From time to time, HII may be subject to routine litigation, claims, or disputes in the ordinary course of business. In the opinion of management; no pending or known threatened claims, actions or proceedings against HII are expected to have a material adverse effect on HIIs consolidated financial position, results of operations or cash flows. HII cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits and investigations.
On April 9, 2012, our board of directors adopted the 2012 Stock Incentive Plan. The purpose of our 2012 Stock Incentive Plan is to advance the best interests of the Company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either stock options or compensation stock under the plan is 10,000,000 shares, subject to adjustment. No shares have been issued under this Plan.
The Company evaluated all events or transactions that occurred after March 31, 2012 up through the date the Company issued these financial statements and did not identify any recognizable or nonrecognizable subsequent events.
We currently employ 1 person. Our executive offices are located at 710 North Post Oak Road, Suite 400, Houston, Texas 77024. Our telephone number is (713) 821-3157 and our Internet address is www.HWEGstockholder.com.
Our predecessor, Global Realty Management Group, Inc., or GRMG, was incorporated in the State of Florida in 1997. In June 2002, GRMG reincorporated under the laws of the State of Delaware from the State of Florida pursuant to a merger with a newly formed Delaware corporation. Under the terms of this reincorporation merger, GRMG changed its name from Global Realty Management Group, Inc. to Excalibur Industries, Inc. in connection with merging with the Excalibur operations. In October 2005, we changed our name from Excalibur Industries, Inc. to Shumate Industries, Inc. In February 2009, we changed our name from Shumate Industries, Inc. to Hemiwedge Industries, Inc. to emphasize and focus on our valve product technology after the recent sale of assets related to our contract machining business discussed below. On August 31, 2011, we changed our name to HII Technologies, Inc., which name change was required in connection with the May 2011 asset sale discussed below.
Sale of KMHVC, Inc.s (f/k/a Hemiwedge Valve Corporation) AssetsDiscontinued Operations
On May 10, 2011, we, and our wholly owned subsidiary KMHVC, Inc. (f/k/a Hemiwedge Valve Corporation (HVC, collectively the Sellers) consummated the sale of substantially all of HVCs assets to Chromatic Industries, Inc. (Chromatic). The sale was effected pursuant to an asset purchase agreement (the HVC Purchase Agreement) pursuant to which HVC transferred substantially all of its assets and certain enumerated liabilities to Chromatic. in exchange for approximately $7,688,000 payable as follows: (a) Cash in a net amount (after reduction of repayment of the April 5, 2011 and April 29, 2011 promissory notes issued by, Asymmetric Investments, LLC) equal to $6,032,000, which cash would be paid directly to existing creditors of the Sellers to extinguish Sellers debt obligations, with any remainder being paid to the Sellers, and (b) assume scheduled trade account payables and foundry payables of the Sellers not exceeding $1,656,000. In addition, at Closing, the 3,500,000 warrants to purchase our common stock issued to Asymmetric on April 5, 2011 were forfeited. We retained approximately $300,000 in net cash at closing.
Working capital and balance sheet issues were the primary reasons we sold the assets of our KMVHC subsidiary in May 2011. We had significant debt, much of which was secured by a pledge of our assets. Further, certain KMHVC customers and suppliers had concerns relating to the new and unique nature of our valve product line, such as the ability to procure spare parts in the future. While the product line ultimately did grow in the two years prior to its sell in 2011, it grew at a rate slower than anticipated and created additional capital constraints on us. These factors, along with the significant secured debt severely affected our capital raising efforts. Selling KMHVCs assets allowed us to repay our creditors and provided working capital for our current plan.
Accordingly, our financial results for the three months ended March 31, 2012 and 2011 present the operation of HVC as discontinued operations.
Our subsidiary manufactured and sold proprietary engineered valves under the product line known as the Hemiwedge® Cartridge valve. This quarter-turn hemispherical wedge valve engineered to provide what we believe are substantial technological improvements compared with what is available in the marketplace today, such as traditional butterfly, ball, and gate valve designs.
KMHVC manufactured the valves in house whereas we intend to use third parties to manufacture our products. In addition, the KMHVC valves are surface level flow control products whereas we intend to focus on down hole measurement tools.
