Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - HII Technologies, Inc. | Financial_Report.xls |
EX-10 - SECURITY AGREEMENT - CONDITIONAL SALES CONTRACT DATED MAY 19, 2014 - HII Technologies, Inc. | komatsunp3lighttowersmay14.htm |
EX-10 - MASTER LEASE AGREEMENT WITH BCL EQUIPMENT LEASING LLC - HII Technologies, Inc. | bclequipmentlease.htm |
EX-10 - MASTER LEASE AGREEMENT WITH NATIONS FUND I, LLC - HII Technologies, Inc. | masterleaseagreementnef.htm |
EX-10 - SECURITY AGREEMENT - CONDITIONAL SALES CONTRACT DATED APRIL 18, 2014 - HII Technologies, Inc. | komatsufinancial5allmandligh.htm |
EX-31 - 302 CERTIFICATION OF MATTHEW C. FLEMMING - HII Technologies, Inc. | ex31.htm |
EX-32 - 906 CERTIFICATION OF MATTHEW C. FLEMMING - HII Technologies, Inc. | ex32.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File No.: 000-30291 |
HII TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 03-0453686 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
710 North Post Oak Road, Suite 400 Houston, Texas 77024 (Address of principal executive offices) |
Issuers telephone number: (713) 821-3157
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ___
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
As of July 30, 2014, 49,618,556 shares of our common stock were outstanding.
1
HII TECHNOLOGIES, INC.
FORM 10-Q
June 30, 2014
TABLE OF CONTENTS
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PART I-- FINANCIAL INFORMATION |
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Item 1. | Financial Statements (unaudited) | 3 |
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 14 |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 21 |
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Item 4 | Control and Procedures | 21 |
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PART II-- OTHER INFORMATION |
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Item 1 | Legal Proceedings | 22 |
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Item 1A | Risk Factors | 22 |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
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Item 3. | Defaults Upon Senior Securities | 22 |
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Item 4. | Mine Safety Disclosures | 22 |
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Item 5. | Other Information | 22 |
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Item 6. | Exhibits | 24 |
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SIGNATURES |
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2
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
HII TECHNOLOGIES, INC. | |||||
CONSOLIDATED BALANCE SHEETS | |||||
(unaudited) | |||||
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| June 30 |
| December 31 |
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| 2014 |
| 2013 |
ASSETS |
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Current assets: |
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| Cash and cash equivalents | $ 1,727,514 |
| $ 866,035 | |
| Accounts receivable, net of allowance of $79,116 and $79,116 | 6,270,933 |
| 3,708,012 | |
| Stock subscriptions receivable | 2,000,000 |
| - | |
| Note receivable | 291,790 |
| 294,755 | |
| Current portion of deferred financing costs | 181,772 |
| 33,541 | |
| Prepaid expense and other current assets | 267,017 |
| 111,147 | |
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| Total current assets
| 10,739,026
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| 5,013,490
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Property and equipment, net of accumulated depreciation of $332,415 and $133,081 | 3,179,367 |
| 2,076,512 | ||
Assets under capital lease, net | 3,195,397 |
| - | ||
Deposits | 33,960 |
| 33,960 | ||
Deferred financing costs, net of current portion | 16,173 |
| 19,949 | ||
Intangible assets, net of accumulated amortization of $40,197 and $0 | 556,803 |
| 227,000 | ||
Goodwill |
| 2,852,107 |
| 2,852,107 | |
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| Total assets | $ 20,572,833 |
| $ 10,223,018 |
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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| Accounts payable | $ 5,293,984 |
| $ 3,421,153 | |
| Accounts payable and other liabilities, related parties | 183,000 |
| 158,000 | |
| Accrued expenses and other liabilities | 1,638,268 |
| 703,302 | |
| Line of credit | 4,082,669 |
| 2,678,992 | |
| Current portion of capital lease obligation | 1,054,280 |
| - | |
| Current portion of notes payable - related parties | 515,000 |
| 545,926 | |
| Current portion of unsecured notes payable | 559,655 |
| - | |
| Current portion of secured notes payable | 261,997 |
| 85,000 | |
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| Total current liabilities | 13,588,853 |
| 7,592,373 |
Long term liabilities: |
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| Capital lease obligation, net of current portion | 1,533,453 |
| - | |
| Notes payable - unsecured | 1,000,000 |
| 1,000,000 | |
| Notes payable - secured | 116,355 |
| 158,855 | |
| Notes payable - related parties net of current portion | 328,459 |
| 585,958 | |
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| Total liabilities | 16,567,120 |
| 9,337,186 |
Commitments and contingencies | - |
| - | ||
Stockholders' equity |
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| Preferred stock, $.001 par value, 10,000,000 shares authorized, |
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| Series A Convertible Preferred stock, $1,000 stated value, 4,000 shares authorized, 3,410 and 0 shares issued and outstanding | 2,786,981 |
| - |
| Common stock, $.001 par value, 250,000,000 shares authorized, |
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| 49,618,556 and 48,424,712 shares issued and outstanding | 49,618 |
| 48,424 |
| Additional paid-in-capital | 29,118,134 |
| 28,121,023 | |
| Accumulated deficit | (27,949,020) |
| (27,283,615) | |
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| Total stockholders' equity | 4,005,713 |
| 885,832 |
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| Total liabilities and stockholders' equity | $ 20,572,833 |
| $ 10,223,018 |
See accompanying notes to unaudited consolidated financial statements.
3
HII TECHNOLOGIES, INC. | |||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||
For the three and six months ended June 30, 2014 and 2013 | |||||||||
(unaudited) | |||||||||
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| For the three months ended |
| For the six months ended | ||||
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| June 30 |
| June 30 | ||||
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| 2014 |
| 2013 |
| 2014 |
| 2013 |
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REVENUES | $ 6,752,384 |
| $ 3,226,437 |
| $14,257,445 |
| $ 5,836,210 | ||
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COST OF REVENUES | 4,919,973 |
| 2,361,309 |
| 10,303,201 |
| 4,438,790 | ||
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GROSS PROFIT | 1,832,411 |
| 865,128 |
| 3,954,244 |
| 1,397,420 | ||
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OPERATING EXPENSES: |
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| Selling, general and administrative | 2,228,288 |
| 913,467 |
| 4,215,358 |
| 1,464,198 | |
| Bad debt expense | - |
| 54,000 |
| - |
| 54,000 | |
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| Total operating expenses | 2,228,288 |
| 967,467 |
| 4,215,358 |
| 1,518,198 | |
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LOSS FROM OPERATIONS | (395,877) |
| (102,339) |
| (261,114) |
| (120,778) | ||
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OTHER INCOME (EXPENSE) |
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| Loss on debt conversion | (11,063) |
| - |
| (11,063) |
| - | |
| Loss on extinguishment of liability | - |
| (96,297) |
| - |
| (96,297) | |
| Interest expense, net | (176,035) |
| (144,123) |
| (315,845) |
| (222,574) | |
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NET LOSS BEFORE INCOME TAXES | (582,975) |
| (342,759) |
| (588,022) |
| (439,649) | ||
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PROVISION FOR INCOME TAXES | (57,579) |
| (30,768) |
| (77,383) |
| (48,267) | ||
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NET LOSS | $ (640,554) |
| $ (373,527) |
| $ (665,405) |
| $ (487,916) | ||
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DEEMED DIVIDEND | (623,019) |
| - |
| (623,019) |
| - | ||
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CUMULATIVE DIVIDEND | (1,343) |
| - |
| (1,343) |
| - | ||
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NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ (1,264,916) |
| $ (373,527) |
| $(1,289,767) |
| $ (487,916) | ||
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Basic and diluted net loss per share | $ (0.03) |
| $ (0.01) |
| $ (0.03) |
| $ (0.01) | ||
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Weighted average shares outstanding-Basic and diluted | 49,134,513 |
| 44,429,551 |
| 48,847,902 |
| 44,087,324 |
See accompanying notes to unaudited consolidated financial statements.
