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EX-99.1 - Broad Street Realty, Inc. | v168611_ex99-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K/A
Amendment
No. 1
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date
of Report: September 4, 2009
(Date of
earliest event reported)
B.H.I.T.
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
1-9043
|
36-3361229
|
(State
or other jurisdiction
|
(Commission
|
(I.R.S.
Employer
|
of
incorporation)
|
File
Number)
|
Identification
No.)
|
2255
Glades Rd., Suite 342-W, Boca Raton, Florida
|
33431
|
(Address
of principal executive offices)
|
(Zip
Code)
|
561-997-7775
(Registrant’s
telephone number, including area code)
Check the
appropriate box below if the Form 8-K/A filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
¨ Written communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
¨ Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Explanation
of Amendment
B.H.I.T.
Inc. (the “Company”) is filing this Form 8-K/A as Amendment No. 1 (this
“Amendment”) to its Current Report on Form 8-K dated September 4, 2009 (the
“8-K”) reporting the Company’s acquisition of The Wood Energy Group, Inc. (“Wood
Energy”). Exhibit 99.1 of the 8-K included the balance sheets of Wood Energy as
of December 31, 2008 and 2007 and the related statements of income,
stockholders’ equity, and cash flows for the years then ended (the “Audited
Financial Statements”) audited by R3 Accounting LLC (“R3”). R3 is not registered
with the Public Company Accounting Oversight Board (the “PCAOB”) and R3’s report
on the Audited Financial Statements did not refer to PCAOB standards. Therefore,
the Audited Financial Statements may be considered deficient, and the 8-K may
not be considered filed timely. The Company engaged Grant Thornton LLP to
re-audit the Audited Financial Statements. Grant Thornton is registered with the
PCAOB. This Amendment includes new Audited Financial Statements audited by Grant
Thornton, and Grant Thornton’s report on the Audited Financial Statements
referring to PCAOB standards.
The
statements of income included in the new Audited Financial Statements are
different from the previously-filed Audited Financial Statements as
follows:
Year ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Net
income as previously reported
|
$ | 324,403 | $ | 87,955 | ||||
Adjustment
of depreciation expense
|
(72,655 | ) | (32,264 | ) | ||||
Adjustment
of accrued liabilities
|
(219,266 | ) | 20,259 | |||||
Adjustment
of accounts receivable
|
(84,828 | ) | - | |||||
Adjustment
of costs incurred related to deferred revenue
|
(40,978 | ) | (12,218 | ) | ||||
Adjustment
of provision for income taxes
|
31,600 | (13,800 | ) | |||||
Other
|
8,844 | (816 | ) | |||||
Net
income (loss) as adjusted
|
$ | (52,880 | ) | $ | 49,116 | |||
Basic
and diluted income (loss) per common share, as adjusted
|
$ | (52.88 | ) | $ | 49.12 |
Changes
have also been made that impact Wood Energy’s unaudited balance sheet at June
30, 2009, and its unaudited statements of income and cash flows for the six
months ended June 30, 2009 and 2008 (the “Unaudited Financial Statements”).
Accordingly, the Unaudited Pro Forma Combined Financial Statements of the
Company and Wood Energy Group included in the original 8-K have changed in this
Amendment.
Finally,
the discussion under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations of Wood Energy” in Item 2.01 of the 8-K has
been revised in this Amendment to reflect the changes in the Audited Financial
Statements and the Unaudited Financial Statements.
Except as
described above, no other amendments have been made to the 8-K. This Amendment
does not reflect events occurring after the September 11, 2009 filing of the
8-K, or modify or update the disclosure contained in the 8-K in any way other
than as required to reflect the revisions discussed above and reflected
herein.
B.H.I.T.
Inc.
CURRENT
REPORT ON FORM 8-K
TABLE
OF CONTENTS
Item
|
Description
|
Page
|
||
Item
1.01
|
Entry
into a Material Definitive Agreement
|
3
|
||
Item
2.01
|
Completion
of Acquisition or Disposition of Assets
|
3
|
||
Description
of Business
|
6
|
|||
Management’s
Discussion and Analysis
|
11
|
|||
Description
of Property
|
13
|
|||
Risk
Factors
|
14
|
|||
Security
Ownership of Certain Beneficial Owners and Management
|
22
|
|||
Directors
and Executive Officers
|
23
|
|||
Executive
Compensation
|
27
|
|||
Certain
Relationships and Related Acquisitions, and Director
Independence
|
28
|
|||
Description
of Securities
|
29
|
|||
Market
Price of and Dividends on the Registrant’s Common Equity and Other
Shareholder Matters
|
31
|
|||
Legal
Proceedings
|
32
|
|||
Changes
in or Disagreements With Accountants
|
32
|
|||
Indemnification
of Officers and Directors
|
33
|
|||
Item
2.03
|
Creation
of a Direct Financial Obligation or an Obligation under an Off-Balance
Sheet Arrangement of a Registrant
|
34
|
||
Item
3.02
|
Recent
Sales of Unregistered Securities
|
34
|
||
Item
5.06
|
Change
in Shell Company Status
|
34
|
||
Item
9.01
|
Financial
Statements and Exhibits
|
34
|
2
Item 1.01
|
Entry into a Material Definitive
Agreement
|
The
disclosures under Item 2.01 of this current report under the captions “Loan
Agreements” and “Employment Agreements” is also responsive to Item 1.01 of this
report and is incorporated herein by reference.
Item 2.01
|
Completion of Acquisition or
Disposition of Assets
|
Closing
of the Acquisition of The Wood Energy Group, Inc.
Effective
September 4, 2009, B.H.I.T. Inc. (“BHIT” or the “Company”) completed the
acquisition of The Wood Energy Group, Inc., a Missouri corporation engaged in
the business of railroad tie reclamation and disposal (“Wood
Energy”). Wood Energy is now a wholly-owned subsidiary of the
Company. Pursuant to the Stock Purchase Agreement (the “Agreement”)
dated May 28, 2009, as amended, by and among the Company, Wood Energy and its
owners Stephanie G. Smith and Greg Smith, Trustees of the Stephanie G. Smith
Trust U/A dated December 20, 1995, as amended, and Andy C. Lewis, we purchased
all of the issued and outstanding stock of Wood Energy for a purchase price of
$5,366,000 in cash and $1.0 million in shares of common stock of the Company
priced at the fair market value of BHIT’s common stock as of the date of the
Agreement ($0.30 per share), or 3,333,334 shares, plus customary working capital
adjustments. The Agreement contains non-solicitation and
noncompetition provisions pursuant to which the sellers agreed not to solicit
any employee or affiliate of Wood Energy or engage in competitive business for a
period of two years after the date of closing of the transaction. Also, we
agreed to register the shares of common stock issued to the sellers with the
Securities and Exchange Commission (“SEC”) in the event we conduct any issuance
of registered securities as long as the sellers hold the shares.
Loan
Agreements
In order
to fund a significant portion of the $5.4 million cash portion of the purchase
price for the acquisition, Wood Energy entered into a $3.0 million five-year
term loan with Fifth Third Bank and paid the proceeds of this loan to the
sellers on behalf of BHIT. The term loan bears interest at the rate
of either prime plus 5.00% or LIBOR plus 450 basis points, at Wood Energy’s
option, with a LIBOR floor of 2%. The term loan is secured by
all of Wood Energy’s assets, including a pledge of outstanding
stock. The term loan requires Wood Energy to make monthly payments of
principal and accrued interest throughout the five-year term and a payment of
75% of any excess cash flow (as defined in the loan and security agreement) for
the fiscal year ending 2009. For subsequent years, Wood Energy will
be required to make excess cash flow payments only if certain conditions are not
met for such year.
Wood
Energy also entered into credit lines with Fifth Third Bank in the amounts of
$500,000 and $1.5 million for working capital and capital expenditure ("capex")
needs, respectively. The credit lines bear interest at the same rates
as the term loan, except that there is no floor on LIBOR draws under the working
capital loan. The working capital credit line has a one-year maturity
and the capex line has a five-year maturity. The working capital
credit line requires Wood Energy to pay interest during the term and the capex
line is amortized in the same manner as the term loan with a draw period of
twelve months following closing. Each credit line requires Wood
Energy to pay a 50 basis point fee on any unused portion of the line on a
quarterly basis. The working capital credit line is a revolving
credit line and is subject to a borrowing base equal to 80% of accounts
receivable under 90 days with a 25% cross-aging rule, and a 50% advance on
inventory. The credit lines prohibit Wood Energy from paying
dividends to BHIT without Fifth Third’s consent and limit the amount of
management fees Wood Energy may pay to BHIT to no more than $50,000 during the
2009 calendar year and “reasonable amounts” in future years.
3
Wood
Energy paid Fifth Third Bank a closing fee of 2% ($100,000) of the original
aggregate amounts of the loans ($5.0 million). All of the loans are
cross collateralized, cross-defaulted and guaranteed by BHIT. If an
event of default occurs, as defined in the loan and security agreement, the
entire balance of each loan becomes due and payable, the interest rate of each
loan increases by 2% until the default is cured and Fifth Third Bank is entitled
to take possession of or sell Wood Energy’s assets.
There is
no material relationship between Wood Energy (or BHIT) and Fifth Third Bank
other than in respect of the Loan Documents. The parties to the Loan
Documents made representations, warranties and covenants that are customary for
a commercial loan agreement consisting of a term loan and revolving line of
credit, including covenants that limit Wood Energy’s ability to make
distributions to us.
Private
Placement of Convertible Debentures
In order
to raise additional capital for our acquisition of Wood Energy, we conducted a
private placement of Series A Convertible Debentures (the
“Debentures”). The Debentures bear interest at the rate of 10%,
payable semi-annually. Each Debenture is convertible at the holder’s
option into shares of common stock of BHIT at a conversion price of $0.20 per
share, subject to customary adjustments for any future stock dividends, stock
splits and certain reorganizations and recapitalizations. Also, we
agreed that if we conduct a registered offering of securities following the
private placement, we will register the shares of common stock underlying the
Debentures at the request of the holders of these shares.
Through
this private placement, we issued Debentures in the aggregate principal amount
of $1,525,000 on September 4, 2009. Further information on the
private placement, our common stock and the Debentures may be found in Item 2.01
of this report under the caption “Description of Securities” and in Item 3.02,
Sale of Unregistered Equity Securities, each of which are incorporated by
reference herein.
Employment
Agreements
In
connection with the acquisition, Wood Energy entered into employment agreements,
dated September 4, 2009 with two Wood Energy executives, Greg Smith and Andrew
C. Lewis (the “Employment Agreements”). Prior to the acquisition, Mr.
Smith was Wood Energy’s president and Mr. Lewis was Wood Energy’s vice
president. The Employment Agreements provide that Mr. Smith and
Mr. Lewis will continue to serve in these capacities for five years following
closing of the acquisition, subject to earlier termination by either
party. The Employment Agreements also require each of Mr. Smith and
Mr. Lewis to refrain from participating in the railroad tie reclamation and
disposal businesses for a period of two years following termination of
his employment. Lastly, the Employment Agreements impose prohibitions
on soliciting customers and employees of Wood Energy. In
consideration of their obligations under their respective Employment Agreements,
Mr. Smith and Mr. Lewis will each receive salaries of $150,000 and employee
benefits that are customary for executive officers, will be entitled to equity
compensation as determined by BHIT’s board of directors and will be eligible for
an annual bonus based upon Wood Energy’s EBITDA for the prior
year. Each Employment Agreement requires BHIT to pay severance equal
to six months of salary (or a lesser amount if less than six months remains in
the employment term) if the executive is terminated without
cause. Wood Energy, Mr. Smith and Mr. Lewis also made customary
representations, warranties and covenants.
