U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

(Mark One)

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 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 Number 000-30291

HII TECHNOLOGIES, INC.

(Name of small business issuer as specified in its charter)

Delaware

03-0453686

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

8588 Katy Freeway, Suite 430

Houston, Texas 77024

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code:  (713) 821-3157

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.001 par value

___________________


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [   ] Yes No [X]


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act:

[   ] Yes No [X]


Indicate by check mark whether the registrant(1) has filed all reports required 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 day.

[X] Yes [    ] 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).                                                                                                   [X] Yes [    ] No


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [    ]


Indicate by check mark whether the registrant is a large accelerated filer, an 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 if the Exchange Act.


Large accelerated filter

Accelerated filter


Non-accelerated filter   

(Do not check if a smaller reporting company)

Smaller reporting company







Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes           No    X 


The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2014 was approximately $26,943,546.  


As of April 15, 2015, 57,232,436 shares of our common stock were issued and outstanding.


Documents Incorporated by Reference:      

Portions of the registrant’s Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2014.




2




PART I


HII Technologies, Inc., including all its subsidiaries, are collectively referred to herein as “HII Technologies,” “HII,” “the Company,” “us,” or “we”.


Item 1.  DESCRIPTION OF BUSINESS


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 solutions and services used by exploration and production (“E&P”) companies in the United States. We operate through our wholly-owned subsidiaries. The table below provides an overview of our current subsidiaries and their oilfield service activities:


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

 

 

 

Hamilton Investment Group, Inc.

Hamilton Water Transfer

Frac Water Management Solutions

 

 

 

Sage Power Solutions, Inc.

Sage Power, South Texas Power, STP

Oilfield Power Management Solutions


The Company changed its name in August 2011 to HII Technologies, Inc. in connection with selling the name and assets of its oilfield valve technology it had previously developed. Since the sale of its oilfield product line in 2011, it has focused on the high value market segments of Water, Safety and Power in the oilfield that management believes are growing markets where the Company’s relationships with its customers, partners, and experience can provide long term stockholder value.


We currently employ 90 persons and also extensively use independent contractor crews in connection with certain portions of our field service work. Our executive offices are located at 8588 Katy Freeway, Suite 430, Houston, Texas 77024.  Our telephone number is (713) 821-3157 and our Internet address is www.HIITinc.com. The information on, or that may be, accessed from our website is not part of this Annual Report.


Business Development


Organization


In 2002, we were incorporated in Delaware under the name “Excalibur Industries, Inc.” In October 2005, we changed our name from “Excalibur Industries, Inc.” to “Shumate Industries, Inc.” in connection with a restructuring that divested Excalibur industrial businesses and focused on Shumate’s oilfield machining business.  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 our contract machining business. On August 31, 2011, we changed our name to



3




“HII Technologies, Inc.”, which name change was required in connection with the May 2011 sale of our Hemiwedge valve product technology, trade mark and other assets.  HII Technologies’ business focuses on the activity of domestic shale horizontal drilling and hydraulic fracturing and the needed essential services such as frac water management.


Acquisition of Apache Energy Services, LLC (dba AES Water Solutions)


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 among 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.


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, Sage Power Solutions, Inc. f/k/a KMHVC, Inc. (dba South Texas Power, “STP”).


Launch of our Contract Safety Consultant Business


In January 2013, we launched AES Safety Services, our Safety division that offers contract safety professionals, training and inspection services in the field for E&P companies that prefer outsourcing their safety programs or are required by state regulation.


Acquisition of Aqua Handling of Texas, LLC. (dba AquaTex)  


On November 12, 2013, we consummated the acquisition of all of the outstanding membership interests of 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 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 AquaTex.  In addition, there exists a working capital adjustment provision whereby we would be required 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 Messer’s George and Brewer, the former members of AquaTex.  




4




Acquisition of Hamilton Investment Group (Hamilton Water Transfer)


On August 12, 2014, we consummated the acquisition (the “Acquisition”) of all of the outstanding stock of Hamilton Investment Group, Inc.  (“Hamilton Water Transfer” or “Hamilton”) pursuant to the terms of a Stock Purchase Agreement dated August 11, 2014 by and among the registrant, Hamilton and the stockholders of Hamilton (the “Stock Purchase Agreement”). The purchase price consisted of: (a) Cash in the amount of $9,000,000; and (b) 3,523,554 shares (the “Shares”) of the registrant’s common stock ($2,300,000 value based on the trailing 20-day average of the registrant’s common stock).   In addition, there exists a working capital adjustment provision whereby we are required to pay the Hamilton stockholders additional cash equal to the amount of any working capital of Hamilton in excess of $2,200,000 (“Working Capital Target”) at closing; provided, however, that in the event that Hamilton’s working capital at closing is less than the Working Capital Target, then the amount of such deficit will be offset against the Shares issued to the former Hamilton stockholders at closing. The purchase agreement contains 2-year non-compete/non-solicitation provisions for William M. Hamilton and Sharon K. Hamilton, the former Hamilton stockholders. 


Our Services:


We focus on providing what we believe are essential services for horizontal drilling and related hydraulic fracturing in the domestic United States for oil and gas companies which includes:


1.

Frac Water Management Services;

2.

Oilfield Safety Services; and

3.

Oilfield Portable Power Solutions and Services


Frac Water Management Services


We began offering frac water transfer services to oilfield operators upon consummation of our purchase of Apache Energy Services, LLC, doing business as AES Water Solutions, on September 27, 2012. We further strengthened our presence in this business with our November 12, 2013 acquisition of Aqua Handling of Texas, LLC, (AquaTex) which had contracts with nationally recognized exploration & production companies in the Eagle Ford Shale and South Texas areas, as well as our August 12, 2014 acquisition of Hamilton Investment Group (Hamilton), which has contracts with nationally recognized E&P companies in Oklahoma.  We offer our services in this line of business under the trade names “AES Water Solutions”, “AquaTex” and “Hamilton Water Transfer”.  


Initially, we provided only water transfer services sending high volumes of water through miles of pipe or hose to frac sites.  However, in the past 18 months, we have expanded our services and now provide what we refer to as “total frac water management services”.  Management believed that single service providers (e.g. only water transfer in-bound to frac jobs) would diminish in value to oilfield operators over time and that turn-key providers would be sought by customers seeking higher value and more efficiencies. We currently believe oilfield operators are migrating towards service companies that can provide a full range of services in the area of frac water management. We believe this is because the amount of water needed in fracing has grown significantly and its costs to oilfield operators has grown substantially.  Our turn-key frac water solutions for oil and gas exploration and production companies during hydraulic fracturing of oil and gas reservoirs accounted for 71% of our total revenues in 2014.


Our segment of the industry does not traditionally do the “pressure pumping” or the frac itself. These pressure pumpers, the largest of which are sometimes referred to as the “Big 3” Halliburton, Baker Hughes and Schlumberger mix the sand/proppant, water and gels/chemicals and pump the solution to break or fracture the hydrocarbon reservoir so as to cause porosity and assist in flow.  Traditionally, we are hired



5




by the oilfield operator while coordinating with the pressure pumping companies to send water to their frac site equipment. We do not currently perform the frac job itself nor provide the chemicals used in fracing to hold sand or ceramic proppants in the solution; we do provide the above ground temporary infrastructure to transfer and store high volumes of water to frac sites via miles of above ground piping and hose, pumps and related equipment.


We can bundle our turn-key services, which range from drilling water wells, digging and lining water storage pits, renting rapid deployment above ground storage tanks, transporting the water via miles of temporary above ground pipe and high volume pumps to address all of the logistics needs of water during fracing for oilfield operators. We typically work in concert with frac completion companies such as the Big 3 to send large volumes of water via our top-of-the-line environmentally safe, no-leak pipe and hose systems specifically designed to support water transfer in hydraulic fracing.  In the post-frac phase, we also provide flow back and well testing services typically required by the operator during the first three or four weeks after the frac to route water and separate frac sand/proppants and gas returning from the frac, commonly called “Flow Back”. We also provide high volume frac water recycling with proprietary equipment that can process up to 20,000 barrels of water per day to be reused in frac processes, usually for a cost cheaper than the price of trucking and disposing of the flow back and waste water. When an operator is finished at a well site or location and requires large volume waste water removal, we offer evaporation services that reduce the transportation needed to haul off remaining waste water usually held in large open pits at the location. These services have been developed to offer a turnkey solution for E&P operators by reducing costs and liabilities, and offering an improvement to the environment.


We do not currently provide trucking of fluids or disposal well services but instead seek technologies and services that offer and address customer onsite needs in lieu of trucking and disposal.


Advances in drilling technology and development of unconventional North American hydrocarbon resources—oil and gas shale fields—allow previously inaccessible or non-economical formations in the earth’s crust to be exploited by utilizing high water pressure methods (or the process known as hydraulic fracturing) combined with proppant fluids (containing sand grains or ceramic beads) to crack open new perforation depths and fissures to extract large quantities of natural gas, oil, and other hydrocarbon condensates. Complex water flows represent the largest waste stream from these methods of hydrocarbon exploration and production. Oil prices have decreased by approximately one half during the last half of 2014, however even with oil prices being above $50 per barrel, industry experts such as Toleq stated in PBO&G, January 2015 issue that 25% of the new wells will be drilled in the Permian Basin in 2015 and the service market is expected to be $3 billion in directional drilling.  Wood MacKenzie also stated on February 19, 2015 that it is expected for drilling rigs to increase in August/September 2015 and continue to increase by 20 rigs per month through 2017.  The Oil and Gas Journal January 5, 2015 issue stated in a special report that total U.S. oil demand in 2015 is forecasted to grow by 0.6% and US. crude oil production to average 9.1 million barrels per day up 6.1% from a year earlier.


In connection with the industry’s horizontal drilling practices of shale and other unconventional resource plays, oil and gas exploration and production (E&P) companies require up to millions of gallons of water to be delivered to frac pads and drill sites during a typical frac job.  There is an increasing awareness of the importance of managing water for use and reuse in oil and gas operations.  Shale Water Management issue November 24, 2014 stated water demand for fossil fuel and electrical generation is expected to grow to more than 500 billion gallons per day by 2035.  Based on this, there will be a 40% short fall in water supply unless water is reused.  The cost of water has risen to 10% of the total capital cost of the well.  IHS in the first quarter of 2015 reports that over the next 10 years $380 billion will be spent on energy water management in unconventional oil and gas drilling.  One of the key drivers is in oilfield wastewater reuse in which there will be a doubling in the amount of wastewater reuse over the next 10 years.  Lux Research believes investment will continue in technologies despite spending cuts and pressure on companies to curb



6




capital spending which will force companies to invest in technologies that will streamline operations and improve production. According to Lux Research Inc. the water-related services in oil and gas shale fracturing operations is expected to increase by a multiple of about 15 through 2020.  Spending worldwide for frac-related water management will increase from $1 billion to approximately $15 billion annually by 2020. According to energy research experts at IHS, water management challenges, as well as the market for water management services, will grow significantly in many plays in the U.S. during the next ten years. A new report, The Future of Water in Unconventionals, compiled by Sarah Fletcher, Senior Research Analyst, IHS, says it expects the continental U.S. oilfield water management market to grow to $38 billion by 2022, with demand for water management services in high-activity shale gas and tight oil plays to grow by nearly 40 percent by 2022, to roughly $11.2 billion.  


We currently operate in active shale and unconventional resource basins in Oklahoma and Texas such as Eagle Ford Shale, EagleBind, Permian Basin, Delaware Basin, Granite Wash, Mississippian Lime and Woodford.  Our Principals have more than 70 years of combined oil and gas experience, with extensive experience in the operation of oil and gas wells in the domestic United States. We serve customers seeking water acquisition, temporary water transmission and storage, and treatment in connection with shale oil and gas hydraulic fracturing drilling, or “hydro-fracturing,” operations.  We do not currently provide disposal activities, such as salt water disposal wells, and do not directly operate large water hauling trucks. We can arrange for these services when requested by third parties, however, our business focus is to address the onsite needs through our services.


Oilfield Safety Services


In January 2013, we launched AES Safety Services, our Safety division that offers contract safety professionals, training and inspection services in the field for E&P companies that prefer outsourcing many of their safety programs or are required by state regulation.  Our oilfield safety division provides experienced trained safety personnel such as contract safety engineers for the duration of the oilfield operation from site preparation “rigging up” to drilling and completion for E&P customers. AES Safety Services provides flexibility as outsourced safety consultants, training and inspection to its customers and can move quickly in key locations.  


Due to increased regulations and safety requirements, oil and gas operator companies will be requiring specific safety training which will provide comprehensive instructions on the safety hazards and day to day operations which are unique to the oil and gas industry.  To address HSE, oil and gas companies will be spending $56 billion by 2030 up from $35 billion in 2011, as heavily publicized environmental disasters have increased regulatory scrutiny, according to Lux Research.  AES Safety Services has consultant engineers and trainers who are accredited to provide the necessary training courses to comply with the specific state rules and regulations.  Our Safety Services division revenues increased from $2.5 million in 2013 to $6.7 million in 2014, accounting for 19% of our total revenues in 2014 and are expected to continue to grow in 2015.


Oilfield Power Management Solutions


In December 2012, we launched our portable power solutions and services division known as Sage Power Solutions, Inc. (f/k/a KMHVC, Inc.), a wholly-owned subsidiary.    Our power division has grown from its original focus of providing temporary portable diesel power or ‘gap power’ applications for the exploration and production industry to now offering the full spectrum of oilfield power needs.  Today, we rent diesel generators and supply hands-on service for initial remote oilfield gap power needs, offer natural gas lower long term operating cost power for pump jacks and artificial lift applications, facilities power, and partner with firms for electrical and grid implementation services. Our value to a customer today is to handle the “cradle to grave” oilfield power needs which has elevated our sales process to a corporate level



7




compared to field level generator discussions where we initially started. Our financial model is renting power supply equipment to oilfield operators usually rented on a daily-rental rate basis where field operations are typically remote and no electricity grid exists.  


The utility sector is the largest user of temporary power.  The second largest user is the oil and gas industry with North America being the largest market.  Increased power demand, lack of grid stability and support and tendency to lease instead of procuring equipment are the major driving factors of the power rental market.  In our experience, companies are inclined to rent equipment rather than purchase due, in part, by issues such as tax treatment of capital assets and the growing awareness and acceptance of outsourced manpower and equipment.  


The overall North American generator-set rental market is mature and is expected to increase slightly over 4% CAGR through 2017, based on the 2012 Frost and Sullivan’s analysis of the North American generator-set rental market.  The diesel and natural gas generator rental market is estimated to be at approximately $995 million in 2017.  The low kVA diesel generator-set rental market is highly competitive, however the larger kVA and natural gas generator market has strong margins and growth opportunities. MarketandMarket Research on October 23, 2014 stated the power systems market is estimated to grow from $3 billion to $9 billion by 2019.


Our current equipment rental fleet includes mobile oilfield diesel and natural gas generators (20kW to 300kW), light towers, combination power/light/water units, and related equipment. We provide best-in-class service on our rental fleet. Our portable power division revenues increased from $1.8 million in 2013 to $3.6 million in 2014, accounting for 10% of our total revenues in 2014 with revenues expected to increase in 2015 in the longer term rentals of natural gas applications as oilfield customers look to lower their operating costs.


Customers


For all three divisions of Water, Safety and Power, our customers include major United States exploration and production companies as well as independent oil and gas operators that have operations in Texas, Oklahoma, Ohio and West Virginia.  During fiscal year 2014, one of the Company’s customers accounted for more than 25% of our total gross revenues. No other customers exceeded 10% of revenues during 2014. During fiscal year 2013, two of the Company’s customers collectively accounted for more than 50% of our total gross revenues, with one customer accounting for 39% and another accounting for approximately 11%. No other customers exceeded 10% of revenues during 2013. We believe we will reduce the customer concentration risks by engaging new customers and increasing activity of existing less active customers and smaller, newer customer relationships. While we continue to acquire new customers in an effort to grow and reduce our customer concentration risks, management believes these risks will continue for the foreseeable future.


Competitors


AES Water Solutions, AquaTex and Hamilton’s focus is on total frac water management services. Currently, larger, private equity backed, private companies such as Rockwater Energy Solutions, Select Energy Services and Crescent Services possess larger equipment fleets, more manpower and are national competitors that have longer industry tenure and greater resources than us. As a result, the market in which AES Water Solutions, AquaTex, and Hamilton Water Transfer operate is highly competitive.


AES Safety Services’ current focus is on providing contractor safety engineers and professionals, training classes and onsite inspection services. We have identified Total Safety as a larger more capitalized competitor as well as local operating contractors. While we believe this safety service is a relatively new



8




niche market for E&P companies starting to outsource their field safety professionals, we do not have a broad base of clientele and competition is anticipated by us from larger more established oilfield services companies with greater resources than us. As such, the market in which AES Safety Services operates is anticipated to be highly competitive.


Sage Power Solutions, our oilfield power management business, is limited by its fleet size and regional geographic scope. Many of its competitors are substantially more capitalized which may have lower costs of capital to procure such equipment. Firms such as Light Tower Rentals (LTR) and National Oilwell Varco (“NOV”) Portable Power have a national presence and more established relationships than us. As a result, the market that Sage Power Solutions operates in is highly competitive.


Competition is influenced by such factors as price, capacity, availability of work crews, health, safety and environmental programs, legal compliance, technology, equipment, reputation and experience of the service provider.


