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 September 30, 2013


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)

Issuer’s 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 November 14, 2013, 48,351,379 shares of our common stock were outstanding.




1



HII TECHNOLOGIES, INC.

  

FORM 10-Q

  

September 30, 2013


TABLE OF CONTENTS

  

  

Page

  

PART I-- FINANCIAL INFORMATION

  

  

  

  

  

  

Item 1.

Financial Statements (unaudited)

3

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

  

Item 4

Control and Procedures

23

  

  

  

 

  

PART II-- OTHER INFORMATION

 

  

  

  

 

  

Item 1

Legal Proceedings

25

  

Item 1A

Risk Factors

25

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

  

Item 3.

Defaults Upon Senior Securities

25

  

Item 4.

Mine Safety Disclosures

25

  

Item 5.

Other Information

25

  

Item 6.

Exhibits

26

  

  

  

 

  

SIGNATURES

26

  




2



ITEM 1 –FINANCIAL INFORMATION


HII TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

September 30

 

December 31

 

 

 

2013

 

2012

ASSETS

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 $            132,021

 

 $               379,336

 

Accounts receivable, net

        2,372,928

 

               1,297,103

 

Current portion of note receivable

         296,699

 

                    11,614

 

Current portion of deferred financing costs

          33,949

 

                              -

 

Prepaid expense and other current assets

           66,084

 

                    55,515

 

 

 

 

 

 

 

 

Total current assets

      2,901,681

 

               1,743,568

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $83,863 and $23,442

         674,990

 

                  537,881

Note receivable, net of current portion

                    -   

 

                      3,722

Deposits

          33,960

 

                            -   

Deferred financing costs, net of current portion

            25,462

 

                            -   

Goodwill

 

      1,897,380

 

               1,897,380

 

 

 

 

 

 

 

 

Total assets

 $          5,533,473

 

 $            4,182,551

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

Accounts payable

 $          1,336,303

 

 $               364,974

 

Accounts payable and other liabilities, related parties

         158,000

 

                  340,248

 

Accrued expenses and other liabilities

          538,661

 

                  323,417

 

Line of credit

       1,436,273

 

                            -   

 

Current portion of notes payable - related parties, net of discount of $0 and $13,133

          483,333

 

                  520,200

 

Current portion of secured notes payable, net of discount of $8,187 and $103,926

         222,013

 

                  896,074

 

 

 

 

 

 

 

 

Total current liabilities

      4,174,583

 

               2,444,913

 

 

 

 

 

 

Long term liabilities:

 

 

 

 

Notes payable - related parties net of current portion

       541,667

 

                  866,667

 

 

 

 

 

 

 

 

Total liabilities

       4,716,250

 

               3,311,580

 

 

 

 

 

 

Commitments and contingencies

                -

 

                              -

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

Preferred stock, $.001 par value, 10,000,000 shares authorized,

 

 

 

 

   

no shares issued or outstanding

                    -

 

                              -

 

Common stock, $.001 par value, 250,000,000 shares authorized,

 

 

 

 

 

46,907,683 and 43,317,683 shares issued and outstanding

             46,907

 

                    43,317

 

Additional paid-in-capital

      27,518,924

 

             26,913,135

 

Accumulated deficit

          (26,748,608)

 

            (26,085,481)

 

 

 

 

 

 

 

 

Total stockholders' equity

                  817,223

 

                  870,971

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 $            5,533,473

 

 $            4,182,551


See accompanying notes to unaudited consolidated financial statements




3




HII TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30

 

September 30

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

REVENUES

 $       3,931,716

 

 $        104,579

 

 $     9,767,926

 

 $     104,579

 

 

 

 

 

 

 

 

 

 

COST OF REVENUES

        2,794,829

 

       10,651

 

  7,233,619

 

     10,651

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

    1,136,887

 

     93,928

 

    2,534,307

 

      93,928

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

       Selling, general and administrative

     1,129,584

 

         56,847

 

      2,593,782

 

      249,479

       Bad debt expense

         77,021

 

               -

 

     131,021

 

              -

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

     1,206,605

 

        56,847

 

      2,724,803

 

      249,479

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM OPERATIONS

       (69,718)

 

       37,081

 

   (190,496)

 

   (155,551)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

       Gain on liability settlement

-

 

              -

 

                 -

 

       37,460

       Loss on extinguishment of liability

                    -

 

                  -

 

         (96,297)

 

              -

       Acquisition expenses

              -

 

    (146,302)

 

               -

 

    (146,302)

       Interest expense

      (97,327)

 

      (1,007)

 

    (319,901)

 

       (1,007)

 

 

 

 

 

 

 

 

 

 

NET LOSS BEFORE INCOME TAXES

     (167,045)

 

   (110,228)

 

   (606,694)

 

   (265,400)

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

        (8,166)

 

              -

 

     (56,433)

 

              -

 

 

 

 

 

 

 

 

 

 

NET LOSS

 $          (175,211)

 

 $        (110,228)

 

 $     (663,127)

 

 $  (265,400)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 $                      -   

 

 $                   -   

 

 $           (0.01)

 

 $        (0.01)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding-Basic and diluted

       45,187,683

 

    36,076,379

 

44,458,141

 

  34,836,351


See accompanying notes to unaudited consolidated financial statements




4




HII TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'  EQUITY

For the nine months ended September 30, 2013

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Common Stock

 

Paid-In

 

Accumulated

 

 

 

Shares

Par

 

Capital

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

Balances at December 31, 2012

43,317,683

$ 43,317

 

$26,913,135

 

$(26,085,481)

 

$       870,971

 

 

 

 

 

 

 

 

 

Common stock issued for lease deposit

  350,000

  350

 