4
These
descriptions of the Agreement, Loan Documents, Debentures and Employment
Agreements do not purport to be complete and are qualified in their entirety by
reference to the complete texts of the agreements, which are filed as Exhibits
2.1, 4.1 and 10.1 through 10.7 hereto and incorporated herein by
reference.
Immediately
prior to our acquisition of Wood Energy, BHIT was a “shell” company subject to
the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange
Act”) but without significant operations or sources of revenues other than
its investments. BHIT’s existing operations related primarily to
servicing its cash investment portfolio and maximizing existing capital with
stable interest generating instruments. Having acquired Wood Energy,
we believe BHIT is no longer a shell company. Accordingly, pursuant
to the requirements of Item 2.01(f) of Form 8-K, set forth below is the
information that would be required if BHIT were filing a general form for
registration of securities on Form 10 under the Exchange Act.
Our
Company
Our
History Prior to Acquiring Wood Energy
The
Company was originally organized under the laws of the State of Massachusetts in
1985, under the name VMS Hotel Investment Trust, for the purpose of investing in
mortgage loans, principally to entities affiliated with VMS Realty Partners.
These loans were collateralized by hotel and resort properties. The Company was
reorganized as a Delaware corporation in 1987. From 1989 to 1992 we experienced
severe losses due primarily to a decline in real estate property values and the
resulting default on mortgage loans held by us. The Company changed
its name to B.H.I.T. Inc. in 1998.
On
January 24, 2007, a group of private investors purchased 41.7% of our
outstanding shares held by our largest shareholder at the time, Summa Holdings,
Inc. As a result of the transaction, James Benenson, Jr. and John V. Curci each
resigned as directors and officers of the company and Paul S. Dennis, Gary O.
Marino, Harvey J. Polly and Andrew H. Scott were appointed to fill vacancies in
the board. To learn more about our current management team, see the
section of this report captioned “Management” on page 23.
Because
certain directors and officers of the Company had experience with railroads, we
began investigating acquisitions of companies in the rail
industry. In 2007, we were presented with the opportunity to purchase
L.A. Colo, LLC (“Colo”), a railroad maintenance and construction company. The
transaction was terminated by us in October 2008 due to the performance of Colo,
resulting in arbitration proceedings over funds we had placed in
escrow. The arbitration was recently resolved in favor of Colo and
its sellers. For more information about Colo and the arbitration, see
the section of this report captioned “Legal Proceedings” on page
32.
In the
spring of 2009, the opportunity to acquire Wood Energy was presented to BHIT,
and our board of directors determined that it would be in the best interests of
BHIT’s shareholders to pursue the acquisition. Therefore, we entered
negotiations with the owners of Wood Energy to acquire it. As a
result of the acquisition, BHIT is now in the business of railroad tie
reclamation and disposal. This business is discussed more fully
below.
5
Our
Business Today
As used
for the duration of this report, all references to the “Company,” “we,” “our”
and “us” for periods prior to the closing of the acquisition refer to Wood
Energy, and references to the “Company,” “we,” “our” and “us” for periods
subsequent to the closing of the acquisition refer to BHIT and its wholly-owned
subsidiary, Wood Energy.
Overview
The Wood
Energy Group, Inc., headquartered in St. Louis, Missouri, is one of the nation’s
largest railroad tie recovery/energy generation companies. Founded in 2001, we
provide railroad tie pickup, reclamation and disposal services to the Class 1
railroads (defined by the American Association of Railroads as a railway company
with annual operating revenue over $346.8 million) and industrial
customers. Prior to that, our founder Greg Smith provided the same
services through Wood Waste Energy, Inc., a company he founded in 1991, built
into the largest railroad tie recovery business in the U.S., and sold in
1999. We operate primarily in Texas, Louisiana and Mississippi. We
reported $5.1 million in annual revenue in 2008, and we employ 25
people.
Our
services include picking up scrap railroad ties for major Class I railroads and
disposing of the ties by selling them to the landscape tie market or having the
ties ground to create shredded wood for sale as biomass fuel to the
co-generation market. In 2008, we picked up over 900,000 railroad
ties, 67% of which were used by the co-generation market, 28% for the landscape
market and 5% went to landfill. In addition, the Company has recently
begun processing wood products for a major forest products company for
additional sources of biomass fuel. We believe that key aspects of
our business model and certain attributes of our Company enable us to achieve
greater efficiencies and profit margins than our competitors in the railroad tie
recovery industry. Our strengths include:
|
·
|
A proven management
team;
|
|
·
|
Long-term
contracts that provide a stable and consistent revenue
stream;
|
|
·
|
An efficient and profitable
operating methodology;
|
|
·
|
Management personnel with the
expertise to grow the alternative fuel segment of the
business;
|
|
·
|
The pursuit of roll-ups of other
North American railroad tie pick-up companies, which present a significant
opportunity for long-term growth;
and
|
|
·
|
Creating economies of scale
through regional expansion.
|
Revenue Sources
Currently,
the Company has four sources of revenue:
|
·
|
Railroad Tie Pick-Up – the
Company charges Class I railroads for picking up and recovering spent
railroad ties from their
tracks;
|
|
·
|
Railroad Tie Disposal – the
Company sells scrap railroad ties for grinding as a biomass fuel
source;
|
6
|
·
|
Landscape Ties – the Company
sells higher-quality reclaimed railroad ties to wholesale landscape
companies; and
|
|
·
|
Wood Products – processing wood
products for co-generation markets as biomass
fuel.
|
We have
contracts with Class I railroads to pick up scrap railroad ties in Texas,
Louisiana and Mississippi:
|
·
|
A new five-year contract (expires
2014) with Union Pacific for tie pick-up in Texas and
Louisiana,
|
|
·
|
A long-term scrap railroad tie
supply agreement with International Paper for its Pineville, Louisiana
location (ties used as boiler fuel
source),
|
|
·
|
A long-term scrap railroad tie
and biomass fuel supply agreement with International Paper at its
Mansfield, Louisiana location (ties used as boiler fuel
source),
|
|
·
|
A 2009 contract for tie pick-up
with Canadian National Railway,
and
|
|
·
|
A contract with Campbell Group to
clean up wood residue from logging operations,
and
|
|
·
|
A five-year contract with
MeadWestvaco Corporation to provide biomass fuel for
co-generation.
|
Union
Pacific and International Paper account for approximately 50% and 25% of our
revenue, respectively.
The
Railroad Tie Recovery/Energy Generation Industry
There are
approximately 15 rail tie recovery companies in North America with total
industry revenue of approximately $65-75 million. Each company
operates within specific geographic regions and each has Class I railroads as
its major customers.
Income
can be generated from the rail ties that are recovered by:
|
·
|
Grinding and selling rail ties to
co-generation plants and utilities for use as alternative
fuel;
|
|
·
|
Re-selling rail ties for use in
the landscape industry; and
|
|
·
|
Selling ties that are
reconditioned back to the railroads for
re-use.
|
The
income potential from these revenue sources is increased by certain barriers to
entry that exist in the rail tie recovery industry. Class I railroads
require that contractors have experience and reliability in disposing non-usable
railroad ties through co-generation.
The
U.S. Railroad Industry and Increased Tie Replacement
U.S.
railroads operate over 140,000 miles of track, and earned $54 billion in
revenues in 2006. In the U.S., railroads account for more than 40% of all
freight transportation by volume — more than trucks, boats, barges or planes.
U.S. freight railroads are the world’s busiest, moving more freight than any
rail system in any other country. North American railroads move more
than four times as much freight as do all of Western Europe’s freight railroads
combined.
Due to
increases in railroad traffic and the increased maximum weight limit of rail
cars to 286,000 pounds, Class I railroads, regional railroads and short
line railroads continue to maintain and repair their infrastructure to ensure
safe operation of their railways. Demand for outsourcing of railroad
maintenance services is expected to increase due to increased union labor costs
as well as an aging population of railroad workers.
7
Further,
over the past five years, the increase of the maximum weight limit and increased
traffic has accelerated wear and tear of railroad infrastructure, increasing the
need for tie replacement. The nation’s railroads have struggled to keep pace
with the resulting growth of maintenance needs due to the tremendous cost of
qualified personnel and equipment. Track maintenance is capital
intensive and requires skilled personnel, resulting in railroads turning to
independent contractors to provide tie recovery services.
In 2008,
Class I railroads replaced over 15 million rail ties. Over the next
five years, they are expected to replace over 80 million ties.
Railroad
Ties as Biomass Fuel Source
Shredded
railroad ties are a viable source of biomass fuel for industrial plants and
utilities. We believe we can generate additional revenue by grinding the
railroad ties in-house and then selling them to co-generation plants. The
Company plans to purchase railroad tie grinding equipment later this year to
more fully integrate its operations in an effort to secure this additional
revenue.
Three
areas where railroad ties provide significant advantages as a biomass fuel
source include:
|
·
|
In the burn
process:
|
|
-
|
Burning ties increases combustion
efficiency and produces less
ash
|
|
-
|
Composition of shredded railroad
ties allows for higher burn
rates
|
|
-
|
Creosote-treated ties burn
cleaner than untreated wood
|
|
·
|
Environmental
impact:
|
|
-
|
Life cycle of treated wood ties
is ‘carbon neutral’
|
|
-
|
Utilizing railroad ties for fuel
results in fewer ties being placed into landfill, where the ties’ carbon
will be biologically converted into methane, a gas with 21 times the
global warming potency of CO 2
|
|
-
|
using shredded wood railroad ties
has been classified as a “green” environmental
alternative
|
|
·
|
Compared to other fuel
sources:
|
|
-
|
Every two tons of treated wood
ties used to generate electricity replace one ton of coal or 90 gallons of
oil (18 ties equal one ton)
|
|
-
|
Railroad ties have a higher BTU
value (7,500-10,000) compared to untreated wood
(3,500)
|
|
-
|
Ties have less moisture (12-26%)
compared to fresh cut wood
(40-60%)
|
|
-
|
Railroad ties cost about half as
much ($2.20) as natural gas ($4-5.00) to generate one million
BTUs
|
Growth Opportunities
We
believe Wood Energy has significant internal and external growth opportunities
over the next several years, including:
8
Internal
growth opportunities:
|
-
|
Expanding use of rail ties as an
alternative fuel and energy
source
|
|
-
|
Investing in new tie
grinding equipment, thus reducing outsourcing and increasing
margins
|
|
-
|
Recovering other wood products
that grinding equipment can accept such as telephone poles, bridge timbers
and pallets
|
|
-
|
Adding new business with Class I
railroads by expanding our service
area
|
|
-
|
Providing ancillary services such
as rail car cleaning, and
|
|
-
|
Providing tie recovery service to
short line railroads in addition to the Class I railroads we already
service.
|
External
growth opportunities:
|
-
|
Acquiring competitor tie recovery
businesses and consolidating management
teams,
|
|
-
|
Expanding service capabilities of
existing companies, particularly with respect to alternative fuel,
and
|
|
-
|
Expanding our customer base by
increasing the number of services we offer and entering new geographic
markets.
|
Management
Prior to
BHIT’s acquisition of Wood Energy, Wood Energy was managed by its principal
shareholders Greg Smith, president, and Andy C. Lewis, vice
president. Mr. Smith and Mr. Lewis agreed to continue serving in
these capacities following the acquisition. Mr. Smith has been in the
business of processing and disposing scrap railroad ties since
1991. He founded Wood Waste Energy in 1987 and built it into the
country’s largest railroad tie recovery service. Wood Waste Energy was the first
company to produce railroad tie-derived fuel. Mr. Smith sold Wood Waste Energy
in 1999 and it remains the largest railroad tie recovery company in the
U.S. Mr. Lewis has been managing railroad tie pick-up crews since
1997. He has worked with all the Class I railroads over the past 12 years. He
has extensive experience in managing field crew employees, hi-rail boom trucks,
tie-cranes, railcars and semi-tractor trailers.