Seasonality


While our frac water services are primarily offered in the Southwest United States and our power management division currently in Texas; they can be impacted by seasonal factors. Generally, our business can be negatively impacted during the winter months due to inclement weather, fewer daylight hours and holidays. During periods of heavy snow, ice or rain, our customers may temporarily cease operations if other vendor equipment is not accessible, or if our equipment may not be readily available, thereby reducing our ability to provide services and generate revenues. In addition, these conditions may impact our customer’s operations, and, as our customers’ drilling activities are curtailed, our services may also be reduced. Weather plays less of a role in our current areas in the Southwest United States where the climate is less severe.


Governmental Regulation


Frac Water Management Services


Our Water Management Services business is subject to extensive and evolving federal, state or provincial and local environmental, health, safety and transportation laws and regulations. These laws and regulations are administered by the U.S. EPA and various other federal, state and local environmental, zoning, transportation, land use, health and safety agencies in the United States. Many of these agencies regularly examine our operations to monitor compliance with these laws and regulations and have the power to enforce compliance, obtain injunctions or impose civil or criminal penalties in case of violations. In recent years, the oil and gas industry that we serve has encountered an increase in both the amount of government regulation and the number of enforcement actions being brought by regulatory entities against operations in related industries. AES expects this heightened governmental focus on regulation and enforcement to continue.


The primary United States federal statutes affecting our business are summarized below:


The Clean Water Act (the “CWA”), and comparable state statutes, impose restrictions and controls on the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the Environmental Protection Agency (the “EPA”) or an analogous state agency. The CWA regulates storm water run-off from oil and natural gas facilities and requires a storm water discharge permit for certain activities. Such a permit requires the regulated facility to monitor and sample storm water run-off from its operations. The CWA and regulations implemented thereunder also prohibit discharges of dredged and fill material in wetlands and other waters of the United States unless authorized



9




by an appropriately issued permit. The CWA and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges of oil and other pollutants and impose liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release.


The Safe Drinking Water Act (SDWA) is the primary statute that governs injection wells. Although as early as the 1930s a few States had regulations concerning discharges to ground water, the regulations were primarily concerned with communication with surface water or subsurface oil reservoirs. By the mid-1960s, state agencies were actively involved with ground water pollution issues. Federal authority for ground water and injection wells began in 1972. Although ground water was not specifically addressed by the Clean Water Act of 1972, Congress required that, in order to qualify for participation in the National Pollutant Discharge Elimination System (NPDES) permitting program, States must have adequate authority to issue permits that control the “disposal of pollutants into wells.”


In 1974, with the enactment of the Safe Drinking Water Act (SDWA), the Federal government took an active role in underground injection control. During deliberations for SDWA in 1974, Congress recognized the existence of a wide variety of injection wells, and struggled to provide a statutory definition that might include all possible injection types and practices. Congress included the “deeper than wide” specification in order to distinguish injection wells from pits, ponds, and lagoons, which were the subject of a different Federal initiative.


Thus, injection through a well is defined as the subsurface emplacement of fluids through a bored, drilled, or driven well or through a dug well where the depth of the dug well is greater than the largest surface dimension; or a dug hole whose depth is greater than the largest surface dimension; or an improved sinkhole; or a subsurface distribution system.


Since 1980, more than 150 Federal Register notices have been published regarding UIC, including additional regulations, amended regulations, explanations of procedures, and guidance. The UIC program was EPA’s major tool to protect ground water until the 1986 Amendments. In 1986, Congress created a larger Federal role in the protection of all ground water from sources other than underground injection. The definition of a UIC well was updated in December 1999, and the new definition makes it clear that many systems not typically thought of at first as a “well” actually meet the definition. The updated definition includes systems such as field tile systems, large capacity septic systems, mound systems and leach beds.


SDWA was amended in 1977, 1979, 1980 and again in 1986. Additionally, Congress reauthorized and amended SDWA in 1996. Many of the changes to the Act over time were focused on procedures to be followed by EPA and/or State UIC programs. Some very significant impacts were felt in the program, however, when Section 1425 was added in 1980. Section 1425 allows a State to obtain primacy from EPA for oil and gas related injection wells, without being required to adopt the complete set of applicable Federal UIC regulations. The State must be able to demonstrate that its existing regulatory program is protecting USDWs without the State regulations being as stringent as Federal rules.


The Occupational Safety and Health Act of 1970, as amended, establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the Occupational Safety and Health Administration, and various reporting and record keeping obligations as well as disclosure and procedural requirements. Various standards for notices of hazards, safety in excavation and demolition work and the handling of asbestos, may apply to our operations. The Department of Transportation and OSHA, along with other federal agencies, have jurisdiction over certain aspects of hazardous materials and hazardous waste, including safety, movement and disposal. Various state and local agencies with jurisdiction over disposal of



10




hazardous waste may seek to regulate movement of hazardous materials in areas not otherwise preempted by federal law.


The Comprehensive Environmental Response, Compensation and Liability Act, referred to as “CERCLA” or the Superfund law, and comparable state laws impose liability, potentially without regard to fault or legality of the activity at the time, on certain classes of persons that are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current or former owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of hazardous substances that have been released at the site. Under CERCLA, these persons may be subject to joint and several liability for the costs of investigating and cleaning up hazardous substances that have been released into the environment, for damages to natural resources and for the costs of some health studies. In addition, neighboring landowners and other third parties may file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment.


The Federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, referred to as “RCRA,” regulates the management and disposal of solid and hazardous waste. Some wastes associated with the exploration and production of oil and natural gas are exempted from the most stringent regulation in certain circumstances, such as drilling fluids, produced waters and other wastes associated with the exploration, development or production of oil and natural gas. However, these wastes and other wastes may be otherwise regulated by the EPA or state agencies. Moreover, in the ordinary course of our operations, industrial wastes such as paint wastes and waste solvents may be regulated as hazardous waste under RCRA or considered hazardous substances under CERCLA.


In the course of operations, some equipment may be exposed to naturally occurring radiation associated with oil and natural gas deposits, and this exposure may result in the generation of wastes containing naturally occurring radioactive materials, or “NORM.” NORM wastes exhibiting trace levels of naturally occurring radiation in excess of established state standards are subject to special handling and disposal requirements, and any storage vessels, piping and work area affected by NORM may be subject to remediation or restoration requirements. Because many of the properties presently or previously owned, operated or occupied by us have been used for oil and natural gas production operations for many years, it is possible that we may incur costs or liabilities associated with elevated levels of NORM.


Fiscal 2014 Developments


License of High Volume Frac Water Recycling System  


In February 2014, we licensed a high volume frac water recycling system to recycle flow back and produced water at the well sites during the completion process.  This recycling system consists of a mobile unit that cleans up to 20,000 barrels per day of frac flow back water to acceptable frac water reuse standards. The technology produces high volumes of polished brine or clean saltwater that is virtually free of total suspended solids (TSS) which is reusable in today's typical fracs. In many cases, our on-site recycling is cheaper for the oilfield operator than the cost to transport and dispose of the flow back water.


HydroFLOW Exclusive Sales Relationship


In June 2014, AES Water Solutions entered into an exclusive agreement with HydroFLOW Holdings USA under which AES received the exclusive right to use HydroFLOW’s explosion proof water conditioning unit (“CEx Units”) as a bacteria deactivation device to the oil and gas frac water industry.   In order to maintain this exclusive right, AES must purchase $160,000 of CEx Units in 2014, $265,000 of CEx Units in 2015 and $455,000 of CEx Units in each year thereafter. In January 2015, HydroFLOW agreed to



11




waive the 2014 minimum purchase requirement and increased the 2015 purchase requirement to $365,000. The Agreement is for an initial term of 10-years.  In addition, AES has agreed to pay HydroFLOW a royalty equal to 3.5% of gross revenues (excluding taxes) received from sales of bacteria deactivation services to AES customers.


June-July 2014 Series A Preferred and Warrant Financing  


From June 21, 2014 through July 8, 2014, we sold 4,000 units (“Series A Units”) to 22 accredited investors at a price of $1,000 per Unit for total gross proceeds of $4,000,000.  Each Unit consisted of (i) 1 share of our series A convertible preferred stock (“Series A Preferred”) convertible into a number of shares of our common stock equal to the quotient of $1,000 divided by the conversion price then in effect, which is initially $0.70 (the “Series A Conversion Shares”), and (ii) common stock purchase warrants (“Series A Warrants”) to purchase five-hundred (500) shares of our common stock with an exercise price of $1.00 per whole share exercisable for 3 years after issuance (the “Series A Warrant Shares”).  


We used $242,700 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 were used for working capital and general corporate purposes and to fund growth opportunities.


Acquisition of Hamilton Investment Group, Inc.


On August 12, 2014, we consummated the acquisition (the “Hamilton Acquisition”) of all of the outstanding stock of Hamilton Investment Group, Inc.  (“Hamilton”) pursuant to the terms of a Stock Purchase Agreement dated August 11, 2014 by and among the registrant, Hamilton and the stockholders of Hamilton (the “Hamilton Stock Purchase Agreement”). The purchase price consisted of: (a) Cash in the amount of $9,000,000; and (b) 3,523,554 shares (the “Shares”) of the registrant’s common stock ($2,300,000 value based on the trailing 20-day average of the registrant’s common stock).   In addition, there exists a working capital adjustment provision whereby we would be required to pay the Hamilton stockholders additional cash equal to the amount of any working capital of Hamilton in excess of $2,200,000 (“Working Capital Target”) at closing; provided, however, that in the event that Hamilton’s working capital is less than the Working Capital Target at closing, then the amount of such deficit will be offset against the Shares issued to the former Hamilton stockholders at closing   The purchase agreement contains 2-year non-compete/non-solicitation provisions for William M. Hamilton and Sharon K. Hamilton, the former Hamilton stockholders.


Heartland Bank Credit Facility


On August 12, 2014, we and each of our wholly-owned subsidiaries (collectively, the “Borrower”) entered a senior secured credit facility (the “Facility”) with Heartland Bank as Agent consisting of (i) a credit agreement (the "Credit Agreement") with Heartland Bank for a 3-year $12 million term loan (the “Term Loan”) and (ii) an account purchase agreement (the “Purchase Agreement”) with Heartland Bank, as agent for the purchase and sale of approved receivables of Borrower in amounts not to exceed $6 million (which was increased to $6.6 million pursuant to a First Modification Agreement executed on September 15, 2014). The proceeds of borrowings under the Facility may be used for the payment of a portion of the purchase price for the acquisition of Hamilton; the refinance of outstanding debt under Borrower’s prior accounts receivable facility; working capital needs of us and our subsidiaries; funding of the debt service reserve account and payment of all costs and expenses arising in connection with the negotiation of the Credit Agreement and related documents. On the closing date, the Borrower received proceeds of $12 million under the Credit Agreement and approximately $4.65 million under the Purchase Agreement.  We utilized $9 million to pay a portion of the purchase price for the Hamilton acquisition, approximately $4.75



12




million to pay off the Borrower’s prior accounts receivable facility, $450,000 in commitment fees, $675,000 to fund Borrower’s debt service reserve account and approximately $190,000 in other expenses related to the Facility.  Borrower retained approximately $1.585 million for working capital. 


Borrowings under the Credit Agreement bear interest at a rate per annum equal to Wall Street Journal (“WSJ”) prime plus a spread that ranges from 5.50% to 8.25% per annum depending on the Borrower’s first lien leverage ratio (provided that at no time shall the WSJ prime be less than 4%). The Term Loan, as amended, requires monthly interest payments, quarterly principal payments of $300,000 and a balloon payment on the August 12, 2017 maturity date.  The Term Loan may be increased by up to an additional $10 million upon request and agreement by the Lenders, but is not a committed amount under the facility.  


Under the Purchase Agreement, all approved receivables will be purchased by the lenders thereunder for the face amount of such receivable less the lender’s 1.50% service charge.   In addition, the Purchase Agreement requires a 10% reserve against receivables purchased, which amount will increase from 25-50% for receivables outstanding past 60-90 days, respectively.  The account purchase facility replaces the Company’s previous senior secured revolving facility.


Both the Credit Agreement and the Purchase Agreement require the Borrower to maintain a fixed charge coverage ratio of not less than 1.2:1.0, a first lien leverage ratio of ranging from 3.0:1.0 during 2014 to 2.75:1.0 -2.25:1.0 during 2015 to 2.0:1.0 beginning in 2016, a EBITDA to Interest Expense ratio ranging from 2.75:1.0 during 2014, 3.75:1.0  during 2015 to 4.75:1.0 beginning in 2016 and a tangible net worth of not less than $1 million for each quarter beginning December 31, 2014.  The Borrower is also required to maintain a debt service reserve account sufficient to pay all debt and interest expense due in the next fiscal quarter. The restrictive covenants include customary restrictions on the Company's ability to incur additional debt; make investments; grant or incur liens on assets; sell assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make dividend payments (although the Borrower is allowed to make dividend payments so long as no event of default will result from such payment or in shares of the our stock. In addition, the Credit Agreement contains customary representations and warranties, affirmative covenants and events of default.


The Facility is secured by all of the Borrower’s assets as well as a pledge of our equity in each of our wholly-owned subsidiaries.  We paid a cash structuring fee of $450,000 to the Lenders and also issued a 4-year warrant to purchase 2.5 million shares of the Company’s common stock with an exercise price $1.00 per share in connection with the Facility.  


Our Strengths


We believe that the following strengths provide us with competitive advantages:


Focus on Critical Oilfield Services. We have a strategic commitment to three key areas of the oilfield services market; Water, Safety and Power. We have a full suite of frac water services ranging from water sourcing, above-ground storage tanks, water transfer to frac site, flow back services post-frac, recycling,  reclamation evaporation services, and bacteria testing, monitoring and destruction services which provide turn-key solutions for our customers. We believe these services are critical for current industry practice of horizontal drilling and its related hydraulic fracturing.


Established Position in Core Oilfield Markets.   We have an established presence and believe we are well positioned in active oilfield markets including the Permian Basin, Delaware Basin, Eagle Ford Shale, Eaglebine, Granite Wash, Woodford and Mississippian Lime.




13




Innovative Green Technology. We have brought, via licensing and strategic arrangements, innovative approaches to frac water management including on-site high volume recycling performed usually cheaper than the alternative of trucking and disposal. We offer on-site evaporation services to oilfield operators where large volumes of water in open pits can be rapidly evaporated in lieu of trucking and disposal of waste water, reducing expenses for operators.


Expertise in Industry.  Our management team has significant experience in the markets in which they serve. Our Chief Executive Officer has served as an executive officer since 2002 and has developed expertise in the energy services industry from operating an oilfield machining and manufacturing operation from 2002 through 2008 and an oilfield valve product line company from 2005 through May 2011. Our AES President is a third generation oilfield executive, degreed petroleum engineer, and trained frac engineer who is an expert in hydro-fracing and its water transfer needs.  We believe this expertise will allow us to develop new service lines and products efficiently and effectively.


Substantial Relationships.  Our management team has substantial ties to the energy community resulting from their previous positions in water transfer companies, portable power, safety consulting and oilfield services companies. We believe these relationships will enhance our ability to secure customers, hire experienced sought-after employees and identify new opportunities.


Superior Service.  We believe in superior service which in the oilfield means 24/7 response in our operating divisions, building a level of trust with our customers by responding timely to any concerns.




14




Our Safety


We are committed to emphasizing and focusing on safety in the workplace.  We currently have a variety of safety programs in place, which include periodic safety meetings and training sessions to teach proper safety work procedures.  We have established “best practices” processes throughout most of our operations to ensure that our employees comply with safety standards that we establish and to ensure full compliance with federal, state and local laws and regulations.  In addition, we intend to continue to emphasize the need for an accident-free workplace.


Risk Management and Insurance


The primary risks in our operations are property damage, workers’ compensation, and third-party bodily injury.  We maintain insurance above certain self-insured limits for liability for bodily injury, third-party property damage, and workers’ compensation, all of which we consider sufficient to insure against these risks.


Intellectual Property


We do not presently own any material property in the form of patents. There are no patents held by third parties. During 2014, we acquired a license granting exclusive use of our frac water recycling technology and the associated water treatment system.


We intend to continue developing or licensing new technologies through our ongoing product development efforts or negotiations with technology inventors. If there is an invention, the Company would pursue intellectual property applications and patents. However, there can be no assurances of any future property developments.


Employees


We currently employ 90 persons and also extensively use independent contractor crews in connection with our field service work. Our executive offices are located at 8588 Katy Freeway, Suite 430, Houston, Texas 77024.  Our telephone number is (713) 821-3157 and our Internet address is www.HIITinc.com.  The information on, or that may be, accessed from our website is not part of this Annual Report.




15





Item 1A.  RISK FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION


The statements in this section describe the most significant risks to our business and should be considered carefully in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Notes to Consolidated Financial Statements” to this Form 10-K. In addition, the statements in this section and other sections of this Form 10-K include “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 and involve uncertainties that could significantly impact results. Forward-looking statements give current expectations or forecasts of future events about the company or our outlook. You can identify forward-looking statements by the fact they do not relate to historical or current facts and by the use of words such as “believe,” “expect,” “estimate,” “anticipate,” “will be,” “should,” “plan,” “project,” “intend,” “could” and similar words or expressions.