    31,150

 

           -

 

     31,500

Warrants exercised

  700,000

  700

 

   49,300

 

            -

 

    50,000

Warrants exercised and applied to debt reductions

   1,720,000

1,720

 

  168,080

 

           -

 

    169,800

Common stock issued for services

820,000

  820

 

    165,980

 

             -

 

     166,800

Warrants issued for extension of secured note

           -

      -

 

    55,154

 

              -

 

     55,154

Stock options issued for services

           -

     -

 

    136,125

 

             -

 

     136,125

Net loss

         -

    -

 

            -

 

   (663,127)

 

  (663,127)

 

 

 

 

 

 

 

 

 

Balances at September 30, 2013

46,907,683

$46,907

 

$27,518,924

 

$(26,748,608)

 

$       817,223



See accompanying notes to unaudited consolidated financial statements




5




HII TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2013 and 2012

(unaudited)

 

 

 

 

2013

 

2012

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net loss

 $          (663,127)

 

 $          (265,400)

 

Adjustments to reconcile net loss to net

 

 

 

 

 

cash used in operating activities:

 

 

 

 

 

Amortization of note payable discount

               108,872

 

                          -

 

 

Amortization of deferred finance costs

                   8,487

 

                          -

 

 

Stock-based compensation

               302,925

 

               119,390

 

 

Depreciation

                 81,851

 

                          -

 

 

Loss on extinguishment of liability

                 96,297

 

                          -

 

 

Warrants issued for extension of secured note

                 55,154

 

                          -

 

 

Bad debt expense

               131,021

 

                          -

 

 

Loss on asset sale

                   6,440

 

                          -

 

 

Changes in:

 

 

 

 

 

 

Accounts receivable

          (1,496,846)

 

             (112,745)

 

 

 

Notes receivable

                        -   

 

                          -

 

 

 

Prepaid expense and other current assets

               (10,569)

 

                 53,270

 

 

 

Deposits

                 (2,460)

 

                        - 

 

 

 

Accounts payable

               971,329

 

                 82,293

 

 

 

Accounts payable and other liabilities - related parties

             (225,248)

 

                        - 

 

 

 

Accrued expenses and other liabilities

               118,947

 

                 58,510

 

Net cash used in operating activities

             (516,927)

 

               (64,682)

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Cash received from the sale of property and equipment

                 86,674

 

                        -   

 

Cash paid for purchase of AES net of cash received

                        -   

 

               (44,861)

 

Notes receivable

                   8,637

 

               (18,167)

 

Cash paid for purchase of property and equipment

             (399,449)

 

                        -   

 

Cash used in investing activities

             (304,138)

 

               (63,028)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Proceeds from exercise of warrants

                 50,000

 

                        -   

 

Proceeds from sale-leaseback transaction

                 87,375

 

                        -   

 

Proceeds from advances - related party

                 63,000

 

                        -   

 

Payments against advances - related party

               (20,000)

 

                        -   

 

Payments for deferred financing costs

               (18,698)

 

                        -   

 

Proceeds from notes payable - related party

                        -   

 

                 50,000

 

Proceeds from notes payable

                        -   

 

               250,000

 

Proceeds from line of credit, net

               874,473

 

                        -   

 

Payments on notes payable

             (462,400)

 

                        -   

 

Net cash provided by financing activities

               573,750

 

               300,000

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

             (247,315)

 

               172,290

CASH AND CASH EQUIVALENTS, beginning of period

               379,336

 

                 76,651

CASH AND CASH EQUIVALENTS, end of period

 $            132,021

 

 $            248,941

Supplemental disclosures:

 

 

 

 

Cash paid for income taxes

 $                     -   

 

 $                     -   

 

Cash paid for interest

                 99,708

 

                        -   

Noncash investing and financing activities

 

 

 

 

Notes issued in conjunction with purchase of equity interest

                        -   

 

            1,300,000

 

Shares issued in connection with acquisition of AES

                        -   

 

               552,500

 

Payable related to working capital adjustment in acquisition of AES

                        -   

 

               225,248

 

Debt discount due to shares and warrants issued with debt

                        -   

 

               105,059

 

Payment on secured note paid directly from line of credit

               512,600

 

                        -   

 

Note receivable received for accounts receivable due

               290,000

 

                        -   

 

Debt reduction from the exercise of warrants

               169,800

 

                        -   

 

Deferred financing costs paid directly from line of credit

                 49,200

 

                        -   

 

Common stock issued for lease deposit

                 31,500

 

                        -   

 

 

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 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, 2012 and 2011 contained in HII Technologies’ Form 10-K originally filed with the Securities and Exchange Commission on March 24, 2013.  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 disclosure contained in the audited consolidated financial statements for the years ended December 31, 2012 and 2011 as reported in the Company’s 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. (dba “South Texas Power”) and Apache Energy Services, LLC (“AES”).  AES launched a new operating division in January 2013 doing business as AES Safety Services providing safety consultancy services to the oilfield industry. Significant intercompany accounts and transactions have been eliminated.  A separate set of financials for AES from inception, January 4, 2012 through September 30, 2012, are presented following those of HII as AES satisfies the requirements for predecessor reporting.


NOTE 2 – ACQUISITION


On September 27, 2012, we closed the acquisition of all of the outstanding membership interests of AES, pursuant to the terms of a Securities Purchase Agreement dated September 26, 2012, by and among the Company, AES and the members of AES (the “Purchase Agreement”).  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 occurred and each month thereafter until paid in full; (b) $1,300,000 in 5% subordinated secured promissory notes, and (c) 6,500,000 common shares, which shares vest pursuant to restricted stock agreements.


The acquisition of AES has been accounted for as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date.