4
HII TECHNOLOGIES, INC. | |||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | |||||||||||
For the six months ended June 30, 2014 | |||||||||||
(unaudited) | |||||||||||
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| Additional |
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| Preferred Stock |
| Common Stock |
| Paid-In |
| Accumulated |
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| Shares | Stated |
| Shares | Par |
| Capital |
| Deficit |
| Total |
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Balances at December 31, 2013 | - | $ - |
| 48,424,712 | $ 48,424 |
| $28,121,023 |
| $(27,283,615) |
| $ 885,832 |
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Warrants exercised | - | - |
| 50,000 | 50 |
| 12,450 |
| - |
| 12,500 |
Warrants exercised using cashless provisions | - | - |
| 117,245 | 117 |
| (117) |
| - |
| - |
Stock options issued for services | - | - |
| - | - |
| 110,420 |
| - |
| 110,420 |
Common shares issued for services | - | - |
| 250,000 | 250 |
| 132,750 |
| - |
| 133,000 |
Common shares issued for note payable conversions | - | - |
| 276,599 | 277 |
| 149,089 |
| - |
| 149,366 |
Stock options exercised | - | - |
| 500,000 | 500 |
| 74,500 |
| - |
| 75,000 |
Preferred stock issued for cash | 3,410 | 3,410,000 |
| - | - |
| - |
| - |
| 3,410,000 |
Deemed dividend for preferred stock beneficial conversion feature | - | (623,019) |
| - | - |
| 623,019 |
| - |
| - |
Issuance costs for preferred stock offering | - | - |
| - | - |
| (105,000) |
| - |
| (105,000) |
Net loss | - | - |
| - | - |
| - |
| (665,405) |
| (665,405) |
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Balances at June 30, 2014 | 3,410 | $2,786,981 |
| 49,618,556 | $ 49,618 |
| $31,905,112 |
| $(27,949,020) |
| $4,005,713 |
See accompanying notes to unaudited consolidated financial statements.
5
HII TECHNOLOGIES, INC. | ||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
For the six months ended June 30, 2014 and 2013 | ||||||
(unaudited) | ||||||
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| 2014 |
| 2013 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net loss | $ (665,405) |
| $ (487,916) | ||
| Adjustments to reconcile net loss to net |
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| cash used in operating activities: |
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| Amortization of note payable discount | - |
| 72,582 | |
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| Amortization of deferred finance costs | 37,718 |
| - | |
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| Stock-based compensation | 110,420 |
| 269,369 | |
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| Stock issued for services | 133,000 |
| - | |
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| Depreciation and amortization | 293,980 |
| 50,899 | |
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| Loss on extinguishment of liability | - |
| 96,297 | |
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| Loss on debt conversion to common shares | 11,063 |
| - | |
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| Warrants issued for extension of secured note | - |
| 55,154 | |
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| Bad debt recovery | - |
| 54,000 | |
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| Loss on asset disposal | 10,581 |
| 4,029 | |
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| Changes in: |
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| Accounts receivable | (2,562,921) |
| (1,390,746) |
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| Prepaid expense and other current assets | (70,492) |
| 40,323 |
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| Other assets | (82,954) |
| (31,500) |
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| Accounts payable | 2,722,656 |
| 778,256 |
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| Accounts payable and other liabilities - related parties | 25,000 |
| (162,248) |
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| Accrued expenses and other liabilities | 841,821 |
| 229,867 |
| Net cash provided by (used in) operating activities | 804,467 |
| (421,634) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Cash received from the sale of property and equipment | - |
| 71,754 | ||
| Cash paid for purchase of property and equipment | (1,851,292) |
| (48,702) | ||
| Net cash provided by (used in) investing activities | (1,851,292) |
| 23,052 | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Proceeds from exercise of warrants and options | 87,500 |
| 50,000 | ||
| Proceeds from sale of preferred shares | 1,410,000 |
| - | ||
| Proceeds from sale-leaseback transaction | - |
| 87,375 | ||
| Payments for deferred financing costs | (182,173) |
| (14,500) | ||
| Proceeds from notes payable | 130,000 |
| - | ||
| Proceeds from line of credit, net | 1,403,676 |
| 372,400 | ||
| Payments on notes payable | (283,456) |
| (354,067) | ||
| Payments on capital lease obligation | (657,243) |
| - | ||
| Net cash provided by (used in) financing activities | 1,908,304 |
| 141,208 | ||
NET INCREASE (DECREASE) IN CASH AND CASH |
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| EQUIVALENTS | 861,479 |
| (257,374) | ||
CASH AND CASH EQUIVALENTS, beginning of period | 866,035 |
| 379,336 | |||
CASH AND CASH EQUIVALENTS, end of period | $ 1,727,514 |
| $ 121,962 | |||
Supplemental disclosures: |
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| Cash paid for income taxes | $ 36,774 |
| $ - | ||
| Cash paid for interest | 237,405 |
| 62,846 | ||
Noncash investing and financing activities |
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| Notes issued in consideration for property and equipment | 229,032 |
| - | ||
| Notes issued in consideration for intangible assets | 370,000 |
| - | ||
| Notes issued for financing of insurance premium | 88,900 |
| - | ||
| Cashless exercise of warrants | 117 |
| - | ||
| Payment on secured note paid directly from line of credit | - |
| 512,600 | ||
| Deferred financing costs paid directly from line of credit | - |
| 49,200 | ||
| Common stock issued for lease deposit Common stock issued for debt | - 138,303 |
| 31,500 - | ||
| Capital lease obligation incurred in consideration for property and equipment | 3,244,976 |
| - | ||
| Accrued issuance costs for preferred stock offering Deemed dividend for preferred stock beneficial conversion feature | 105,000 623,019 |
| - - | ||
See accompanying notes to unaudited consolidated financial statements.
6
HII TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited interim consolidated financial statements of HII Technologies, Inc. (we, our, HII or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2013 and 2012 contained in HII Technologies Form 10-K originally filed with the Securities and Exchange Commission on March 31, 2014. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the audited consolidated financial statements for years ended December 31, 2013 and 2012 as reported in the Companys Form 10-K have been omitted.
Principles of consolidation
The consolidated financial statements include the accounts of HII and its wholly-owned subsidiaries KMHVC, Inc., a Texas corporation (dba South Texas Power, KMHVC), Aqua Handling of Texas, LLC, a Texas limited liability company (dba AquaTex) and Apache Energy Services, LLC, a Nevada limited liability company (dbas AES Water Solutions and AES Safety Services, herein AES). Significant inter-company accounts and transactions have been eliminated.
Beneficial conversion feature
In accordance with FASB ASC 470-20, Debt with Conversion and Other Options, the Company records a beneficial conversion feature (BCF) related to the issuance of convertible instruments that have conversion features at fixed rates that are in the-money when issued. The BCF for the convertible instruments is recognized and measured by allocating the proceeds to the convertible instruments and any other detachable instruments included in the exchange based on their relative fair values.
Leases
Capital leases are recorded as an asset and an obligation at an amount equal to the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense on assets under capital lease is computed using the straight-line method over the estimated useful lives of the assets.
Reclassifications
Certain amounts in the consolidated financial statements of the prior year have been reclassified to conform to the presentation of the current year for comparative purposes.
Recently Adopted Accounting Standards
No new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Companys consolidated financial statements.
7
NOTE 2 INTANGIBLE ASSETS
Intangible assets consist of:
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| June 30, 2014 |
| December 31, 2013 |
Technology license |
| $370,000 |
| $ - |
Customer relationships |
| 227,000 |
| 227,000 |
|
| 597,000 |
| 227,000 |
Less accumulated amortization |
| (40,197) |
| - |
|
| $556,803 |
| $227,000 |
On January 15, 2014, the Companys wholly owned subsidiary, AES Water Services, entered into a sublicense agreement granting exclusive use of licensed frac water recycling technology and the associated water treatment system. AES paid a sublicense fee of $370,000, which fee was paid via issuance of a 10% promissory note by both the Company and AES. The note is due on July 15, 2014 and bears annual interest of 10%. The note was paid in full on July 8, 2014. The agreement remains in force on an exclusive basis for so long as AES Water Services or its designees continue to use the water recycling technology.