Forward-looking statements are based on assumptions and on known risks and uncertainties. Although we believe we have been prudent in our assumptions, any or all of our forward-looking statements may prove to be inaccurate, and we can make no guarantees about our future performance. Should known or unknown risks or uncertainties materialize or underlying assumptions prove inaccurate, actual results could materially differ from past results and/or those anticipated, estimated or projected.


We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult any subsequent disclosures we make in our filings with the SEC on Form 10-Q or Form 8-K.


The following is a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our business. In addition to the factors discussed elsewhere in this report, the following are some of the important factors that, individually or in the aggregate, we believe could make our actual results differ materially from those described in any forward-looking statements. It is impossible to predict or identify all such factors and, as a result, you should not consider the following factors to be a complete discussion of risks, uncertainties and assumptions.


Risks Related to Our Business


We may be unable to continue as a going concern


Our independent auditor has noted in its report concerning our financial statements as of December 31, 2014 and 2013 that we have incurred recurring losses from operations and have a working capital deficiency, which raises substantial doubt about our ability to continue as a going concern.  We have incurred recurring losses from operations in 2014 and 2013, respectively and, we have negative working capital as of December 31, 2014.  These conditions raise substantial doubt as to our ability to continue as a going concern. 


Our business is highly sensitive to global economic conditions and economic conditions in the industries and markets we serve.


Our results of operations are materially affected by conditions in the global economy generally and in various capital markets. The demand for our products and services tends to be cyclical and can be significantly reduced in an economic environment characterized by higher unemployment, lower consumer spending, lower corporate earnings and lower levels of government and business investment. A prolonged



16




period of slow growth may also reduce demand for our products and services. Economic conditions vary across regions and countries, and demand for our products generally increases in those regions and countries experiencing economic growth and investment.


Most of our operating subsidiaries are early stage companies with no significant operating history.


Our wholly owned subsidiaries, Apache Energy Services and Aqua Handling of Texas are early stage companies, both formed in 2012 and have not had long term operations. Their primary business purpose is to manage the logistics and transportation associated with water used during the hydraulic fracturing process. Our Sage Power Solutions, Inc. f/k/a KMHVC, Inc., (dba South Texas Power) subsidiary launched its oilfield power business in December 2012.  As early stage companies, the prospects for our operating subsidiaries are subject to all of the risks, uncertainties, expenses, delays, problems, and difficulties typically encountered in the establishment of a new business.  


The loss of one or more key members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business.


Our success is largely dependent on the skills, experience and efforts of our people.  We currently depend on the continued services and performance of the key members of our management team, including Matthew Flemming, our Chief Executive Officer, Acie Palmer, our Chief Financial Officer and Brent Mulliniks, President of our AES Water Solutions subsidiary. The loss of key personnel could disrupt our operations and have an adverse effect on our ability to grow our business if we are unable to replace them.


We may not be able to successfully integrate Hamilton into HII Technologies and achieve the benefits expected to result from the acquisition.


The Hamilton Acquisition will present challenges to management, including the integration of the operations, and personnel of HII Technologies and Hamilton, and special risks, including possible unanticipated liabilities, unanticipated integration costs and diversion of management attention.


We cannot assure you that we will successfully integrate or profitably manage Hamilton’s businesses.  Even if we are able to integrate and profitably manage Hamilton’s businesses, we cannot assure you that, following the transaction, our business will achieve sales levels, profitability, efficiencies or synergies that justify the acquisition or that the acquisition will result in increased earnings for us in any future period.


We have substantial indebtedness outstanding, and our operations are significantly leveraged.  If we were unable to service our debt, our business would be adversely affected.


In order to finance our operations we have incurred substantial indebtedness, including the debt with Heartland Bank which consists of a line of credit and term loan.  As of the date hereof, we owed total indebtedness of approximately $11.7 million to Heartland Bank, our senior lender. Additionally, we owe approximately $745,000 from other indebtedness owed to the former members of Apache Energy Services LLC and Aqua Handling of Texas, LLC under notes payable in connection with the acquisition of each company. Although our cash flows from operations are currently sufficient to service our debt obligations, we may not be able to continue to service our debt in the future.  If we were unable to service our debt in the future and fail to pay our debt obligations in a timely fashion, we will be in default under one or more of our loan agreements.  If we default on our loan obligations with Heartland Bank, Heartland Bank could exercise its rights and remedies under the loan agreement, which could include seizing all of our assets. Any such action would have a material adverse effect on our business and prospects.




17




The line of credit and term loan with Heartland Bank contains numerous restrictive covenants which limit management’s discretion to operate our business.


In order to obtain the line of credit and term loan from Heartland Bank, we agreed to certain covenants that place significant restrictions on, among other things, our ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments and investments, and to sell or otherwise dispose of assets and merge or consolidate with other entities.  The Heartland Credit Facility also requires us to meet certain financial ratios and tests and requires us to obtain consent from Heartland Bank in order to change our senior management. We were not in compliance with certain financial covenants (fixed charge coverage ratio, tangible net worth and first lien leverage ratio) at December 31, 2014 and we have reason to believe that we may not be in compliance with the fixed charge coverage ratio and the tangible net worth covenant for the period ended March 31, 2015.  As of the date hereof, we have not received any notice of acceleration from Heartland Bank.  In addition, we are in active discussions with Heartland Bank for a waiver of such non-compliance for these periods and for certain technical defaults. There can be no assurance that Heartland Bank will grant a waiver for such non-compliance for the period and events listed above and even if such waiver is granted that we will be in compliance with the financial covenants imposed by Heartland Bank in future periods or that Heartland Bank will issue a waiver for any future periods in which we are not in compliance with these covenants. Any failure to comply with the covenants included in the Heartland Bank loan agreements could result in an event of default, which could trigger an acceleration of the related debt.  If we were unable to repay the debt upon any such acceleration, Heartland Bank could seek to foreclose on our assets in an effort to seek repayment under the loans.  If Heartland Bank were successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected.


The interest rate on a significant portion of our indebtedness varies with the market rate of interest.  An increase in the interest rate could have a material adverse effect on our results of operations.


The interest on the line of credit and term loan from Heartland Bank is payable monthly and is at a  rate per annum equal to WSJ prime plus a spread that ranges from 5.50% to 8.25% per annum depending on the Borrower’s first lien leverage ratio (provided that at no time shall the WSJ prime be less than 4%). The interest under the Heartland Credit Facility will fluctuate over time, and if the WSJ rate and/or our first lien ratio significantly increase, our interest expense will increase.  This could have a material adverse effect on our results of operations.  


We may need additional financing to further our business plans.


We may require additional funds to finance our business development projects.  We may not be successful in raising additional financing as and when needed. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms, our operating results and prospects could be adversely affected.


We may not realize all of the anticipated benefits of our acquisitions, joint ventures or divestitures, or these benefits may take longer to realize than expected.


Our business strategy includes growth through the acquisitions of other businesses in the areas of water treatment, Power and Safety.  We may not be able to continue to identify attractive acquisition opportunities or successfully acquire those opportunities that are identified.  There is always the possibility that even if there is success in integrating our current or future acquisitions into the existing operations, we may not derive the benefits, such as administrative or operational synergy or earnings obtained, that were expected from such acquisitions, which may result in the commitment of capital resources without the



18




expected returns on the capital.  The competition for acquisition opportunities may increase which in turn would increase our cost of making further acquisitions or causing us to curb our activities of making additional acquisitions.


In pursuing our business strategy, from time to time we evaluate targets and enter into agreements regarding possible acquisitions, divestitures and joint ventures. To be successful, we conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction terms, complete transactions and manage post-closing matters such as the integration of acquired businesses. Our due diligence reviews are subject to the completeness and accuracy of disclosures made by third parties. We may incur unanticipated costs or expenses following a completed acquisition, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation, and other liabilities.


The risks associated with our past or future acquisitions also include the following:


·

the business culture of the acquired business may not match well with our culture;


·

we may fail to retain, motivate and integrate key management and other employees of the acquired business;


·

we may experience problems in retaining customers and integrating customer bases; and


·

we may experience complexities associated with managing the combined businesses and consolidating multiple physical locations.


We believe that we have sufficient resources to integrate these acquisitions successfully, such integration involves a number of significant risks, including management’s diversion of attention and resources.  There can be no assurance as to the extent to which the anticipated benefits of these acquisitions will be realized, if at all, or that significant time and cost beyond that anticipated will not be required with the integration of new acquisitions to the existing business.  If we are unable to accomplish the integration and management successfully, or achieve a substantial portion of the anticipated benefits of these acquisitions within the time frames anticipated by management and within budget, it could have a material adverse effect on our business.


Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and attention. They may also delay the realization of the benefits we anticipate when we enter into a transaction.   Failure to implement our acquisition strategy, including successfully integrating acquired businesses, could have an adverse effect on our business, financial condition and results of operations.


We are vulnerable to the potential difficulties associated with rapid growth


We believe that our future success depends on our ability to manage the rapid growth that we are experiencing and the continued growth that we expect to experience organically through acquisitions.  Our growth places additional demands and responsibilities on our management to maintain existing customers and attract new customers, recruit, retain and effectively manage employees, as well as expand operations and integrate customer support and financial control systems.  The following could present difficulties


·

Lack of sufficient executive level personnel

·

Increased administrative burden,

·

Availability of suitable acquisitions



19




·

Additional equipment to satisfy customer requirements

·

The ability to provide focused service attention to our customers in the areas of water treatment and management, power and safety


We operate in a highly competitive environment, which could adversely affect our sales and pricing.


We operate in a highly competitive environment. We expect competition to intensify in the future. We compete on the basis of customer service, quality and price. There can be no assurance that we will be able to compete successfully with other companies. Thus, revenues could be reduced due to aggressive pricing pursued by competitors.  Many of our competitors are entities that are more- established, larger and have greater financial and personnel resources than we do.  If we do not compete successfully, our business and results of operations will be materially adversely affected.


We are subject to stringent environmental laws and regulations.


We are subject to increasingly stringent laws and regulations relating to use of hazardous materials and environmental protection including laws and regulations governing air emissions, water discharges and waste management. We may incur capital and operating costs to comply with environmental laws and regulations. The technical requirements of these laws and regulations are becoming increasingly complex, stringent and expensive to implement. These laws may provide for “strict liability” for damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several strict liabilities for remediation of spills and releases of hazardous substances.   Stricter enforcement of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could reduce our earnings and cash available for operations. We believe we are currently in substantial compliance with environmental laws and regulations. We cannot provide assurances that we will not be adversely affected by costs, liabilities or claims with respect to existing or subsequently acquired operations or under present laws and regulations or those that may be adopted or imposed in the future.


Compliance with climate change legislation or initiatives could negatively impact our business.


The U.S. Congress has considered legislation to mandate reductions of greenhouse gas emissions and certain states have already implemented, or may be in the process of implementing, similar legislation. Additionally, the U.S. Supreme Court has held in its decisions that carbon dioxide can be regulated as an “air pollutant” under the Clean Air Act, which could result in future regulations even if the U.S. Congress does not adopt new legislation regarding emissions. At this time, it is not possible to predict how legislation or new federal or state government mandates regarding the emission of greenhouse gases could impact our business; however, any such future laws or regulations could require us or our customers to devote potentially material amounts of capital or other resources in order to comply with such regulations. These expenditures could have a material adverse impact on our financial condition, results of operations, or cash flows.


Changes in accounting guidance could have an adverse effect on our results of operations, as reported in our financial statements.


Our consolidated financial statements are prepared in accordance with GAAP, which is periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting guidance and related interpretations issued by recognized authoritative bodies, including the Financial Accounting Standards Board and the SEC. Market conditions have prompted these organizations to issue



20




new guidance that further interprets or seeks to revise accounting pronouncements related to various transactions as well as to issue new guidance expanding disclosures. The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in this annual report on Form 10-K and our quarterly reports on Form 10-Q. An assessment of proposed standards is not provided, as such proposals are subject to change through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully assessed. It is possible that future accounting guidance we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have an adverse effect on our results of operations, as reported in our consolidated financial statements.


Unexpected events, including natural disasters, may increase our cost of doing business or disrupt our operations.


The occurrence of one or more unexpected events, including fires, tornadoes, tsunamis, hurricanes, earthquakes, floods and other forms of severe weather in the United States or in other countries in which we operate or in which our suppliers are located could adversely affect our operations and financial performance. Natural disasters, pandemic illness, equipment failures, power outages or other unexpected events could result in physical damage to and complete or partial closure of one or more of our offices and disrupt our ability to deliver our services. Existing insurance arrangements may not provide protection for all of the costs that may arise from such events.


The loss of key contracts could adversely impact our financial condition and results of operations.


Contracts with customers of our core businesses generally have initial terms with renewal options and early termination clauses. Although we have experienced growth in the number of companies using our services the loss or material reduction of business could adversely affect our financial condition and results of operations. We cannot assure that our existing contracts will continue or be extended or renewed and that existing customers will continue to use our services at current levels or that we will be successful in obtaining new contracts.


We depend on several significant customers, and a loss of one or more significant customers could adversely affect our results of operations.


Our customers consist primarily of major and independent oil and natural gas companies. During fiscal year 2014, one of our customers accounted for more than 25% of our total gross revenues. No other customers exceeded 10% of revenues during 2014. During fiscal year 2013, two of our customers collectively accounted for more than 50% of our total gross revenues, with one customer accounting for 39% and another accounting for approximately 11%. No other customers exceeded 10% of revenues during 2013. These customers do not have any ongoing commitment to purchase our services.  While additional customers have been sourced since December 31, 2013, significant customer concentration still exists.  The loss of or a sustained decrease in demand by this customer could result in a substantial loss of revenues and could have a material adverse effect on our results of operations.  In addition, should this large customer default in their obligation to pay, our results of operations and cash flows could be adversely affected.


Demand for our water transfer services is substantially dependent on the levels of expenditures by the oil and gas industry. A substantial or an extended decline in oil and gas prices could result in lower expenditures by the oil and gas industry, which could have a material adverse effect on our financial condition, results of operations and cash flows.


Demand for our water transfer services depends substantially on the level of expenditures by the oil and gas industry for the exploration, development and production of oil and natural gas reserves. These



21




expenditures are generally dependent on the industry’s view of future oil and natural gas prices and are sensitive to the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. Declines, as well as anticipated declines, in oil and gas prices could also result in project modifications, delays or cancellations, general business disruptions, and delays in, or nonpayment of, amounts that are owed to us. These effects could have a material adverse effect on our results of operations and cash flows.


The prices for oil and natural gas have historically been volatile and may be affected by a variety of factors, including the following:


 

 

demand for hydrocarbons, which is affected by worldwide population growth, economic growth rates and general economic and business conditions;

 

 

the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels for oil;

 

 

oil and gas production by non-OPEC countries;

 

 

the level of excess production capacity;

 

 

political and economic uncertainty and sociopolitical unrest;

 

 

the level of worldwide oil and gas exploration and production activity;

 

 

the cost of exploring for, producing and delivering oil and gas;

 

 

technological advances affecting energy consumption; and

 

 

weather conditions.

The oil and gas industry historically has experienced periodic downturns. A significant downturn in the oil and gas industry could result in a reduction in demand for our water transfer services and could adversely affect our financial condition, results of operations and cash flows.


Federal and state legislative and regulatory initiatives related to hydraulic fracturing could result in operating restrictions or delays in the completion of oil and natural gas wells that may reduce demand for our water transfer activities and could adversely affect our financial position, results of operations and cash flows.


Hydraulic fracturing is a commonly used process that involves using water, sand, and certain chemicals to fracture the hydrocarbon-bearing rock formation to allow flow of hydrocarbons into the wellbore. The federal Energy Policy Act of 2005 amended the Underground Injection Control provisions of the federal Safe Drinking Water Act to exclude hydraulic fracturing from the definition of “underground injection” and associated permitting requirements under certain circumstances. However, the repeal of this exclusion has been advocated by certain advocacy organizations and others in the public. Legislation to amend the SDWA to repeal this exemption and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, were proposed in recent sessions of Congress. Similar legislation could be introduced in the current session of Congress or at the state level. Scrutiny of hydraulic fracturing activities continues in other ways, with the U.S. Environmental Protection Agency, or the EPA, having commenced a study of the potential environmental impacts of hydraulic fracturing. In 2010, a committee of the U.S. House of Representatives undertook investigations into hydraulic fracturing practices, including



22




requesting information from various field services companies. The U.S. Department of the Interior has announced that it will consider regulations relating to the use of hydraulic fracturing techniques on public lands and disclosure of fracturing fluid constituents. In addition, some states and localities have adopted, and others are considering adopting, regulations or ordinances that could restrict hydraulic fracturing in certain circumstances, or that would impose higher taxes, fees or royalties on natural gas production. Moreover, public debate over hydraulic fracturing and shale gas production has been increasing and has resulted in delays of well permits in some areas.


Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition, including litigation, to oil and natural gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to operational delays or increased operating costs in the production of oil and natural gas, including from the developing shale plays, incurred by our customers or could make it more difficult to perform hydraulic fracturing. The adoption of any federal, state or local laws or the implementation of regulations or ordinances regarding hydraulic fracturing could potentially cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our water transfer activities, which could adversely affect our financial position, results of operations and cash flows.


Adverse weather conditions, natural disasters, droughts, climate change, and other adverse natural conditions can impose significant costs and losses on our business.