 

NOTE 3 - NOTE RECEIVABLE

 

On August 1, 2013, the Company agreed to take a secured note for $290,000 for a past due accounts receivable from a customer.  The note is subject to annual interest of 5% with principal and interest due on July 31, 2014.

NOTE 4 – NOTES PAYABLE


A summary of the activity in notes payable for the nine months ended September 30, 2013 is shown below:





7




Notes payable - related parties

 

 

 

 

 

 

 

 

 Balance at January 1, 2013

 

 $      1,386,867

 

 Less:  payments on notes payable

 

      (375,000)

 

 Add:  amortization of note discount

 

         13,133

 

 

 

 

     1,025,000

 

 Less - current maturities, net - related parties

 

      (483,333)

 

 Long-term notes payable, net September 30, 2013

 

 $        541,667

 

 

 

 

 

 Notes payable - third parties

 

 

 

 

 

 

 

 

 Balance at January 1, 2013

 

 $        896,074

 

 Less:  payments on notes payable

 

      (600,000)

 

 Less:  reduction in notes payable due to the exercise of warrants

 

      (169,800)

 

 Add:  amortization of note discount

 

          95,739

 

 

 

 

           222,013

 

 Less - current maturities, net - third parties

 

       (222,013)

 

 Long-term notes payable, net September 30, 2013

 

 $                 -   


On September 23, 2013, the Company entered into an amendment to the secured promissory note of $50,000 dated September 24, 2012, with a related party.  The amendment extended the maturity date from September 24, 3013 to February 23, 2014.  In addition a payment plan was added for $5,000 bi-weekly beginning October 7, 2013 until paid with all accrued interest due on the maturity date.  The Company evaluated the amendment under FASB ASC 470-50 and determined that the modification was not substantial and therefore did not constitute a debt extinquishment.


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 consideration was paid by reduction of indebtedness for each warrant holder by the amount equal to their exercise price under outstanding notes payable to such warrant holders.


As of September 30, 2013, a certain secured promissory note of $200,000 in original principal dated September 25, 2012, had been reduced by $120,000 by the warrant exercise mentioned above.  The remaining principal due of $80,000 and accrued interest was in default as of September 30, 2013.  The full principal and interest was paid on October 3, 2013.


As of September 30, 2013, a certain secured promissory note of $50,000 in original principal dated September 25, 2012, had been reduced by $49,800 by the warrant exercise mentioned above.  An additional $20 of principal and all accrued interest was paid on September 25, 2013.  The remaining principal due of $180 was paid on November 1, 2013.


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 Borrower’s accounts receivable to Rosenthal and is secured by the Borrower’s 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 Borrower’s 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 1% of the maximum credit facility and a monthly administration fee of $1,000 as well as monthly minimum interest 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.


During the nine months ended September 30, 2013, the Company made draws, net of expenses, of $1,436,273.



8




Pursuant to the terms of the financing facility, the Company is 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.  The Company was in compliance with these covenants as of September 30, 2013.


The Company paid a total of $67,898 in various financing fees which are amortized over the two year life of the line of credit.  A summary is shown below:


Balance at January 1, 2013

 

 $          -   

 Add:  financing fees paid

 

67,898

 Less:  amortization of deferred financing costs

   (8,487)

 

 

 

 

 59,411

 Less:  current maturities

 

 (33,949)

 Long-term deferred financing costs

 $ 25,462


NOTE 6 – COMMON STOCK


On January 10, 2013 and pursuant to the December 7, 2012 agreement with Power Reserve Corp. (“PRC”) the Company issued 350,000 shares of common stock to PRC as a prepayment toward future lease payments.  The shares were valued at $31,500 and are reported as deposits in the consolidated balance sheets.


On March 4, 2013, a warrant holder exercised warrants to purchase 375,000 common shares at an exercise price of $0.05, for total proceeds of $18,750.  


On May 23, 2013, a warrant holder exercised warrants to purchase 300,000 common shares at an exercise price of $0.10, for total proceeds of $30,000.


In connection with the acquisition of AES, the Company entered into a consulting agreement for business development advisory services in which the consultant would be issued up to a maximum of 750,000 common shares if AES met certain performance targets.  These performance targets were met and as such, on May 31, 2013, the Company issued 750,000 common shares to the consultant.  The shares were recorded at their fair value of $150,000. The Company recognized a loss on extinguishment of this liability of $87,000 which is the difference between the liability accrued of $63,000 and the fair value of the stock.


On June 3, 2013, a warrant holder exercised warrants to purchase 25,000 common shares at an exercise price of $0.05, for total proceeds of $1,250.


On June 21, 2013, the Company issued 70,000 common shares for consulting services.  The Company recognized a loss on extinguishment of liability of $9,297 which is the difference between the liability accrued of $7,503 and the fair value of the shares of $16,800.


On September 25, 2013, two warrant holders exercised warrants to purchase 1,720,000 shares of our common stock for a total consideration of $169,800  (see also Note 4).


NOTE 7 – 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 April 9, 2012, and (b) the 2012 Stock Incentive Plan reserved 10,000,000 common shares and 1,586,000 stock options have been granted through September 30, 2013.  As of September 30, 2013, there are 1,779,000 options outstanding.


During the nine months ended September 30, 2013, no options were exercised or expired.


During the nine months ended September 30, 2013, 350,000 options were granted to an employee and valued at $41,720 using the Black-Scholes pricing model.   The options vest upon achievement of certain revenue targets, some of which were met during the nine months ended September 30, 2013, resulting in 175,000 options vesting.