Project
Management
The
Company’s business model focuses on efficient operations and improved profit
margins. Information flow between on-site employees and management personnel is
critical to achieve goals assigned for each project and complete projects
efficiently and effectively. Daily information flow provides management an
accurate view of productivity and profitability of each project so that our
financial performance can be closely monitored. We have developed a
management reporting system that is comparatively comprehensive for our industry
and we believe this system helps us effectively manage our
projects.
Staffing
Railroad
professionals are the core of our company. Experienced managers and supervisors
are critical to success in our industry, as are skilled equipment operators and
laborers. Many of our employees have worked for us for many years. Our personnel
are assembled into crews of various sizes depending on the needs of a given
project, and the crews have specific goals and incentives tailored to the
project which support safety, quality, productivity and profitability
goals. We currently have 25 employees who make up the railroad tie
pick-up crews. Our current infrastructure is capable of handling up to 1.5
million railroad ties each year.
9
Competition
There are
approximately 15 rail tie recovery companies in North America with total
industry revenue of approximately $65-75 million. Each company
operates within specific limited geographic region and each has Class I
railroads as its major customers. Competitors in the tie recovery
market include Wood Waste Energy, Shade Railroad Services and Recycle
Technologies International, Inc.
Government
Regulation
Our
operations are subject to federal, state and local regulation under
transportation laws and environmental laws. Our operations may be subject to
various regulations of the Surface Transportation Board, the Federal Railroad
Administration (FRA), the Occupational Safety and Health Administration, Federal
Environmental Protection Agency, state departments of transportation and other
state and local regulatory agencies. Because the FRA regulates railroad safety
and equipment standards, its regulations affect certain aspects of our business
operations and the services we provide, including worker safety. For example,
the FRA promulgated the Roadway Worker Protection Rules, which apply to rail
contractors and establish certain safety criteria that must be complied with on
rail projects. At this time, we believe we are substantially in compliance with
regulations applicable to our business.
Government Initiatives
In 2009,
the U.S. government introduced Renewable Energy Standards House Bill (HR-809)
which requires electrical suppliers to procure a certain percentage of
electricity from renewable energy sources. The bill includes biomass fuel and/or
cogeneration plants. The Treated Wood Council has petitioned the U.S. Senate to
include treated wood waste as biomass fuel.
In 2008,
the Texas legislature passed House Bill 1090 (HB-1090), which provides
incentives through a grant program at the Texas Department of Agriculture for
the delivery of agricultural and wood waste material to facilities that generate
electricity through the use of biomass. Producers of qualified biomass that
deliver the material to a biomass power plant in Texas receive $20 a dry ton. A
qualified biomass power facility placed in service after August 31, 2009 can
receive up to $6.0 million in reimbursements from the Department of
Agriculture.
Forward-Looking
Statements
Some of
the statements that we make in this report, including statements about our
confidence in our prospects and strategies, are forward-looking statements
within the meaning of § 21E of the
Securities Exchange Act. Some of these forward-looking statements can be
identified by words like “believe,” “expect,” “will,” “should,” “intend,”
“plan,” or similar terms; others can be determined by context. Statements
contained in this report that are not historical facts are forward-looking
statements. These statements are necessarily estimates reflecting our best
judgment based upon current information, and involve a number of risks and
uncertainties. Many factors could affect the accuracy of these forward-looking
statements, causing our actual results to differ significantly from those
anticipated in these statements. While it is impossible to identify all
applicable risks and uncertainties, they include our ability
to:
10
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·
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successfully operate Wood
Energy;
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·
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execute our acquisition/expansion
plan by identifying and acquiring additional operating
companies;
|
|
·
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obtain appropriate financing to
complete potential
acquisitions;
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·
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generate adequate revenue to
service our debt; and
|
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·
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comply with SEC regulations and
filing requirements applicable to us as a public
company.
|
You
should not place undue reliance on our forward-looking statements, which reflect
our analysis only as of the date of this report. The risks and uncertainties
listed above and elsewhere in this report and other documents that we file with
the SEC, including our annual report on Form 10-K, quarterly reports on Form
10-Q, and any current reports on Form 8-K, must be carefully considered by any
investor or potential investor in the Company.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations of Wood
Energy
This
discussion should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this current report on Form
8-K/A. Management’s discussion and analysis contains forward-looking statements
that are provided to assist in the understanding of anticipated future
performance. However, future performance involves risks and uncertainties which
may cause actual results to differ materially from those expressed in the
forward-looking statements. See “ Forward-Looking Statements .”
Overview
We are a
railroad tie reclamation and disposal company. Currently, we have
four sources of revenue:
|
·
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Railroad Tie Pick-Up – the
Company charges Class I railroads for picking up and recovering spent
railroad ties from their
tracks;
|
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·
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Railroad Tie Disposal – the
Company sells scrap railroad ties for grinding as a biomass fuel
source;
|
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·
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Landscape Ties – the Company
sells higher-quality reclaimed railroad ties to wholesale landscape
companies; and
|
|
·
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Wood Products – processing wood
products for co-generation markets as biomass
fuel.
|
We
operate primarily in Texas, Louisiana and Mississippi. We reported $5.1 million
in annual revenue in 2008, and we employ 25 people. Our contractual
relationships are generally long term, lasting several years, but specific tasks
are often completed within 90 days. Accordingly, we utilize the completed
contract method of accounting for revenue recognition. We recognize
revenue for the pick-up and disposal of used railroad ties upon the completion
of the scope of work required under our contracts, which is when we consider
amounts to be earned (evidence of an arrangement has been obtained, services are
delivered, fees are fixed or determinable and collectiblity is reasonably
assured). Billings related to the services for which contracts have not been
completed are recorded as deferred revenue. Direct costs, including payroll,
fuel, equipment rental, trucking expense and steel strapping costs that are
related to the pick-up and disposal of used railroad ties are deferred until the
related revenue recognition process is complete. We also receive revenue from
the sale of a portion of the reclaimed ties. These revenues are recorded when
the ties are sold to third parties. Operating costs and expenses consist
primarily of payroll and transportation expenses.
11
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operation is
based upon financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities, if any, at the
date of the financial statements. We base our estimates on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these
estimates. See a complete list of significant accounting policies in
Note 1 of the notes to the financial statements included herein.
Results
of Operations
Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008
Revenue
for the six months ended June 30, 2009 was $2,619,928, an increase of $297,419
or 12.8%, compared to $2,322,509 in revenue for the six months ended June 30,
2008. Due to a change in the payment methodology by the Company’s
major customer, the Company is incentivized to complete jobs sooner in 2009 than
in 2008, thus leading to more revenue being recorded in the 2009 period than in
the 2008 period.
Gross
margins in 2009 were 28.4% of revenues as compared to 33.8% in 2008. The
decrease in the margin is due to higher equipment repairs ($68,394), travel
($181,321) and trucking expense ($146,353), offset by a reduction in fuel
expense ($199,120) in the 2009 period as compared to 2008.
General
and administrative expenses were $407,266 in 2009, a reduction of $136,230 or
25.1% compared to $543,496 in 2008. This reduction is primarily due to a
decrease in officers’ salaries in 2009 of $17,000, legal fees related to a
worker’s compensation suit in 2008 of $51,406 and miscellaneous other expenses
which are individually not significant.
Depreciation
expense in 2009 was $150,178 compared to $109,832 in 2008. This increase is due
to equipment purchased and acquired under capital leases.
Interest
expense of $39,133 in 2009 is comparable to $33,263 in 2008.
Income
tax expense of $6,200 was recorded in 2009, compared to $27,000 in 2008. The
computation of income tax expense is based on the expected effective tax rate
for each full fiscal year.
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenue
for the year ended December 31, 2008 was $5,077,569, a decrease of $120,784 or
2.3%, when compared to the $5,198,353 in revenue for the same period one year
ago. Revenues are comparable, as the revenues from major customers during
these periods were consistent. Gross margins for the periods were 26.9% for 2008
and 30.7% in 2007. The reduction in the gross margin of 3.8% in 2008 is
primarily due to higher fuel costs which resulted in increased trucking expense
in 2008 of $439,240, offset by a reduction in subcontract labor
($232,925).
General
and administrative expenses decreased by $144,461, or 12.4% to $1,021,032 in
2008 from $1,165,493 in 2007. During 2008, the Company had a significant
reduction in officers’ salaries and benefits ($261,738), offset by an accrual
for the settlement and related legal costs for a worker’s compensation lawsuit
($141,593).
Depreciation
expense of $302,927 in 2008 is comparable to $287,706 in 2007.
Interest
expense of $84,702 in 2008 is comparable to $79,320 in 2007.
Income
tax expense of $11,400 recorded in 2008 is comparable to $13,800 in 2007, and
results from providing for uncertain tax positions.
12
Liquidity
and Capital Resources
To
finance the acquisition of Wood Energy, we entered a five-year senior secured
term loan in the amount of $3.0 million with Fifth Third Bank. BHIT
guaranteed the loan and Wood Energy is the borrower. Payments of
principal and interest are due monthly. Therefore the term loan will
increase our need for liquidity on an ongoing basis throughout the
year. To obtain additional funds for the acquisition, BHIT also
issued Series A Convertible Debentures bearing interest at the rate of 10%,
payable semi-annually. We raised $1,525,000 through the
issuance. The debentures are due in 5 years, and are convertible into
shares of common stock of BHIT at a conversion price of $0.20 a
share.
In
connection with the acquisition of Wood Energy, we obtained two credit lines in
the amounts of $500,000 and $1.5 million from Fifth Third Bank for working
capital and capital expenditures respectively. Draws on the working
capital line are based on specific percentages of eligible working capital
amounts, including accounts receivable and inventory. Draws on the
capital expenditures line are based on 80% of the cost of such capital
expenditures. We believe these funds will be sufficient to meet our
working capital needs in the near term. However, we cannot guarantee we will not
require additional funds for ongoing operations or other
acquisitions.
Additional
information on the loans, debentures and credit lines may be found under Item
2.01 of this current report on Form 8-K/A in the disclosures captioned “Loan
Agreements,” “Private Placement of Convertible Debentures,” and “Description of
Securities,” each of which is incorporated by reference herein.
We are
exploring various additional acquisition opportunities and may incur due
diligence, legal and accounting costs in connection with evaluating these
opportunities. At this time, we have no other material commitments
for capital expenditures, although we plan to purchase grinding equipment within
the next several months. We believe our cash is sufficient to meet
our needs for anticipated operating expenses for 2009. We are
exploring additional sources of financing to fund the possible acquisition of
additional operating subsidiaries. We cannot guarantee we will be able to obtain
adequate financing on acceptable terms.
