chemicals under high pressures into rock formations to stimulate production. Unconventional wells can require three to twelve million gallons of water to complete a hydrofracking procedure. Some portion of the water used in production process will return to the surface as a by-product or waste stream; this water is commonly referred to by operators in the oil and gas industry as frack-flowback. In addition to frack-flowback, oil and natural gas wells also generate produced salt water or brine which is water from underground formations that is brought to the surface during the normal course of oil or gas production. Because the water has been in contact with hydrocarbon-bearing formations, it contains some of the chemical characteristics of the formations and the hydrocarbons. The physical and chemical properties of produced water vary considerably depending on the geographic location of the field, the geologic formation, and the type of hydrocarbon product being produced. Produced water properties and volume also vary through the lifetime of a reservoir.

Produced water is the largest volume by-product or waste stream associated with oil and gas exploration and production. Although the details on generation and management of produced water are not well understood on a national scale, the U.S. Department of Energy’s National Energy Technology Laboratory (NETL) estimates that the total volume of produced water generated by U.S. onshore and offshore oil and gas production activities in 2007 was nearly 21 billion barrels or 882 billion gallons (1 barrel equals 42 U.S. gallons).

While produced water (also known as oil field brine or brine due to its high salinity content) can be reused if certain water quality conditions are met, approximately 95 percent of U.S. onshore produced water generated by the oil and gas industry is disposed of by using high-pressure pumps to inject the water into under-ground geologic formations or is discharged under National Pollutant Discharge Elimination System (NPDES) permits. The remaining 5 percent is managed through beneficial reuse or disposed through other methods including evaporation, percolation pits, and publicly owned treatment works.

Federal and state legislation and regulatory initiatives relating to hydraulic fracturing are expected to result in increased costs and additional operating restrictions for oil and gas explorers and producers. Congress is currently considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process. Sponsors of two companion bills, which are currently pending in the House Energy and Commerce Committee and the Senate Committee on Environment and Public Works Committee have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, this legislation, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays or increased operating costs and could result in additional regulatory burdens for oil and natural gas operators. Several states are also considering implementing, or in some instances, have implemented, new regulations pertaining to hydraulic fracturing, including the disclosure of chemicals used in connection therewith. The adoption of any future federal or state laws or implementing regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process would make it more difficult and more expensive to complete new wells in the unconventional shale resource formations and increase costs of compliance and doing business for oil and natural gas operators.

Management, which has a significant and broad background in the oil and gas industry, has identified water reuse and water management opportunities in the energy industry as a new growth opportunity and is exploring various ways to reposition the Company to serve this growing segment through joint ventures, targeted acquisitions, development and deployment of water resource management technologies, and services including underground injection for disposal, evaporation, pre-treatment of water for underground injection for increasing oil recovery, offsite commercial disposal, onsite remediation and beneficial reuse.

We have filed an application with the United States Patent and Trademark Office to register the term “Total Water Management Solutions” as a proprietary trademark for use in our customer-facing marketing materials. Within our water management business our branded water services and products include Frac-Cycle™ and RAMCAT™. Frac-Cycle is a technology-agnostic water treatment system for oilfield water recycling and reuse that is customized to meet the unique recycling characteristics of frack-flowback and produced water. Our Frac-Cycle systems are designed to return either clean brine or fresh water that can be used again for a subsequent hydraulic fracturing procedure. RAMCAT (Remote Access

-16-

Monitor Compliance Asset Tracking) is a well head management system and compliance tool that uses a combination of proprietary software, advanced hardware and communications technology to provide a method for remote well-head management. Both Frac-Cycle and RAMCAT are available for immediate deployment in the Marcellus Shale in Appalachia and the Eagle Ford Shale in South Texas and we have prospective customers either using or evaluating these services and systems.

We recently entered into a definitive agreement to acquire approximately 99 mineral acres and 84 surface acres located in West Virginia where we will develop a commercial water service facility. The acquisition includes an existing well that has been approved for commercial water disposal. The acquisition will close in two phases where the first closing is anticipated on November 30, 2011 and the second closing will be upon the well commencing commercial operations. Total consideration to be paid consists of $750 thousand in cash and preferred stock to be valued at $300 thousand.