9



During the nine months ended September 30, 2013, 1,000,000 options were granted to an employee and director and valued at $178,237 using the Black-Scholes pricing model.   The 500,000 options issued to the director vested immediately while the remaining 500,000 options vest monthly over a period of 24 months.


During the nine months ended September 30, 2013, 36,000 options were granted to an employee and valued at $9,522 using the Black-Scholes pricing model.  The 36,000 options vest monthly over a 36 month period.


Significant assumptions used in the valuation of the above options include the following:


Expected term

5 years

Expected volatility

206.88% - 245.43%

Risk free interest rate

0.70% -  1.39%

Expected dividend yield

0.00%


Stock compensation expense recognized for the nine months ended September 30, 2013 related to the above options and options granted in the prior year amounted to $136,125.  Unrecognized compensation cost as of September 30, 2013 of $65,539 is expected to be recognized over a period of 3.0 years.


Warrants


On March 4, 2013, a warrant holder exercised warrants to purchase 375,000 common shares at an exercise price of $0.05, for total proceeds of $18,750.  


On May 23, 2013, a warrant holder exercised warrants to purchase 300,000 common shares at an exercise price of $0.10, for total proceeds of $30,000.


On June 3, 2013, a warrant holder exercised warrants to purchase 25,000 common shares at an exercise price of $0.05, for total proceeds of $1,250.


On September 25, 2013, two warrant holders exercised warrants to purchase 1,720,000 common shares for a total consideration of $169,800.


On June 21, 2013, the Company issued 200,000 warrants in conjunction with the forbearance of a noteholder concerning the note being paid in full two-months after the due date.  The warrants have an exercise price of $0.28 and a term of 5 years.


The warrants were valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include the following:


Expected term

5 years

Expected volatility

215.84%

Risk free interest rate

1.42%

Expected dividend yield

0.00%


The fair value of the warrants of $55,154 was immediately recorded as interest expense since the note was fully paid as of June 30, 2013.  


During the nine months ended September 30, 2013, 100,000 warrants expired unexercised.


In September 2012, HII issued 900,000 Class B warrants.  The Class B Warrants were exercisable beginning on the one-year anniversary from the issuance date (“Target date”) if the Company’s stock price on or after the Target date through September 24, 2017 is less than $0.20, however, if the Company’s stock price on or after the Target date and through September 24, 2017 is at least $0.20, no shares are issuable under the Class B warrants.  The Company’s stock price on the target date exceeded the $0.20 and the 900,000 warrants were cancelled in September 2013.




10



A summary of activity in options and warrants is as follows:


 

 

 Options

 

Weighted Average Remaining Life

 

Weighted Average Exercise Price

 

Aggregate Intrinsic Value

 

 Warrants

 

 Weighted Average Remaining Life

 

 Weighted Average Exercise Price

 

Aggregate Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2012

  393,000

 

       4.20

 

 $     0.12

 

 $           -   

 

7,193,269

 

       2.91

 

 $        0.15

 

 $   57,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

1,386,000

 

 

 

     0.15

 

 

 

200,000

 

 

 

   0.28

 

 

 

Exercised

-

 

 

 

-

 

 

 

(2,420,000)

 

 

 

       0.09

 

 

 

Forfeited

-

 

 

 

-

 

 

 

(1,000,000)

 

 

 

      0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2013

1,779,000

 

    4.25

 

 $     0.14

 

 $240,240

 

3,973,269

 

 1.09

 

 $         0.20

 

 $ 302,498


NOTE 8 – RELATED PARTY TRANSACTIONS


During the nine months ended September 30, 2013, a member of the Board provided cash advances to the Company totaling $63,000, and the Company made repayments totaling $20,000.  As of September 30, 2013, the outstanding balance payable to this related party amounted to $158,000.  In addition, a member of the Board purchased equipment for STP at a cost of $4,200 and sold it to the Company for the same cost.    This amount has been paid as of September 30, 2013. The outstanding amounts are included in accounts payable and other liabilities – related parties in the consolidated balance sheets.


NOTE 9 – COMMITMENTS AND CONTINGENCIES


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 HII’s 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 any lawsuits and investigations.


The Company has entered into various operating leases for office and storage facilities for terms ranging from month to month to six months.  Rent expense for the nine months ended September 30, 2013 for these leases amounted to $73,415.   


On December 7, 2012, as amended on July 19, 2013, the Company's subsidiary, STP, entered into a strategic alliance agreement with PRC for an operating lease of equipment.  Under the agreement, PRC agreed to fund the purchase of generators, light towers and related equipment for STP's rental fleet.  Under the agreement, STP's monthly lease payment to PRC is calculated as 50% of monthly rental revenue earned on the leased PRC equipment.  The lease effectively started in January 2013, and in January 2013 the Company issued 350,000 shares of common stock as a deposit for future lease payments (see Note 5 above).  In addition, the lease contained a provision for a minimum of $10,000 in payments per month for the first 3 months, which was paid by the Company.  During the nine months ended September 30, 2013, STP recognized $153,978 in lease expense.


In January 2013, the Company entered into a master lease agreement with Enterprise Leasing Company for its rolling stock which is being accounted for as an operating lease.  As of September 30, 2013 the Company leases 30 vehicles and 10 trailers under this master lease with monthly lease payments totaling approximately $44,556.  7 of the leased vehicles resulted from a sale/leaseback transaction with Enterprise in January 2013 where Enterprise purchased 7 vehicles from the Company for $87,375 resulting in a net loss of $11,773.  $2,133 of the loss was recognized immediately and the remainder is being amortized over the life of each respective lease.