Acquisition of Hemiwedge Assets
On December 5, 2005, we acquired the intellectual property rights to the Hemiwedge® line of products, including the Hemiwedge® valve, from Soderberg Research and Development, Inc. and certain of its affiliates. The intellectual property rights acquired consist of all patents, trademarks, and internet website relating to the Hemiwedge® product line. For these intellectual property rights, we paid $138,500 in cash and a two-year, six percent (6%) promissory note in the principal amount of $100,000, payable in 24 equal installments of principal and interest. In addition, we agreed to deposit: (a) $72,000 into an escrow account, the property of Soderberg Research Inc., to be paid in the form of a monthly advance in the amount of $3,000 for each month of the 24 month period beginning with the month immediately following the closing date; and (b) three percent (3%) of the net sales proceeds collected from customers from: (i) gross revenue from sales of products to which the acquired intellectual property relates, less (ii) sales and/or use taxes, import and/or export duties, outbound transportation costs, and amounts allowed or credited due to returns, which payments shall begin two years after the closing date and continue until March 29, 2013. The $72,000 in monthly advances shall be credited against the three percent (3%) of the net sales proceeds. In May 2011, this royalty obligation was assumed by Chromatic Industries in connection with their purchase of the Hemiwedge technology and related assets with consent provided by SRD. We have no further obligation to SRD since May 2011.
Activities to Date
Since May 2011, we procured a new trading symbol for our common stock, which commenced trading on February 29, 2012 and all activities required in connection with the same including completion of independent audits for our 2009, 2010 and 2011 financial statements. Operationally, since May 2011, we have reviewed several business strategies and ideas including down hole tool technologies used in the drilling and production of oil and natural gas and services businesses benefiting from the increased activity levels in resource exploration plays such as oilfield shale areas.
Plan of Operation
While there can be no assurances of any milestones being met by us, below is a brief description of our planned activities over the next 12 months:
We will continue reviewing drilling and production products and services technologies developed by inventors, design and operating companies. Our plan is to in-license, acquire or develop internally products or services that can be used in the energy services market particularly focusing on oilfield resource areas such as shale plays. Currently we anticipate finalizing due diligence and discussions surrounding a potential opportunity in down hole MWD tools during 2012. We intend to utilize our relationships with larger energy services companies, end user customers and our supply chain experience to establish a product line or services company that generates operational revenues and cash flow. At this time, we have not determined when these product or services opportunities would be obtained by us and when any of these technologies would be commercialized in the marketplace.
Trends, events and uncertainties
The primary driver for our current business as well as our prior contract machining and engineered valve product business is the demand for oil and gas. The status of the global economy impacts oil and natural gas consumption.
During the latter portion of 2008 and throughout much of 2009, there was a substantial decline in oil and natural gas prices and demand for our services due to the worldwide recession. Since then, oil prices have rebounded. According to the International Energy Agencys (IEA) January 2011 Oil Market Report, 2011 world petroleum demand is forecasted to increase 2% over 2010 levels. Emerging economies continue to be a significant factor in the recovery, while mature economies play a lesser role. The outlook thus faces uncertainties, as the global recovery continues to remain somewhat fragile. However, we believe that, over the long term, any major macroeconomic disruptions may ultimately correct themselves as the underlying trends of smaller and more complex reservoirs, high depletion rates, and the need for continual reserve replacement should drive the long-term need for our future products and services.
A decrease in oil and gas prices causing an industry wide slowdown may result in certain companies to bring in-house the manufacturing of certain component parts otherwise made at outside machining and manufacturing companies. This practice directly impacted our prior contract machining and engineered valve product business. As we intend to sell fully assembled products (and not just components) to end-users, we believe this particular practice will not affect our business.
Results of Operations for the Three Months Ended March 31, 2012
Revenues. We had no revenues for the three months ended March 31, 2012 and 2011, as our industrial valve sales operations have been re-classified as Discontinued Operations for the periods mentioned above as a result of our sale of KMHVC, Inc.s (f/k/a Hemiwedge Valve Corporation) assets in May 2011.
Selling, general, and administrative. Selling, general and administrative expenses decreased slightly to $76,333 for the three months ended March 31, 2012, as compared to $76,499 for the comparable period in 2011. These expenses during the first three months ended March 31, 2012 were primarily the result of accrued payroll for our principal for approximately $18,000 and professional fees associated with the ongoing expenses of being a public reporting company of $39,000.
Interest expense. We did not incur any interest expense for the three months ended March 31, 2012 as compared to $206,784 for the comparable period in 2011. The decrease is due to all outstanding debt being paid in full in May 2011.