Off-Balance
Sheet Financing Arrangements
We do not
have any material off-balance sheet financing arrangements.
Critical
Accounting Policies
For a
discussion of significant accounting policies that impact our financial
reporting, please turn to Note 1 of our financial statements beginning on page
F-7.
Inflation
We do not
believe inflation had a material impact on our results of operations in 2007,
2008 or the six-month period ended June 30, 2009.
Description
of Property
We do not
own, nor do we have any material leases for, any real property.
13
Risk
Factors
You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. There are numerous and varied risks,
known and unknown, that may prevent us from achieving our goals, and the risks
described below are not the only ones we will face. The risks below
are intended to reflect the material risks that are specific to our Company, to
our industry and to companies that seek to maintain a class of securities that
is registered or traded on any exchange or over-the-counter market.
Risks
Relating to Our Business
We
depend upon a limited number of customers and contracts to generate revenue, and
this concentration of customers and contracts may expose us to heightened
financial exposure.
Our
business is a service business, and our revenue is generated from a limited
number of contracts/projects and, to some degree, a limited number of customers.
For instance in 2007 and 2008, we derived 71% and 70% of our revenue,
respectively, from services performed for Union Pacific, and we anticipate
deriving over 50% of our revenue from Union Pacific in the coming
year. Although we have long-term agreements and relationships with
that customer and most of our other customers, the agreements may be terminated
on short notice. Thus, our concentration of customers and contracts
exposes us to greater financial risk than businesses with a broader customer
base. A significant reduction in the number of contracts or the loss
of a customer would have a material adverse effect on our business, financial
condition and results of operations. In addition, we rely on timely and regular
payments from our customers on ordinary course business terms. The failure of
our customers to pay on ordinary course business terms may also have a material
adverse effect on our business, financial condition and results of
operations.
Our
business is competitive and, as a service business, is based largely on
long-term contracts and personal relationships, which makes it difficult for us
to obtain new customers and contracts.
The rail
tie disposal and reclamation industry is competitive. Most companies
have long-term contracts and long-standing relationships with their customers,
which makes obtaining new business difficult. If we are unable to
obtain new customers and contracts and expand into other geographic markets,
growth of revenue and profitability could be slow or non-existent.
We
depend heavily upon highly skilled and knowledgeable management personnel and
laborers.
The
railroad construction, rehabilitation and maintenance industry is a highly
specialized one; therefore we depend significantly upon key management personnel
and highly-skilled laborers. Many of our employees are employed at-will. We
cannot guarantee that these employees will not choose to terminate their
employment. Similarly, we cannot guarantee that employees with employment
agreements can be renegotiated upon expiration or that skilled individuals can
be found to replace these employees. The loss of the services of one or more of
these employees before we are able to attract and retain qualified replacement
personnel could have a material adverse effect on our business, financial
condition and results of operations.
14
The
bankruptcy or insolvency of a major customer would adversely impact
us.
Any or
all of our customers could be subject to a bankruptcy proceeding or otherwise
close its doors. The bankruptcy or insolvency of a significant customer or a
number of smaller customers would have an adverse impact on our revenue because
a bankruptcy could delay efforts to collect past due balances and could
ultimately preclude full collection of these sums. Such events could
cause a decrease or cessation of revenue that would mean a reduction in our cash
flow. An extreme reduction in cash flow could cause us to default on
our obligations to our creditors.
Our
business is subject to substantial environmental and other government
regulation, and failure to comply with these laws and obtain necessary permits
and approvals could adversely affect our operations.
Our
operations are subject to federal, state and local regulation under
transportation laws and environmental laws, and sometimes require us to obtain
permits or other approvals. Our operations may be significantly affected by
regulations of the Federal Railroad Administration (FRA), and may also be
affected by regulations of the Surface Transportation Board, the Occupational
Safety and Health Administration, state departments of transportation and other
federal, state and local regulatory agencies. Our grinding and disposal
operations may also be affected by environmental laws and regulations regarding
emissions, handling, storage, transportation and disposal of waste and hazardous
chemicals, soil contamination and groundwater contamination. Our business
operations sometimes necessitate the use of hazardous chemicals. Liability can
arise from the use of these materials, and claims may be asserted from third
parties and even our own customers and employees. We could incur significant
costs from such claims as well as ongoing costs associated with mere
environmental regulatory compliance. Although we believe that we materially
comply with all of the various regulations applicable to our business and obtain
all necessary regulatory permits and approvals, a change in regulations or a
failure or delay in obtaining a necessary permit or approval could cause us to
incur significant additional costs or suffer a decrease in revenue or
profitability.
Our
business is inherently dangerous, particularly for our employees, requiring us
to consistently incur costs to minimize our potential liability
exposure.
We
operate a labor-intensive service business where our employees are regularly
subjected to dangerous conditions. We consistently incur costs to mitigate these
dangers and risks, including but not limited to safety training and payment of
workers’ compensation premiums. We cannot guarantee that these measures, or
others taken by us, will successfully prevent accidents and the potentially
substantial losses that can result from accidents.
Our
future growth is dependent upon many factors, some of which are not within our
control, such as whether demand for ties will increase as a “green” energy
source.
Growing
our business will require us to attract new customers and contracts while
expanding our workforce to accommodate their needs. However, the level of demand
for ties is largely beyond our control, and depends on whether shredded ties
will, in the future, be perceived as a biomass or “green” energy
source. Even if we are successful in obtaining new business, we
cannot guarantee that we will be able to manage cash flow sufficiently to expand
our supplies and workforce to accommodate our new business, nor can we guarantee
that we will be able to maintain high-quality services to our customers if we
are faced with rapid growth. In short, because we operate a labor-intensive
service business in a “niche” industry, future growth must be carefully managed
and sought at an achievable rate.
15
Changes
in technology may have a material adverse effect on our
profitability.
Research
and development activities are ongoing to provide alternative and more efficient
technologies to dispose of wood waste or produce power. It is possible that
advances in these or other technologies will reduce the cost of wood waste
disposal technologies to a level below our costs. Furthermore, increased
conservation efforts could reduce the demand for power or reduce the value of
our services. Any of these changes could have a material adverse effect on our
revenues and profitability.
Risks
Relating to Our Company
We
financed a substantial portion of the purchase price for the acquisition of Wood
Energy, and we recently obtained credit lines for working capital and capital
expenditure needs, all of which may decrease our profit margin or cause our
operations to be unprofitable.
We
borrowed $3.0 million of the $5.4 million cash portion of the purchase price for
Wood Energy, and we obtained credit lines in the aggregate amount of $2.0
million. For additional capital for the acquisition, we also issued
debentures in the amount of $1,525,000. Although investments in
leveraged companies offer the opportunity for capital appreciation, leveraged
investments also involve a high degree of risk. The amount of our
debt outstanding from time to time could have important consequences for us and
our investors. For example, it could:
·
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require
us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing funds available for operations,
acquisitions, redevelopments and other appropriate business development
opportunities that may arise in the
future,
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make
it difficult to satisfy our debt service
requirements,
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·
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limit
our flexibility in planning for, or reacting to, changes in our business
and the factors that affect the profitability of our business, including a
downturn in business or the general economy,
and
|
·
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limit
our flexibility in conducting our business, which may place us at a
disadvantage compared to competitors with less debt or debt with less
restrictive terms.
|
Additionally,
our organizational documents do not limit the level or amount of debt that we
may incur. Our ability to make scheduled payments of the principal
of, to pay interest on, or to refinance our indebtedness will depend primarily
on our future performance, which to a certain extent is subject to economic,
financial, competitive and other factors beyond our control. There
can be no assurance that our business will generate sufficient cash flow from
operations to service our debt or meet our other cash needs. If we
are unable to generate this cash flow from our business, we may be required to
refinance all or a portion of our existing debt or obtain additional financing
from our lender to meet our debt obligations and other cash needs. We
cannot assure you that any such refinancing, sale of assets or additional
financing would be possible on terms that we would find acceptable, and failure
to pay or refinance our debt could result in the acceleration of our debt and
foreclosure of substantially all of our assets.
16
Our
primary asset is Wood Energy, and our credit facilities include financial
covenants that limit our ability to obtain revenue from Wood Energy, limiting
our operating activities and results of operations.
We are a
holding company with no direct operations and our principal asset is our stock
of Wood Energy. Wood Energy is legally distinct from us and has no
obligation to make funds available to us. Further, our ability to
obtain distributions from Wood Energy by way of dividends, interest or other
payments (including intercompany loans) is subject to restrictions imposed by
our term loan and credit facilities (under which Wood Energy is the borrower and
we are a guarantor), such as:
·
|
We
may cause Wood Energy to distribute no more than $50,000 to us during the
2009 calendar year, and “reasonable amounts” in future years, and any
other transactions between us and Wood Energy (or between Wood
Energy and any related party) must be arm’s length
transactions,
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·
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We
must ensure that Wood Energy meets certain financial tests on a quarterly
basis,
|
·
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If
certain equipment is sold in the ordinary course of business, the sale
proceeds must be used to reduce debt unless they are used to purchase
replacement equipment,
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·
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We
may not cause Wood Energy to invest in, acquire assets of, or merge or
consolidate with, other companies,
and
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·
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We
may not cause Wood Energy to grant liens, incur additional indebtedness or
contingent obligations or obtain additional
financing.
|
These
covenants place constraints on our business and may adversely affect our growth,
earnings, cash flow, liquidity and financial condition. Further, we
may be required to comply with additional covenants. Failure to
comply with financial covenants may result in the acceleration of the debt and
foreclosure of Wood Energy’s assets, which would have a material adverse effect
on our business, earnings, cash flow, liquidity and financial
condition.
Our
performance depends substantially on the experience and judgment of our
management team.
Our
executive officers and directors are responsible for making critical decisions
regarding our business and strategies. Our stockholders will not be
entitled to vote on day-to-day operating decisions or even many significant
transactions, such as whether or not to acquire new assets or businesses and on
what terms. Poor execution on the part of our management team would
adversely affect our business and financial condition. In addition,
because they each own or control a significant number of our shares or hold
positions as executive officers, none of our directors are considered
“independent” under SEC or exchange rules. Therefore, the decisions of our
officers and directors will not be subject to the review of independent board
members and our board will not have the benefit of the input of independent
directors.
17
If
we are unable to hire additional qualified personnel, including members of
senior management, our ability to grow our business will be harmed.
We
currently have a small management team. Our failure to attract competent and
qualified personnel would have a material adverse effect on our operations. We
will need to hire qualified personnel with expertise in the railroad
construction industry to implement our business plan and to operate companies we
acquire. Attracting and retaining qualified and competent personnel in a timely
manner will be critical to our success. We compete for qualified individuals
with numerous other companies. Competition for such individuals is intense, and
we cannot be certain that our search for such personnel will be
successful. In addition, the loss of a key member of our management
team would negatively impact our Company, and we carry no key-man life insurance
for our executive officers or members of senior management.
We
may need to raise additional capital, which may not be available to us and may
limit our operations or growth.
We may
need additional capital to fund the implementation of our business plan. We
cannot assure you that any necessary subsequent financing will be successful.