Planned use for the West Virginia location includes treatment facilities for oilfield produced water, frac water and drilling mud, salt water disposal wells and heavy equipment and frac tank lay-down yards. The property to be acquired through this transaction is strategically located in the heart of the drilling activity within the Appalachian resource plays of the Marcellus Shale and the new Utica Shale, as well as being strategically located nearby existing highway infrastructure where water hauling trucks are prevalent.

We have identified additional locations for water service and disposal facilities in the Appalachia and South Texas regions and are in various stages of negotiations with the owners of these properties for purchase or lease.

On August 31, 2011, we secured an order to deploy a next-generation above ground temporary water storage system in the Marcellus Shale of the Appalachian Basin. In addition we entered into a definitive agreement to install and operate an onsite semi-portable water treatment facility in the Marcellus Shale. The process includes the removal of chemicals and impurities in a sufficient amount for reuse in new wells scheduled for fracture stimulation.

On October 28, 2011, we secured a significant order to provide equipment rental and services which include thirty new frac storage tanks to an independent oil and gas company focused on Eagle Ford Shale drilling and development operations. The initial one year contract includes rental and management of multiple sized fluid tanks, including 500 BBL water storage tanks, manifolds and other services.

BioMass

In May 2007, we acquired Mesquite Lake, an inactive 18.5 megawatt (nameplate capacity) biomass waste-to-energy electricity facility located on a 40-acre site in unincorporated Imperial County, California. We began refurbishing the plant during 2008. During 2008, we found that the existing air permit for the plant was not sufficient to support our planned operations, and we put this project on hold during the fourth quarter of 2008 while we went through the re-permitting process. We executed a new power purchase agreement for this facility in October 2009 and we obtained the air permit in July 2010. We plan to resume construction on the facility, including an expansion of up to 10 Megawatts (“MW”), sometime during the first half of 2012, assuming additional sources of funding are obtained.

Phase I of the project is anticipated to be operational by the end of 2012. When Phase II of the project is completed and in operation, which is anticipated by the second half of 2013, the Mesquite Lake biomass facility will burn annually more than 280,000 tons of waste woody biomass which will be converted into green electricity to serve residential and industrial users.

Mesquite Lake is located in a region that the U.S. Bureau of Labor Statistics registers as having the highest unemployment rate in the United States of 27.3 percent, and the Imperial Valley Economic Development Corporation estimates that approximately 642 jobs will be directly or indirectly created as a result of the project development.

Wind Energy

Until April 2007, our primary business was the investment in and development of wind energy farms. We continue to own rights to a potential wind energy farm located in southern California. The significant decrease in natural gas prices over the past several years has caused a similar decline in wholesale electric prices which has caused our ability to develop new wind projects to be commercially uneconomical.

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Solar Energy

According to the National Renewable Energy Laboratory (NREL), average annual irradiance per square meter in the Imperial County is 6.23 kilowatt hours per day. Our Mesquite Lake biomass facility is located on a 40-acre parcel of which 30 acres could be utilized for the biomass operation leaving 10 to 15 acres for the development of additional renewable energy projects. During the first quarter of 2010, we formed a new subsidiary to explore the development of a solar energy farm on our Mesquite Lake project site and completed a generator interconnection request with the Imperial Irrigation District (IID). On March 16, 2010 we were notified that IID had preserved an interconnection queue position for our solar project. Subject to regulatory and permitting approvals, we believe there are unique economic and operational advantages to building a solar farm on this site most significant being the ability to share existing interconnection infrastructure with the biomass facility.

Results of Operations

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010:

Total Revenues

Our total revenue for the 2011 three month period was approximately $230 thousand versus $0 during the similar 2010 period. The increase is due to storage and other revenue generated through our water management segment.

Operating Costs

Our operating costs were $207 thousand for the three months ended September 30, 2011 and $0 for the three months ended September 30, 2010. The increase is due to operating costs incurred by our water management segment.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A”) was approximately $662 thousand and $1.6 million during the three months ended September 30, 2011 and 2010, respectively.

Unallocated corporate SG&A decreased approximately $557 thousand between the two periods, from $1.2 million to $646 thousand. The decrease is due to decreased legal fees in the third quarter of 2011 as well as decreased share based payment costs resulting from time based options vesting between the periods.