Our ability to provide water transfer services is subject to the availability of water, which is vulnerable to adverse weather conditions, including extended droughts and temperature extremes, which are quite common, but difficult to predict and may be influenced by global climate change. This risk is particularly true with respect to regions where oil and gas operations are significant. In extreme cases, entire operations may be unable to continue without substantial water reserves. These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on AES’ business, results of operations and financial condition.


Improvements in or new discoveries of alternative energy technologies could have a material adverse effect on our financial condition and results of operations.


Because our business depends on the level of activity in the oil and natural gas industry, any improvement in or new discoveries of alternative energy technologies (such as wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil and natural gas could have a material adverse impact on our business, financial condition and results of operations. In addition, technological changes could decrease the quantities of water required for hydro-fracturing operations or otherwise affect demand for our services.


Increased regulation of hydraulic fracturing, including regulation of the quantities, sources and methods of water use and disposal, could result in reduction in drilling and completing new oil and natural gas wells or minimize water use, which could adversely impact the demand for our services.


Demand for our services depends, in large part, on the level of exploration and production of oil and gas and the oil and gas industry’s willingness to purchase our services. Our customer base uses hydraulic fracturing to drill new oil and gas wells. Hydraulic fracturing is a process that is used to release hydrocarbons, particularly natural gas, from certain geological formations. The process involves the injection of water (typically mixed with significant quantities of sand and small quantities of chemical additives) under pressure into the formation to fracture the surrounding rock and stimulate movement of hydrocarbons through the formation. The process is typically regulated by state oil and gas commissions and



23




has been exempt (except when the fracturing fluids or propping agents contain diesel fuels) since 2005 from United States federal regulation pursuant to the Safe Drinking Water Act.


The EPA is conducting a comprehensive study of the potential environmental impacts of hydraulic fracturing activities, and a committee of the United States House of Representatives is also conducting an investigation of hydraulic fracturing practices. The results of the EPA study and House investigation could lead to restrictions on hydraulic fracturing. The EPA is currently working on new guidance for application of the Safe Drinking Water Act permits for drilling or completing processes that use fracturing fluids or propping agents containing diesel fuels. In addition, the EPA proposed regulations under the federal Clean Air Act in July 2011 regarding certain criteria and hazardous air pollutant emissions from hydraulic fracturing wells and, in October 2011, announced its intention to propose regulations by 2014 under the federal Clean Water Act to regulate wastewater discharges from hydraulic fracturing and other gas production. Legislation has been introduced before Congress to provide for federal regulation of hydraulic fracturing, including, for example, requiring disclosure of chemicals used in the fracturing process or seeking to repeal the exemption from the Safe Drinking Water Act. If adopted, such legislation would add an additional level of regulation and necessary permitting at the federal level and could make it more difficult to complete wells using hydraulic fracturing. Similar laws and regulations with respect to chemical disclosure also exist or are being considered by the United States Department of Interior and in several states, including certain states in which we operate, that could restrict hydraulic fracturing. The Delaware River Basin Commission is also considering regulations which may impact hydro-fracturing water practices in certain areas of Pennsylvania, New York, New Jersey and Delaware. Some local governments have also sought to restrict drilling in certain areas.


Future United States federal, state or local laws or regulations could significantly restrict, or increase costs associated with hydraulic fracturing and make it more difficult or costly for producers to conduct hydraulic fracturing operations, which could result in a decline in exploration and production. New laws and regulations, and new enforcement policies by regulatory agencies, could also expressly restrict the quantities, sources and methods of water use and disposal in hydraulic fracturing and otherwise increase our costs and our customers’ cost of compliance, which could minimize water use and disposal needs even if other limits on drilling and completing new wells were not imposed. Any decline in exploration and production or any restrictions on water use could result in a decline in demand for our services and have a material adverse effect on our business, financial condition, results of operations and cash flows.


Delays or restrictions in obtaining permits by our customers for their operations or by us for our operations could impair our business.


In most states, our customers are required to obtain permits from one or more governmental agencies in order to perform drilling and completion activities and we may be required to procure permits for construction and operation of our disposal wells and pipelines. Such permits are typically required by state agencies, but can also be required by federal and local governmental agencies. The requirements for such permits vary depending on the location where our or our customers’ activities will be conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued, and the conditions which may be imposed in connection with the granting of the permit. Delays or restrictions in obtaining salt water disposal well permits could adversely impact our growth, which is dependent in part on new disposal capacity.


Failure to obtain and retain skilled technical personnel could impede our operations.


We require skilled personnel to operate and provide technical services and support for our business. Competition for the personnel required for our businesses intensifies as activity increases. In periods of high



24




utilization it may become more difficult to find and retain qualified individuals. This could increase our costs or have other adverse effects on our operations.


Our operations are subject to inherent risks, some of which are beyond our control. These risks may not be fully covered under our insurance policies.


Our operations are subject to hazards inherent in the oil and natural gas industry, such as, but not limited to, accidents, blowouts, explosions, fires and oil spills. These conditions can cause:


 

§

Personal injury or loss of life,


 

§

Damage to or destruction of property, equipment and the environment, and


 

§

Suspension of operations by our customers.


The occurrence of a significant event or adverse claim in excess of the insurance coverage that we maintain or that is not covered by insurance could have a material adverse effect on our financial condition and results of operations. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims.


The Company maintains insurance coverage that we believe to be customary in the industry against these hazards. However, we do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. As such, not all of our property is insured. The occurrence of an event not fully insured against, or the failure of an insurer to meet its insurance obligations, could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at reasonable rates. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance prohibitively expensive. It is likely that, in our insurance renewals, our premiums and deductibles will be higher, and certain insurance coverage either will be unavailable or considerably more expensive than it has been in the recent past. In addition, our insurance is subject to coverage limits, and some policies exclude coverage for damages resulting from environmental contamination.


Our ability to use net operating loss carry-forwards to offset future taxable income for U.S. federal income tax purposes may be limited as a result of issuances of equity related to acquisitions or otherwise.


In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”), to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years).


As of December 31, 2014, we had approximately $35.3 million of federal and state NOL carry-forwards. It is possible that the issuance of equity in connection with recent acquisitions and additional acquisitions (if any) occurring during the testing period as well as issuances to employees and consultants within the testing period, could result in an ownership change. Even if the issuances related to acquisitions and employees/consultants do not result in an ownership change, such equity issuances would significantly



25




increase the likelihood that there would be an  ownership change in the future (which ownership change could occur as a result of transactions involving our stock that are outside of our control).


The occurrence of an ownership change could limit the ability to utilize NOLs that are not currently subject to limitation. The amount of the annual limitation generally is equal to the value of the stock of the corporation immediately prior to the ownership change multiplied by the adjusted federal tax-exempt rate, set by the Internal Revenue Service. Limitations imposed on the ability to use NOLs to offset future taxable income could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules and limitations may apply for state income tax purposes.


Risks Related to Our Securities


There is a limited trading market for our shares.  You may not be able to sell your shares if you need money.


Our common stock is traded on the OTC Markets (QB Marketplace Tier), an inter-dealer automated quotation system for equity securities.  During the three months preceding filing of this report, the average daily trading volume of our common stock was approximately 81,908 shares.  As of April 15, 2015, we had 374 record holders of our common stock (not including an indeterminate number of stockholders whose shares are held by brokers in “street name”).  There has been limited trading activity in our stock, and when it has traded, the price has fluctuated widely.  We consider our common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the common stock.  Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid market and limited public float for our common stock.


Your investment may be significantly diluted by the conversion of our Series A Preferred Stock, or exercise of presently outstanding options and warrants.


A substantial number of shares of our common stock are, or could, upon conversion of our Series A Preferred Stock, or upon exercise of options or warrants, become eligible for sale in the public market as described below. Sales of substantial amounts of our shares of common stock in the public market, or the possibility of these sales, may adversely affect our stock price.


As of April 15, 2015, 4,128,572 shares of our common stock were reserved for issuance upon conversion of the remaining 2,890 outstanding shares of Series A Preferred Stock.  In addition, we have granted options and warrants to purchase an aggregate of 9,731,000 shares of our common stock to various persons and entities, of which options and warrants to purchase up to 7,926,269 shares of our common stock are currently exercisable.  The exercise prices on these options and warrants range from $0.055 per share to $1.00 per share.  If issued, the shares underlying our Series A Preferred Stock and options and warrants would increase the number of shares of our common stock currently outstanding and will dilute the holdings and voting rights of our then-existing stockholders.  


We are subject to the penny stock rules and these rules may adversely affect trading in our common stock.


Our common stock is a “low-priced” security under rules promulgated under the Securities Exchange Act of 1934.  In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer’s duties in selling the stock, the customer’s rights and remedies and certain market and other information.  Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial situation, investment



26




experience and objectives.  Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions probably decreases the willingness of broker-dealers to make a market in our common stock, decreases liquidity of our common stock and increases transaction costs for sales and purchases of our common stock as compared to other securities.


Transfers of our securities may be restricted by virtue of state securities “blue sky” laws which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.


Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as “blue sky” laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.


Our officers and directors collectively own a substantial portion of our outstanding common stock, and as long as they do, they may be able to control the outcome of stockholder voting.


Our officers and directors are collectively the beneficial owners of approximately 18% of the outstanding shares of our common stock as of the date of this report.  As long as our officers and directors collectively own a significant percentage of our common stock, our other shareholders may generally be unable to affect or change the management or the direction of our company without the support of our officers and directors.  As a result, some investors may be unwilling to purchase our common stock.  If the demand for our common stock is reduced because our officers and directors have significant influence over our company, the price of our common stock could be materially depressed.  The officers and directors will be able to exert significant influence over the outcome of all corporate actions requiring stockholder approval, including the election of directors, amendments to our certificate of incorporation and approval of significant corporate transactions.


We have the ability to issue additional shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause your investment to be diluted.


Our Certificate of Incorporation authorizes the Board of Directors to issue up to 250,000,000 shares of common stock and up to 10,000,000 shares of preferred stock.  The power of the Board of Directors to issue shares of common stock, preferred stock or warrants or options to purchase shares of common stock or preferred stock is generally not subject to stockholder approval.  Accordingly, any additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting your investment.


By issuing preferred stock, we may be able to delay, defer or prevent a change of control.


Our Certificate of Incorporation permits us to issue, without approval from our shareholders, a total of 10,000,000 shares of preferred stock.  Our Board of Directors can determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series.  It is possible that our Board of Directors, in determining the rights, preferences and privileges to be granted when the preferred stock is issued, may include provisions that have the effect of delaying, deferring or preventing a change in control,



27




discouraging bids for our common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights of the holders of our common stock.


Our stock price is volatile.


The trading price of our common stock has been and continues to be subject to fluctuations.  The stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, the operating and stock performance of other companies that investors may deem as comparable and news reports relating to trends in the marketplace, among other factors.  Significant volatility in the market price of our common stock may arise due to factors such as:


·

our developing business;


·

relatively low price per share;


·

relatively low public float;


·

variations in quarterly operating results;


·

general trends in the industries in which we do business;


·

the number of holders of our common stock; and


·

the interest of securities dealers in maintaining a market for our common stock.


As long as there is only a limited public market for our common stock, the sale of a significant number of shares of our common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered, and could cause a severe decline in the price of our common stock.


There are limitations in connection with the availability of quotes and order information on the OTC Markets.


Trades and quotations on the OTC Markets involve a manual process and the market information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available.  The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price.  Execution of trades, execution reporting and the delivery of legal trade confirmation may be delayed significantly.  Consequently, one may not be able to sell shares of our Common Stock at the optimum trading prices.


There are delays in order communication on the OTC Markets.


Electronic processing of orders is not available for securities traded on the OTC Marketplace and high order volume and communication risks may prevent or delay the execution of one's OTC Marketplace trading orders.  This lack of automated order processing may affect the timeliness of order execution reporting and the availability of firm quotes for shares of our Common Stock.  Heavy market volume may lead to a delay in the processing of OTC Marketplace security orders for shares of our Common Stock, due to the manual nature of the market.  Consequently, one may not able to sell shares of our Common Stock at the optimum trading prices.



28





There is a risk of market fraud on the OTC Marketplace


OTC Marketplace securities are frequent targets of fraud or market manipulation. Not only because of their generally low price, but also because the OTCBB reporting requirements for these securities are less stringent than for listed or NASDAQ traded securities, and no exchange requirements are imposed.  Dealers may dominate the market and set prices that are not based on competitive forces. Individuals or groups may create fraudulent markets and control the sudden, sharp increase of price and trading volume and the equally sudden collapse of the market price for shares of our Common Stock.


There is a limitation in connection with the editing and canceling of orders on the OTC Markets.


Orders for OTCBB securities may be canceled or edited like orders for other securities. All requests to change or cancel an order must be submitted to, received and processed by the OTC Markets.  Due to the manual order processing involved in handling OTC Markets trades, order processing and reporting may be delayed, and one may not be able to cancel or edit one's order. Consequently, one may not be able to sell its shares of our Common Stock at the optimum trading prices.


Increased dealer compensation could adversely affect our stock price.


The dealer's spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of shares of our Common Stock on the OTC Markets if the stock must be sold immediately.  Further, purchasers of shares of our Common Stock may incur an immediate "paper" loss due to the price spread.  Moreover, dealers trading on the OTC Markets may not have a bid price for shares of our Common Stock on the OTC Markets.  Due to the foregoing, demand for shares of our Common Stock on the OTC Markets may be decreased or eliminated.


Cautionary Statement Concerning Forward-Looking Information


This annual report and the documents to which we refer you and incorporate into this annual report by reference contain forward-looking statements.  In addition, from time to time, we, or our representatives, may make forward-looking statements orally or in writing.  These are statements that relate to future periods and include statements regarding our future strategic, operational and financial plans, potential acquisitions, anticipated or projected revenues, expenses and operational growth, markets and potential customers for our products and services, plans related to sales strategies and efforts, the anticipated benefits of our relationships with strategic partners, growth of our competition, our ability to compete, the adequacy of our current facilities and our ability to obtain additional space, use of future earnings, and the feature, benefits and performance of our current and future products and services.


You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” “seek” or “continue” or the negative of these or similar terms.  In evaluating these forward-looking statements, you should consider various factors, including those described in this annual report under the heading “Risk Factors.”  These and other factors may cause our actual results to differ materially from any forward-looking statement.  We caution you not to place undue reliance on these forward-looking statements.


We base these forward-looking statements on our expectations and projections about future events, which we derive from the information currently available to us.  Such forward-looking statements relate to future events or our future performance.  Forward-looking statements are only predictions.  The forward-looking events discussed in this annual report, the documents to which we refer you and other statements



29




made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us.  For these statements, we claim the protection of the “bespeaks caution” doctrine.  The forward-looking statements speak only as of the date hereof, and we expressly disclaim any obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing.


Item 1B.  UNRESOLVED STAFF COMMENTS


None.


Item 2.  PROPERTIES


Our executive offices are located at 8588 Katy Freeway, Suite 430, Houston, Texas 77024.  The lease has an initial monthly lease rate of $5,535.35 plus monthly common area maintenance (CAM) fees of $2,965.10 (estimated).  Beginning September 2016, the monthly lease rate increases to $5,907.85 and the monthly CAM fees are estimated to remain at $2,965.10 (with actual costs to be reconciled at the end of each year). Sage Power Solutions and AquaTex maintain a facility in South Texas near Tuletta, Texas for $3,500 per month on a one year lease expiring in January 2015 with a month to month agreement after this date. AES Water Solutions maintains several storage yards and facilities in Oklahoma and Texas for a total of approximately $3,500 per month on a month-to-month basis. AES Safety Solutions has a lease in Ohio for $1,295 per month and one in South Texas for $2,500 per month, each on a month to month basis. Hamilton Investment Group leases two storage yards in Oklahoma under 3-year leases ending on August 2017 for a total of $6,000 per month.  Hamilton Investment Group also leases office space in Guthrie, Oklahoma under a lease ending February 2016 at a rate of $850 per month. Management believes the relationships with all of its landlords are good.  


Item 3.   LEGAL PROCEEDINGS


As of the date of this report, we do not have any material litigation and are not aware of any threats of material consequence.


Item 4.   MINE SAFETY DISCLOSURES.


None.




30




PART II


Item 5. MARKET FOR COMMON EQUITY


On January 13, 2012 FINRA assigned our common stock the trading symbol “HIIT.” Our stock is quoted on the OTC Markets (QB Marketplace Tier).  The shares of our common stock commenced trading on February 29, 2012.  


Our common was stock traded on the OTC Bulletin Board under the symbol “HWEG.OB” from February 19, 2009 until February 9, 2011, the date on which the Securities and Exchange Commission issued its order revoking the registration of the common stock of HII Technologies, Inc. due to our failure to comply with Section 13(a) and Rules 13a-1 and 12a-13 of the Securities Exchange Act of 1934 because we did not file any periodic reports with the Securities and Exchange Commission since the period ended March 31, 2009.  Our failure to file financial reports was a direct result of capital constraints.  Selling our assets in May 2011 provided additional working capital while reducing substantially all indebtedness.  We are registering our securities at this time as we believe having publicly traded securities will provide certain benefits, such as: (i) the ability to use public securities to make acquisitions of assets or businesses; (ii) increased visibility in the financial community; (iii) the facilitation of borrowing from financial institutions; (iv) enhanced ability to raise capital; and (v) compensation of key employees through stock options.  We may seek to have our securities quoted on the OTCBB in the future.  Before that date our common stock traded on the OTC Bulletin Board under the symbol “SHMT.OB” October 20, 2005.  Prior to February 19, 2009, our common stock traded on the OTC Bulletin Board under the symbol “EXCB.OB” since June 10, 2002.  Before that date, our common stock traded on the OTC Bulletin Board under the symbol “GRMA.OB,” and before that, it traded on the OTC Bulletin Board under the symbol “GRMG.OB.”  The following table shows the high and low bid prices for our common stock for each quarter since January 1, 2013 as reported by the OTC Bulletin Board.