NOTE 10 – SUBSEQUENT EVENTS


From October 31, 2013, we issued 10% convertible promissory notes in the aggregate principal amount of $750,000 to six accredited investors.   We received net proceeds of $600,000 from the issuance of these notes.  The difference of $150,000 was used to cancel a secured promissory note dated December 17, 2012 in the amount of $150,000.  The notes have a two-year term from the issuance date.   The outstanding principal may be converted into our common stock at a fixed conversion price of $0.50 per share.  The proceeds will be used to fund the cash consideration for our acquisition of Aqua Handling of Texas, LLC (“and for working capital and general corporate purposes.  



11



 

On November 12, 2013, we consummated the acquisition (the “Acquisition”) of all of the outstanding membership interests of Aqua Handling of Texas LLC, a Texas limited liability company  (“Aqua”) pursuant to the terms of s a Securities Purchase Agreement dated November 11, 2013 by and among the registrant, Aqua and the members of Aqua (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 (the “Shares”) of the registrant’s common stock ($500,000 value based on the trailing 30-day average of the registrant’s 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 Aqua.  In addition, there exists a working adjustment provision whereby we would be required pay the Aqua members additional cash equal to the amount of any working capital of Aqua at closing; provided, however, that in the event that Aqua has negative working capital at closing, then the amount of such negative working capital will be offset against the notes issued to the former Aqua members at closing   The purchase agreement contains 3-year non-compete/non-solicitation provisions for Chris George and Branden Brewer, the former members of Aqua.    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 shares.

 

On November 12, 2013, the Company issued 250,000 options to an office of Aqua.  The options vest monthly over a 3 year period.

 


 

12




APACHE ENERGY SERVICES, LLC

BALANCE SHEET

As of September 30, 2012

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

Current assets:

 

 

Cash and cash equivalents

 $               205,139

 

Accounts receivable

268,347

 

Prepaid expense and other current assets

11,917

 

 

 

 

 

 

Total current assets

485,403

 

 

 

 

Property and equipment, net of accumulated depreciation of $13,637

45,120

 

 

 

 

 

 

Total assets

 $               530,523

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

Current liabilities:

 

 

Accounts payable

 $                 37,921

 

Sales tax payable

15,324

 

Current portion of equipment note payable

46,910

 

 

 

 

 

Total liabilities

100,155

 

 

 

 

Members' equity

 

 

Members' capital

(33,650)

 

Retained earnings

464,018

 

 

 

 

 

 

Total members' equity

430,368

 

 

 

 

 

 

Total liabilities and members' equity

 $               530,523


See accompanying notes to unaudited financial statements.



13



APACHE ENERGY SERVICES, LLC

STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2012

 

From inception, January 4, 2012 to September 30, 2012

 

 

 

 

REVENUES

$                     334,103

 

$                         1,320,211

 

 

 

 

 

 

COST OF REVENUES

359,912

 

802,456

 

 

 

 

 

 

GROSS PROFIT (LOSS)

(25,809)

 

517,755

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

Selling, general and administrative

3,817

 

27,156

 

Professional fees

23,720

 

23,720

 

 

 

 

 

 

 

Total operating expenses

27,537

 

50,876

 

 

 

 

 

 

INCOME (LOSS) FROM OPERATIONS

 

(53,346)

 

466,879

 

 

 

 

 

 

OTHER EXPENSE

 

 

 

 

 

Interest expense

 

(2,861)

 

(2,861)

 

 

 

 

 

 

NET INCOME (LOSS)

 $                   (56,207)

 

$                           464,018



See accompanying notes to unaudited financial statements.

 

14




APACHE ENERGY SERVICES, LLC

STATEMENT OF MEMBERS' EQUITY

For the period from January 4, 2012 (inception) to September 30, 2012

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members'

 

Retained

 

Members'

 

 

 

Capital

 

Earnings

 

Equity

 

 

 

 

 

 

 

 

Capital contributions

 

 $    36,350

 

 $            -   

 

 $ 36,350

 

 

 

 

 

 

 

 

Distributions

 

             (70,000)   

 

   -  

 

  (70,000)

 

 

 

 

 

 

 

 

Net income for the period

               -   

 

464,018

 

464,018

 

 

 

 

 

 

 

 

Balance at September 30, 2012

 $   (33,650)

 

 $ 464,018

 

$430,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited financial statements

 

 

 

 

 

 

 

 




15




APACHE ENERGY SERVICES, LLC

STATEMENT OF CASH FLOWS

For the period from January 4, 2012 (inception) to September 30, 2012

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

Net income

 $            464,018

 

Adjustments to reconcile net income to net

 

 

 

cash provided by operating activities:

 

 

 

Depreciation expense

19,652

 

 

Gain on sale of property and equipment

(2,386)

 

 

Changes in:

 

 

 

 

Accounts receivable

             (268,347)

 

 

 

Prepaid expense and other current assets

                 (11,917)

 

 

 

Accounts payable

37,921

 

 

 

Accrued liabilities

15,324

 

 

 

Sales tax payable

46,910

 

Net cash provided by operating activities

301,175

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

Purchase of property and equipment

               (58,756)

 

 

Proceeds received from sale of property and equipment

52,500

 

Net cash used in investing activities

               (6,256)

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

Payments on financing loan

                 (56,130)

 

 

Members' contributions

                 36,350

 

 

Members' distributions

               (70,000)

 

Net cash provided by financing activities

(89,780)

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

205,139

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

                        -   

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

 $            205,139

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

Interest expense paid

 $                2,861

 

Income taxes paid

                        -   

 

 

 

 

 

NONCASH INVESTING ACTIVITY

 

 

Purchase of property and equipment through a financing loan

 $              56,130




See accompanying notes to unaudited financial statements.