BioMass SG&A was a credit of approximately $6 thousand during the 2011 period resulting from a refund received versus expense of approximately $387 thousand during the 2010 period. The decrease is due to higher legal fees and other consulting fees incurred during the 2010 period.

Operating Income/Loss

Our operating loss was $686 thousand in the 2011 period versus $1.6 million in the 2010 period. The decrease in the operating loss is due to operating income generated by our water management segment as well as the decrease in unallocated corporate and our BioMass segment SG&A described above.

Our water management segment generated operating income of $5 thousand and $0 for the three months ended September 30, 2011 and 2010, respectively. The operating income in the 2011 period resulted from storage rental services provided.

Our BioMass segment generated operating income of approximately $6 thousand and operating loss of $387 thousand during the three months ended September 30, 2011 and 2010, respectively. The decrease in operating loss is due to the decrease in SG&A costs incurred by the BioMass segment as described above.

Our unallocated corporate operating loss was $694 thousand for the 2011 period compared to operating loss of $1.2 million during the 2010 period. The decrease in loss resulted from decreased SG&A expenses described above.

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Other Income and Expense

Other expense was $180 thousand in the 2011 period compared to other income of $563 thousand for the 2010 period. The decrease in other income is due to the settlement of trade payables at less than full value in the 2010 period versus none in the 2011 period, net of unrealized gain on convertible securities of $13 thousand in 2011 versus none in 2010.

Preferred Stock Dividends

Dividends on our preferred stock were $160 thousand in the 2011 period versus $164 thousand in the 2010 period. The decrease in preferred dividends is the result of accrued dividends converted into stated value on September 30, 2010 and March 31, 2011, net of $1.8 million of preferred converted to units in June 2011.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010:

Total Revenues

Our total revenue for the nine month 2011 period was approximately $230 thousand versus $0 during the similar 2010 period. The increase is due to storage revenue generated through our water management segment.

Operating Costs

Our operating costs were $207 thousand for the nine months ended September 30, 2011 and $0 for the nine months ended September 30, 2010. The increase is due to operating costs incurred by our water management segment.

Loss on Impairments

Loss on impairments was $0 and $161 thousand during the nine months ended September 30, 2011 and 2010, respectively. The impairment recognized in the 2010 period resulted from the write off of assets on inactive projects.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A”) was approximately $2.8 million and $3.4 million during the nine months ended September 30, 2011 and 2010, respectively, which included $345 thousand and $1.2 million, respectively, of non-cash stock compensation expense included in unallocated corporate SG&A as described below.

Unallocated corporate SG&A decreased approximately $845 thousand between the two periods, from $3.3 million down to $2.5 million. The decrease is due mainly to decreased share based compensation resulting from the vesting of options between periods.

BioMass SG&A was approximately $274 thousand during the 2011 period versus approximately $34 thousand during the 2010 period. The increase is due to $588 thousand of cancelled consultant fees related to a consulting agreement canceled during the nine months ended September 30, 2010, net of decreased in legal fees incurred in the 2011 period.

Wind Energy SG&A decreased approximately $14 thousand, down to $1 thousand for the nine months ended September 30, 2011, resulting from the Company not pursuing any new wind projects during the period.

Operating Loss

Our operating loss was $2.9 million and $3.7 million for the nine months ended September 30, 2011 and 2010, respectively. The decrease in operating loss is caused by the decrease in SG&A expenses incurred by unallocated corporate and decreased loss on impairments described above partially offset by the operating income generated from out Water Management segment and increased SG&A expenses incurred by our BioMass segment.

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Our operating loss generated by our Wind Energy segment decreased by $176 thousand, down to $5 thousand from $180 thousand during 2010 due to decreased impairment charges taken to wind projects.

Our BioMass segment generated operating losses of $274 thousand during 2011 and $34 thousand during 2010. The increase in loss is due to the increase in SG&A expense as described above.

Our Water Management segment generated operating income of $5 and $0 during the nine months ended September 30, 2011 and 2010, respectively. The operating income in the 2011 period resulted from storage rental services provided.

Our unallocated corporate operating loss was $2.6 million for the 2011 period, compared to operating loss of $3.5 million during the 2010 period. The decrease in loss resulted from decreased SG&A expenses described above.