NOTE 3 CAPITAL LEASE OBLIGATION
On June 30, 2014, the Company entered into a capital lease agreement with BCL-Equipment Leasing, LLC (BCL) to acquire lay flat hose, which will be used in our frac water transfer service revenue activities, as set out below.
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| June 30, 2014 |
| December 31, 2013 |
Capital lease lay flat hose, interest at 30.5%, payments of |
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$150,769 per month, terms 24 months |
| $ 3,244,976 |
| $ - |
Less initial lease payment |
| (657,243) |
| - |
|
| 2,587,733 |
| - |
Less current portion of capital lease obligation |
| (1,054,280) |
| - |
|
| $ 1,533,453 |
| $ - |
The lease contains a purchase option at the end of the initial 24 month term, granting the Company the right to purchase all equipment covered under the lease for the greater of its fair value or 20% of the total capitalized cost. If the Company does not elect to exercise the purchase option, the lease automatically renews for a term of one year.
Concurrently with the lease transaction, the Company entered into a sale and simultaneous lease transaction with BCL for assets the Company had previously purchased directly from vendors for $828,546. The Company sold the property to BCL for an aggregate purchase price of $828,546
Pursuant to the guidelines in ASC 840, the gain on the sale of $49,579 is accounted for as a deferred gain in the consolidated balance sheets and amortized on a straight-line basis over the life of the lease.
A summary of the minimum lease payments over the 24 month term of the lease is shown below:
Lease payments from inception through June 30, 2015 | $2,315,698 |
Lease payments from June 30, 2015 through May 30, 2016 | 1,809,223 |
Total payments | 4,124,921 |
Less interest on capital lease | (879,945) |
Total | 3,244,976 |
The Company paid a total of $32,347 in various financing fees which will be amortized over the life of the capital lease.
NOTE 4 NOTES PAYABLE
On January 15, 2014, the Company, and its wholly owned subsidiary AES issued a promissory note in the amount of $370,000 to a single accredited investor. The note is due on July 15, 2014 and bears annual interest of 10%. The note was issued as consideration to fund a technology licensing fee. This note and all associated accrued interest were paid in full on July 8, 2014.
On February 17, 2014, the Company issued a promissory note in the amount of $130,000 to a single accredited investor. The note is due on July 15, 2014 and bears annual interest of 10%. The proceeds were used for working capital and general corporate purposes. This note and all associated accrued interest were paid in full on July 8, 2014.
8
On February 27, 2014, the Companys wholly-owned subsidiary KMHVC entered into a promissory note with a third-party equipment seller for the purchase of equipment. KMHVC financed $117,120 of the purchase price and agreed to pay an additional $5,459 in finance charges (equal to 8.5% of the amount financed) for a total amount due under the promissory note of $122,579. The promissory note is secured by the equipment purchased. The promissory note is payable in 12 equal monthly installments of $10,215 with the first payment due on March 27, 2014 and the last payment due on February 27, 2015.
On April 18, 2014, the Companys wholly-owned subsidiary KMHVC entered into a promissory note with a third-party equipment seller for the purchase of equipment. KMHVC financed $63,006 of the purchase price and agreed to pay an additional $2,935 in finance charges (equal to 8.5% of the amount financed) for a total amount due under the promissory note of $65,941. The promissory note is secured by the equipment purchased The promissory note is payable in 12 equal monthly installments of $5,495 with the first payment due on May 18, 2014 and the last payment due on April 18, 2015.
On May 19, 2014, the Companys wholly-owned subsidiary KMHVC entered into a promissory note with a third-party equipment seller for the purchase of equipment. KMHVC financed $48,906 of the purchase price and agreed to pay an additional $2,278 in finance charges (equal to 8.5% of the amount financed) for a total amount due under the promissory note of $51,184. The promissory note is secured by the equipment purchased. The promissory note is payable in 12 equal monthly installments of $4,265 with the first payment due on June 19, 2014 and the last payment due on May 19, 2015.
On April 22, 2014, the Companys wholly-owned subsidiary AES Water entered into a promissory note with Texas Mutual Insurance Company for workers compensation insurance premiums. AES Water financed the full amount of the premiums of $88,900, bearing an annual interest rate of 17% and agreed to pay an additional $3,853 in finance charges for a total amount due under the promissory note of $92,483. The promissory note is unsecured and is payable in 6 equal monthly installments of $15,342 with the first payment due on May 1, 2014 and the last payment due on October 1, 2014.
On April 30, 2014, the Company issued 276,599 common shares with a market value of $149,366 to three related party note holders as partial consideration for notes payable and accrued interest outstanding of $138,303. A loss on conversion of debt of $11,063 resulting from the transactions was recorded at April 30, 2014.
A summary of the activity in notes payable for the six months ended June 30, 2014 is shown below:
Notes payable - related parties |
|
|
| ||
|
|
|
|
|
|
| Balance at January 1, 2014 |
|
| $ 1,131,884 | |
| Less: payments on notes payable |
|
| (159,676) | |
| Less: conversions of notes payable to common shares |
| (128,749) | ||
|
|
|
|
| 843,459 |
| Less - current maturities, net - related parties |
| (515,000) | ||
| Long-term notes payable, net June 30, 2014 |
| $ 328,459 | ||
|
|
|
|
|
|
Notes payable - third parties |
|
|
| ||
|
|
|
|
|
|
| Balance at January 1, 2014 |
|
| $ 1,243,855 | |
| Note issued in consideration for intangible assets |
| 370,000 | ||
| Notes issued in connection with purchase of property and equipment |
| 229,032 | ||
| Unsecured promissory notes |
|
| 130,000 | |
| Note issued for financing of insurance premium |
| 88,900 | ||
| Less: payments on notes payable |
|
| (123,780) | |
|
|
|
|
| 1,938,007 |
| Less - current maturities, net - third parties |
| (821,652) | ||
| Long-term notes payable, net June 30, 2014 |
| $ 1,116,355 |
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NOTE 5 LINE OF CREDIT
On June 26, 2013, our wholly-owned subsidiaries, KMHVC, Inc. and AES (the Borrower) entered into a $2 million revolving accounts receivable financing facility with Rosenthal & Rosenthal (Rosenthal). The financing facility provides for the Borrower to have access to the lesser of (i) $2 million or (ii) 85% of Net Amount of Eligible Receivables (as defined in the financing agreement). The financing facility is paid for by the assignment of the Borrowers accounts receivable to Rosenthal and is secured by the Borrowers assets. The financing facility has an interest rate of 4.00% in excess of the prime rate reported by the Wall Street Journal per annum. The interest rate increases to the prime rate plus 7.00% for any borrowings in excess of 85% of the Borrowers Net Amount of Eligible Receivables. In addition, the Borrower paid Rosenthal a facility fee of $30,000 on the closing and an annual fee of $20,000 and a monthly administration fee of $1,000 as well as monthly additional charges of not less than $2,000. The financing facility is for an initial term of two-years, expiring on June 30, 2015, and will renew on a year to year basis, unless terminated in accordance with the financing agreement. If the facility is terminated prior to the first anniversary, Borrower is obligated to pay Rosenthal a fee of $40,000 and if terminated after the first anniversary and prior to the second anniversary then Borrower shall pay a fee of $20,000. We guaranteed repayment of the line of credit, which guaranty is secured by our assets. As such, this transaction does not constitute a sale of receivables.
On November 20, 2013, our wholly-owned subsidiary, AquaTex entered into an Assumption Agreement with Rosenthal & Rosenthal, Inc. under which AquaTex became an additional borrower under the financing facility with Rosenthal. In connection with AquaTex becoming an additional borrower under the facility, Rosenthal increased the maximum amount available under the facility to $3 million. In January 2014, Rosenthal increased the maximum amount available under the facility to $4 million. In April 2014, Rosenthal increased the maximum amount available under the facility to $5 million. Pursuant to the terms of the financing facility, the Company was required to maintain at the end of each quarter, tangible net worth in an amount not less than negative $1,000,000 and working capital of not less than negative $2,000,000.