We consider our stock to be “thinly traded” and any reported sale prices may not be a true market-based valuation of our stock.  Some of the bid quotations from the OTC Bulletin Board set forth below may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.


2015 (OTC Markets)

 

High Bid

 

 

Low Bid

 

First quarter

 

$

0.58

 

 

$

0.33

 


2014 (OTC Markets)

 

High Bid

 

 

Low Bid

 

First quarter

 

$

0.85

 

 

$

0.42

 

Second quarter

 

 

0.76

 

 

 

0.53

 

Third quarter

 

 

0.93

 

 

 

0.55

 

Fourth quarter

 

 

1.10

 

 

 

0.76

 


2013 (OTC Markets)

 

High Bid

 

 

Low Bid

 

First quarter

 

$

0.21

 

 

$

0.10

 

Second quarter

 

 

0.29

 

 

 

0.15

 

Third quarter

 

 

0.32

 

 

 

0.24

 

Fourth quarter

 

 

0.62

 

 

 

0.28

 

  

 

 

 

 

 

 

 

 


As of April 15, 2015, there were 57,232,436 shares of common stock outstanding, which were held by approximately 374 record stockholders.  This does not include an indeterminate number of beneficial shareholders whose shares are held by brokers in street name.  In addition, as of the date of this annual



31




report, we have reserved 4,128,572 shares of our common stock for issuance upon conversion of the remaining 2,890 outstanding shares of Series A Preferred Stock, 3,953,000 shares of common stock for issuance upon exercise of outstanding options under our Stock Incentive Plans, and 5,378,000 shares of common stock for issuance upon exercise of outstanding warrants.


Dividend Policy


We have not paid cash dividends on our common stock since our inception and we do not contemplate paying dividends in the foreseeable future.  


Recent Sales of Unregistered Securities


1.

On December 9, 2014 we issued 95,456 shares of our common stock to Acie Palmer, our chief financial officer for his $50,000 cash investment.  The proceeds were used for working capital and general corporate purposes.  The issuance was exempt under Section 4(a)(2) of the Securities Act of 1933, as amended.


2.

From December 8, 2014 through March 20, 2015, we issued 1,585,717 shares of our common stock upon conversion of 1,110 shares of our series A preferred stock.  We did not receive any proceeds upon issuance of these shares.  The issuances were exempt under Section 3(a)(9) of the Securities Act of 1933, as amended.


3.

On February 18, 2015, we issued 359,153 shares of our common stock upon exercise of outstanding warrants. The warrant was issued to purchase 400,000 shares and was exercised in full on a cashless basis and accordingly 40,847 shares withheld by us at the market price of $0.5386 per share less the exercise price of $0.055 per share to fund the exercise price.  We relied on the exemption from registration provided by Section 3(a)(9) and/or Section 4(a)(2) of the Securities Act of 1933, as amended.


Item 6.  SELECTED FINANCIAL DATA


We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OR PLAN OF OPERATION


This section of the Registration Statement includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.


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,



32




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. The table below provides an overview of our current subsidiaries and their oilfield service activities:


Name

Doing Business As (dba):

Business

Apache Energy Services, LLC

AES Water Solutions

Frac Water Management Solutions

 

 

 

 

AES Safety Services

Oilfield Safety Services

 

 

 

Aqua Handling of Texas, LLC

AquaTex

Frac Water Management Solutions

 

 

 

Hamilton Investment Group

Hamilton Water Transfer

Frac Water Management Solutions

 

 

 

Sage Power Solutions, Inc.

Sage Power, South Texas Power, STP

Oilfield Power Management Solutions


The Company’s total frac water management services division does business as AES Water Solutions, AquaTex and Hamilton Investment Group, 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 Company’s 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 Company’s oilfield mobile power subsidiary, Sage Power Solutions,  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 90 persons and extensively use independent contractor crews in connection with our field service work. Our executive offices are located at 8588 Katy Freeway, Suite 430, Houston, Texas, 77024.  Our telephone number is (713) 821-3157 and our Internet address is www.HIITinc.com. The information on, or that may be, accessed from our website is not part of this annual report.


Business Development – HII Technologies, Inc.


Organization


In 2002, we were incorporated in Delaware under the name “Excalibur Industries, Inc.” In October 2005, we changed our name from “Excalibur Industries, Inc.” to “Shumate Industries, Inc.” in connection with a restructuring that divested Excalibur industrial businesses and focused on Shumate’s oilfield machining business.  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



33




2008 sale of assets related to our contract machining business. On August 31, 2011, we changed our name to “HII Technologies, Inc.”, which name change was required in connection with the May 2011 sale of our Hemiwedge valve product technology, trademarks and other assets.  HII Technologies’ business focuses on the activity of domestic shale horizontal drilling audits hydraulic fracturing and the needed essential services such as frac water management.


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 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 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.


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, Sage Power Solutions, Inc. f/k/a 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 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 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



34




former AquaTex members at closing   The purchase agreement contains 3-year non-compete/non-solicitation provisions for Messer’s George and Brewer, the former members of AquaTex.    


Acquisition of Hamilton Investment Group (Hamilton Water Transfer)


On August 12, 2014, we consummated the acquisition (the “Acquisition”) of all of the outstanding stock of Hamilton Investment Group, Inc.  (“Hamilton Water Transfer” or “Hamilton”) pursuant to the terms of a Stock Purchase Agreement dated August 11, 2014 by and among the registrant, Hamilton and the stockholders of Hamilton (the “Stock Purchase Agreement”). The purchase price consisted of: (a) Cash in the amount of $9,000,000; and (b) 3,523,554 shares (the “Shares”) of the registrant’s common stock ($2,300,000 value based on the trailing 20-day average of the registrant’s common stock).   In addition, there exists a working capital adjustment provision whereby we are required pay the Hamilton stockholders additional cash equal to the amount of any working capital of Hamilton in excess of $2,200,000 (“Working Capital Target”) at closing; provided, however, that in the event that Hamilton’s working capital at closing is less than the Working Capital Target, then the amount of such deficit will be offset against the Shares issued to the former Hamilton stockholders at closing   The purchase agreement contains 2-year non-compete/non-solicitation provisions for William M. Hamilton and Sharon K. Hamilton, the former Hamilton stockholders. 


Results of Operations for the Years Ended December 31, 2014 and 2013


Revenues. Our revenues increased by $20,858,297, or approximately 143% to $35,409,992 for the year ended December 31, 2014 from $14,551,695 for the year ended December 31, 2013.  This increase was primarily attributable to the acquisition of Hamilton on August 12, 2014, which provided $4.4 million in additional revenues in 2014 as well as continued growth within our water division from AES Water Solutions and AquaTex (acquired in November 2013) frac water management services, which provided $10.5 million in additional revenues in 2014 from 2013.  Additionally, increased revenues came from the continued organic growth of AES Safety Services, including its new spill remediation service line, resulting in $4.2 million of increased revenues during 2014 from 2013 and the organic growth of Sage Power’s generator rental fleet business in mobile oilfield power resulting in $1.8 million in increased revenues in 2014 from 2013. 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 $14,686,095 or approximately 137%, to $25,421,159 for the year ended December 31, 2014, or 72% of revenues, compared to cost of revenues of $10,735,064, or 74% of revenues for the year ended December 31, 2013.  The cost of revenues during the year ended December 31, 2014 were primarily the result of contract labor of $10,103,674, frac water pipe and pump rental of $3,044,456, direct costs associated with the spill remediation line of $1,586,008, equipment and truck rental of $4,177,950 and related fuel costs of $3,270,541.  The decrease in cost of revenues as a percentage of sales was the result of the additional revenues of AquaTex, subsidiary which was acquired in November 2013, Hamilton, subsidiary which was acquired in August 2014, 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 anticipates a lower cost of sales as a percentage of sales in the next fiscal year from continued increases in revenues covering 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 the anticipated commencement of new technology related services and their higher margins. The cost of revenues during the year ended December 31, 2013 were primarily the result of contract labor of $5,349,002, frac water pipe and pump rental of $1,906,181, equipment and truck rental of $1,404,520 and related fuel costs of $1,393,404.


Selling, general, and administrative. Selling, general and administrative expenses increased by



35




$6,092,257, or approximately 144%, to $10,325,631, or approximately 29% of revenues, for the year ended December 31, 2014, as compared to $4,233,374 or approximately 29% 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 currently anticipates lower selling, general and administrative expenses as a percentage of sales in the next fiscal year from continued increases in revenues covering a higher percentage of fixed costs, reduced testing and development costs related to water recycling technologies, and decreasing growth in expenses for personnel.

 

Impairment loss.  We had impairment loss of $2,344,420 for the year ended December 31, 2014, which is attributable to the full impairment at year-end of the intangible customer relationship assets acquired with the acquisitions of AquaTex and Hamilton.  We had no impairment loss in the year ended December 31, 2013.

 

Acquisition expenses. We had acquisition expenses of $175,945 for the year ended December 31, 2014, which expenses are attributable to our acquisition of Hamilton in August 2014. We had acquisition expenses of approximately $17,000 in the year ended December 31, 2013, which expenses are attributable to our acquisition of AquaTex in November 2013.


Interest expense. Interest expense increased by $4,345,282, or approximately 1,088% to $4,744,776 in the year ended December 31, 2014, from $399,494 for the comparable period in 2013.  The increase was attributable to the interest accrued on the accounts receivable financing facility, the senior term loan credit facility and amortization of related deferred finance costs and non-cash debt discount, interest expense associated with promissory notes we issued in our September 2012 and October 2013 financings, as well as accrued interest on the Seller 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 $1,196,919, or approximately 100% to $2,395,053 for the year ended December 31, 2014 from a net loss of $1,198,134 for the comparable period in 2013. The net loss for the year ended December 31, 2014 included the tax benefit related to the reduction of the valuation allowance on the deferred tax asset of $5,639,233, depreciation and amortization charges of $4,309,827, non-cash charges in connection with the issuance of share-based awards of $133,000, the amortization of non-cash debt discount costs of $1,634,929 and the amortization of deferred financing costs of $1,031,229.  In addition, the Company incurred $181,002 in expenses from the testing and development costs related to water recycling technologies. The net loss during the year ended December 31, 2013 was primarily attributable to our net loss from operations of $578,986 which included bad debt expense of $162,243, charges in connection with the issuance of share-based awards of $357,937 and the amortization of note payable discount and deferred finance costs of $143,467 combined.


Liquidity and Capital Resources


We have financed our operations, acquisitions, debt service, and capital requirements through cash flows generated from operations, debt financing, other loans, and issuance of equity securities.  We had cash of $1, 330,507, restricted cash of $1,666,652 and a working capital deficit of $14,757,082 as of December 31, 2014 as compared to cash of $866,035 and a working capital deficit of $2,578,883 as of December 31, 2013.


Net cash used in operating activities for the year ended December 31, 2014 was $4,324,271 resulting primarily from our net loss of $2,395,053 and increases in accounts payable-related parties of $25,000 and accrued expenses of $1,366,668 and adjustments in non-cash items including $133,000 in non-cash stock for services, $1,965,407 in depreciation and amortization, impairment loss of $2,344,420, $1,634,929 in amortization of debt discount, $236,085 in amortization of stock based compensation, and $1,031,229 in amortization of deferred finance costs, which amounts were offset by increases in accounts receivable of $4,722,228 and prepaid expenses and other assets of $281,530, decrease in accounts payable of $186,137, the $44,312 in gain on asset disposal, and $5,639,233 in tax benefits for release of deferred tax asset allowance. By comparison, net cash used in operating activities for the year



36




ended December 31, 2013 was $89,152 resulting primarily from our net loss of $1,198,134 and increases in accounts receivable of $2,265,326, prepaid expenses of $20,410, deposits of $33,960 and accounts payable – related parties of $225,248, which amounts were offset by an increase in accounts payable of $2,487,242 and adjustments in non-cash items including $357,937 in non-cash stock for services, $117,059 in amortization of debt discount, $162,243 in bad debt expense, $131,069 in depreciation, $26,408 in amortization of deferred financing costs, $96,297 of loss on extinguishment of liability $55,154 of warrants issued in extension of a secured note, and $8,851 of loss on asset sale.


Net cash provided by investing activities for the year ended December 31, 2014 was $658,928 resulting primarily from our acquisition of assets and equipment of $3,248,161, offset by cash received from the acquisition of Hamilton of $2,797,327 and proceeds received from the sale of property and equipment of $1,109,762. By comparison, net cash used in investing activities for the year ended December 31, 2013 was $1,893,410 resulting primarily from $1,957,683 related to our acquisition of assets which was offset by $64,273 in cash received from our sale of property and equipment.


Our net cash provided by financing activities was $4,129,815 for the year ended December 31, 2014. This consisted of $3,757,300 in net proceeds from the sale of preferred shares, $1,755,685 in proceeds from the issuance of notes, $2,073,325 in net proceeds from our revolving line of credit, $484,655 in net proceeds from secured borrowings, $50,000 in proceeds from common shares sold for cash, and $87,500 in proceeds from the exercise of warrants, which amounts were offset by payments on notes payable of $1,559,474, payments on capital lease obligations of $1,209,250, $1,208,584 in payments for deferred financing costs, and dividends paid on our preferred shares of $101,342. Our net cash provided by financing activities was $2,469,261 in the year ended December 31, 2013. This consisted of $850,000 in proceeds from the issuance of notes, $2,117,192 in proceeds from our line of credit, $50,000 in proceeds from warrant exercise, $109,775 in proceeds from our sale-leaseback transaction and $63,000 in related party advances which amounts were offset by payments on notes payable of $670,008, $20,000 in repayments on related party advances and $30,698 in payments for deferred financing costs.


The net increase in cash for the year ended December 31, 2014 was $464,472 as compared to a net increase in cash of $486,699 for the year ended December 31, 2013.


Future maturities of debt and required payments under capital and operating leases as of December 31, 2014 are as follows:


 

Debt

Capital Leases

Operating Leases

2015

$ 3,204,034

$ 2,441,542

$  3,751,512

2016

2,583,432

1,687,699

2,692,735

2017

10,124,710

1,044,927

1,585,859

2018

-

-

292,098

2019

-

-

73,175

 

 

 

 

Totals

$ 15,912,176

$ 5,174,168

$ 8,395,379


Credit Facilities


Accounts Receivable Financing Facility


On June 26, 2013, our wholly-owned subsidiaries, Sage Power Solutions, Inc. f/k/a 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 Borrower’s accounts



37




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.  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 obligated to pay Rosenthal a fee equal to 2% of the maximum facility amount and if terminated after the first anniversary and prior to the second anniversary then Borrower shall pay a fee equal to 1% of the maximum facility amount. 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.   On August 12, 2014, in connection with the consummation of the Heartland Bank Credit Facility, we terminated this financing facility and paid approximately $4.75 million in repayment of all amounts due thereunder with proceeds received under the Heartland Bank Credit Facility.


Heartland Bank Credit Facility


On August 12, 2014, HII Technologies, Inc. (the "Company") and its wholly-owned subsidiaries (collectively, the “Borrower”) entered a senior secured credit facility (the “Facility”) with Heartland Bank as Agent consisting of (i) a credit agreement (the "Credit Agreement") with Heartland Bank for a 3-year $12 million term loan (the “Term Loan”) and (ii) an account purchase agreement (the “Purchase Agreement”) with Heartland Bank, as agent for the purchase and sale of approved receivables of Borrower in amounts not to exceed $6 million, which amount was increased to $6.6 million pursuant to a first modification agreement executed on September 15, 2014. The proceeds of borrowings under the Facility may be used for the payment of a portion of the purchase price for the acquisition of Hamilton Investment Group (“Hamilton”); the refinance of outstanding debt under Borrower’s prior accounts receivable facility; working capital needs of the Company and its subsidiaries; funding of the debt service reserve account and payment of all costs and expenses arising in connection with the negotiation of the Credit Agreement and related documents. On the closing date, the Borrower received proceeds of $12 million under the Credit Agreement and approximately $4.65 million under the Purchase Agreement.  The Company utilized $9 million to pay a portion of the purchase price for the Hamilton acquisition, approximately $4.75 million to pay off the Borrower’s prior accounts receivable facility, $450,000 in commitment fees, $675,000 to fund Borrower’s debt service reserve account and approximately $190,000 in other expenses related to the Facility.  Borrower retained approximately $1.585 million for working capital. 


Borrowings under the Credit Agreement bear interest at a rate per annum equal to WSJ prime plus a spread that ranges from 5.50% to 8.25% per annum depending on the Borrower’s first lien leverage ratio (provided that at no time shall the WSJ prime be less than 4%). The Term Loan, as amended, requires monthly interest payments, quarterly principal payments of $300,000 and a balloon payment on the August 12, 2017 maturity date.  The Term Loan contains an accordion feature, whereby the borrowings may be increased by up to an additional $10 million upon request and agreement by the Lenders, but is not a committed amount under the facility.  