Other Income and Expense

Other expense was $747 thousand in the 2011 period compared to other income of $2.4 million for the 2010 period. The decrease in other income is due to the settlement of trade payables at less than full value in the 2010 period versus none in the 2011 period.

Preferred Stock Dividends

Dividends on our preferred stock were $511 thousand in the 2011 period versus $484 thousand in the 2010 period. The increase is the result of accrued dividends converted into additional stated value which accrues dividends at 10%, net of a decrease in dividends resulting from the conversion of $1.8 million of preferred to units during June 2011.

Liquidity and Capital Resources

Cash Flow and Working Capital

As of September 30, 2011, we had cash and cash equivalents of approximately $15 thousand and a working capital deficit of $12.6 million as compared to cash and cash equivalents of $360 thousand and working capital deficit of $52.4 million as of September 30, 2010. Our working capital deficit at September 30, 2010 included $44.1 million of liabilities associated with assets held in receivership from the BioFuels entity that was subsequently disposed.

Operating Activities

During the nine months ended September 30, 2011, operating activities used $1.7 million versus $6.3 million by operating activities during the nine months ended September 30, 2010. We continue to have insufficient operating sources of income with which to pay our operating costs. 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 nine months ended September 30, 2011, our financing activities provided $1.6 million compared to $287 thousand for the nine months ended September 30, 2010. The cash provided during the 2011 period resulted from proceeds of $1.0 million from the issuance of common stock and warrants under our private placement offering and proceeds from borrowing on notes payable of $702 thousand, $670 thousand of which was from the Chairman and CEO. We made payments on notes payable of $157 thousand during the nine months ended September 30, 2011. In the 2010 period, the cash provided by financing activities was made up of borrowing on notes payable of $666 thousand, net of repayment on notes payable of $198 thousand and payment of deferred financing costs of $181 thousand.

Investing Activities and Future Requirements

Capital Expenditures

During the first nine months of 2011, we had capital expenditures of $7 thousand. During the first nine months of 2010, we had cash flows used by investing activities of $505 thousand, which was made up of cash capital expenditures of $1.3 million and expenditures related to the power purchase agreement of $1.2 million, partially offset by a change in restricted cash of $2.0 million.

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BioMass

We are seeking financing for a minimum of $24 million and a maximum of $34 million in capital expenditures for the biomass plant during the remainder of 2011 and first part of 2012. The use of proceeds would be to refurbish and fund the expansion costs at the Mesquite Lake biomass facility near El Centro, California.

Water Resource Management

On August 2, 2011, GreenHunter Water, LLC, entered into a definitive agreement to acquire approximately 99 mineral acres and 84 surface acres located in West Virginia where we will develop a commercial water service facility. The acquisition includes an existing well that has been approved for commercial water disposal. The acquisition will close in two phases where the first closing is anticipated on November 30, 2011 and the second closing will be upon the well commencing commercial operations. Total consideration to be paid consists of $750 thousand in cash and preferred stock to be valued at $300 thousand.

We have indentified additional locations for water service and disposal facilities in the Appalachia & South Texas regions and are in various stages of negotiations with the owners of these properties for purchase or lease.

On October 28, 2011, we secured a significant order to provide equipment rental and services which include thirty new frac tanks to an independent oil and gas company focused on Eagle Ford Shale drilling and development operations. The initial one year contract includes rental and management of multiple sized fluid tanks, including 500 BBL water storage tanks, manifolds and other services.

Obligations Under Material Contracts

We have an outstanding employment agreement with an executive officer through September 30, 2011. Our maximum commitment under the employment agreement, which would apply if the employee covered by the agreement was involuntarily terminated during a change in control, was $500 thousand at September 30, 2011.

Related Party Transactions

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Promissory Note was converted to 250,000 units which were offered under our private placement of common stock and warrants. See Note 8, Stockholders’ Equity, for more information.

Off-Balance Sheet Arrangements

From time to time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of September 30, 2011, the off-balance sheet arrangements and transactions that we have entered into include an employee agreement. We do not believe that this arrangement is reasonably likely to materially affect our liquidity or availability of, or requirements for, capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

Our operations may expose us to market risks in the areas of commodity price risk, foreign currency exchange risk, and interest rate risk. We do not have formal policies in place at this stage of our business to address these risks, but we may develop strategies in the future to deal with the volatilities inherent in each of these areas. We have not entered into any derivative positions through September 30, 2011.