Our future liquidity and capital requirements are difficult to predict as they
depend upon many factors, including our ability to identify and complete
acquisitions and the success of any business we do acquire. We may need to raise
additional funds in order to meet working capital requirements or additional
capital expenditures or to take advantage of other opportunities. We cannot be
certain that we will be able to obtain additional financing on favorable terms
or at all. If we are unable to raise needed capital, our growth and operations
may be impeded. In addition, if we raise capital by selling additional shares of
stock, your percentage ownership in BHIT will be diluted.
We
may not be able to successfully acquire or integrate new business.
We face a
variety of risks associated with acquiring and integrating new business
operations, including Wood Energy. The growth and success of our
business will depend to a significant extent on our ability to acquire and
operate new assets or business. We may compete with companies that have
significantly greater resources than we do for potential acquisition
candidates. We cannot provide assurance that we will be able
to:
·
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identify
suitable acquisition candidates or
opportunities,
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·
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acquire
assets or business operations on commercially acceptable
terms,
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·
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obtain
financing necessary to complete an acquisition on reasonable terms or at
all,
|
·
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manage
effectively the operations of Wood Energy or other acquired businesses,
or
|
·
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achieve
our operating and growth strategies with respect to the acquired assets or
businesses.
|
Our
management and operation of Wood Energy and of other businesses that we acquire
in the future could involve unforeseen difficulties, which could have a material
adverse affect on our business, financial condition, and operating
results.
Our
directors and officers own a significant interest in BHIT.
Our
directors and officers, together with Greg Smith and Andy Lewis who serve as
President and Vice President of our operating subsidiary, control 31.5% of our
outstanding shares (37.1% if they exercised their options and converted their
debentures). Accordingly, they possess a significant vote on all
matters submitted to a vote of our shareholders including the election of the
members of our board. This concentration of ownership may have the effect of
preventing or discouraging transactions involving an actual or a potential
change of control of BHIT, regardless of whether a premium is offered over
then-current market prices.
18
If
the value of our intangible assets is materially impaired, our financial
condition, results of operations and stockholders’ equity could be materially
adversely affected.
Due
largely to our acquisition of Wood Energy and the nature of our operations as a
service business, goodwill and other intangible assets represent a substantial
portion of our assets. If we make additional acquisitions, it is
likely that we will record additional intangible assets on our books. We
periodically evaluate our goodwill and other intangible assets to determine
whether all or a portion of their carrying values may no longer be recoverable,
in which case a charge to earnings may be necessary. Any future evaluations
requiring an asset impairment of our goodwill and other intangible assets could
materially affect our financial condition, results of operations and
stockholders’ equity in the period in which the impairment occurs.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
Our
internal controls and operations are subject to extensive SEC regulation and
reporting obligations. A company’s internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. We cannot be certain that our efforts to
develop and maintain our internal controls will be successful, that we will be
able to maintain adequate controls over our financial processes and reporting in
the future or that we will be able to continue to comply with our obligations
under Section 404 of the Sarbanes-Oxley Act. Before we acquired Wood Energy, it
was a privately held company not subject to SEC reporting requirements or the
financial controls and procedures applicable to publicly traded companies like
BHIT. In connection with the audit of Wood Energy’s financials, we determined
that its financial controls and procedures were deficient in certain respects.
We intend to put effective internal control over financial reporting in place at
Wood Energy, but cannot guaranty we will be able to do so. Any failure to
develop or maintain effective internal controls, or difficulties encountered in
implementing or improving our internal controls, could harm our operating
results or cause us to fail to meet certain reporting obligations. Ineffective
internal controls could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price
of our shares.
Wood
Energy may have material liabilities of which we are not aware, such as third
party claims.
Although
we have conducted a due diligence review of the financial condition and legal
status of Wood Energy, Wood Energy may have material liabilities that we did not
discover while conducting that review. Further, although the purchase agreement
for Wood Energy contained customary representations and warranties from the
sellers concerning Wood Energy’s assets, liabilities, financial condition and
affairs, we may have only limited recourse against Wood Energy’s prior owners or
principals in the event these prove to be untrue.
Current
state of debt markets could have a material adverse impact on our earnings and
financial condition.
The
commercial debt markets are currently experiencing volatility as a result of
certain factors including the tightening of underwriting standards by lenders
and credit rating agencies and the significant inventory of unsold
collateralized mortgage backed securities in the market. Credit spreads for
major sources of capital have widened significantly as investors have demanded a
higher risk premium. This is resulting in lenders increasing the cost for debt
financing. Should the overall cost of borrowings increase, either by increases
in the index rates or by increases in lender spreads, we will need to factor
such increases into the economics of our business plan. This may result in our
generating lower overall economic returns and potentially reducing cash flow
available for business operations and business development.
19
Risks
Relating to Our Shares
Directors’
options and outstanding convertible debentures may depress the price of our
common stock.
As a
result of the private placement, there are convertible debentures to purchase as
many as 7,625,000 million shares of our common stock for $0.20 per
share. In addition, we have issued options to purchase 3.0 million
shares to our directors as compensation for serving on the board at prices
ranging from $0.15 to $0.35 a share. If the directors’ options are exercised or
the debentures are converted, your ownership of the Company will be diluted. In
addition, the issuance of a significant number of shares upon conversion of
debentures or the exercise of options could depress the price of our stock if
there isn’t enough demand for the shares in the market. Even if the debentures
are not converted, the large number of shares issuable upon conversion of the
debentures could cause on overhang on the market and prevent the market price of
our stock from rising above the debenture conversion price of
$0.20.
If
you invest in BHIT, you may experience substantial dilution and the market price
of our shares may decrease, particularly in the coming months.
In the
event we obtain any additional funding, such financings may have a dilutive
effect on the holders of our securities. In addition, as part of its recruitment
process and in connection with our efforts to attract and retain employees and
directors, we may offer stock options, restricted shares or other types of
equity-based incentives to its future employees and directors. The Company’s
issuance of equity-based incentives to new hires, especially senior management
and directors, may be substantial and you may suffer significant dilution as a
result of such issuances. Also, we agreed that if we conduct a registered
offering of securities following the private placement, we will register the
shares of common stock issued to the sellers of Wood Energy and underlying the
convertible debentures issued in connection with our acquisition of Wood
Energy. Further, although shares of common stock issued to the
sellers and to be issued upon conversion of the debentures will be “restricted”
securities under the Securities Act of 1933 prior to any registration statement
being filed and being declared effective by the SEC, they may nonetheless be
sold prior to that time in reliance on certain exemptions contained in Rule 144
of the Securities Act. Such issuances and sales may also depress the
market price of our shares.
You
may not be able to sell your shares because there is a limited market for our
stock.
Although
our common stock is traded on the OTCBB, because we have had no significant
business operations for several years, currently there is limited trading volume
in our stock and there may be very limited demand for it as well. As a result,
it may be difficult for you to sell our common stock despite the fact it is
traded on the OTCBB.
Our
common stock is considered a “penny stock.”
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share, subject to
specific exemptions. The current market price for our common stock is less than
$5.00 per share and therefore is a “penny stock” according to SEC rules. This
designation requires any broker or dealer selling these securities to disclose
certain information concerning the transaction, obtain a written agreement from
the purchaser and determine that the purchaser is reasonably suitable to
purchase the securities. These rules may restrict the ability of brokers or
dealers to sell our common stock and may affect the ability of investors to sell
their shares.
20
We
do not intend to pay any cash dividends on our stock.
We do not
anticipate paying any cash dividends on our stock in the foreseeable future. The
payment of cash dividends depends on our future earnings, financial condition
and other business and economic factors that our board of directors may consider
relevant. Additionally, our credit facilities prohibit Wood Energy from paying
dividends to BHIT without our senior lender’s consent, and limits the amount of
management fees Wood Energy may pay to BHIT. Wood Energy may pay
management fees of no more than $50,000 to us during the 2009 calendar year and
“reasonable amounts” in future years. These restrictions on Wood
Energy make the payment of dividends by BHIT to its shareholders
unlikely. Because we do not intend to pay cash dividends, the only
return on your investment may be limited to the market price of the
shares.
21
Security
Ownership of Certain Beneficial Owners and Management
The
following table lists the stock ownership of our directors, executive officers
and significant stockholders as of September 4, 2009.
Pre-acquisition
|
Shares and
Debentures
Issued in
|
Percentage
|
||||||||||||||||||||||
Significant Stockholders
|
Shares
|
Options
|
Total
|
Percentage
(1)
|
Acquisition
(2)
|
Post-acquisition
(3)
|
||||||||||||||||||
Gary
O. Marino
Patriot
Equity, LLC
2255
Glades Road,
Suite
342-W
Boca
Raton, FL 33431
|
1,460,613
|
(4)
|
750,000
|
2,210,613
|
8.3
|
%
|
500,000
|
8.9
|
%
|
|||||||||||||||
Paul
S. Dennis
16330
Vintage Oaks Lane,
Delray
Beach, FL 33484
|
2,231,250
|
750,000
|
2,981,250
|
11.2
|
%
|
2,000,000
|
15.6
|
%
|
||||||||||||||||
Harvey
J. Polly
2901
South Ocean Blvd.,
Penthouse
5
Highland
Beach, FL 33487
|
2,486,250
|
(5)
|
500,000
|
2,986,250
|
11.3
|
%
|
—
|
10.0
|
%
|
|||||||||||||||
Bennett
Marks
Patriot
Rail, LLC
2255
Glades Road,
Suite
342-W
Boca
Raton, FL 33431
|
261,354
|
500,000
|
761,354
|
2.9
|
%
|
—
|
2.6
|
%
|
||||||||||||||||
Greg
Smith
2016
Kingspointe Drive
Chesterfield,
MO 63005
|
—
|
—
|
—
|
—
|
2,666,667
|
8.8
|
%
|
|||||||||||||||||
Andy
C. Lewis
868
South Allis Rd.
Wilmar,
AR 71675
|
—
|
—
|
—
|
—
|
2,666,667
|
8.8
|
%
|
|||||||||||||||||
All
directors, and executive officers as a group (7 individuals) (6)
|
6,720,921
|
2,625,000
|
9,345,921
|
32.8
|
%
|
8,083,334
|
47.7
|
%
|
(1)
|
There
were 25,838,051 shares outstanding on September 4, 2009 immediately prior
to BHIT’s acquisition of Wood Energy. Assumes the exercise of
options held by that director, but no others.
|
(2)
|
Indicates
3,333,334 shares of common stock issued to the sellers in the acquisition
(1,666,667 to each of Greg Smith and Andy C. Lewis) and 4,750,000 shares
issuable under the Series A Convertible Debentures issued in connection
with BHIT’s acquisition of Wood Energy.
|
(3)
|
This
percentage assumes conversion of any Series A Convertible Debenture held
by that director or officer, but does not assume conversion by any other
holders of the debentures.
|
(4)
|
Shares
held by Patriot Equity, LLC, a limited liability company of which Mr.
Marino is the sole member.
|
(5)
|
Includes
100,000 shares beneficially owned by Mr. Polly’s wife.
|
(6)
|
Greg
Smith and Andy C. Smith are directors and officers only of Wood Energy,
but have been included due to the number of shares beneficially owned by
them.
|
22
Equity
Compensation Plan Information
Our
directors each received a total of 500,000 options as compensation for serving
on our board in 2007 and 2008. 125,000 of these options were
subsequently cancelled upon a board member’s resignation from the
board. In 2008, a newly appointed director and officer received
125,000 options in connection with joining the board and 125,000 options for
serving as an officer. In 2009, 875,000 options were issued, 250,000
to each of three directors and 125,000 to a member of senior
management. BHIT has not issued any other options, warrants or rights
in 2009. Our equity plans are summarized in the following
table.