16





APACHE ENERGY SERVICES, LLC

NOTES TO FINANCIAL STATEMENTS

(unaudited)



NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES


Description of Business.  Apache Energy Services, LLC (“Apache”, “AES”, “we”, “our”, “us” or the “Company”) provides water transfer services in connection with the hydraulic fracturing (“fracing”) of oil and gas reservoirs. AES arranges for up to millions of gallons to be delivered to frac pads and drill sites. The water transfer services can range from drilling water wells and digging water storage pits to arranging for miles of above ground temporary pipe and high volume pumps to address all of the logistics needs of water during fracing for an oilfield operator.  Once a frac job is completed, AES transfers the pipe, pumps and other temporary infrastructure to another location at the request of its customers.


Basis of presentation.  On September 27, 2012, HII Technologies, Inc. (“HII”) acquired all of AES outstanding membership interests pursuant to the terms of a Securities Purchase Agreement dated September 26, 2012 by and among AES, the members of AES and HII.   AES was deemed the predecessor entity in this transaction.   The financials included herein are presented at their historical basis.


Use of Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


NOTE 2 – PROPERTY AND EQUIPMENT


Property and equipment at September 30, 2012 consists of the following:


 

 

 Accumulated

 Net Book

 

 Cost

 Depreciation

 Value

 

 

 

 

 Road Crossings

 $          9,891

 $          1,932

 $          7,959

 Trailers

      48,866

11,705

37,161

 

 $        58,757

 $        13,637

 $         45,120


A truck was purchased in February 2012, and was subsequently sold in September 2012 for $52,500 resulting in a net gain of $2,386.   The purchase of the truck was funded through standard commercial financing.  The financing was paid in full from the proceeds of the sale.  Depreciation expense for the period amounted to $19,652.


NOTE 3 – CUSTOMER CONCENTRATION


AES provides its services to relatively few oil and gas companies that have accounted for a substantial portion of AES’ revenues.  For the period ended September, 2012, two customers accounted for 85% of AES’ total net sales.


AES’ customers generally do not enter into long-term agreements obligating them to future services. AES may not continue to receive significant revenues from any of these or from other large customers. A reduction or delay in orders from any of AES’ significant customers, or a delay or default in payment by any significant customer could materially impact AES’ business and prospects. Because of AES’ significant customer concentration, its net sales and operating income could fluctuate significantly due to changes in political or economic conditions, or the loss, reduction of business, or less favorable terms for any of AES’ significant customers.


NOTE 4 – MEMBERS’ EQUITY


AES was formed on January 4, 2012, by two members.  Each original member had a 50% ownership in AES.  During the period from January 4, 2012 to September 26, 2012, the original members contributed $36,350.  During the same period, the original members received distributions totaling $70,000 from the net earnings of AES.



17



 

NOTE 5 – CONTINGENCIES


From time to time, AES 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 AES are expected to have a material adverse effect on AES’ financial position, results of operations or cash flows.   AES cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters. There can be no assurance as to the ultimate outcome of these lawsuits and investigations.




18




ITEM 2.  MANAGEMENT’S 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. (“HIIT”) is a Houston, Texas based oilfield services company with operations in Texas, Oklahoma, Ohio and West Virginia focused on commercializing technologies in water management, safety services and portable power used by exploration and production (“E&P”) companies in the United States. The Company’s total water management services subsidiary does business as AES Water Solutions and manages the logistical and transportation associated with millions of gallons of water used typically during hydraulic fracturing and completions of horizontally drilled oil and gas wells. AES Safety Services is the Company’s onsite oilfield contract safety consultancy providing experienced trained safety personnel during oilfield site preparation, “drilling completion” with drilling activity and related operations enhancing safety for E&P customers and providing the flexibility as outsourced safety consultants to its customers to quickly address their needs. The Company’s oilfield 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 where remote locations provide little or no existing electrical infrastructure.


We currently employ 14 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 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 by our subsidiary KMHVC, Inc.


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), a Nevada limited liability company (“AES” ) pursuant to the terms of a Securities Purchase Agreement dated September 26, 2012 by and among the us, 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 registrant’s 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.




19



Apache Energy Services, LLC (“AES”) was organized in Nevada on January 4, 2012. AES is a water transfer services company providing turn-key water solutions for oil and gas exploration and production companies needed during hydraulic fracturing of oil and gas reservoirs, commonly known as fracing.


AES currently operates in select shale and other areas in Oklahoma and Texas. AES’ principals have more than 50 years of combined oil and gas experience, with extensive experience in operation of oil and gas wells in Texas, West Virginia and Kentucky. AES serves customers seeking water acquisition, temporary water transmission and storage, transportation, in connection with shale oil and gas hydraulic fracturing drilling, or “hydro-fracturing,” operations. AES does not currently provide disposal activities directly, but it will handle logistics for disposal activities with third party operators on behalf of its customers.


KMHVC’s business


On October 26, 2012, KMHVC applied for a dba to do business as South Texas Power (STP) in connection with our decision to start up an oilfield generator rental business.


Results of Operations for the Three Months Ended September 30, 2013 and 2012


Revenues. HIIT revenues increased to $3,931,716 for the three months ended September 30, 2013, as compared to $104,579 for the comparable period in 2012. This increase was primarily attributable to the continued growth of our wholly owned subsidiary AES’ frac water supply business (acquired in September 2012) along with the commercialization of AES Safety Services division (commencing January 2013) and STP’s mobile oilfield power and lighting business (beginning December 2012). All three divisions benefitted from the continued activity in horizontal drilling and it related hydraulic fracing.  AES revenues for the three months ended September 30, 2012 were $334,103.