Under the Purchase Agreement, all approved receivables will be purchased by the lenders thereunder for the face amount of such receivable less the lender’s 1.50% service charge.   In addition, the



38




Purchase Agreement requires a 10% reserve against receivables purchased, which amount will increase from 25-50% for receivables outstanding past 60-90 days, respectively.  The account purchase facility replaces the Company’s previous senior secured revolving facility.


Both the Credit Agreement and the Purchase Agreement require the Borrower to maintain a fixed charge coverage ratio of not less than 1.2:1.0, a first lien leverage ratio of ranging from 3.0:1.0 during 2014 to 2.75:1.0 - 2.25:1.0 during 2015 to 2.0:1.0 beginning in 2016, a EBITDA to Interest Expense ratio ranging from 2.75:1.0 during 2014, 3.75:1.0  during 2015 to 4.75:1.0 beginning in 2016 and a tangible net worth of not less than $1 million for each quarter beginning December 31, 2014.  The Borrower is also required to maintain a debt service reserve account sufficient to pay all debt and interest expense due in the next fiscal quarter. The restrictive covenants include customary restrictions on the Company's ability to incur additional debt; make investments; grant or incur liens on assets; sell assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make dividend payments (although the Borrower is allowed to make dividend payments so long as no event of default will result from such payment or in shares of the Company’s stock). In addition, the Credit Agreement contains customary representations and warranties, affirmative covenants and events of default.


The Facility is secured by all of the Borrower’s assets as well as a pledge of the Company’s equity in each of its wholly-owned subsidiaries.  The Company paid a cash closing fee of $450,000 to the Lenders and also issued a 4-year warrant to purchase 2.5 million shares of the Company’s common stock with an exercise price $1.00 per share in connection with the Facility.


We were not in compliance with certain financial covenants (fixed charge coverage ratio, tangible net worth and first lien leverage ratio) at December 31, 2014.  The table below forth the financial covenants, we are required to maintain under our agreements with Heartland Bank and our compliance with such covenants at December 31, 2014:


  

Required

 

 

Actual at 12/31/2014

Fixed Charge Coverage Ratio (greater than)

1.20

  

  

1.07

Tangible Net Worth (less than)

$1,000,000

  

  

($1,642,339)

Capital Expenditures (less than)

$100,000

  

 

$65,000

First Lien Leverage Ratio (less than)

3

  

  

3.32

Ratio of EBITDA to Interest Expense (greater than)

2.75

  

 

3.31

Debt Service Reserve Account

675,000

  

  

675,000


We also have reason to believe that we may not be in compliance with the fixed charge coverage ratio and the tangible net worth covenant for the period ended March 31, 2015.  In addition, we have certain other technical defaults under its agreements with Heartland Bank.  As of the date hereof, we have not received any notice of acceleration from Heartland Bank.  In addition, we are in active discussions with Heartland Bank for a waiver of such non-compliance for these period as well as the technical defaults. There can be no assurance that Heartland Bank will grant a waiver for the periods and events referred to above and even if such waiver is grants that we will be in compliance with these covenants in future periods or that Heartland will issue a waiver for any future periods in which we are not in compliance with these covenants.  Any failure to comply with the financial covenants under the Heartland Bank agreements could result in the acceleration of all amounts due to Heartland Bank under the line of credit and term loan.


Capital Lease Facilities



39





On June 30, 2014, we entered into a capital lease agreement with BCL-Equipment Leasing, LLC (“BCL”) 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.   The equipment under the lease consisted of lay flat hose which will be used in our frac water transfer service related activities.


On July 10, 2014, we entered into a capital lease agreement with Nations Fund I, LLC (“NEF”) under which we leased equipment with a value of $1,908,542.  The lease requires 36 monthly payments during such term of $52,485 per month and a purchase at the end of term of $572,563.  The lease contains a purchase option at the end of the initial 36 month term, granting the Company the right to purchase all equipment covered under the lease for its fair market value. If the Company does not elect to exercise the purchase option, it may elect to exercise the renewal option for a negotiated renewal term at a periodic rent equal to the fair market rental value of the equipment, as determined at the time of renewal. The equipment under the leases consisted of flowback equipment, evaporation units, and generators which will be used in our flowback, evaporation, and portable power service revenue activities.


Series A Preferred Stock Financing


From June 21, 2014 through July 8, 2014, we sold 4,000 units (“Series A Units”) to 22 accredited investors at a price of $1,000 per Series A Unit for total gross proceeds of $4,000,000.  Each Series A Unit consisted of (i) 1 share of our Series A Convertible Preferred Stock (“Series A Preferred”) 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 currently $0.70 (the “Series A Conversion Shares”), and (ii) common stock purchase warrants (“Series A 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 “Series A Warrant Shares”).  The Series A Conversion Shares and the Series A Warrant Shares contain standard piggy back registration rights.   We used $242,700 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 be used for working capital and general corporate purposes and to fund growth opportunities.


Promissory Notes – 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 license fee for AES’ sublicense of a frac water treatment technology.  We did not receive any cash 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 Sage Power Solutions, Inc. f/k/a KMHVC entered into a Security Agreement-Conditional Sales Contract with a third party equipment seller for the purchase of equipment.  Sage Power Solutions 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, Sage



40




Power Solutions 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 Sage Power Solutions f/k/a KMHVC entered into a Security Agreement-Conditional Sales Contract with a third party equipment seller for the purchase of equipment.  Sage Power Solutions 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, Sage Power Solutions 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 Solutions 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 was due on October 1, 2014. This note was paid in full on October 1, 2014.


On May 19, 2014, our wholly-owned subsidiary Sage Power Solutions f/k/a KMHVC entered into a Security Agreement-Conditional Sales Contract with a third party equipment seller for the purchase of equipment.  Sage Power Solutions 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, Sage Power Solutions 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 investor’s 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. All outstanding principal and accrued interest under these notes were converted into shares of our common stock on October 31, 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 Purchase Agreement with Heartland Bank for the sale of our 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



41




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.  The Company carries its 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.


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.


Item 7A QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK


We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.


Item 8.  FINANCIAL STATEMENTS – HII TECHNOLOGIES, INC.




42





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors

HII Technologies, Inc.

Houston, TX


We have audited the accompanying consolidated balance sheets of HII Technologies, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HII Technologies, Inc. and its subsidiaries as of December 31, 2014 and 2013 and the results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring losses and has a working capital deficit, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ MaloneBailey, LLP

www.malonebailey.com

Houston, Texas


April 15, 2015



43





HII TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

 

December 31

 

December 31

 

 

 

2014

 

2013

ASSETS

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 $      1,330,507

 

 $       866,035

 

Restricted cash

       1,666,652

 

               - 

 

Accounts receivable, net of allowance of $291,672 and $79,116

     10,529,742

 

     3,708,012

 

Note receivable

        290,000

 

      294,755

 

Current portion of deferred financing costs

50,850

 

      33,541

 

Prepaid expense and other current assets

     168,916

 

    111,147

 

 

Total current assets

14,036,667

 

     5,013,490

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $1,100,274 and $133,081

       8,909,483

 

    2,076,512

Assets under capital lease, net

   4,673,166

 

              -

Deposits

     257,723

 

     33,960

Deferred financing costs, net of current portion

60,103

 

     19,949

Intangible assets, net of accumulated amortization and impairment of $2,642,454 and $0

   334,546

 

      227,000

Deferred tax asset

  5,639,233

 

               -

Goodwill

 

    4,675,820

 

      2,852,107

 

 

Total assets

 $     38,586,741

 

 $  10,223,018

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

Accounts payable

 $       4,357,868

 

 $     3,421,153

 

Accounts payable and other liabilities, related parties

   2,611,871

 

      158,000

 

Accrued expenses and other liabilities

  1,692,121

 

     703,302

 

Line of credit

               - 

 

    2,678,992

 

Secured borrowings

    6,131,917

 

-

 

Current portion of capital lease obligation

      1,637,296

 

                -

 

Current portion of notes payable - related parties

      515,000

 

      545,926

 

Current portion of secured notes payable

11,847,676

 

         85,000

 

 

Total current liabilities

28,793,749

 

      7,592,373

 

 

 

 

 

 

Long term liabilities:

 

 

 

 

Capital lease obligation, net of current portion

       2,306,972

 

                 -

 

Notes payable – unsecured

                 - 

 

      1,000,000

 

Notes payable - secured, net of current portion

73,856

 

      158,855

 

Notes payable - related parties net of current portion

         70,958

 

       585,958

 

 

Total liabilities

31,245,535

 

    9,337,186

 

 

 

 

 

 

Commitments and contingencies

                    -

 

                 -

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

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

 

 

 

 

   

Series A Convertible Preferred stock, $1,000 stated value, 4,000 shares

 

 

 

 

 

authorized, 3,750 and 0 shares issued and outstanding

     2,848,093

 

                -

 

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

 

 

 

 

 

55,644,711 and 48,424,712 shares issued and outstanding

          55,644

 

           48,424

 

Additional paid-in-capital

    34,217,479

 

     28,121,023

 

Accumulated deficit

   (28,780,010)

 

   (27,283,615)

 

 

Total stockholders' equity

7,341,206

 

         885,832

 

 

Total liabilities and stockholders' equity

 $       38,586,741

 

 $      10,223,018

See accompanying notes to consolidated financial statements




44







HII TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

 

 

 

 

 

REVENUES

 $           35,409,992

 

 $          14,551,695

 

 

 

 

 

 

COST OF REVENUES

     25,421,159

 

     10,735,064

 

 

 

 

 

 

GROSS PROFIT

       9,988,833

 

       3,816,631

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

Selling, general and administrative

     10,325,631

 

    4,233,374

   Impairment loss

2,344,420   

-   

 

Bad debt expense

          196,421

 

         162,243

 

 

 

 

 

 

 

Total operating expenses

     12,866,472

 

       4,395,617

 

 

 

 

 

 

LOSS FROM OPERATIONS

     (2,877,639)

 

       (578,986)

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

Loss on debt conversion

         (11,063)

 

                   -

 

Loss on extinguishment of liability

                   -

 

          (96,297)

 

Acquisition expenses

         (175,945)

 

         (17,000)

 

Interest expense, net

    (4,744,776)

 

       (399,494)

 

 

 

 

 

 

NET LOSS BEFORE INCOME TAXES

     (7,809,423)

 

    (1,091,777)

 

 

 

 

 

 

(PROVISION) BENEFIT FOR INCOME TAXES

 

 

 

 

Deferred

     5,639,233

 

                   -

 

Current

        (224,863)

 

       (106,357)

 

 

 

 

 

 

NET LOSS

 $           (2,395,053)

 

 $        (1,198,134)

 

 

 

 

 

 

DEEMED DIVIDEND

       (720,424)

 

             -

 

 

 

 

 

 

CUMULATIVE DIVIDEND

       (205,078)

 

                -

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS

 $           (3,320,555)

 

 $        (1,198,134)

 

 

 

 

 

 

BASIC AND DILUTED  EARNINGS PER COMMON SHARE

 

 

 

Basic net income (loss) per share

 $                    (0.07)

 

 $                  (0.03)

 

 

 

 

 

 

Weighted average shares outstanding-Basic

     50,962,165

 

     44,458,141


See accompanying notes to consolidated financial statements



45






HII TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'  EQUITY

For the years ended December 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

Accumulated

 

 

 

Shares

Stated

 

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

Common stock issued for services

             -   

            -   

 

870,000

   870

 

  193,930

 

            -

 

    194,800

Common stock issued in purchase of Aqua Handling of Texas LLC

            -   

        -   

 

 1,443,696

  1,444

 

   547,160

 

            -

 

    548,604

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

Warrants issued for extension of secured note

           -   

       -   

 

          -

    -

 

     55,154

 

             -

 

  55,154

Stock options exercised using cashless provision

         -   

      -   

 

  23,333

 23

 

       (23)

 

             -

 

           -

Stock options issued for services

        -   

      -   

 

          -

    -

 

    163,137

 

              -

 

    163,137

Net loss

          -   

         -   

 

          -

     -

 

            -

 

  (1,198,134)

 

  (1,198,134)

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2013

           -

 $           -   

 

 48,424,712

$48,424

 

$28,121,023

 

$(27,283,615)

 

$     885,832

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercised

           -

       -   

 

  50,000

  50

 

     12,450

 

           -   

 

      12,500

Warrants exercised using cashless provisions

           -

            -   

 

  117,245

   117

 

      (117)

 

          -   

 

               -

Stock options issued for services

          -

      -   

 

             -

    -   

 

    236,085

 

            -   

 

   236,085

Common shares issued for services

            -

    -   

 

 250,000

   250

 

132,750

 

             -   

 

   133,000

Common shares issued for note payable conversions

           -

          -   

 

  2,326,599

  2,327

 

  1,172,039

 

           -   

 

  1,174,366

Stock options exercised

           -

       -   

 

 500,000

  500

 

   74,500

 

            -   

 

      75,000

Preferred stock issued for cash

     4,000

4,000,000

 

        -

   -   

 

           -   

 

            -   

 

    4,000,000

Deemed dividend for preferred stock beneficial conversion feature

         -

(720,424)

 

        -

 -   

 

  720,424

 

            -   

 

           -

Issuance costs for preferred stock offering

           -

(242,700)

 

        -

   -   

 

          -   

 

         -   

 

    (242,700)

Common shares issued in purchase of Hamilton Investment Group

           -

      -   

 

 3,523,554

  3,523

 

  2,216,316

 

             -   

 

    2,219,839

Warrants issued in conjunction with notes payable

            -

       -   

 

            -

    -   

 

   1,293,679

 

             -   

 

   1,293,679

Common shares issued for cash to related party

           -

         -   

 

  95,456

    96

 

   49,904

 

            -   

 

       50,000

Series A Preferred shares converted to common shares

      (250)

(188,783)

 

 357,145

   357

 

  188,426

 

                -   

 

                  -

Cumulative dividends paid on Series A Preferred Shares

          -

      -   

 

          -

-   

 

           -   

 

  (101,342)

 

   (101,342)

Net loss

          -

           -   

 

            -

   -   

 

           -   

 

  (2,395,053)

 

    (2,395,053)

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

       3,750

$2,848,093

 

 55,644,711

$55,644

 

$ 34,217,479

 

$(29,780,010)

 

$  7,341,206

See accompanying notes to consolidated financial statements



47





HII TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

2014

 

2013

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net loss

 $          (2,395,053)

 

 $       (1,198,134)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Amortization of note payable discount

1,634,929

 

               117,059

 

 

Amortization of deferred finance costs

1,031,229

 

                 26,408

 

 

Stock-based compensation

               236,085

 

               163,137

 

 

Stock issued for services

               133,000

 

               194,800

 

 

Depreciation and amortization

            1,965,407

 

               131,069

   Impairment loss

2,344,420   

-    

 

 

Loss on extinguishment of liability

                        - 

 

                 96,297

 

 

Loss on debt conversion to common shares - related party

                 11,063

 

                        - 

 

 

Warrants issued for extension of secured note

                        - 

 

                 55,154

 

 

Bad debt expense

               196,421

 

               162,243

 

 

(Gain) loss on asset sale

               (44,312)

 

                   8,851

 

 

Deferred tax benefit

          (5,639,233)

 

                          - 

 

 

Changes in:

 

 

 

 

 

 

Accounts receivable

          (4,722,228)

 

          (2,265,326)

 

 

 

Notes receivable

                        - 

 

                   6,859

 

 

 

Prepaid expense and other current assets

             (57,767)

 

               (20,410)

 

 

 

Other assets

             (223,763)

 

               (33,960)

 

 

 

Accounts payable

            (186,137)

 

            2,487,242

 

 

 

Accounts payable and other liabilities - related parties

                 25,000

 

             (225,248)

 

 

 

Accrued expenses and other liabilities

               1,366,668

 

               204,807

 

Net cash used in operating activities

          (4,324,271)

 

               (89,152)

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Cash received from the sale of property and equipment

            1,109,762

 

                 64,273

 

Cash paid for purchase of AquaTex net of cash received

                          -

 

             (271,962)

 

Cash received from acquisition of Hamilton Investment Group

            2,797,327

 

                        - 

 

Cash paid for purchase of property and equipment

          (3,248,161)

 

          (1,685,721)

 

Net cash provided by (used in) investing activities

          658,928

 

          (1,893,410)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Proceeds from exercise of warrants and options

                 87,500

 

                 50,000 

   Proceeds from  common shares sold for cash

50,000   

 

 

Proceeds from sale of preferred shares

            3,757,300

 

                        - 

 

Dividends paid on preferred shares

             (101,342)

 

                        - 

 

Proceeds from sale-leaseback transaction

                        - 

 

               109,775

 

Proceeds from advances - related party

                        - 

 

                 63,000

 

Payments against advances - related party

                        - 

 

               (20,000)

 

Payments for deferred financing costs

             (1,208,584)

 

               (30,698)

 

Proceeds from notes payable

            1,755,685

 

               850,000

 

Proceeds from line of credit, net

            2,073,325

 

            2,117,192

 

Proceeds from (payments of) secured borrowings, net

               484,655

 

                        - 

 

Payments on notes payable

          (1,559,474)

 

             (670,008)

 

Payments on capital lease obligation

          (1,209,250)

 

                          - 

 

Net cash provided by financing activities

            4,129,815

 

            2,469,261

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

               464,472

 