Plan
category
|
Number
of
securities
to
be issued
upon
exercise
of
outstanding
options
|
Weighted-average
exercise
price of
outstanding
options
|
Number
of
securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in
the first column)
|
|||||||||
Equity
compensation plans approved by security holders
|
—
|
—
|
—
|
|||||||||
Equity
compensation plans not approved by security holders
|
3,000,000
|
$
|
0.27
|
—
|
||||||||
Total
|
3,000,000
|
$
|
0.27
|
—
|
Management
Directors
and Executive Officers
Our
current directors and executive officers are:
Gary O. Marino, age 64, joined
our board in January 2007, was appointed chairman in January 2008 and chief
executive officer in November 2008. Mr. Marino has served as chairman, president
and CEO of Patriot Rail Corp., an owner and operator of short line and regional
railroads, since 2005, and formerly held the same positions at RailAmerica, Inc.
(NYSE:RRA), a company he founded in 1985, until his retirement in 2004. From
1984 until 1993, Mr. Marino served as chairman, president and CEO of Boca Raton
Capital Corporation, a publicly owned venture capital investment company. Prior
to that he spent more than fifteen years in commercial banking in New York as a
senior loan officer and was also president and CEO of two small business
investment companies (SBICs), as well as president of a Florida-based commercial
bank. Mr. Marino received his B.A. degree from Colgate University and his M.B.A.
from Fordham University. From 1966 to 1969, he served as an officer of the
United States Army Ordnance Corps. He has also served on the board of directors
of the American Association of Railroads.
23
Paul S. Dennis, age 71, joined
the board in January 2007 and was appointed interim chief financial officer in
February 2007 and interim chief executive officer in April 2008. Mr. Dennis
stepped down as interim CEO and CFO in November 2008 and was appointed as vice
president and treasurer. Mr. Dennis has served as president and CEO of
Associated Health Care Management Company, Inc. since 1977. Health Care
Management is a Cleveland, Ohio based company that managed eight nursing care
facilities and four congregate living facilities. The company has sold all but
one of its facilities. Mr. Dennis has also been a director and officer with
various companies and business ventures in the hardware distribution,
pharmaceuticals distribution and steel fabrication industries and a real estate
developer, general contractor, owner and investor.
Bennett Marks, age 61, joined
the board and was appointed vice president and chief financial officer in
November 2008. Mr. Marks has been executive vice president and CFO of Patriot
Rail Corp., an owner and operator of short line and regional railroads, since
2005. Mr. Marks has served as EVP and CFO of six publicly-held and
privately-owned companies in the transportation, healthcare, manufacturing,
distribution and telecommunications industries. While CFO at RailAmerica, Inc.
(NYSE:RRA), he developed and implemented the financial framework of the company
as revenues grew from $130 million to $450 million. Mr. Marks has more than
twenty years of experience in public accounting, including ten years as an
audit/client services partner with KPMG where he was an Associate SEC Reviewing
Partner and the Administrative Partner in Charge of the West Palm Beach office.
A licensed CPA in Florida and New York, he has held leadership positions in a
variety of community, charitable, and professional organizations. Mr. Marks
received his degree in accounting from New York University.
Harvey J. Polly, age 80,
joined our board in January 2007 and served as chairman until January
2008. Mr. Polly previously served as our CEO from 1995 to 2000 before
selling his interest in the company to Summa. He has been a principal
shareholder, director and COO of various short line railroads and The Hanover
Bank of Florida, and a principal and the president of Helena Rubinstein, an
international cosmetics company. Mr. Polly is a graduate of Keystone
College and Columbia University’s Graduate School of Business.
Other
Key Management Personnel
BHIT and
Wood Energy also utilize the following key management personnel:
C. Lawrence Rutstein, age 65,
serves as our vice president of administration. He also serves as
manager of special projects for Patriot Rail Corp. Mr. Rutstein has
over 40 years of legal and business experience. From 1968 through 1970, Mr.
Rutstein practiced securities law and corporate banking for several major
Philadelphia law firms, including Morgan, Lewis & Bockius and Blank,
Rome. In 1971-72, he served as Assistant Attorney General and Chief
Counsel to the Pennsylvania Department of Banking and later in 1972 became the
first in-house counsel for Continental Bank. In 1980, Mr. Rutstein
founded Parker & Rutstein, a corporate law firm in Philadelphia. In 1989, he
led an IPO for Cedar Group, Inc., and served as its CEO until
1991. Mr. Rutstein has also served on the boards of several NASDAQ
companies. Mr. Rutstein earned his undergraduate degree from the University of
Massachusetts and his law degree from Harvard Law School.
24
Greg Smith, age 47, founded
Wood Energy in 2001 and has served as its president ever since. Mr.
Smith has been in the business of railroad tie reclamation and disposal since
1991. He founded Wood Waste Energy and built it into the country’s largest
railroad tie recovery service. Wood Waste Energy was the first company to
produce railroad tie-derived fuel, with Mr. Smith developing a patented design
for processing used ties. He also developed an efficient system for crews to
pick up rail ties behind railroad system gangs. He has worked as a contractor
for many large railroads: BNSF (1997-2001); Union Pacific (1991-present);
Norfolk Southern (1994-2000); Illinois Central (1997-2001); and Kansas City
Southern (1998-2001). Mr. Smith sold Wood Waste Energy in 1999 and it remains
the largest railroad tie recovery company in the U.S. Mr. Smith is a
graduate of the University of Kansas.
Andy C. Lewis, age 41, has
served as vice-president of Wood Energy since 2001. Mr. Lewis has
been managing railroad tie pick-up crews since 1997, and has extensive
experience in managing field crew employees, hi-rail boom trucks, tie-cranes,
railcars and semi-tractor trailers. He has worked with many of the
Class I railroads over the past 12 years as a manager of Wood Waste Energy and
as Vice President of Wood Energy.
Committees
of the Board
We are
still in the early stages of our business plan and our board has only four
members. Because of the small size of our board, our directors have not yet
designated audit, nominating or other committees. Instead, these
responsibilities are handled by the entire board. Without an audit committee, we
have not designated a director as an “audit committee financial expert” as
defined by SEC rules. Although we are pleased with the diverse skills and level
of expertise that our directors possess, we intend to add additional directors
as our operations grow. Our board plans to form appropriate committees at that
time.
Code
of Ethics
In March
2004, our board of directors unanimously adopted a code of conduct and ethics
that applies to all of our officers, directors and employees, including our
principal executive officer and principal financial and principal accounting
officer. We will provide a copy of our code without charge upon written request
to Gary O. Marino, 2255 Glades Road, Suite 342-W, Boca Raton, Florida
33431.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10% of our common stock, to
make filings with the SEC reporting their ownership of our common stock and to
furnish us with copies of these filings. In 2008, Paul Dennis filed one Form 4
late reporting two purchases of our common stock. Based solely on our
review of copies of reports furnished to us, we believe that all other Section
16(a) filing requirements were met in 2008. Copies of these filings are
available on the SEC’s website at www.sec.gov.
Director
Nominations
Our board
of directors does not have a nominating committee. Instead, the board believes
it is in the best interests of the company to rely on the insight and expertise
of all directors in the nominating process.
25
Our
directors will recommend qualified candidates for director to the full board and
nominees are subject to approval by a majority of our board members. Nominees
are not required to possess specific skills or qualifications; however, nominees
are recommended and approved based on various criteria including relevant skills
and experience, personal integrity and ability and willingness to devote their
time and efforts to BHIT. Qualified nominees are considered without regard to
age, race, color, sex, religion, disability or national origin. We do not use a
third party to locate or evaluate potential candidates for
director.
The board
of directors considers nominees recommended by stockholders according to the
same criteria. A stockholder desiring to nominate a director for election must
deliver a notice to our president at our principal executive office. The notice
must include as to each person whom the stockholder proposes to nominate for
election or re-election as director:
•
|
the
name, age, business address and residence address of the
person,
|
|
•
|
the
principal occupation or employment of the person,
|
|
•
|
the
written consent of the person to being named in the proxy as a nominee and
to serving as a director,
|
|
•
|
the
class and number of our shares of stock beneficially owned by the person,
and
|
|
•
|
any
other information relating to the person that is required to be disclosed
in solicitations for proxies for election of director pursuant to
Rule 14a under the Securities Exchange Act of
1934;
|
and as to
the stockholder giving the notice:
•
|
the
name and record address of the stockholder, and
|
|
•
|
the
class and number of our shares beneficially owned by the
stockholder.
|
We may
require any proposed nominee to furnish additional information reasonably
required by us to determine the eligibility of the proposed nominee to serve as
our director.
26
Executive
Compensation
Summary
Compensation Table
BHIT did
not pay any executive officer, including our chief executive officers, any
salary, bonus or other cash compensation in 2008 or 2007, although our executive
officers did receive stock options in 2007 and 2008 for serving on our
board. The following table summarizes the compensation paid by us to
our chief executive officers and to officers of Wood Energy in 2008 and
2007.
Executive
Officers of BHIT:
|
Year
|
Salary
|
Bonus
|
Option
Awards
|
All
Other
Compensation
|
Total
|
||||||||||||||||
Gary
O. Marino
|
2008
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||
Chairman,
President and Chief Executive Officer (1)
|
2007
|
—
|
—
|
$
|
107,500
|
(2)
|
—
|
$
|
107,500
|
|||||||||||||
Andrew
H. Scott
|
2008
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||
Former
Interim Chief Executive Officer (3)
|
2007
|
—
|
—
|
$
|
107,500
|
(2)
|
—
|
$
|
107,500
|
|||||||||||||
Paul
S. Dennis
|
2008
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||
Former
Interim Chief Executive Officer (4)
|
2007
|
—
|
—
|
$
|
107,500
|
(2)
|
—
|
$
|
107,500
|
Executive
Officers of Wood Energy:
|
||||||||||||||||||||||
Greg
Smith
|
2008
|
$
|
313,000
|
—
|
—
|
—
|
$
|
313,000
|
||||||||||||||
2007
|
$
|
414,091
|
—
|
—
|
—
|
$
|
414,091
|
|||||||||||||||
Andy
C. Lewis
|
2008
|
$
|
283,222
|
—
|
—
|
—
|
$
|
283,222
|
||||||||||||||
2007
|
$
|
414,091
|
—
|
—
|
—
|
$
|
414,091
|
____________________ | |
(1)
|
Mr.
Marino was appointed our Chief Executive Officer in November
2008.
|
(2)
|
The
fair value of stock options is based on the FAS 123(R) compensation
expense recognized as of the date of grant. We use the Black-Scholes
option pricing model to estimate compensation cost for stock option
awards. Please see the table regarding the assumptions used in this
calculation in Note 1: “Summary of Business and Significant Accounting
Policies — Stock-Based Compensation” to our consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008.
|
(3)
|
Mr.
Scott resigned as our Interim Chief Executive Officer in April
2008.
|
(4)
|
Mr.
Dennis served as our Interim Chief Executive Officer from April 2008 to
November 2008. Until November 2008, he also served as our
Interim Chief Financial Officer.
|
27
Outstanding
Equity Awards at December 31, 2008
The
following table summarizes information with respect to the stock options held by
the executive officers in our summary compensation table as of December 31,
2008.
