GreenHunter (NYSEMKT:GRH) continues to be precariously positioned from a funding perspective. Despite recent rosy headlines, attendance at expensive conferences and hosting fancy dinners for potential investors, the company seems to be running out of options to raise capital to fund its cash flow negative operations (including capex) and its multi-million dollar preferred dividends.
In GreenHunter's last financial report, it showed negative $9.1 million in working capital, which is a large deficit for a small company with a history of negative cash flows. GreenHunter had planned to fund that negative working capital through a combination of asset sales and issuance of preferred stock, as disclosed in its quarterly report.
GreenHunter failed to sell the assets it planned to sell, leading to the company "guiding up" its expected revenue, but not explaining how it would fund the millions of dollars in negative working capital, as well as its capex budget. And the $3.18 million gross (the company had to pay over 5% of that in commissions and expense reimbursements) it raised by issuing preferred stock may have simply gone to fund capex and pay required dividends on existing preferred stock, leaving the large negative working capital balance in place.
With a substantial negative working capital balance in place, it seems likely that GreenHunter may again have to issue a "going concern" warning in its financial statements. Except that the next warning may be worse than the past disclosure. Through the recent $3.18 million preferred issuance, GreenHunter completed the allowed issuance of preferred and common stock available under its shelf filing. This means that GreenHunter may need to take additional steps before issuing more preferred or common stock, which may negatively impact the market for such securities.
While GreenHunter has been able to secure a contract with sister company Magnum Hunter (NYSE:MHR) for Mag Tanks, which combined with rosy press releases and extensive stock promotion, may have driven GRH stock up recently, it remains unclear how capex on Mag Tanks will be funded. And it remains unclear how dividends on preferred stock will be funded, as GreenHunter's core business does not seem to generate enough cash flow to fund itself, much less fund payment of millions of dollars a year in dividends.
One possible explanation for why GreenHunter's former CFO (who had also been an executive at Magnum Hunter) may have left GreenHunter recently is that it appears the recent preferred issuances could be funding dividends on existing preferred. This is obviously unsustainable - if at any point the market for the preferred stock dried up, if GreenHunter is using new issuance to fund payments to existing stock, it would be unable to fund such payments. This is a precarious situation, and if fully disclosed as a risk by the company, could negatively impact the market for the preferred and the common stock.
This unsustainable funding situation and negative working capital position, combined with GreenHunter's disclosed plans to spend tens of millions of dollars on capex to grow its business, indicate that GreenHunter may be in the market to raise additional capital. If GreenHunter did raise more money, it would likely have to do so either in unregistered equity at a very large discount to the current market price, or as junior debt with a high interest rate and/or conversion feature. If GreenHunter issued more debt, it would further lever the company, impose a further interest and dividend burden on the asset base, and would "prime" the existing $50 million (face value) of the preferred. This could negatively impact the asset coverage of the preferred stock and could introduce further risk to the common equity.
One other consideration worth noting - competitor Nuverra (NYSE:NES) is much larger but has had similar funding and operational issues, and the previous leading provider of modular above-ground storage tanks, Poseidon Concepts, went bankrupt after admitting to falsifying financial statements. One of the reasons to invest in small cap companies is the hope that one day they might grow larger and achieve premium valuations associated with successful, mature businesses. Nuverra and Poseidon's issues dim that hope for GreenHunter, tarnishing the case for investing in the stock and challenging the underlying valuation support for GreenHunter's preferred and common stock.
Additional disclosure: I am short GRH and may buy or sell it or any other security mentioned at any time with no further notice.