Selling, general, and administrative. HIIT selling, general and administrative expenses increased to $1,129,584, or 29% of revenue, for the three months ended September 30, 2013, as compared to $56,847 for the comparable period in 2012. The increase was primarily attributable to increased wage expense of $338,285 for new employees related to the AES acquisition in September 2012, the launch of STP’s new business in mobile oilfield power in December 2012, the cost of public reporting and holding company expenses, and the testing and development costs related to water recycling technologies of $83,371. AES selling, general and administrative expenses for the three months ended September 30, 2012 were $3,817.


Bad debt expense.  We incurred $77,021 in bad debt expense in the three months ended September 30, 2013 with no such expense in the comparable 2012 period.  Our bad debt expense is attributable to the write-off of one customer’s receivable along with management’s estimate of potential future bad debt.


Acquisition expense. We had no acquisition expenses for the three months ended September 30, 2013, as compared to $146,302 for the comparable period in 2012.  These expenses in 2012 were related to the acquisition of AES.  AES had no acquisition expenses for the three months ended September 30, 2012.


Interest expense. We had interest expense of $97,327 in the three months ended September 30, 2013, as compared to $1,007 for the comparable period in 2012.  The increase is attributable to the promissory notes we issued in our September 2012 financing as well as the notes issued in connection with our acquisition of AES and the line of credit. AES had interest expense of $2,861 for the three months ended September 30, 2012.


Net loss. We had a net loss of $175,211 for the three months ended September 30, 2013 as compared to a net loss of $110,228 for the comparable period in 2012. AES had a net loss of $56,207 for the three months ended September 30, 2012.


Results of Operations for the Nine Months Ended September 30, 2013 and 2012


Revenues. HIIT revenues increased to $9,767,926 for the nine months ended September 30, 2013, as compared to $104,579 for the comparable period in 2012. This increase was primarily attributable to the continued growth of our wholly owned subsidiary AES’ frac water supply business (acquired in September 2012) along with the commercialization of AES Safety Services (commencing January 2013) and the growth of STP’s business in mobile oilfield power (beginning December 2012). All three divisions benefitted from the continued activity in horizontal drilling and it related hydraulic fracing.  AES revenues for the period from January 4, 2012 (inception) to September 30, 2012 were $1,320,211.




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Selling, general, and administrative. HIIT selling, general and administrative expenses increased to $2,593,782, or 27% of revenue, for the nine months ended September 30, 2013, as compared to $249,479 for the comparable period in 2012. The increase was primarily attributable to increased wage expense of $849,364 for new employees related to the AES acquisition in September 2012, the growth of STP’s business in mobile oilfield power in December 2012, the cost of public reporting and holding company expenses, and the testing and development costs related to water recycling technologies of $235,364. AES selling, general and administrative expenses for the period from January 4, 2012 (inception) to September 30, 2012 were $27,156.


Bad debt expense.  We incurred $131,021 in bad debt expense in the nine months ended September 30, 2013 with no such expense in the comparable 2012 period.  Our bad debt expense is attributable to the write-off of one customer’s receivable along with management’s estimate of potential future bad debt.


Loss on extinguishment of liability. We had loss on extinguishment of liabilities of $96,297 in the nine months ended September 30, 2013, which expense is primarily attributable to the extinguishment of $63,000 for a consulting agreement for business development advisory services with Company stock with a fair value of $150,000. No loss on extinguishment of liabilities was incurred in the comparable period in 2012.


Acquisition expense. We had no acquisition expenses for the nine months ended September 30, 2013, as compared to $146,302 for the comparable period in 2012.  These expenses in 2012 were related to the acquisition of AES.  AES had no acquisition expenses for the period from January 4, 2012 (inception) to September 30, 2012.


Interest expense. We had interest expense of $319,901 in the nine months ended September 30, 2013, as compared to $1,007 for the comparable period in 2012.  The increase is attributable to the promissory notes we issued in our September 2012 financing as well as the notes issued in connection with our acquisition of AES. AES had interest expense of $2,861 for the period from January 4, 2012 (inception) to September 30, 2012.


Net loss. We had a net loss of $663,127 for the nine months ended September 30, 2013 as compared to a net loss of $265,400 for the comparable period in 2012. AES had net income of $464,018 for the period from January 4, 2012 (inception) to September 30, 2012.


Liquidity and Capital Resources


We have financed our operations, acquisitions, debt service, and capital requirements through cash flows generated from operations, debt financing, loans and advances 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. HIIT had cash of $132,021 and a working capital deficit of $1,272,902 at September 30, 2013 as compared to cash of $379,336 and a working capital deficit of $701,345 at December 31, 2012. AES had cash of $205,139 and working capital of $385,248 at September 30, 2012.


Net cash used in operating activities for the nine months ended September 30, 2013 was $516,927 resulting primarily from our net loss of $663,127 which was offset by an increase in accounts payable and accrued expenses of $865,028 and an increase in accounts receivable and prepaid expenses of $1,509,875. By comparison, net cash used in operating activities for the period from January 4, 2012 (inception) to September 30, 2012 was $64,682. AES had net cash provided by operating activities of $301,175 for the nine months ended September 30, 2012. This was the result of $464,018 in net income offset by an increase in accounts receivable and prepaid expenses of $280,264 and an increase in accounts payable and accrued liabilities of $100,155.


Our net cash used in investing activities was $304,138 in the nine months ended September 30, 2013 consisting of proceeds from the sale of property and equipment for $86,674 and payments received on notes receivable of $8,637 which was offset by $399,449 for the purchase of equipment. By comparison, net cash used in investing activities for the period from January 4, 2012 (inception) to September 30, 2012 was $63,028.  AES had net cash used in investing activities of $6,256 for the nine months ended September 30, 2012 due to the purchase of equipment for $58,756 offset by the proceeds from the sale of equipment of $52,500.