Loss from discontinued operations. We did not incur any loss from discontinued operations for the three months ended March 31, 2012 as compared to a net loss from discontinued operations of $364,531 for the comparable period in 2011. The difference period over period is primarily attributable to our sale of our valve division in May 2011.
Net loss. We had net loss of $76,333 for the three months ended March 31, 2012 as compared to a net loss of $647,814 for the comparable period in 2011. The Net Loss was primarily attributed to selling, general and administrative expenses as discussed above.
Liquidity and Capital Resources
We have financed our operations, acquisitions, debt service, and capital requirements through cash flows generated from operations, debt financing, loans from officers, and issuance of equity securities. In addition, we sold substantially all of our assets in May 2011 and used the proceeds to retire all outstanding indebtedness and retain net cash of approximately $300,000. We had cash of approximately $95,032 and working capital of $30,752 as of March 31, 2012 as compared to cash of $76,651 and working capital of $100,965 as of March 31, 2011.
Net cash provided by operating activities for the three months ended March 31, 2012 was $18,381 resulting primarily from our decrease in prepaid expenses and increase in liabilities which was offset by our net loss of $76,333. By comparison, net cash used in operating activities for the three months ended March 31, 2011 was $273,102.
We did not have any financing activities in the three months ended March 31, 2012. Our net cash provided by financing activities for the three months ended March 31, 2011 was $270,000 consisting of proceeds of notes payable.
The net increase in cash three months ended March 31, 2012 was approximately $18,381 as compared to a net decrease in cash of $3,939 for the three months ended March 31, 2011.
Sale of KMHVC, Inc.s (f/k/a Hemiwedge Valve Corporation) AssetsDiscontinued Operations
On May 10, 2011, we, and our wholly owned subsidiary KMHVC, Inc. (f/k/a Hemiwedge Valve Corporation (HVC, collectively the Sellers) consummated the sale of substantially all of HVCs assets to Chromatic Industries, Inc. (Chromatic). The sale was effected pursuant to an asset purchase agreement (the HVC Purchase Agreement) pursuant to which HVC transferred substantially all of its assets and certain enumerated liabilities to Chromatic in exchange for approximately $7,688,000 payable as follows: (a) Cash in a net amount (after reduction of repayment of the April 5, 2011 and April 29, 2011 promissory notes issued by, Asymmetric Investments, LLC) equal to $6,032,000, which cash would be paid directly to existing creditors of the Sellers to extinguish Sellers debt obligations, with any remainder being paid to the Sellers, and (b) assume scheduled trade account payables and foundry payables of the Sellers not exceeding $1,656,000. In addition, at Closing, the 3,500,000 warrants to purchase our common stock issued to Asymmetric on April 5, 2011 were cancelled. We retained approximately $300,000 in net cash at closing.
From January 2010 through March 2010, we issued $88,000 of 10% notes which, had maturity dates of less than one year and were secured by junior lien on our assets. The proceeds were used for working capital and general corporate purposes. The issuances were exempt under Rule 506 of the Securities Act of 1933, as amended. We also issued 5 year warrants to purchase 296,250 shares of our common stock with an exercise price ranging from $0.05 to $0.10 in connection with these notes.
In January 2011, we issued a $100,000 10% secured convertible note and 75,000 shares of our common stock in connection with the note to a single accredited investor. The proceeds were used for working capital and general corporate purposes.
In February 2011, we issued a $62,000 10% secured convertible note to a related party. The proceeds were used for working capital and general corporate purposes.
From April to May, 2011, we issued a $900,000 10% secured promissory note and a 15-month common stock warrant to purchase 3,500,000 shares of our common stock at an exercise price of $0.001 per share to a single accredited investor. The proceeds were used to repay outstanding indebtedness and for working capital and general corporate purposes.
All of these promissory notes were repaid with the proceeds our May 2011 sale of substantially all of our assets related to our valve division.
June 2010 Amended and Restated Loan Documents
Pursuant to the provisions of an Assignment of Note, Loan Documents and Security Interests (Assignment Agreement) dated June 30, 2010 by and among Stillwater National Bank and Trust Company (the Bank), as assignor, and Eads Investments I, LLC and D. Bradley McWilliams (collectively, New Lenders), as assignees, the New Lenders purchased from the Bank all outstanding indebtedness and obligations (Prior Indebtedness) of Hemiwedge Industries, Inc. (the Corporation) and its subsidiary, Hemiwedge Valve Corporation (Subsidiary) (collectively, Borrowers) under and pursuant to the Loan and Consolidation Agreement and certain other loan documents, each dated September 30, 2008 among Borrowers, certain other parties and the Bank (collectively the Prior Loan Documents).