               486,699

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

               866,035

 

               379,336

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

 $         1,330,507

 

 $            866,035

See accompanying notes to consolidated financial statements



48





HII TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2014 and 2013

Continued

 

 

 

 

 

 

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

Cash paid for income taxes

 $              36,774

 

 $                       - 

 

Cash paid for interest

 $         1,886,410

 

 $            187,816

 

 

 

 

 

 

 

Noncash investing and financing activities

 

 

 

 

Note payable issued in conjunction with acquisition of AquaTex

                        - 

 

               500,000

 

Common shares issued for acquisition of AquaTex

                        - 

 

               548,604

 

Working capital adjustment due to acquisition of AquaTex

                        - 

 

               (21,853)

 

Property and equipment purchased with accounts payable

               604,585

 

                        - 

 

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

 

                        - 

 

Debt discount due to warrants issued with debt

            1,293,679

 

                        - 

 

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

 

Common stock issued for debt

               1,163,301

 

                          -

 

Capital lease obligation incurred in consideration for property and equipment

            5,153,518

 

                          -

 

Deemed dividend for preferred stock beneficial conversion feature

               720,424

 

                          -

 

Common shares issued for acquisition of Hamilton Investment Group

            2,219,839

 

                          -

 

Working capital adjustment due to acquisition of Hamilton Investment Group

            2,428,871

 

 

 

Note payable issued in conjunction with acquisition of Hamilton Investment Group

            9,000,000

 

                          -

 

Deferred financing costs paid directly from note proceeds

               562,607

 

                          -

 

Accounts payable paid directly from note proceeds

                 40,000

 

                          -

 

Line of credit paid directly from secured borrowings and note proceeds

            4,752,317

 

                          -

 

Restricted cash reserve account paid directly from secured borrowings and note proceeds

            1,666,652

 

                          -

 

Common shares issued for conversion of Preferred Series A shares

               188,783

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements

 





49






HII TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 – DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES


Description of Business. HII Technologies, Inc. (“we”, “our”, “the Company” or “HII”) (f/k/a Hemiwedge Industries, Inc.) is a Houston, Texas based oilfield services company with operations in Texas, Oklahoma, Ohio and West Virginia focused on commercializing technologies 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, Apache Energy Services, LLC (dbas “AES Water Solutions” and “AES Safety Services”; collectively “AES”), Aqua Handling of Texas, LLC (“AquaTex”), Hamilton Investment Group, Inc.  (“Hamilton”) and Sage Power Solutions, Inc. (f/k/a KMHVC, Inc., dba “South Texas Power” and “STP”). The Company’s total frac water management services subsidiary does business as AES Water Solutions, AquaTex and Hamilton and manages the logistical and transportation associated with the 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 and completion activities 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, Sage Power Solutions, 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.


Principles of consolidation. The consolidated financial statements include the accounts of HII and its wholly-owned subsidiaries Sage Power Solutions, Inc. (f/k/a KMHVC, Inc., dba “South Texas Power” and “STP”), Aqua Handling of Texas, LLC, a Texas limited liability company (dba “AquaTex”), Hamilton Investment Group, Inc. (“Hamilton”) and Apache Energy Services, LLC, a Nevada limited liability company (dba’s “AES Water Solutions” and “AES Safety Services”, herein “AES”). Significant inter-company accounts and transactions have been eliminated.  


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.


Use of Estimates in Financial Statement Preparation. The preparation of consolidated 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


Acquisition Accounting. The Company’s acquisitions are accounted for under the acquisition method of accounting whereby purchase price is allocated to tangible and intangible assets acquired and liabilities assumed based on fair value. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired is recorded as goodwill. The consolidated statements of operations for the fiscal years presented include the results of operations for each of the acquisitions from the date of acquisition.


Customer Concentration and Credit Risk. One customer accounted for more than 25% of revenues for the year ended December 31, 2014 and two customers represented 50% of revenues for the year ended December 31, 2013. The Company believes it will continue to reduce the customer concentration risks by



50





engaging new customers and increasing activity of existing less active customers and smaller, newer customer relationships. While the Company continues to acquire new customers in an effort to grow and reduce its customer concentration risks, management believes these risks will continue for the foreseeable future. The Company maintains demand deposits with commercial banks. At times, certain balances held within these accounts may not be fully guaranteed or insured by the U.S. federal government. The uninsured portion of cash are backed solely by the assets of the underlying institution. As such, the failure of an underlying institution could result in financial loss to the Company.


Cash and Cash Equivalents. For purposes of the statements of cash flows, cash equivalents include all highly liquid investments with original maturities of three months or less.


Restricted cash. As of December 31, 2014, the Company had restricted cash of $1,666,652 which was held in deposit accounts as collateral under the senior secured term loan and accounts receivable purchase agreements (see Note 8).


Accounts Receivable. Accounts receivable are comprised of unsecured amounts due from customers. The Company carries it 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. As of December 31, 2014 and 2013, the allowance for bad debts was $291,672 and $79,116, respectively.


The Company factors certain of its accounts receivable under the accounts receivable purchase agreement (see Note 8), which is accounted for as a financing arrangement, rather than as a sale.  


Deferred Financing Costs. Costs relating to obtaining financing are capitalized and amortized over the term of the related debt using the straight-line method. Amortization of deferred financing costs charged to expense for the years ended December 31, 2014 and 2013 were $1,031,229 and $26,408, respectively.




51





Property and Equipment. Property and equipment is valued at cost. Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are three to ten years.


Long-lived Assets. The Company reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value.


Intangible Assets. Intangible assets acquired in a business acquisition are initially measured at their fair value. The intangible assets are amortized over their estimated useful lives using the straight-line method. 

The Company evaluated the carrying value of the customer relationships intangible assets as of December 31, 2014 and determined the assets were fully impaired due to the effect of crude oil market prices on the future planned revenue activities of our customers. An impairment loss of $2,344,420 was recognized for the year ended December 31, 2014.


Goodwill. 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 performs its goodwill impairment testing at the reporting unit level. There was no impairment of goodwill as of December 31, 2014 and 2013.


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.


Capital 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.


Revenue Recognition. 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. AES, AquaTex, Hamilton and STP receive verbal orders from customers for services to be rendered.


Cost of Revenues. Cost of revenue includes all direct expenses incurred to produce the revenue for the period. This includes, but is not limited to, employee cost, contract labor, equipment rental, equipment maintenance, and fuel. Cost of revenues are recorded in the same period as the resulting revenue.


Income Taxes. Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for consolidated financial reporting purposes and such amounts recognized for tax purposes, and are measured by applying enacted tax rates in effect in years in which the differences are expected to reverse.



52





The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.


The Company has evaluated the deferred income taxes with regards to Section 382 of the Internal Revenue Code and has determined no limitations on the use of net operating loss carryforwards exist at December 31, 2014.


Stock-Based Compensation. 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.


Fair Value of Financial Instruments. The carrying value of short-term instruments, including cash, accounts payable and accrued expenses, and short-term notes approximate fair value due to the relatively short period to maturity for these instruments. The long-term debt approximate fair value since the related rates of interest approximate current market rates.


Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a three-level valuation hierarchy for disclosures of fair value measurements, defined as follows:


Level 1:

inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets


Level 2:

inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.


Level 3:

inputs to the valuation methodology are unobservable and significant to the fair value


The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.


Basic and Diluted Net Loss per Share. Basic loss per share is computed using the weighted average number of shares of common stock outstanding during each period. Diluted income (loss) per share includes the dilutive effects of common stock equivalents calculated using the treasury stock method, which assumes that all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. For the years ended December 31, 2014 and 2013 potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.


Recently Adopted Accounting Standards. No new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.




53





NOTE 2 - GOING CONCERN

 

These financial statements have been prepared in accordance with United States generally accepted accounting principles, on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company was not in compliance with certain financial covenants we are required to maintain under our agreements with Heartland Bank as of December 31, 2014 (see Note 8). Any failure to comply with the financial covenants under the Heartland Bank agreements could result in the acceleration of all amounts due to Heartland Bank under the line of credit and term loan. Additionally, as shown in the accompanying consolidated financial statements during the year ended December 31, 2014, the Company incurred net losses of $2,395,053 and used $4,324,271 in cash for operating activities. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. If necessary, the Company will pursue additional equity and/or debt financing while managing cash flows from operations in an effort to provide funds to meet its obligations on a timely basis and to support future operational growth.


The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include and adjustments that might result should the Company re unable to continue as a going concern.


NOTE 3 – ACQUISITION


On August 12, 2014, we consummated the acquisition of all of the outstanding stock of Hamilton Investment Group, Inc.  (“Hamilton”) pursuant to the terms of a Stock Purchase Agreement dated August 11, 2014 by and among the Company, Hamilton and the stockholders of Hamilton (the “Stock Purchase Agreement”). The purchase price consisted of: (a) Cash in the amount of $9,000,000 (paid by loan proceeds from the Hearland Bank Credit Facility - See Note 8); and (b) 3,523,554 shares (the “Shares”) of the registrant’s common stock (determined based on the trailing 20-day average of our common stock) with a fair value of $2,219,839.   In addition, there exists a working capital adjustment provision whereby we would be required pay the Hamilton stockholders additional cash equal to the amount of any working capital of Hamilton in excess of $2,200,000 (“Working Capital Target”) at closing; provided, however, that in the event that Hamilton’s working capital is less than the Working Capital Target at closing, then the amount of such deficit will be offset against the Shares issued to the former Hamilton stockholders at closing. The purchase agreement contains 2-year non-compete/non-solicitation provisions for the former Hamilton stockholders. The Company 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 Shares.   


The acquisition of Hamilton 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.   Related acquisition costs amounting to approximately $175,945 were expensed outright and are shown under Other Income/Expenses in the consolidated statements of operations.


A summary of the purchase price consideration and related purchase price allocation are shown below:


Purchase Price

 

     Cash

$ 9,000,000

     Stock

2,219,839

     Working capital adjustment

2,428,871

     Total purchase price

$13,648,710

 

 

Purchase Price Allocation

 

     Cash

$ 2,797,327

     Accounts receivable

2,291,169

     Net assets

5,003,667

     Accounts payable and accrued liabilities

(647,166)

     Intangible asset – customer list

2,380,000

     Goodwill

1,823,713

     Total purchase price

$13,648,710


Unaudited pro forma operation results for the years ended December 31, 2014 and 2013 as though the Company had acquired Hamilton on the first day of each fiscal year are set forth below.



54




 

HII TECHNOLOGIES, INC.

PROFORMA COMBINED STATEMENT OF OPERATIONS

For the years ended December 31, 2014 and 2013

(unaudited)

 

2014

 

2013

Revenues

$44,120,806

 

$26,587,954

Cost of revenues

30,670,316

 

18,557,835

 

 

 

 

Gross Profit

13,450,490

 

8,030,119

 

 

 

 

Operating expenses:

 

 

 

Selling, general and administrative

13,735,852

 

5,357,769

 

 

 

 

Total operating expenses

13,735,852

 

5,357,769

 

 

 

 

Income (loss) from operations

(285,362)

 

2,672,350

 

 

 

 

Other income (expense)

 

 

 

Loss on debt conversion

(11,063)

 

-

   Loss on extinguishment of liability

-   

(96,297)   

Interest expense, net

(5,021,035)

 

(2,628,351)

 

 

 

 

Loss before income taxes

(5,317,460)

 

(52,298)

 

 

 

 

Benefit for deferred income taxes

5,639,233

 

5,490,251

 

 

 

 

Net income

$321,774

 

$5,437,953

Deemed dividend

(720,424)

 

-

Cumulative dividend

(205,078)

 

-

 

 

 

 

Net income attributable to common shareholders

$(603,729)

 

$5,437,953


 

NOTE 4 – 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. The note is secured by interests owned under an oil and gas lease. The Company has taken the necessary legal action to collect the balance through the sale of the collateralized assets and is currently negotiating terms with interested parties.


On June 29, 2012 the Company agreed to take a promissory note for $20,000 in conjunction with a legal settlement. The note is personally guaranteed. The note is subject to annual interest of 4% with principal and interest due March 1, 2014. The balance outstanding at December 31, 2013 was $4,755 and the note was paid in full on August 1, 2014.




55





NOTE 5 – INTANGIBLE ASSETS


Intangible assets consist of:

 

 

December 31, 2014

 

December 31, 2013

Technology license

 

 $    370,000

 

 $             -

Customer relationships

 

 2,607,000

 

 227,000

 

 

 2,977,000

 

 227,000

   Less – accumulated amortization

 (298,034)  

-   

 Less - impairment

 

(2,344,420)

 

 -

Total

 

 $    334,546

 

 $  227,000


On January 15, 2014, the Company’s wholly owned subsidiary, AES Water Solutions, 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 was paid in full on July 8, 2014. The agreement remains in force on an exclusive basis for so long as AES Water Solutions or its designees continue to use the water recycling technology.  

 

The Company evaluated the carrying value of the customer relationships intangible assets as of December 31, 2014 and determined the assets were fully impaired due to the effect of crude oil market prices on the future planned revenue activities of our customers. An impairment loss of $2,344,420 was recognized for the year ended December 31, 2014.

 

NOTE 6 – ACCRUED EXPENSES


Accrued expenses as of December 31, 2014 and 2013 included the following:


 

 

 December 31, 2014

 

 December 31, 2013

 

 

 

 

 

 Salaries and bonus payable

 

$             411,733

 

$                76,047

 Sales tax payable

 

           464,852

 

          212,645

 Interest payable

 

         214,010

 

            42,357

 Accrued state margin tax

 

            264,910

 

              95,927

 Other

 

          336,616

 

           276,326

 

 

 

 

 

 Total Accrued Expenses

 

 $          1,692,121

 

$              703,302


NOTE 7 – CAPITAL LEASE OBLIGATIONS


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.


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 market 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 lay flat hose to BCL for an aggregate purchase price of $828,546.




56





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. During the year ended December 31, 2014, $12,395 was recognized as gain on the sale.


The Company paid a total of $32,347 in various financing fees which will be amortized over the life of the capital lease.  


On July 10, 2014, the Company entered into a capital lease agreement with Nations Fund I, LLC (“NEF”) to acquire flowback equipment, evaporation units, and generators which will be used in our flowback, evaporation, and portable power service revenue activities, as set out below.


The lease contains a purchase option at the end of the initial 36 month term, granting the Company the right to purchase all equipment covered under the lease for its fair market value. If the Company does not elect to exercise the purchase option, it may elect to exercise the renewal option for a negotiated renewal term at a periodic rent equal to the fair market rental value of the equipment, as determined at the time of renewal.


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 $1,209,908.  The Company sold the property to NEF for an aggregate purchase price of $1,209,908.


Pursuant to the guidelines in ASC 840, the gain on the sale of $84,804 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. During the year ended December 31, 2014, $21,201 was recognized as gain on the sale.    


The Company paid a total of $75,000 in various financing fees which will be amortized over the life of the capital lease.  


 

 

December 31,

2014

 

December 31,

2013

Capital lease – lay flat hose, interest at 33.5%, payments of $150,769 per month, terms 24 months

 

 $3,244,976

 

 $             -

Capital lease – flowback, evaporation, and generator equipment, interest at 15.25%, payments of $52,485 per month, terms 36 months

 

 1,908,542

 

 -

Less – lease payments

 

 (1,209,250)

 

 -

 

 

 3,944,268

 

 -

Less – current portion of capital lease obligation

 

 (1,637,296)

 

 -

Long-term portion of capital lease obligation

 

 $2,306,972

 

 $             -


A summary of the minimum lease payments for the above leases is shown below:


Lease payments from January 1, 2015 through December 31, 2015

 $1,637,296

Lease payments from January 1, 2016 through December 31, 2016

 1,393,732

Lease payments from January 1, 2017 through December 31, 2017

 913,240

Total

 $3,944,268


The summary below shows the activity related to all deferred financing fees related to the capital lease obligations as of December 31, 2014:



57






Balance at January 1, 2014

 $             - 

 Add:  financing fees paid

  132,347

 Less:  amortization of deferred financing costs

   (21,394)

 

   110,953

 Less:  current maturities

   (50,850)

 Long-term deferred financing costs

 $    60,103


NOTE 8 – NOTES PAYABLE


Notes payable included the following as of December 31:



58






 

 

2014

2013

Notes payable - related parties:

 

 

 

 

 

 

 

Secured promissory note to related parties issued on September 24, 2012, bearing interest of 10% per year

 

 $              -   

 $         30,926

 

 

 

 

Secured promissory notes to related parties issued on September 27, 2012 for acquisition of AES, bearing interest of 5% per year and due in quarterly installments

 

       433,333

          866,667

 

 

 

 

Secured promissory notes to related party issued on November 12, 2012 for acquisition of AquaTex, bearing interest of 5% per year and due in quarterly installments

 

       152,625

          234,291

 

 

 

 

 

 

       585,958

       1,131,884

 

 

 

 

Less current maturities

 

     (515,000)

         (545,926)

 

 

 

 

Long term debt - related parties, net of current maturities

 

 $      70,958

 $       585,958

 

 

 

 

 

 

 

 

 

 

2014

2013

Notes payable:

 

 

 

 

 

 

 

Unsecured convertible notes payable issued from October through November 2013, bearing interest of 10% per year

 

 $              -   

 $    1,000,000

 

 

 

 

Secured promissory notes issued on November 12, 2012 for acquisition of AquaTex, bearing interest of 5% per year and due in quarterly installments

 

       158,855

          243,855

 

 

 

 

Promissory note issued on February 27, 2014, bearing interest of 8.5% per year  

 

         20,174

                    -   

 

 

 

 

Promissory note issued on April 18, 2014, bearing interest of 8.49% per year  

 

         21,607

                    -   

 

 

 

 

Promissory note issued on April 18, 2014, bearing interest of 8.49% per year  

 

         20,895

                    -   

 

 

 

 

Secured Term Loan issued on August 12, 2014

 

  11,700,000

                    -   

 

 

 

 

 

 

11,921,532

       1,243,855

 

 

 

 

Less current maturities

 

  (11,847,676)

           (85,000)

 

 

 

 

Long term debt, net of current maturities

 

 $ 73,856

 $    1,158,855





59





On September 24, 2012, we issued $300,000 of secured promissory notes to three investors, of which $50,000 was issued to a related party. The notes bear annual interest of 10%, mature on September 23, 2013 and are secured by Company’s assets. The notes were issued with 1,800,000 “Class A” warrants which have an exercise price of $0.10 per share and a term of 5 years and 900,000 “Class B” warrants which have an exercise price of $0.10 per share and a term of 5 years. The Class A warrants are exercisable at the date of issuance. The Class B warrants are 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 relative fair value of the Class A warrants amounting to $105,059 was recognized as a debt discount and is amortized over the term of the notes. 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 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.