On March 26, 2014, the Companys wholly-owned subsidiaries, AquaTex, AES, and STP entered into a waiver and amendment agreement with Rosenthal & Rosenthal, Inc. under which Rosenthal waived our non- compliance with the covenant to maintain working capital of not less than negative $2,000,000 for the period ended December 31, 2013. Additionally, Section 6.10 of our Financing Agreement with Rosenthal & Rosenthal, Inc. was amended to provide that we are required to maintain working capital of not less than negative $4,500,000 in future periods. As of June 30, 2014, the Company was in compliance with all of its financial covenants.
During the six months ended June 30, 2014, the Company made draws, net of expenses of $1,403,676.
The Company paid a total of $54,167 in various financing fees related to the line of credit during the current period which will be amortized over the two year life of the line of credit.
The summary below shows the activity related to all deferred financing fees as of June 30, 2014:
Balance at January 1, 2014 |
| $ 53,490 | ||
Add: financing fees paid |
| 182,173 | ||
Less: amortization of deferred financing costs | (37,718) | |||
|
|
|
| 197,945 |
Less: current maturities |
| (181,772) | ||
Long-term deferred financing costs | $ 16,173 |
NOTE 6 PREFERRED STOCK
From June 21, 2014 through June 30, 2014, we sold 3,410 shares of Series A Convertible Preferred Stock at a price of $1,000 per unit for $3,410,000. At June 30, 2014, we had received $1,410,000 in gross proceeds and had $2 million in subscription receivables for the sale of such preferred stock which were fully collected on July 3, 2014.
Each unit consists of (i) 1 share of our Series A Convertible Preferred Stock immediately convertible into shares of our common stock at a rate of $0.70 per share, and (ii) common stock purchase warrants to purchase 500 common shares at an exercise price of $1.00 and a term of 3 years. The Series A Convertible Preferred Stock and warrants contain standard piggy back registration rights.
The Company evaluated the embedded conversion option of the preferred stock under FASB ASC 815-15 and determined that it is clearly and closely related to the host contract, the preferred stock, and does not require to be bifurcated. The Company evaluated the preferred stock for a beneficial conversion feature under FASB ASC 470-
10
20 and determined that a beneficial conversion feature of $623,019 existed which has been fully recognized as a deemed dividend to the preferred shareholders.
The Company incurred issuance costs of $105,000 for broker fees related to the preferred share offering for the six months ended June 30, 2014.
From July 1, 2014 through July 8, 2014, we sold 590 shares of Series A Convertible Preferred Stock for total gross proceeds of $590,000 (see note 10), resulting in the Preferred Stock offering being fully subscribed at a total of 4,000 shares and gross proceeds of $4,000,000.
Pursuant to the terms of the Series A Certificate of Designation, each share of Series A Preferred: (i) is entitled to receive cumulative cash dividends at an annual rate of 10% out of any funds and assets of the Company legally available therefor, prior and in preference to any declaration or payment of any dividend payable on the Common Stock, payable quarterly; (ii) is convertible into a number of shares of Common Stock equal to the quotient of $1,000 divided by the conversion price then in effect, which is initially $0.70; (iii) votes generally with the Common Stock on an as-converted basis on all matters, other than those matters on which the Series A Preferred is entitled to vote as a separate class by law or as set forth in the Series A Certificate of Designation; (iv) is senior to the Common Stock upon a liquidation of the Company; (v) is automatically converted into Common Stock at the then applicable conversion price: (A) (1) if the underlying conversion shares are registered or such conversion shares are eligible for resale under Rule 144 under the Securities Act of 1933 and (2) Companys stock price is at least $1.60 for 40 trading days during a 60 trading day period with average daily volume of at least 50,000 shares during those 40 trading days; (B) upon the written consent of the holders of 50% of the Series A Preferred, or, (C) on June 30, 2017; and (vi) is entitled to anti-dilution adjustments in the event of a dividend, stock split, reclassification, reorganization, consolidation or merger.
NOTE 7 COMMON STOCK
On January 7, 2014, the Company issued 25,000 shares of its common stock to one of our directors upon exercise of outstanding warrants. The Company received $6,250 in proceeds from the exercise of the warrant, which proceeds were used for working capital and general corporate purposes.
On January 23, 2014, we issued 59,210 shares of our common stock upon exercise of outstanding warrants. The warrant was issued to purchase 125,000 shares and was exercised in full on a cashless basis and accordingly 65,790 shares were withheld by the Company at the market price of $0.57 per share less the exercise price of $0.30 per share to fund the exercise price.
On January 23, 2014, we issued 58,035 shares of our common stock upon exercise of outstanding warrants. The warrant was issued to purchase 125,000 shares and was exercised in full on a cashless basis and accordingly 66,965 shares were withheld by the Company at the market price of $0.56 per share less the exercise price of $0.30 per share to fund the exercise price.
On January 30, 2014, the Company issued 25,000 shares of its common stock upon exercise of outstanding warrants. We received $6,250 in proceeds from the exercise of the warrant, which proceeds were used for working capital and general corporate purposes.
On April 25, 2014, the Company entered into an investor relations consulting agreement pursuant to which the Company agreed to issue 250,000 shares of its common stock to a consultant in consideration of services rendered under the agreement. The fair value of the shares issued of $133,000 was recognized as stock compensation expense during the six months ended June 30, 2014.
On April 30, 2014, the Company issued an aggregate of 276,599 shares of its common stock for the conversion of notes payable and accrued interest totaling to $138,303.
On May 29, 2014, the Company issued 500,000 shares of its common stock to one of our directors upon exercise of his outstanding stock options. The Company received $75,000 in proceeds from the exercise of the stock options, which proceeds were used for working capital and general corporate purposes.
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NOTE 8 STOCK OPTIONS AND WARRANTS
Stock options
HII currently has two stock option plans: (a) the 2005 Stock Incentive Plan reserved 10,000,000 common shares and 8,615,140 stock options have been granted through June 30, 2014 and 153,000 options are outstanding at June 30, 2014, and (b) the 2012 Stock Incentive Plan reserved 10,000,000 common shares and 2,500,000 stock options have been granted through June 30, 2014 and 2,000,000 options are outstanding at June 30, 2014.
During the six months ended June 30, 2014, 500,000 options were exercised and no options expired.
During the six months ended June 30, 2014, 564,000 options were granted to employees and valued at $278,022 using the Black-Scholes pricing model. The 564,000 options vest over a period of 36 months.
Significant assumptions used in the valuation include the following:
Expected term 7 years
Expected volatility 186.00%
Risk free interest rate 2.13%
Expected dividend yield 0.00%
During the six months ended June 30, 2014, 100,000 options were granted to two directors and valued at $50,972 using the Black-Scholes pricing model. The 100,000 options vest over a 12 month period.
Significant assumptions used in the valuation include the following:
Expected term 5 years
Expected volatility 185.66%
Risk free interest rate 1.46%
Expected dividend yield 0.00%
Stock compensation expense recognized for the six months ended June 30, 2014 related to the above options including those issued in the prior year amounted to $110,420. Unrecognized compensation cost as of June 30, 2014 of $350,494 is expected to be recognized over a period of 2.58 years.
Warrants
From June 21, 2014 to June 30, 2014, 1,705,000 warrants were issued in conjunction to the Series A Preferred Stock subscriptions to accredited investors (see note 6) and valued at $745,372 using the Black-Scholes pricing model. The 1,705,000 warrants are immediately exercisable. The fair value of the warrants are included in additional paid in capital.
Significant assumptions used in the valuation include the following:
Expected term 3 years
Expected volatility 173.03%
Risk free interest rate 0.88%
Expected dividend yield 0.00%
On June 30, 2014, 50,000 warrants were issued in conjunction with the Capital Lease transaction disclosed above (see note 3) and valued at $31,788 using the Black-Scholes pricing model. The 50,000 warrants only vest if the Company elects to exercise the purchase option prior to the end of the lease term, and, therefore, the fair value was not recorded. The warrants have an exercise price of $0.65 and a 5 year term.
Significant assumptions used in the valuation include the following:
Expected term 5 years
Expected volatility 173.03%
Risk free interest rate 0.88%
Expected dividend yield 0.00%
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During the six months ended June 30, 2014, 50,000 warrants were exercised for cash and 250,000 warrants were exercised on a cashless basis (see Note 7).