Name
|
Number
of
Underlying
Unexercised
Options
Exercisable
|
Number
of
Underlying
Unexercised
Options
Unexercisable
|
Option
Exercise
Price
|
Option
Expiration
Date
|
||||||||||||
Gary
O. Marino
|
250,000
|
—
|
$
|
0.35
|
10/23/2010
|
(1)
|
||||||||||
250,000
|
—
|
$
|
0.15
|
3/02/2010
|
(2)
|
|||||||||||
Andrew
H. Scott
|
125,000
|
—
|
$
|
0.35
|
10/23/2010
|
(1)
|
||||||||||
250,000
|
—
|
$
|
0.15
|
3/02/2010
|
(2)
|
|||||||||||
Paul
S. Dennis
|
250,000
|
—
|
$
|
0.35
|
10/23/2010
|
(1)
|
||||||||||
250,000
|
—
|
$
|
0.15
|
3/02/2010
|
(2)
|
|||||||||||
Greg
Smith
|
—
|
—
|
—
|
—
|
||||||||||||
Andy
C. Lewis
|
—
|
—
|
—
|
—
|
(1)
|
Options
vested on October 23, 2007, the date of grant.
|
(2)
|
Options
vested on March 2, 2007, the date of
grant.
|
Director
Compensation
None of
our directors received additional compensation in 2008 for serving on the
board. However, Bennett Marks, who was appointed to the board in
November 2008, did receive options to purchase 125,000 shares of the company’s
stock in connection with joining the board and options to purchase an additional
125,000 shares for serving as vice president and chief financial officer. The
following table summarizes information with respect to the compensation paid to
Mr. Marks during the fiscal year ended December 31, 2008.
Name
|
Fees
Earned
or
Paid
in
Cash
|
Option
Awards
|
All
Other
Compensation
|
Total
|
||||||||||||
Bennett
Marks
|
—
|
$
|
28,750
|
*
|
—
|
$
|
28,750
|
*
|
*
|
The
fair value of stock options is based on the FAS 123(R) compensation
expense recognized as of the date of grant. We use the Black-Scholes
option pricing model to estimate compensation cost for stock option
awards. Please see the table regarding the assumptions used in this
calculation in Note 1: “Summary of Business and Significant Accounting
Policies — Stock-Based Compensation” to our consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008, which is on file with the
SEC.
|
Certain
Relationships and Related Acquisitions, and Director Independence
BHIT did
not engage in any related party transactions in 2008 and is not currently
engaged in any related party transactions.
None of
our directors are independent, nor are we required to have independent directors
as shares of our common stock are not listed on any exchange but are traded
over-the-counter.
28
Description
of Securities
Common
Stock
Our
certificate of incorporation provides that we are authorized to issue 75.0
million shares of common stock, par value $0.01 per share. The holders of our
common stock are entitled to one vote per share on all matters to be voted upon
by our stockholders, including the election of directors. Our shares of common
stock are not convertible into any other security and do not have any preemptive
rights, conversion rights, redemption rights or sinking fund provisions.
Stockholders are entitled to receive dividends out of funds legally available if
our board of directors, in its discretion, determines to issue dividends and
only then at the times and in the amounts that our board of directors may
determine. In the event of our liquidation, dissolution, or winding up, our
stockholders receive ratably any net assets that remain after the payment of all
of our debts and other liabilities.
Our
certificate of incorporation also limits the number of shares that may be held
by any one person or entity. No person or entity may directly or
indirectly acquire shares if it would cause the person or entity to
be:
(1)
|
treated
as a 5% shareholder within the meaning of Section 382 of the Internal
Revenue Code, which relates to net operating losses (NOLs) and limitations
on a company’s ability to utilize
them,
|
(2)
|
treated
as a holder of shares in an amount that could otherwise result in a
limitation on our use of, or a loss of, NOLs,
or
|
(3)
|
the
beneficial owner (as defined under Rule 13d-3 of the Securities Exchange
Act of 1934) of more than 4.5% of our outstanding
shares.
|
Our board
may, at its option, exempt a shareholder from the foregoing limitations if such
shareholder can provide evidence to assure the board that no NOLs will be lost
or limited by such exemption or the board determines such exemption is in the
best interests of BHIT.
Convertible
Debentures and Piggyback Registration Rights
In
connection with our acquisition of Wood Energy, we conducted a private placement
of Series A Convertible Debentures. The debentures bear interest at
the rate of 10%, payable semi-annually. Each debenture is convertible
at the holder’s option into shares of common stock of BHIT at a conversion price
of $0.20 a share. The number of shares issuable under the debentures
will be adjusted if we (a) pay a stock dividend or otherwise make a distribution
or distributions with respect to the common stock payable in shares of its
capital stock (whether payable in shares of its common stock or of capital stock
of any class), (b) subdivide outstanding shares of common stock into a larger
number of shares, (c) combine outstanding shares of common stock into a smaller
number of shares or (d) issue by reclassification of shares of common stock any
shares of capital stock of the corporation. Currently there are
debentures in the principal amount of $1,525,000 outstanding, convertible into
7,625,000 shares at the initial $0.20 a share conversion price.
29
Also, we
agreed that if we conduct a registered offering of securities following the
private placement, we will register the shares of common stock issued to the
sellers of Wood Energy and underlying the debentures. We will bear
the registration expenses (exclusive of transfer taxes) of all such
registrations.
Anti-Takeover
Effect of Delaware Law
We are
subject to the provisions of Section 203 of the Delaware General Corporation
Law, an anti-takeover law. In general, Section 203 prohibits a publicly-held
Delaware corporation from engaging in a ‘‘business combination’’ with an
‘‘interested stockholder’’ for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a ‘‘business combination’’ includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder, and
an ‘‘interested stockholder’’ is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
voting stock.
Stock
Options
In 2008
and 2009, we issued compensatory stock options to certain members of our Board
of Directors exercisable for periods from 3 to 5 years from the date of
grant. As of June 30, 2009, there were 3,000,000 stock options issued
and outstanding and none had been exercised. For information on the
stock options, see the section of this report captioned “Director
Compensation.”
30
Market
Price of and Dividends on BHIT’s Common Equity
and
Other Shareholder Matters
Prior to
Wood Energy being acquired by BHIT, Wood Energy was a privately-held company and
there was no public market for the securities of Wood Energy. Upon
completion of the acquisition, Wood Energy became a wholly-owned subsidiary of
BHIT. Shares of BHIT common stock are traded over-the-counter and
sales are reported on the OTC Bulletin Board ® under
the symbol “BHIT.OB.” The last reported sale price on September 9,
2009 was $0.28 per share. The following table lists the high and low closing
sale prices of our stock for the periods indicated as reported on OTCBB. These
sale prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Fiscal Year Ending
|
Fiscal Year Ended December 31,
|
|||||||||||||||||||||||
December 31, 2009
|
2008
|
2007
|
||||||||||||||||||||||
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||||||||||||||
Fourth
Quarter
|
-
|
-
|
$
|
0.42
|
$
|
0.17
|
$
|
0.51
|
$
|
0.30
|
||||||||||||||
Third
Quarter (through Sept. 10, 2009)
|
$
|
0.43
|
$
|
0.28
|
$
|
0.60
|
$
|
0.25
|
$
|
0.50
|
$
|
0.20
|
||||||||||||
Second
Quarter
|
$
|
0.40
|
$
|
0.28
|
$
|
0.54
|
$
|
0.26
|
$
|
0.25
|
$
|
0.17
|
||||||||||||
First
Quarter
|
$
|
0.30
|
$
|
0.17
|
$
|
0.51
|
$
|
0.16
|
$
|
0.27
|
$
|
0.13
|
Holders
of Record
There
were 1,833 stockholders of record of BHIT’s common stock as of September 9,
2009. There are additional stockholders who own stock in their accounts at
brokerage firms and other financial institutions.
Dividends
We intend
to reinvest our earnings, if any, in the business, and have never declared or
paid, and do not intend to declare or pay, any cash dividends on our
stock. Even if we did not intend to reinvest our earnings, our credit
facilities prohibit Wood Energy from paying dividends to BHIT without our senior
lender’s consent and limits the amount of management fees Wood Energy may pay to
BHIT. Wood Energy may pay management fees of no more than $50,000 to
us during the 2009 calendar year and “reasonable amounts” in future
years. These restrictions on Wood Energy make the payment of
dividends by BHIT to its shareholders unlikely.
Outstanding
Options and Convertible Debentures
In 2008
and 2009, we issued compensatory stock options to certain members of our board
of directors exercisable for a period not to exceed three years, and for certain
options five years, from the date of grant. As of June 30, 2009,
there were 3,000,000 stock options issued and outstanding and none had been
exercised.
Also, in
connection with our acquisition of Wood Energy, we issued 3,333,334 shares of
common stock of BHIT to the sellers in payment of a portion of the purchase
price, and we conducted a private placement of Series A Convertible Debentures
bearing interest at a rate of 10% and convertible at the holder’s option into
shares of common stock of BHIT at a conversion price of $0.20 a
share. Currently there are debentures in the principal amount of
$1,525,000 outstanding, convertible into 7,625,000 shares of our common stock at
the initial $0.20 a share conversion price.
31
For
additional information on outstanding stock options, common stock issued to the
sellers of Wood Energy and our recent issuance of debentures in a private
placement, see the disclosures under Item 2.01 of this current report under the
captions “Closing of Acquisition of The Wood Energy Group, Inc.” and “Private
Placement of Convertible Debentures,” as well as the disclosure under Item 3.02
of this current report, captioned “Recent Sales of Unregistered
Securities.”
The
transfer agent for our common stock is Computershare Trust Company, Inc., 350
Indiana Street, Suite 800, Golden, Colorado, 60602, Attn: Patrick Hayes,
telephone: 303-262-0711.
Legal
Proceedings
On July
24, 2008, we entered into an asset purchase agreement with L.A. Colo, LLC
(“Colo”) and Iron Rail Group, LLC (“Iron Rail”), the owner of Colo, pursuant to
which we agreed to purchase substantially all of the assets of Colo for $15.0
million, subject to adjustment. Colo provides railroad maintenance and
construction services to short line railroads and industrial customers. The
transaction was delayed due to deteriorating financial and economic conditions
and was ultimately terminated by us due to a reported reduction in the financial
results of Colo, which were contrary to prior representations of Colo as to
their financial performance.
Upon
termination, Colo and Iron Rail demanded payment of the $350,000 that had been
placed into escrow. We authorized the distribution of $10,000 of the escrow to
Iron Rail on October 31, 2008, but because of the nature of the circumstances
surrounding the termination of the acquisition we disputed that Colo and Iron
Rail are entitled to the remaining $340,000. On November 18, 2008, Colo and Iron
Rail instituted arbitration proceedings before the American Arbitration
Association under the terms of the escrow agreement against BHIT and the escrow
agent to obtain the remaining contents of the escrow in an action captioned L.A.
Colo, LLC and Iron Rail Group LLC v. B.H.I.T. Inc. and Kohrman Jackson &
Krantz PLL. The parties had a binding arbitration in July 2009 to resolve this
matter. A final decision was reached on September 2, 2009. The
arbitration panel awarded Colo and Iron Rail the $340,000 in escrow as well as
attorneys’ fees, interest and costs, the amounts of which have yet to be
determined. The $340,000 escrow proceeds are reflected as a deposit
in BHIT’s June 30, 2009 balance sheet filed in its Form 10-Q for the six months
ended June 30, 2009. The arbitration award will be reflected as an
expense in the third quarter of 2009.