Commodity Price Risk

Our Mesquite Lake facility will consume woody biomass as fuel to generate electricity. The woody biomass will be made up of any organic material not derived from fossil fuels, such as agriculture crop residue, orchard prunings and removals, stone fruit pits, nut shells, vineyard prunings, cull logs, eucalyptus logs, bark, lawn clippings, yard and garden clippings, leaves, silvicultural residue, tree and brush prunings, wood and wood chips and wood waste. We have performed a fuel availability study and believe there is ample woody biomass available at economically feasible prices in the geographic area surrounding Mesquite Lake. However, a number of factors including continued decline in economic activity, adverse weather conditions and competition from other consumers of woody biomass could result in reduced supply or higher prices for woody biomass which could increase our costs to produce electricity. In the future, we may decide to address these risks through the use of fixed price supply contracts as well as commodity derivatives.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no significant changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Bioversel, Inc

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On October 11, 2011, the Court dismissed all claims against the Company under this lawsuit, with no right to appeal on the part of the Plaintiff.

Certain Series A Debenture Holders

On or about June 29, 2007, GreenHunter issued a Private Placement Memorandum to potential investors for 10% Series A Secured Redeemable Debentures. The plaintiffs allege that the defendants fraudulently made representations to the plaintiffs that the debentures were collaterally backed by the biodiesel refinery, when in fact the only collateral for the Debentures was the equity ownership GreenHunter’s wholly owned subsidiary, GreenHunter Biofuels, Inc.

Plaintiffs filed an arbitration case for this matter to be heard in Houston, Texas. The parties have since conducted a preliminary hearing. There will be no discovery conducted between the parties and an arbitration hearing has now been set for January 2012. No amounts have been accrued as no losses are anticipated as a result of this claim. GreenHunter’s insurance carrier has been covering the legal cost of this litigation.

Item 6. 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*		Purchase and Sale Agreement, dated May 14, 2007 between GreenHunter Energy, Inc. and Chateau Energy, Inc. regarding acquisition of Mesquite Lake Resource Recovery Facility

10.2*		Registration rights agreement, dated March 9, 2007 between GreenHunter Energy, Inc. and certain institutional investors

10.3*******		Employment Agreement with Jonathan D. Hoopes

10.4**		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

10.5****		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

10.6******		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

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Exhibit
Number		Exhibit Title
10.7*****		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

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.

101.INS ††		XBRL Instance Document

101.SCH ††		XBRL Taxonomy Extension Schema Document

101.CAL ††		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB ††		XBRL Taxonomy Extension Label Linkbase Document

101.PRE ††		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF ††		XBRL Taxonomy Extension Definition Linkbase Document


*		Incorporated by reference to the Company’s Form 10, dated October 19, 2007

**		Incorporated by reference to the Company’s Form 10-Q, dated May 15, 2008

***		Incorporated by reference to the Company’s Form 8-K, dated August 21, 2008

****		Incorporated by reference to the Company’s Form 8-K, dated June 25, 2009

*****		Incorporated by reference to the Company’s Form 8-K, dated March 30, 2010

******		Incorporated by reference to the Company’s Form 10-K, dated December 31, 2009

*******		Incorporated by reference to the Company’s Form 8-K, dated October 2, 2009

†		Filed herewith

††		These exhibits are furnished herewith. In accordance with Rule 406T of Regulation S-T, these exhibits are not deemed to be filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized


	GreenHunter Energy, Inc.
Date: November 14, 2011	By:	/s/ Gary C. Evans
		Gary C. Evans
		Chairman and Chief Executive Officer

Date: November 14, 2011	By:	/s/ Jonathan D. Hoopes
		Jonathan D. Hoopes
		President and Chief Operating Officer

Date: November 14, 2011	By:	/s/ David S. Krueger
		David S. Krueger
		Vice President and Chief Financial Officer

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GreenHunter Resources (GRHH) Inactive 10-Q2011 Q3 Quarterly report

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