A summary of activity in options and warrants is as follows:
NOTE 9 RELATED PARTY TRANSACTIONS
During the six ended June 30, 2014, a member of the Board provided cash advances to the Company totaling $75,000. The Company made repayments of $50,000 resulting in an outstanding balance of $183,000 as of June 30, 2014. The outstanding amount is included in accounts payable and other liabilities - related parties in the consolidated balance sheets.
NOTE 10 SUBSEQUENT EVENTS
Series A Convertible Preferred Stock
From July 1, 2014 through July 8, 2014, we sold 590 shares of Series A Convertible Preferred Stock for total gross proceeds of $590,000.
From July 1, 2014 through July 3, 2014, we received the $2 million in subscriptions receivable related to the sale of the Series A Convertible Preferred Stock units (see Note 6).
Capital Lease Obligation
On July 10, 2014, the Company entered into a capital lease agreement with Nations Equipment Finance (NEF) to acquire flowback systems, evaporator systems, and generators, which will be used in our revenue activities. The assets were recorded at their fair value in the amount of $1,908,542. The lease has a 39 month term, with 36 monthly payments of $52,485, and a Purchase option at the end of the term of $572,563. Total minimum lease payments under the lease are $2,590,612, with no initial payment due.
Concurrently with the lease transaction, the Company entered into a sale and simultaneous lease transaction with NEF for assets the Company had previously purchased directly from vendors for $1,166,899. The Company sold the property to NEF for an aggregate purchase price of $1,166,899
Pursuant to the guidelines in ASC 840, the gain on the sale of $84,804 will be accounted for as a deferred gain in the consolidated balance sheets and amortized on a straight-line basis over the life of the lease.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management's expectations. Factors that could cause differences include, but are not limited to, continued reliance on external sources on financing, development risks for new products and services, commercialization delays and customer acceptance risks when introducing new products and services, fluctuations in market demand, pricing for raw materials as well as general conditions of the energy and oilfield marketplace.
Overview
HII Technologies, Inc. is a Houston, Texas based oilfield services company with operations in Texas, Oklahoma, Ohio and West Virginia focused on commercializing technologies and providing services in frac water management, safety services and portable power used by exploration and production (E&P) companies in the United States. We operate through our wholly-owned subsidiaries, Aqua Handling of Texas, LLC. (dba AquaTex), Apache Energy Services, LLC (dbas AES Water Solutions and AES Safety Services) and KMHVC, Inc. (dba South Texas Power and STP).
Name | Doing Business As (dba): | Business |
Apache Energy Services, LLC | AES Water Solutions | Frac Water Management Solutions |
| AES Safety Services | Safety Services |
Aqua Handling of Texas, LLC | AquaTex | Frac Water Management Solutions |
KMHVC, Inc. | South Texas Power, STP | Portable Power |
The Companys total frac water management services division does business as AquaTex and AES Water Solutions and provides total frac water management solutions associated with the needed millions of gallons of water typically used during hydraulic fracturing and completions of horizontally drilled oil and gas wells. AES Safety Services is the Companys oilfield safety consultancy providing experienced trained safety personnel such as contract safety engineers during oilfield operation from site preparation rigging up to drilling and completion for E&P customers. AES Safety Services provides the flexibility as outsourced safety consultants, training and inspection to its customers to move quickly in key locations. The Companys oilfield mobile power subsidiary does business as South Texas Power (STP) and operates a fleet of mobile generators, light towers and related equipment for in-field power rental where remote locations provide little or no existing electrical infrastructure.
We currently employ 51 persons and extensively use independent contractor crews in connection with our field service work. 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.HIITinc.com.
Business Development HII Technologies, Inc.
Organization
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 October 2008 sale of assets related to Shumate, our contract machining business. On August 31, 2011, we changed our name to HII Technologies, Inc., which name change was required in connection with our May 2011 sale of our valve product technology and assets.
Acquisition of Apache Energy Services, LLC
On September 27, 2012, we consummated the acquisition (the Acquisition) of all of the outstanding membership interests of Apache Energy Services LLC (dba AES Water Solutions), a Nevada limited liability company (AES ) pursuant to the terms of a Securities Purchase Agreement dated September 26, 2012 by and
14
among the registrant, AES and the members of AES (the Purchase Agreement). AES is a water transfer services company serving oilfield customers. The purchase price consisted of: (a) Cash in the amount of $290,000, of which $250,000 was paid on the closing date and the remaining $40,000 is payable (subject to a purchase price adjustment) in six equal installments, with the first installment payable on the first day of each month beginning the third month following the month in which the Closing occurs and each month thereafter until paid in full; (b) $1,300,000 in 5% subordinated secured promissory notes (the Notes), and (c) 6,500,000 shares (the Shares) of the registrants common stock. The Notes are payable in 12 equal quarterly installments beginning on February 1, 2013 and have a maturity date of November 1, 2015. The Notes are secured by the assets of the registrant and AES. The Shares are subject to a restricted stock agreement pursuant to which 500,000 shares will vest each quarter beginning December 31, 2012. The purchase agreement contains 2-year non-compete/non-solicitation provisions for Messrs. Mulliniks and Cox.
Launch of our Mobile Oilfield Power Business
In December 2012, we launched our mobile oilfield power solutions and services business, which is being conducted through our wholly-owned subsidiary, KMHVC, Inc. dba South Texas Power, or STP.
Launch of our Contract Safety Consultant Business
In January 2013, we launched AES Safety Services, our Safety division that offers contract safety engineers and professionals, safety training and onsite safety inspection services for E&P companies that prefer outsourcing many of their safety programs or are required to by state regulation.
Acquisition of Aqua Handling of Texas, LLC.
On November 12, 2013, we consummated the acquisition of all of the outstanding membership interests of Acquisition of Aqua Handling of Texas, LLC. (dba AquaTex) pursuant to the terms of a Securities Purchase Agreement dated November 11, 2013 by and among the registrant, AquaTex and the members of AquaTex (the Purchase Agreement). The purchase price consisted of: (a) Cash in the amount of $300,000; (b) $500,000 in 5% subordinated secured promissory notes (the Notes), and (c) 1,443,696 shares of the registrants common stock ($500,000 value based on the trailing 30-day average of the registrants common stock). The Notes are payable in 12 equal quarterly installments beginning on February 1, 2014 and have a maturity date of November 1, 2016. The Notes are secured by the assets of the registrant and AquaTex. In addition, there exists a working capital adjustment provision whereby we would be required to pay the AquaTex members additional cash equal to the amount of any working capital of AquaTex at closing; provided, however, that in the event that AquaTex has negative working capital at closing, then the amount of such negative working capital will be offset against the notes issued to the former AquaTex members at closing The purchase agreement contains 3-year non-compete/non-solicitation provisions for Messers George and Brewer, the former members of AquaTex.
Results of Operations for the Three Months Ended June 30, 2014 and 2013
Revenues. Our revenues increased by $3,525,947, or approximately 109% to $6,752,384 for the three months ended June 30, 2014 from revenues of $3,226,437 for the three months ended June 30, 2013. This increase was primarily attributable to the continued growth within our water division from AES Water Solutions and AquaTex (acquired in November 2013) frac water management services. Additionally, increased revenues came from organic growth of AES Safety Services including its new spill remediation service line and the organic growth of STPs business in renting mobile oilfield power to its customers. All three divisions of Water, Safety and Power benefitted from the continued activity levels of horizontal drilling and its related hydraulic fracing in the domestic U.S.
Cost of Revenues. Cost of revenues increased by $2,558,664 or approximately 108%, to $4,919,973 for the three months ended June 30, 2014, or 73% of revenues, compared to cost of revenues of $2,361,309, or 73% of revenues for the three months ended June 30, 2013. The cost of revenues during the three months ended June 30, 2014 were primarily the result of contract labor of $1,746,515, direct costs associated with the spill remediation line of $514,794, frac water pipe, hose and pump rental of $587,997, equipment and truck lease expense of $978,113 and related fuel costs of $616,535. The increase in cost of revenues as a percentage of sales was the result of the additional revenues of AquaTex, our subsidiary which was acquired in November 2013, increased equipment rental costs, as well as higher revenues covering more fixed costs within cost of revenues particularly in the newer Safety and Power divisions. The Company currently projects a lower cost of sales as a percentage of sales in the future through continued increases in revenues to cover a higher percentage of fixed costs, decreasing rental expense through the procurement of additional fixed assets, and the anticipated future impact of revenues resulting from new technology services and their lower cost of sales. The cost of revenues during the three months ended June 30, 2013
15
were primarily the result of contract labor of $1,180,200, equipment rental of $652,922 and fuel for water pumps of $300,257.