Our net cash provided by financing activities was $573,750 in the nine months ended September 30, 2013 consisting primarily of draws net of expenses on the line of credit of $874,473, $50,000 received upon the exercise of warrants, $87,375 received on the sale-leaseback transaction and advances from a related party of $63,000 offset by payments on notes payable for $462,400, payments for deferred financing costs of $18,698 and payments against related party advances of $20,000. By comparison, net cash provided by financing activities for the nine months ended September 30, 2012 was $300,000.  AES had net cash used in financing activities of $89,780 for the period



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from January 4, 2012 (inception) to September 30, 2012, due to members’ contributions of $36,350 offset by distributions of $70,000 and payments on loans of $56,130.


The net decrease in cash for the nine months ended September 30, 2013 was $247,315 as compared to a net increase in cash of $172,290 for the nine months ended September 30, 2012. AES had a net cash increase of $205,139 for the period from January 4, 2012 (inception) to September 30, 2012.


Promissory Notes – 2012


On December 17, 2012, we issued 10% subordinated secured promissory note in the amount of $150,000 and a warrant to purchase 550,000 shares of the registrant’s common stock. The note is due on December 17, 2013 and bears interest at the ten percent (10%). The note is secured by our assets. The note was issued with a warrant to purchase 550,000 shares of our 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.


On November 5, 2012, we, and our wholly-owned subsidiary, AES 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 an asset sale. The note is due on March 30, 2013 and bear interest at the ten percent (10%). The notes are secured by this 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 single accredited investor. The aggregate gross proceeds from the sale of the note were $50,000. The proceeds were used to working capital and general corporate purposes. The note matured 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 in full 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 AES 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 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 registrant’s 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 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.  As of the Target Date the Market Price was greater than $0.20 and the Class B Warrants were cancelled.


Termination of Revolving Credit Facility


On March 18, 2013, our wholly-owned subsidiaries, KMHVC, Inc. and Apache Energy Services, LLC terminated their $1 million revolving accounts receivable based line of credit facility with an asset based lender which was previously entered into November 2012 but never initiated by HIIT. A cancellation fee of $4,100 was paid in connection with the termination.


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 AES subsidiary and our cash and accounts receivables.


The closing of our sale of the Hemiwedge valve assets on May 10, 2011, allowed us to repay all outstanding indebtedness at that time. Currently, we have 14 employees and lease our executive office space and facility in South Texas on a month to month basis.



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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 and STP carry accounts receivable at their face amounts less an allowance for bad debts. The allowance for bad debts is recognized based on management’s 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. The Company elected to have goodwill reviewed for impairment as of December 31, 2012, by an independent outside expert which resulted in no impairment of the goodwill as recorded.


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. A job ticket that is completed by AES or STP and signed by the customer's local representative includes the date of services, the type of services and the agreed upon rate for the services. This document meets the requirements for Items 1, 2 and 3 above. Collectability is proven over time with any customer, but assumed to be reasonably assured unless history proves differently.


The Company accounts for share-based awards issued to employees and non-employees in accordance with the guidance on share-based payments. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period.


Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value.


Off-Balance Sheet Arrangements


None.


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 September 30, 2013, 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 SEC’s rules



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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 September 30, 2013 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.

On August 12, 2013, we granted an option to purchase 36,000 shares of our common stock at an exercise price of $0.28 to an employee under an employment agreement. The issuance was exempt under Section 4(2) of the Securities Act, as amended.

2.

On September 30, 2013, we issued 1,200,000 shares of common stock upon exercise of previously issued warrants with an exercise price of $0.10 per shares.  In consideration of the exercise price, the warrant holder agreed to cancel and extinguish $120,000 of indebtedness under an outstanding promissory note.  The issuance was exempt under Section 4(2) of the Securities Act of 1933, as amended.

3.

On September 30, 2013, we issued 300,000 shares of common stock upon exercise of previously issued warrants with an exercise price of $0.10 per shares.  In consideration of the exercise price, the warrant holder agreed to cancel and extinguish $30,000 of indebtedness under an outstanding promissory note.  The issuance was exempt under Section 4(2) of the Securities Act of 1933, as amended.

4.

On September 30, 2013, we issued 220,000 shares of common stock upon exercise of previously issued warrants with an exercise price of $0.09 per shares.  In consideration of the exercise price, the warrant holder agreed to cancel and extinguish $19,800 of indebtedness under an outstanding promissory note.  The issuance was exempt under Section 4(2) of the Securities Act of 1933, as amended.

5.

On June 21, 2013, we issued a warrant to purchase 200,000 shares of our common stock at an exercise price of $0.28 per shares in consideration of a noteholder’s forbearance on an outstanding promissory note, including its rights to foreclose on certain of our collateral securing its interest under such note.  The issuance was exempt under Section 4(2) of the Securities Act of 1933, as amended.

6.       On October 31, 2013 we issued 10% convertible promissory notes in the aggregate principal amount of $750,000 to six accredited investors.   We received net proceeds of $600,000 from the issuance of these notes.  The notes have a two-year term from the issuance date.   The notes are convertible into our common stock at a fixed conversion price of $0.50 per share.  The proceeds will be 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.

7.       On November 12, 2013, we issued 1,443,696 shares of our common stock to the former members of Aqua Handling of Texas, LLC as partial consideration for our acquisition of Aqua.  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 these shares.

  

ITEM 3 – DEFAULT UPON SENIOR SECURITIES


None.


ITEM 4 – MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5 – OTHER INFORMATION


None.



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ITEM 6 - EXHIBITS


Item No.


Description


Method of Filing

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.

 

 

 

 

November 14, 2013

 /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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