We are
not aware of any other pending legal proceedings involving BHIT, nor were any
proceedings terminated in the quarter ended June 30, 2009. We are not
aware of any pending legal proceedings involving Wood Energy other than
litigation arising in the ordinary course of business. We believe the outcome of
the litigation will not have a material adverse effect on our
financial condition, cash flows or results of operations.
Changes
in or Disagreements With Accountants
None.
32
Recent
Sales of Unregistered Securities
Prior to
being acquired by BHIT, Wood Energy did not engage in any recent sales of
unregistered securities. For information on issuances of unregistered
securities by BHIT in connection with the acquisition, see the disclosures under
Item 2.01, Completion of Acquisition or Disposition of Assets, of this current
report, and particularly the captions “Closing of the Acquisition of The Wood
Energy Group, Inc.” and “Private Placement of Convertible Debentures,” as well
as the disclosure under Item 3.02 of this current report, captioned “Recent
Sales of Unregistered Securities.”
Indemnification
of Officers and Directors
The
Delaware General Corporation Law, Section 102(b)(7) provides that directors,
officers, employees or agents of Delaware corporations are entitled, under
certain circumstances, to be indemnified against expenses (including attorneys’
fees) and other liabilities actually and reasonably incurred by them in
connection with any suit brought against them in their capacity as a director,
officer, employee or agent, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful. This statute provides
that directors, officers, employees and agents may also be indemnified against
expenses (including attorneys’ fees) actually and reasonably incurred by them in
connection with a derivative suit brought against them in their capacity as a
director, if they acted in good faith and in a manner they reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification may be made without court approval if such person was adjudged
liable to the corporation.
Our
certificate of incorporation and by-laws provide we must indemnify our directors
and officers, to the fullest extent authorized by the Delaware General
Corporation Law, in any action, suit or proceeding, whether criminal,
administrative or investigative, brought against a director or officer by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of BHIT or is or was serving at
the request of BHIT as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefits. Our directors
and officers are entitled to this indemnification whether the basis of the
proceeding is alleged action in an official capacity or in any other capacity
while serving as a director, officer, employee or agent. Our directors and
officers are entitled to be indemnified against all reasonably incurred or
suffered expense, liability, loss, attorneys’ fees, judgments, fines, ERISA
excise taxes (or penalties) and amounts paid (or to be paid) in
settlement. Subject to certain limitations set forth in our
certificate of incorporation and by-laws and subject to applicable law, amounts
paid to indemnify officers and directors may be paid in advance of final
disposition of a proceeding.
Our
by-laws authorize us to maintain insurance for the indemnification of directors
and officers even in instances where we would not be permitted to indemnify them
under the Delaware General Corporation Law.
33
Item 2.03
|
Creation of a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement of a
Registrant.
|
The
disclosures under Item 2.01 of this current report under the caption “Loan
Agreements” are also responsive to Item 2.03 of this report and are incorporated
herein by reference.
Item 3.02
|
Recent Sales of Unregistered
Securities
|
In
connection with our acquisition of Wood Energy, we issued 3,333,334 shares of
our common stock to the sellers of Wood Energy in payment of a portion of the
purchase price. We also conducted a private placement of Series A
Convertible Debentures. The debentures bear interest at the rate of
10%, payable semi-annually. Each debenture is convertible at the
holder’s option into shares of common stock of BHIT at a conversion price of
$0.20 per share. We agreed that if we conduct a registered offering
of securities following the private placement, we will register the shares of
common stock issued to the sellers of Wood Energy and underlying the
debentures.
Through
this private placement, debentures were issued in the amount of
$1,525,000. The issuance of shares to the sellers and the private
placement of debentures were made in reliance on Section 4(2) of
the Securities Act of 1933 (the "Securities Act") for the offer and
sale of securities not involving a public offering and Rule 506 of Regulation D
of the Securities Act. For additional information on the
characteristics of the debentures and our common stock, see the caption
“Description of Securities” under Item 2.01 of this current report on Form 8-K,
which is incorporated by reference herein.
Item 5.06
|
Change in Shell Company
Status
|
As a
result of the consummation of the acquisition of Wood Energy, we believe that we
will no longer be a “shell company” as that term is defined in Rule 405 of the
Securities Act of 1933 and Rule 12b-2 of the Securities Exchange Act of
1934.
Item 9.01
|
Financial Statements and
Exhibits.
|
(a)
|
Financial
Statements of Business
Acquired.
|
Wood
Energy’s audited balance sheets as of December 31, 2008 and 2007 and audited
statements of income, stockholders’ deficit and cash flows for the years ended
December 31, 2008 and December 31, 2007 and Wood Energy’s unaudited balance
sheet as of June 30, 2009 and unaudited statements of income, stockholders’
deficit and cash flows for the six months ended June 30, 2009 and unaudited
statements of income and cash flows for the six months ended June 30, 2008 are
attached to this report and may be found in pages F-2 through F-18 of Exhibit
99.1. As explained on Page 1 of this current report on Form 8-K/A, these audited
and unaudited financial statements are different than those contained in the
Form 8-K originally filed on September 4, 2009.
34
(b)
|
Pro Forma
Financial Information.
|
The
following pro forma financial information is attached and may be found on pages
F-13 through F-18 of Exhibit 99.1:
|
·
|
Unaudited Pro Forma Condensed
Combined Balance Sheet of B.H.I.T. Inc. and The Wood Energy Group, Inc. as
of June 30, 2009
|
|
·
|
Unaudited Pro Forma Condensed
Combined Statements of Income of B.H.I.T. Inc. and The Wood Energy
Group, Inc. for the six months ended June 30, 2009 and the year ended
December 31, 2008
|
The pro
forma financial statements give effect to BHIT's acquisition of Wood Energy as
if the acquisition had occurred at the beginning of the periods presented for
income statement and per share information and at the date of the balance sheet
for balance sheet information. However, the pro forma financial
statements are not necessarily indicative of the combined financial position of
the companies had the acquisition occurred as of those periods. The pro
forma financial statements should be read in conjunction with the separate
historical financial statements of Wood Energy, appearing elsewhere herein, and
the historical financial statements of BHIT in its annual reports on Form 10-KSB
and 10-K and quarterly reports on Forms 10-QSB and 10-Q, all of which have been
filed with the SEC. As explained on Page 1 of this current report on Form 8-K/A,
these pro forma financial statements are different than those contained in the
Form 8-K originally filed on September 4, 2009.
(c)
|
Shell Company
Acquisitions.
|
All
financial statements and pro forma financial statements that are required to be
filed with this report are contained herein. Reference is made to Items 9.01(a)
and 9.01(b) and the exhibits referred to therein which are incorporated herein
by reference.
(d)
|
Exhibits.
|
No.
|
Description
|
|
2.1
|
Stock
Purchase Agreement, dated May 28, 2009, by and among B.H.I.T. Inc.,
Stephanie G. Smith and Greg Smith, Trustees of the Stephanie G. Smith
Trust U/A dated December 20, 1995, as amended, Andy C. Lewis, and The Wood
Energy Group, Inc. Exhibit 10.1 to the Form 8-K filed July 28,
2009 is incorporated by reference herein.
|
|
2.2
|
Amendment
to Stock Purchase Agreement, dated August 31, 2009, by and among B.H.I.T.
Inc., Stephanie G. Smith and Greg Smith, Trustees of the Stephanie G.
Smith Trust U/A dated December 20, 1995, as amended, Andy C. Lewis, and
The Wood Energy Group, Inc. Exhibit 2.2 to the Form 8-K filed September
11, 2009 is incorporated by reference herein.
|
|
2.3
|
Second
Amendment to Stock Purchase Agreement, dated September 3, 2009, by and
among B.H.I.T. Inc., Stephanie G. Smith and Greg Smith, Trustees of the
Stephanie G. Smith Trust U/A dated December 20, 1995, as amended, Andy C.
Lewis, and The Wood Energy Group, Inc. Exhibit 2.3 to the Form 8-K filed
September 11, 2009 is incorporated by reference herein.
|
|
4.1
|
Form
of Series A Convertible Debenture. Exhibit 4.1 to the Form 8-K filed
September 11, 2009 is incorporated by reference herein.
|
|
10.1
|
Loan
and Security Agreement, dated September 4, 2009 by and between The Wood
Energy Group, Inc. and Fifth Third Bank. Exhibit 10.1 to the Form 8-K
filed September 11, 2009 is incorporated by reference
herein.
|
35
10.2
|
Term
Note, dated September 4, 2009 from The Wood Energy Group, Inc. in favor of
Fifth Third Bank. Exhibit 10.2 to the Form 8-K filed September 11, 2009 is
incorporated by reference herein.
|
||
10.3
|
Revolving
Note for Working Capital Credit Line, dated September 4, 2009 from The
Wood Energy Group, Inc. in favor of Fifth Third Bank. Exhibit 10.3 to the
Form 8-K filed September 11, 2009 is incorporated by reference
herein.
|
||
10.4
|
Capex
Note, dated September 4, 2009 from The Wood Energy Group, Inc. in favor of
Fifth Third Bank. Exhibit 10.4 to the Form 8-K filed September 11, 2009 is
incorporated by reference herein.
|
||
10.5
|
Guaranty,
dated September 4, 2009 by B.H.I.T. Inc. in favor of Fifth Third Bank.
Exhibit 10.5 to the Form 8-K filed September 11, 2009 is incorporated by
reference herein.
|
||
10.6
|
Employment
Agreement, dated September 4, 2009 by and between The Wood Energy Group,
Inc. and Greg Smith. Exhibit 10.6 to the Form 8-K filed September 11, 2009
is incorporated by reference herein.
|
||
10.7
|
Employment
Agreement, dated September 4, 2009 by and between The Wood Energy Group,
Inc. and Andy C. Lewis. Exhibit 10.7 to the Form 8-K filed September 11,
2009 is incorporated by reference herein.
|
||
21.1
|
List
of Significant Subsidiaries. Exhibit 21.1 to the Form 8-K filed September
11, 2009 is incorporated by reference herein.
|
||
99.1
|
(a)
|
Audited
Balance Sheets and Audited Statements of Income, Stockholder's Equity
and Cash Flows of The Wood Energy Group, Inc. as of and for the
fiscal years ended December 31, 2008 and December
31, 2007
|
|
(b)
|
Unaudited
Balance Sheet and Unaudited Statements of Income, Stockholder's Equity and
Cash Flows as of and for the six months ended June 30, 2009 and June 30,
2008
|
||
(c)
|
Unaudited
Pro Forma Condensed Combined Balance Sheet of B.H.I.T. Inc. and The Wood
Energy Group, Inc. as of June 30, 2009 and Unaudited Pro Forma
Condensed Combined Statements of Income of B.H.I.T. Inc. and
The Wood Energy Group, Inc. for the six months ended June 30, 2009 and the
year ended December 31, 2008
|
||
99.2
|
Press
Release dated September 9, 2009. Exhibit 99.2 to the Form 8-K filed
September 11, 2009 is incorporated by reference
herein.
|
36
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
B.H.I.T.
Inc.
|
||
By:
|
/s/ Gary O. Marino
|
|
Name:
|
Gary
O. Marino
|
|
Title:
|
Chief
Executive Officer
|
|
Dated:
December 10, 2009
|
37