Selling, general, and administrative. Selling, general and administrative expenses increased by $1,314,821, or approximately 144%, to $2,228,288, or approximately 33% of revenues, for the three months ended June 30, 2014, as compared to $913,467 or approximately 28% of revenues for the comparable period in 2013. The increase was primarily attributable to newly added employee compensation expense, consulting fees, the cost of public reporting and holding company expenses, as well as the testing and development costs related to water recycling technologies during 2014. The Company projects these costs to be reduced in the future as a percentage of revenues, as it believes it now has the infrastructure in place ot increase operating leverage through increased revenues.
Interest expense. Interest expense increased by $31,912, or approximately 22% to $176,035 in the three months ended June 30, 2014, from $144,123 for the comparable period in 2013. The increase was attributable to the interest accrued on the line of credit accounts receivable financing facility and amortization of related deferred finance costs, promissory notes we issued in our September 2012 and October 2013 financings, promissory notes issued during the current period for equipment financing, as well as accrued interest on the notes issued in connection with our acquisition of AES Water Solutions in September 2012 and AquaTex in November 2013.
Net loss. Our net loss increased by $267,027, or approximately 72% to $640,554 for the three months ended June 30, 2014 from a net loss of $373,527 for the comparable period in 2013. The loss for the three months ended June 30, 2014 included non-cash charges in connection with the issuance of share-based awards of $68,911, the amortization of shares issued for services of $133,000, the loss on debt conversions to common shares of $11,063 and the amortization of deferred financing costs of $18,859. In addition the Company incurred $36,738 in expenses from the testing and development costs related to its frac water recycling technologies. The loss during the three months ended June 30, 2013 was primarily attributable to the acquisition expenses related to the purchase of AES Water Solutions and the disposal of obsolete assets.
Results of Operations for the Six Months Ended June 30, 2014 and 2013
Revenues. Our revenues increased by $8,421,235, or approximately 144% to $ 14,257,445 for the six months ended June 30, 2014 from revenues of $ 5,836,210 for the six months ended June 30, 2013. This increase was primarily attributable to the continued growth within our water division from AES Water Solutions and AquaTex (acquired in November 2013) frac water management services. Additionally, increased revenues came from organic growth of AES Safety Services including its new spill remediation service line and the organic growth of STPs business in mobile oilfield power. All three divisions of Water, Safety and Power benefitted from the continued activity levels of horizontal drilling and its related hydraulic fracing in the domestic U.S.
Cost of Revenues. Cost of revenues increased by $5,864,411 or approximately 132%, to $10,303,201 for the six months ended June 30, 2014, or 72% of revenues, compared to cost of revenues of $4,438,790, or 76% of revenues for the six months ended June 30, 2013. The cost of revenues during the six months ended June 30, 2014 were primarily the result of contract labor of $3,937,161, direct costs associated with the spill remediation line of $1,442,606, frac water pipe, hose and pump rental of $1,408,584, equipment and truck rental of $1,490,795 and related fuel costs of $1,153,971. The decrease in cost of revenues as a percentage of sales was the result of the additional revenues of AquaTex, our subsidiary which was acquired in November 2013, lower equipment rental costs, as well as higher revenues covering more fixed costs within cost of revenues particularly in the newer Safety and Power divisions. The Company currently projects a lower cost of sales as a percentage of sales in the future through continued increases in revenues to cover a higher percentage of fixed costs, decreasing rental expense through the procurement of additional fixed assets, and the anticipated future impact of revenues resulting from new technology services and their lower cost of sales. The cost of revenues during the six months ended June 30, 2013 were primarily the result of contract labor of $2,504,057, equipment rental of $1,020,209 and fuel for water pumps of $513,725.
Selling, general, and administrative. Selling, general and administrative expenses increased by $2,751,160, or approximately 188%, to $4,215,358, or approximately 30% of revenues, for the six months ended June 30, 2014, as compared to $1,464,198 or approximately 25% of revenues for the comparable period in 2013. The increase was primarily attributable to newly added employee compensation expense, consulting fees, the cost of public reporting and holding company expenses, as well as the testing and development costs related to water recycling technologies during 2014. The Company projects these costs to be reduced in the future as a percentage of revenues, as it believes it now has the infrastructure in place to increase operating leverage through increased revenues.
Interest expense. Interest expense increased by $93,271, or approximately 42% to $315,845 in the six months ended June 30, 2014, from $222,574 for the comparable period in 2013. The increase was attributable to the interest accrued on the accounts receivable financing facility and amortization of related deferred finance costs, promissory notes we issued in our September 2012 and October 2013 financings, promissory notes issued during the current period for equipment financing, as well as accrued interest on the notes issued in connection with our acquisition of AES Water Solutions in September 2012 and AquaTex in November 2013.
16
Net loss. Our net loss increased by $177,489, or approximately 36% to $665,405 for the six months ended June 30, 2014 from a net loss of $487,916 for the comparable period in 2013. The loss for the six months ended June 30, 2014 included non-cash charges in connection with the issuance of share-based awards of $110,421, the amortization of shares issued for services of $133,000, the loss on debt conversions to common shares of $11,063 and the amortization of deferred financing costs of $37,718. In addition the Company incurred $123,688 in expenses from the testing and development costs related to frac water recycling technologies. The loss during the six months ended June 30, 2013 was primarily attributable to the acquisition expenses related to the purchase of AES Water Solutions and the disposal of obsolete assets.
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. We had cash of $1,727,514 and a working capital deficit of $2,849,827 as of June 30, 2014 as compared to cash of $866,035 and a working capital deficit of $2,578,883 as of December 31, 2013.
Net cash provided by operating activities for the six months ended June 30, 2014 was $804,467 resulting primarily from our net loss of $665,405 and increases in accounts receivable of $2,562,921 and prepaid expenses of $70,492, which amounts were offset by the increases in accounts payable of $2,722,656, accounts payable-related parties of $25,000 and accrued expenses of $841,821 and adjustments in non-cash items including $110,420 in non-cash stock compensation, $293,980 in depreciation and amortization, $10,581 in loss on asset disposal, $133,000 in stock issued for services, $11,063 in loss on debt conversions to common shares and $37,718 in amortization of deferred finance costs. By comparison, net cash used in operating activities for the six months ended June 30, 2013 was $421,634 resulting primarily from our net loss of $487,916 which was offset by an increase in accounts payable and accrued expenses of $778,256 and a decrease in accounts receivable, prepaid expenses and other assets of $1,381,923 and adjustments in non-cash items including $72,582 in amortization of note payable discount, 269,369 in non-cash stock for services, $50,899 in depreciation and amortization, $96,297 in loss on extinguishment of liability, $55,154 in warrants issued for extension of secured note, $54,000 in bad debt recovery, and $4,029 in loss on asset disposal.
Net cash used in investing activities for the six months ended June 30, 2014 was $1,851,292 resulting from our acquisition of assets. By comparison, net cash provided by investing activities for the six months ended June 30, 2013 was $23,052 consisting primarily of proceeds from the sale of property and equipment for $71,754 which was offset by $48,702 related to the purchase of property and equipment.
Our net cash provided by financing activities was $1,908,304 for the six months ended June 30, 2014. This consisted of $1,410,000 in proceeds from sale of preferred shares, $130,000 in proceeds from the issuance of notes, $1,403,676 in net proceeds from our line of credit, and $87,500 in proceeds from the exercise of warrants and options, which amounts were offset by payments on notes payable of $283,456, payments on capital lease obligation of $657,243 and $182,173 in payments for deferred financing costs. Our net cash provided by financing activities was $141,208 in the six months ended June 30, 2013. This consisted primarily of payments on notes payable for $354,067, which was offset by $50,000 received upon the exercise of warrants, $372,400 in net proceeds from our line of credit, $14,500 in payments for deferred financing costs and $87,375 received on the sale-leaseback transaction.