As a condition of the purchase of the Prior Indebtedness by the New Lenders from the Bank under the Assignment Agreement, the Bank agreed to release the Borrowers from all obligations and indebtedness to the Bank under the Original Loan Documents pursuant to the terms of a Consent and Release Agreement dated June 30, 2010.
As a condition of (a) the purchase by the New Lenders of the Prior Indebtedness and all obligations of Borrowers to the Bank under the Prior Loan Documents and (b) the agreement by the New Lenders to extend and
renew the Prior Indebtedness and obligations of the Borrowers under the Prior Loan Documents and (c) the Lenders forbearance from accelerating the loans and Prior Indebtedness under the Prior Loan Documents, we entered into an Amended and Restated Loan Agreement and certain other loan documents and security agreements with the New Lenders (New Loan Documents) all dated June 30, 2010 evidencing our indebtedness and granting certain security interests to the New Lenders (New Indebtedness).
The New Loan Documents dated June 30, 2010 consisted of: (i) an Amended and Restated Loan Agreement (the Loan Agreement) by and among us and the New Lenders; (ii) a 10% Amended and Restated Promissory Note in the aggregate principal amount of $706,125 issued by the Corporation and the Subsidiary in favor of the New Lenders (the Note); (iii) an Amended and Restated Security Agreement by and among the Corporation, the Subsidiary and the New Lenders (the Security Agreement); and (iv) a Stock Pledge and Security Agreement between the Corporation and the New Lenders (the Pledge Agreement).
In addition, we issued New Lenders 5-year common stock purchase warrants (the Warrants) to purchase 2,875,000 shares of our common stock (Warrant Shares) at an exercise price of $0.10 per share); provided that the amount of Warrant Shares shall be reduced to 575,000 shares of Common Stock at a purchase price of $0.10 per share if, on or before August 15, 2010 either (i) New Lenders sell all (but not less than all) of their interest in Note to a third party for the full outstanding balance thereunder, or (ii) the Note is paid in full plus all interest and costs (without duplication) owed thereon (including attorney fees of New Lenders) all in the form and substance satisfactory to the New Lenders.
The Note had a maturity date of June 30, 2011. Interest accrued on the Note at a rate of 10% and was to be paid on September 30, 2010, December 31, 2010, March 31, 2011 and the balance due on the Maturity Date. At the Corporations option, interest may be paid in Common Stock at a rate of 5,000 shares of Common Stock per day (the Interest Common Stock).
The Note was secured by a pledge of all of our (and our subsidiarys) assets under the terms of the Security Agreement. In addition, we pledged its shares of subsidiarys common stock as additional security for the Note.
These obligations were repaid with the proceeds our May 2011 sale of substantially all of our assets related to our valve division.
Liquidity and Capital Requirements
As of the date of this report, we believe that we will be able to fund our operations for the next 12 months. The closing of our sale of the Hemiwedge valve assets on May 10, 2011, allowed us to repay all outstanding indebtedness. We currently only have one employee and sublease our office space on a month to month basis.
Critical Accounting Policies
The depreciable assets of Hemiwedge Valve Corporation were depreciated through the date of Board approval and then the cost and accumulated depreciation was moved to a long term asset account identified as "Assets held for sale."
The results of operations are presented under the caption Income (loss) from discontinued operations in the accompanying Consolidated Statement of Operations for the three month period ended March 31, 2011.
Off-Balance Sheet Arrangements
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
ITEM 4 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2012, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II: OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Material developments in legal proceedings affecting us are described in Part I, Item 3 Legal Proceedings, of our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no developments in these matters since the filing of such Annual Report with the Securities and Exchange Commission on March 27, 2012.
ITEM 1A RISK FACTORS
As a smaller reporting company as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 18, 2012, we issued a 5-year non-qualified stock option to purchase 153,000 shares of our common stock at an exercise price of $0.10 per share to a consultant in consideration of financial reporting and accounting services provided. We relied on the exemption provided under Section 4(2) of the Securities Act of 1933, as amended..
ITEM 3 DEFAULT UPON SENIOR SECURITIES
ITEM 4 MINE SAFETY DISCLOSURES
ITEM 5 OTHER INFORMATION
ITEM 6 EXHIBITS