The net increase in cash for the six months ended June 30, 2014 was $861,479 as compared to a net decrease in cash of $257,374 for the six months ended June 30, 2013.
Accounts Receivable Financing Facility.
On June 26, 2013, our wholly-owned subsidiaries, KMHVC, Inc. and Apache Energy Services, LLC (the Borrower) entered into a $2 million revolving accounts receivable financing facility with Rosenthal & Rosenthal. The financing facility provides for the Borrower to have access to the lesser of (i) $2 million or (ii) 85% of Net Amount of Eligible Receivables (as defined in the financing agreement). The financing facility is paid for by the assignment of the Borrowers accounts receivable to Rosenthal and is secured by the Borrowers assets. The financing facility has an interest rate of 4.00% in excess of the prime rate reported by the Wall Street Journal per annum. In addition, the Borrower paid Rosenthal a facility fee of $30,000 on the closing and an annual fee of $20,000 and a monthly administration fee of $1,000 as well as monthly additional charges of not less than $2,000. The financing facility is for an initial term of two-years and will renew on a year to year basis, unless terminated in accordance with the financing agreement. If the facility is terminated prior to the first anniversary, Borrower is
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obligated to pay Rosenthal a fee of $40,000 and if terminated after the first anniversary and prior to the second anniversary then Borrower shall pay a fee of $20,000. We guaranteed repayment of the line of credit, which guaranty is secured by our assets. On November 20, 2013, our wholly-owned subsidiary, Aqua Handling of Texas, LLC (dba AquaTex) entered into an Assumption Agreement Rosenthal & Rosenthal, Inc. under which AquaTex became an additional borrower under the financing facility with Rosenthal. In connection with AquaTex becoming an additional borrower under the facility, the Lender increased the maximum amount available under the facility to $3 million. In January 2014, the Lender increased the maximum amount available under the facility to $4 million. In April 2014, the Lender increased the maximum amount available under the facility to $5 million. The Company is required to maintain at the end of each fiscal quarter a tangible net worth of not less than negative $1 million and working capital of not less than $4.5 million. The Company was in compliance with the working capital covenant for the period ended June 30, 2014.
Series A Preferred Stock Financing
From June 21, 2014 through July 2, 2014, we sold 4,000 units (Units) to 22 accredited investors at a price of $1,000 per Unit for total gross proceeds of $4,000,000 (of which 3,450 Units were purchased on or after June 27, 2014). We are offering up to 4,000 Units with each Unit consisting of (i) 1 share of our Series A Convertible Preferred Stock (Series A Preferred) convertible into shares of our common stock, $0.001 par value per share (Common Stock) at a rate of $0.70 per share (the Conversion Shares), and (ii) common stock purchase warrants (Warrants) to purchase five-hundred fifty (500) shares of Common Stock with an exercise price of $1.00 per whole share exercisable for 3 years after issuance (the Warrant Shares). The Conversion Shares and the Warrant Shares contain standard piggy back registration rights. We used $223,440 of these proceeds as payment for non-exclusive placement agent fees to FINRA registered broker-dealers. In addition, approximately $500,000 was used to repay outstanding indebtedness under 10% promissory notes. The remaining proceeds will used for working capital and general corporate purposes and to fund growth opportunities. These issuances were exempt under Rule 506 of the Securities Act of 1933, as amended.
Promissory Notes/ Conditional Sales Contracts 2014
On January 15, 2014, we and our wholly-owned subsidiary issued a 10% promissory note in the amount of $370,000 to a single accredited investor. The note has a maturity date of July 15, 2014 and was issued as consideration for a sublicense fee for AES sublicense of a water treatment platform unit. We did not receive any proceeds for issuance of this note. This note was paid in full on July 8, 2014. On February 17, 2014, we, and our wholly-owned subsidiary, Apache Energy Services, LLC issued a 10% promissory note in the amount of $130,000 to a single accredited investor. This note has a July 15, 2014 maturity date. We received cash proceeds of $130,000 from the issuance of this note, which proceeds were used for working capital and general corporate purposes. This note was paid in full on July 8, 2014.
On February 27, 2014, our wholly-owned subsidiary KMHVC entered into a Security Agreement-Conditional Sales Contract with a third party equipment seller for the purchase of equipment. KMHVC financed $117,120 of the purchase price and agreed to pay an additional $5,459 in finance charges (equal to 8.5% of the amount financed) for a total amount due under the conditional sales contract of $122,579. To secure payment under this conditional sales contract, KMHVC granted a purchase money security interest in the equipment sold. The conditional sales contract is payable in twelve equal monthly installments of $10,215 beginning on March 27, 2014, the last of which is due on February 27, 2015.
On April 18, 2014, our wholly-owned subsidiary KMHVC entered into a Security Agreement-Conditional Sales Contract with a third party equipment seller for the purchase of equipment. KMHVC financed $63,006 of the purchase price and agreed to pay an additional $2,935 in finance charges (equal to 8.5% of the amount financed) for a total amount due under the conditional sales contract of $65,941. To secure payment under this conditional sales contract, KMHVC granted a purchase money security interest in the equipment sold. The conditional sales contract bears 8.50% interest and is payable in twelve equal monthly installments of $5,495 beginning on May 18, 2014, the last of which is due on April 18, 2015.
On April 22, 2014, our wholly-owned subsidiary AES Water issued a 17% secured promissory note in the amount of $88,900 to Texas Mutual Insurance Company. This note was issued as consideration for workers compensation insurance premiums and is not secured. The note bears 17% interest and is payable in six equal monthly installments of $15,342 beginning on May 1, 2014, the last of which is due on October 1, 2014.
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On May 19, 2014, our wholly-owned subsidiary KMHVC entered into a Security Agreement-Conditional Sales Contract with a third party equipment seller for the purchase of equipment. KMHVC financed $48,906 of the purchase price and agreed to pay an additional $2,278 in finance charges (equal to 8.5% of the amount financed) for a total amount due under the conditional sales contract of $51,184. To secure payment under this conditional sales contract, KMHVC granted a purchase money security interest in the equipment sold. The conditional sales contract is payable in twelve equal monthly installments of $4,265 beginning on June 19, 2014, the last of which is due on May 19, 2015.
Convertible Debenture 2013
From October 31, 2013 through November 30, 2013, we issued 10% convertible promissory notes in the aggregate principal amount of $1,000,000 to ten accredited investors. We received cash proceeds of $850,000 from the issuance of these notes and $150,000 of these notes were issued in consideration of an investors cancellation of an existing promissory note dated December 17, 2012 in the principal amount of $150,000. The notes have 2 year term. The notes are convertible into our common stock at a fixed conversion price of $0.50 per share. The proceeds were used to fund the cash consideration for our acquisition of Aqua Handling of Texas, LLC and for working capital and general corporate purposes. We relied on the exemption from registration provided by Rule 506 and/or Section 4(2) of the Securities Act of 1933, as amended, for the offer and sale of the convertible notes.
Promissory Notes - 2012
On December 17, 2012, the registrant issued a 10% subordinated secured promissory note in the amount of $150,000 with a warrant to purchase 550,000 shares of the registrants common stock. The aggregate gross proceeds from the sale of the note and warrant was $150,000. The note is due on December 17, 2013 and bears interest at the ten percent (10%). The note is secured by the assets of the registrant. The notes was issued with a warrant to purchase 550,000 shares of the registrants common stock at an exercise price of $0.09 per share The warrant is exercisable until five (5) years after the closing date. The registrant relied on the exemption from registration provided by Rule 506 and/or Section 4(2) of the Securities Act of 1933, as amended, for the offer and sale of the notes and the warrants. This note was cancelled in exchange for $150,000 of 10% convertible promissory notes issued on October 31, 2013.
On November 5, 2012, we, and our wholly-owned subsidiary, Apache Energy Services, LLC issued a $600,000 10% secured promissory note to a single accredited investor. The aggregate gross proceeds from the sale of the note were $600,000. The proceeds were used to facilitate the purchase of equipment by AES from a third party (see Item 5 below). The note is due on March 30, 2013 and bears interest at the ten percent (10%). The notes are secured by the equipment purchased with the proceeds. The issuance was exempt under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended. This note was paid in full on June 27, 2013.
On October 31, 2012, we issued a $50,000 10% subordinated secured promissory note to a related party. The aggregate gross proceeds from the sale of the note were $50,000. The proceeds were used for working capital and general corporate purposes. The note is due on March 30, 2013 and bears interest at ten percent (10%). The note is secured by our assets. The issuance was exempt under Section 4(2) and/or Rule 506 of Regulation D of the Securities Act of 1933, as amended. This note was paid on May 24, 2013.
On September 24, 2012, we issued $300,000 of principal amount of 10% subordinated secured promissory notes and warrants to purchase our common stock. The aggregate gross proceeds from the sale of the notes and warrants were $300,000. The proceeds were used to fund the cash purchase price of the acquisition of Apache Energy Services LLC (dba AES Water Solutions) and for working capital requirements. The notes are due on September 23, 2013 and bear interest of ten percent (10%). The notes are secured by our assets. The notes were issued with Class A warrants to purchase up to 1,800,000 shares of the our common stock at an exercise price of $0.10 per share and Class B warrants to purchase up to 900,000 shares of the registrants common stock at an exercise price of $0.10 per share. The number of Warrant Shares underlying each Class A Warrant equals to the principal amount of the Note subscribed for by a purchaser Subscriber multiplied by six (6) The Class B Warrants are exercisable beginning on the one-year anniversary of the Closing Date (the Target Date) and the number of warrant shares underlying the Class B Warrant equals either (A) the principal amount of note subscribed for by a purchaser multiplied by 3 shares, if the Market Price (as defined in the Class B Warrant) on the Target Date is less than $0.20 or (B) 0 shares, if the Market Price on the Target Date is at least $0.20. The Class A Warrants and Class B Warrants are exercisable until five (5) years after the closing date. The Class A Warrants and the Class B Warrants are exercisable on a cashless basis. In September 2013, the Class B Warrant did not vest on the Target Date based on the Market Price and were effectively forfeited. On September 25, 2013 warrant holders exercised warrants to purchase 1,720,000 shares of our common stock for a total consideration of $169,800 which
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consideration was paid by reduction of indebtedness for each warrant holder by the amount equal to their exercise price under the outstanding note. The remaining principal balance of $130,200 and accrued interest was paid between September 25, 2013 and February 21, 2014.
Liquidity and Capital Requirements HII Technologies, Inc.
As of the date of this report, we believe that we will be able to fund our operations for the next 12 months by a combination of the continuing operations of our three divisions and our senior revolving line of credit for accounts receivables.
Critical Accounting Policies
Our discussion and analysis of our financial conditions and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires managers to make estimates and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition. We use authoritative pronouncements, historical experience, and other assumptions as the basis for making judgments. Actual results could differ from those estimates.
Accounts receivable are comprised of unsecured amounts due from customers. AES carries its accounts receivable at their face amounts less an allowance for bad debts. The allowance for bad debts is recognized based on managements estimate of likely losses per year, based on past experience and review of customer profiles and the aging of receivable balances.
Goodwill acquired in a business acquisition is initially measured at cost being the excess of the cost of business combination over the net fair value of the identifiable assets, liabilities and contingent liabilities. Following the initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortized but instead, it is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
Revenue is recognized when all of the following criteria are met: 1) persuasive evidence of an arrangement, 2) delivery has occurred, 3) the price is fixed and determinable, and 4) collectability is reasonably assured.
Off-Balance Sheet Arrangements
None.
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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 June 30, 2014, 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 June 30, 2014 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.
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PART II: OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
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
1.
See Item 2 of our Quarterly Report for the period ended March 31, 2014.
2.
On May 29, 2014, we issued 500,000 shares of our common stock to one of our directors upon exercise of outstanding options. We received $75,000 in proceeds from the exercise of the option, which proceeds were used for working capital and general corporate purposes. The registrant relied on the exemption from registration provided by Section 3(a)(9) and/or Section 4(2) of the Securities Act of 1933, as amended.
3.
See our Current Report on Form 8-K dated June 21, 2014 and filed with the SEC on July 3, 2014.
4.
On June 30, 2014, we issued a warrant to purchase 50,000 shares of our common stock at an exercise price of $0.65 per share as additional consideration under a Master Lease Agreement with BCL Equipment Leasing. The Warrant is exercisable only if we exercise the early buyout option under such lease. We did not receive any proceeds pursuant to the issuance of the warrant. The issuance was exempt under Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3 DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 OTHER INFORMATION
1.
On April 18, 2014, our wholly-owned subsidiary KMHVC entered into a Security Agreement Conditional Sales Contract with a third-party equipment seller for the purchase of equipment. KMHVC financed $63,006 of the purchase price and agreed to pay an additional $2,935 in finance charges (equal to 8.5% of the amount financed) for a total amount due under the conditional sales contract/promissory note of $65,941. To secure payment, under this conditional sales contract/promissory note, KMHVC granted a purchase money security interest in the equipment sold. The conditional sales contract/promissory note is payable in 12 equal monthly installments of $5,495 with the first payment due on May 18, 2014 and the last payment due on April 18, 2015. The Company provided a continuing guaranty of KMVHCs obligations under this conditional sales contract/promissory note.
2.
On May 19, 2014, our wholly-owned subsidiary KMHVC entered into a Security Agreement Conditional Sales Contract with a third-party equipment seller for the purchase of equipment. KMHVC financed $48,906 of the purchase price and agreed to pay an additional $2,278 in finance charges (equal to 8.5% of the amount financed) for a total amount due under the conditional sales contract/promissory note of $51,184. To secure payment, under this conditional sales contract/promissory note, KMHVC granted a purchase money security interest in the equipment sold. The conditional sales contract/promissory note is payable in 12 equal monthly installments of $4,265 with the first payment due on June 19, 2014 and the last payment due on May 19, 2015. The Company
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provided a continuing guaranty of KMVHCs obligations under this conditional sales contract/promissory note.
3.
On June 30, 2014, we entered into a Master Lease Agreement with BCL-Equipment Leasing LLC under which we leased equipment with a capitalized cost of $3,244,976. The lease term is for 24 months, with an automatic 12 month extension if the purchase option is not elected at the end of year 2. The purchase price is for the greater of fair market value or 20% of the total capitalized cost. The monthly payments under the lease are $150,769 and we paid a security deposit of $657,243 and an origination fee of $32,347. As additional consideration, we issued lessor a warrant to purchase 50,000 shares of our common stock at exercise price of $0.65 per share, which warrant is exercisable only if we exercise the early buyout option under such lease
4.
On July 10, 2014, we entered into a master lease agreement with Nations Fund I, LLC under which we leased equipment with a value of $1,908,542. The lease requires 36 monthly payments during such term of $54,485 per month and a purchase at the end of term of $572,563.
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ITEM 6 - EXHIBITS
Item |
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No. | Description | Method of Filing | |
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10.1 | Master Lease Agreement with BCL Equipment Leasing LLC | Filed herewith | |
10.2 | Master Lease Agreement with Nations Fund I,, LLC | Filed herewith. | |
10.3 | Security Agreement - Conditional Sales Contract dated April 18, 2014 | Filed herewith. | |
10.4 | Security Agreement-Conditional Sales Contract dated May 19, 2014. | Filed herewith. | |
31.1 | Certification of Matthew C. Flemming pursuant to Rule 13a-14(a) | Filed herewith. | |
32.1 | Chief Executive Officer and Chief Financial Officer Certification pursuant o 18 U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HII TECHNOLOGIES, INC. |
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August 7, 2014 | /s/ Matthew C. Flemming |
| Matthew C. Flemming |
| President, Chief Financial Officer, Secretary, Treasurer and Director |
| (Principal Executive Officer and Principal Accounting Officer) |
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