In connection with the acquisition of AES, we issued $1,300,000 of subordinated secured promissory notes to the members of AES. The notes bear annual interest of 5% and 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 Company and AES.


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 extinguishment. The note and all accrued interest was paid in full by February 21, 2014.


On November 5, 2012, we and our wholly owned subsidiary AES issued a $600,000 secured promissory note to Reserve Financial Corp. (“RFC”). The note bears annual interest of 10% and matures on March 30, 2013. The proceeds were used to purchase certain water transfer assets from Vanderra Resources, LLC (under its Chapter 11 proceeding with the United States Bankruptcy Court for the Northern District of Texas), including trucks, trailers, piping and related equipment. The total purchase price paid for the assets was $586,500. To secure repayment of this note, AES granted Reserve Financial Corp. a first priority security interest in the assets purchased. This note was paid in full on June 27, 2013.


On December 17, 2012, the Company issued a $150,000 secured promissory note to Reserve Financial Corp. The note bears annual interest of 10% and matures on December 17, 2013. The Company issued 550,000 warrants in conjunction with the note. The related fair value of the warrants amounting to $40,098 was recorded as a debt discount and is amortized over the term of the note. This note was cancelled in exchange for $150,000 of 10% convertible promissory notes issued on October 31, 2013.


On November 12, 2013, in connection with the acquisition of AquaTex we issued $500,000 in 5% subordinated secured promissory notes. The notes are payable in 12 equal quarterly installments beginning on February 1, 2014 and mature on November 1, 2016. The Notes are secured by the assets of AquaTex.


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



60





investor’s cancellation of an existing promissory note dated December 17, 2012 in the principal amount of $150,000. The notes had a two year term and are convertible to the Company’s common stock at a fixed conversion price of $0.50 per share. The Company evaluated whether a beneficial conversion feature exists on the notes and determined that there were none. On October 31, 2014, all of the holders of the unsecured convertible notes exercised their option to convert the outstanding principal and accrued interest amounts into our common shares (see Note 11).  Since the notes were converted based on their original terms, no gain or loss was recognized upon conversion.


On January 15, 2014, the Company, and its wholly owned subsidiary AES issued a promissory note in the amount of $370,000. 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 (see Note 5). This note and all associated accrued interest was paid in full on July 8, 2014.


On February 17, 2014, the Company issued a promissory note in the amount of $130,000. 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.


On February 27, 2014, the Company’s wholly-owned subsidiary Sage Power Solutions (f/k/a KMHVC, Inc.) entered into a promissory note with a third-party equipment seller for the purchase of equipment.  Sage Power Solutions 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 Company’s wholly-owned subsidiary Sage Power Solutions (f/k/a KMHVC, Inc.) entered into a promissory note with a third-party equipment seller for the purchase of equipment.  Sage Power Solutions 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 April 22, 2014, the Company’s wholly-owned subsidiary AES Water Solutions entered into a promissory note with Texas Mutual Insurance Company for workers’ compensation insurance premiums. AES Water Solutions 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. This note and all associated accrued interest was paid in full 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. The notes payable are not convertible, rather the note holders accepted common shares in lieu of cash for these payments. A loss on settlement of debt of $11,063 resulting from the transactions was recorded at April 30, 2014.


On May 19, 2014, the Company’s wholly-owned subsidiary Sage Power Solutions (f/k/a KMHVC, Inc.) entered into a promissory note with a third-party equipment seller for the purchase of equipment.  Sage Power Solutions 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



61





monthly installments of $4,265 with the first payment due on June 19, 2014 and the last payment due on May 19, 2015.  


Heartland Bank Credit Facility


On August 12, 2014, the Company and its wholly-owned subsidiaries (collectively, the “Borrower”) entered a senior secured credit facility (the “Facility”) with Heartland Bank as Agent consisting of (i) a credit agreement (the “Credit Agreement”) with Heartland Bank for a 3-year $12 million term loan (the “Term Loan”) and (ii) an account purchase agreement (the “Purchase Agreement”) with Heartland Bank, as agent for the purchase and sale of approved receivables of Borrower in amounts not to exceed $6 million. The proceeds of borrowings under the Facility may be used for the payment of a portion of the purchase price for the acquisition of Hamilton Investment Group; the refinance of outstanding debt under Borrower’s prior accounts receivable facility; working capital needs of the Company and its subsidiaries; funding of the debt service reserve account and payment of all costs and expenses arising in connection with the negotiation of the Credit Agreement and related documents. On the closing date, the Borrower received proceeds of $12 million under the Credit Agreement and approximately $4.65 million under the Purchase Agreement.   


Borrowings under the Credit Agreement bear interest at a rate per annum equal to WSJ prime plus a spread that ranges from 5.50% to 8.25% per annum depending on the Borrower’s first lien leverage ratio (provided that at no time shall the WSJ prime be less than 4%). The Term Loan requires monthly interest payments, quarterly principal payments of $300,000 and a balloon payment on the August 12, 2017 maturity date.  The Term Loan may be increased by up to an additional $10 million upon request and agreement by the Lenders, but is not a committed amount under the Facility.  


Under the Purchase Agreement, all approved receivables will be purchased by the lenders thereunder for the face amount of such receivable less the lender’s 1.50% service charge.   In addition, the Purchase Agreement requires a 10% reserve against receivables purchased, which amount will increase from 25-50% for receivables outstanding past 60-90 days, respectively. The Lenders have the option under the agreements to require the Borrower to repurchase receivables under certain circumstances. The account purchase facility replaces the Company’s previous senior secured revolving Facility.


The Company evaluated the Purchase Agreement under ASC 860 and determined that related transactions should be accounted for as secured borrowings, the receivables sold under the Purchase Agreement remain as assets of the Company, the service charge under the agreement is included in interest expense, and the reserve established is presented as restricted cash on the Company’s balance sheet.


Both the Credit Agreement and the Purchase Agreement require the Borrower to maintain a fixed charge coverage ratio of not less than 1.2:1.0, a first lien leverage ratio of ranging from 3.0:1.0 during 2014  to 2.75:1.0 -2.25:1.0 during 2015 to 2.0:1.0 beginning in 2016, a EBITDA to Interest Expense ratio ranging from 2.75:1.0 during 2014, 3.75:1.0  during 2015 to 4.75:1.0 beginning in 2016 and a tangible net worth of not less than $1 million for each quarter beginning December 31, 2014.  The Borrower is also required to maintain a debt service reserve account sufficient to pay all debt and interest expense due in the next fiscal quarter. The restrictive covenants include customary restrictions on the Company’s ability to incur additional debt; make investments; grant or incur liens on assets; sell assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make dividend payments (although the Borrower is allowed to make dividend payments so long as no event of default will result from such payment or in shares of the Company’s stock). In addition, the Credit Agreement contains customary representations and warranties, affirmative covenants and events of default.


The Facility is secured by all of the Borrower’s assets as well as a pledge of the Company’s equity in each of its wholly-owned subsidiaries.  The Company paid a cash closing fee of $450,000 to the Lenders and also



62





issued a 4-year warrant to purchase 2.5 million shares of the Company’s common stock with an exercise price $1.00 per share in connection with the Term Loan. The related fair value of the warrants amounting to $1,293,679 was recorded as a debt discount and is amortized over the term of the note. The Company relied on the exemption provided by Rule 506 and/or Section 4(2) of the Securities Act of 1933, as amended.


Effective September 15, 2014, the Company and its wholly-owned subsidiaries entered into a First Modification Agreement (the “APA Amendment”) with Heartland Bank, administrative agent, (“Agent”) wherein the following amendments were made:  (i) increase the Facility Limit under the Account Purchase Agreement to $6,600,000 (from $6,000,000); (ii) change the Borrowers’ address and (iii) extend the deadline for Borrower’s delivery of landlord’s consents and waivers to 60-days of the date of the Account Purchase Agreement.


Effective September 15, 2014, the Company and its wholly-owned subsidiaries entered into a First Modification Agreement (the “Term Loan Amendment”) with Agent, wherein amendments were made to (i) change the Borrowers’ address and (ii) extend the deadline for Borrower’s delivery of landlord’s consents and waivers to 60-days of the date of the Account Purchase Agreement.


Effective October 2014, the Company and its wholly owned subsidiaries, as Borrower, entered into a Second Modification Agreement under which the Agent provided consent for Borrower’s sale of certain collateral and as well as certain capital expenditures under an equipment lease.


The Company was not in compliance with certain financial covenants (fixed charge coverage ratio, tangible net worth and first lien leverage ratio) at December 31, 2014.  The table below sets forth the financial covenants the Company is required to maintain under our agreements with Heartland Bank and the Company’s compliance with such covenants at December 31, 2014:


  

Required

 

 

Actual at 12/31/2014

Fixed Charge Coverage Ratio (greater than)

1.20

  

  

1.07

Tangible Net Worth (less than)

$1,000,000

  

  

($1,642,339)

Capital Expenditures (less than)

$100,000

  

 

$65,000

First Lien Leverage Ratio (less than)

3

  

  

3.32

Ratio of EBITDA to Interest Expense (greater than)

2.75

  

 

3.31

Debt Service Reserve Account

675,000

  

  

675,000


The Company also have reason to believe that it may not be in compliance with the fixed charge coverage ratio and the tangible net worth covenant for the period ended March 31, 2015.  In addition, the Company has certain other technical defaults under its agreements with Heartland Bank.  As of the date hereof, the Company has not received any notice of acceleration from Heartland Bank.  In addition, the Company is in active discussions with Heartland Bank for a waiver of such non-compliance for these period as well as the technical defaults. There can be no assurance that Heartland Bank will grant a waiver for the period and events referred to above and even if such waiver is granted that the Company  will be in compliance with these covenants in future periods or that Heartland will issue a waiver for any future periods in which we are not in compliance with these covenants.  Any failure to comply with the financial covenants under the Heartland Bank agreements could result in the acceleration of all amounts due to Heartland Bank under the line of credit and term loan.  As a result of the default, the outstanding balance of the Term loan was classified as current and the corresponding debt discount and deferred financing fees totaling to $2,613,470 were fully amortized.


 



63





 

A summary of the activity in notes payable for the year ended December 31, 2014 is shown below:


Notes payable - related parties

 

 

 

 

 

 

 

Balance at January 1, 2014

 

 $          1,131,884

 

Less:  payments on notes payable

 

            (417,177)

 

Less: conversions of notes payable to common shares

 

       (128,749)

 

 

 

         585,958

 

Less - current maturities, net - related parties

 

        (515,000)

 

Long-term notes payable, net December 31, 2014

 

 $              70,958

 

 

 

 

 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

 

Note issued in conjunction with acquisition

 

      12,000,000

 

Secured borrowings

 

      6,133,959

 

Less:  payments on notes payable

 

    (1,142,297)

 

Less: conversions of notes payable to common shares

 

    (1,000,000)

 

Less: debt discount for warrants issued with acquisition note

 

    (1,293,679)

 

Less: debt discount for commitment fee

 

       (341,250)

 

Add:  amortization of note discount

 

1,634,929

 

 

 

        18,053,449

 

Less - current maturities, net - third parties

 

      (17,979,593)

 

Long-term notes payable, net December 31, 2014

 

 $              73,856


NOTE 9 – 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



64





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 2% of the maximum Facility amount and if terminated after the first anniversary and prior to the second anniversary then Borrower shall pay a fee of 1% of the maximum Facility amount. 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 Company’s 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 year ended December 31, 2014, the Company made draws, net of expenses of $2,073,328.


On August 12, 2014, the balance of $4,752,317 on the line of credit was paid off using proceeds from the Heartland credit Facility (see Note 8).


The Company paid a total of $54,167 in various financing fees related to the line of credit during the current period which were fully amortized as of August 12, 2014 due to the closing of the line of credit.  


The summary below shows the activity related to all deferred financing fees related to the line of credit as of December 31, 2014:


Balance at January 1, 2014

$    53,490

 Add:  financing fees paid

   54,167

 Less:  amortization of deferred financing costs

 (107,657)

 

           -   

 Less:  current maturities

        -   

 Long-term deferred financing costs

$          -   


NOTE 10 – PREFERRED STOCK


From June 21, 2014 through July 8, 2014, we sold 4,000 shares of Series A Convertible Preferred Stock at a price of $1,000 per unit for $4,000,000. Each unit consists of (i) 1 share of our Series A Convertible Preferred Stock immediately convertible into a number of shares of our common stock equal to the quotient



65





of $1,000 divided by the conversion price then in effect, which is initially $0.70, 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 470-20 and determined that a beneficial conversion feature of $720,424 existed which has been fully recognized as a deemed dividend to the preferred shareholders.  


The Company incurred issuance costs of $242,700 for broker fees related to the preferred share offering during the year ended December 31, 2014.


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 therefore, 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) Company’s 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. As of December 31, 2014, cumulative dividends in arrears were $103,736 in total and $27.66 per share of Preferred Series A Stock outstanding.


On December 8, 2014, one of the preferred shareholders converted 50 shares of their Series A Preferred Stock into 71,429 shares of common stock.


On December 19, 2014, three of the preferred shareholders converted 200 shares of their Series A Preferred Stock into 285,716 shares of common stock.


NOTE 11 – 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 metcertain 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.

 

In connection with the acquisition of AquaTex, we issued 1,443,696 shares of the Company’s common

stock which was valued at $548,604.

 

On December 6, 2013, the Company issued 50,000 common shares for consulting services in connection with the acquisition of AquaTex. The shares were valued at $28,000.

 

On December 13, 2013, an officer exercised 40,000 options using the cashless provision of the option agreement for net shares issued of 23,333.

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, the Company 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, the Company 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.



66






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 year ended December 31, 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. The Company recognized a loss on debt conversion for the year ended December 31, 2014 of $11,063.  


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.  


In connection with the acquisition of Hamilton (see Note 3), the Company issued 3,523,554 common shares to the members of HIG pursuant to the terms of the Purchase Agreement.  The fair value of the shares was recorded at $2,219,839 as determined based on the market value of our common stock.


On October 31, 2014, all of the holders of the Company’s existing unsecured convertible notes exercised their option to convert the outstanding principal and accrued interest amounts into our common shares at the fixed conversion price of $0.50 per share. The aggregate principal and accrued interest totaling to $1,025,000 was converted to 2,050,000 common shares.


On December 8, 2014, the Company issued 71,429 shares of common stock for the conversion of 50 shares of the Series A Preferred Stock, pursuant to the terms of the Series A Certificate of Designation.


On December 9, 2014 the Company issued 95,456 shares of its common stock to our chief financial officer for $50,000.  The proceeds were used for working capital and general corporate purposes.


On December 19, 2014, the Company issued 285,716 shares of common stock for the conversion of 200 shares of the Series A Preferred Stock, pursuant to the terms of the Series A Certificate of Designation.


NOTE 12 – 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 December 31, 2014 and 153,000 options are outstanding at December 31, 2014, and (b) the 2012 Stock Incentive Plan reserved 10,000,000 common shares and 2,500,000 stock options have been granted through December 31, 2014 and 2,000,000 options are outstanding at December 31, 2014.


During the year ended December 31, 2014, 500,000 options were exercised and no options expired.


During the year ended December 31, 2014, 1,364,000 options were granted to employees and valued at $524,698 using the Black-Scholes pricing model. The 1,364,000 options vest over a period of 36 months.




67





Significant assumptions used in the valuation include the following:


Expected term                       5 years

Expected volatility             162.35% - 186.00%

Risk free interest rate             1.58% - 2.13%

Expected dividend yield           0.00%


During the year ended December 31, 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 year ended December 31, 2014 related to the above options including those issued in the prior year amounted to $236,085. Unrecognized compensation cost as of December 31, 2014 of $503,550 is expected to be recognized over a period of 2.83 years.


Warrants


From June 21, 2014 to July 8, 2014, 2,000,000 warrants were issued in conjunction to the Series A Preferred Stock subscriptions to accredited investors (see Note 10) and valued at $908,059 using the Black-Scholes pricing model. The 2,000,000 warrants are immediately exercisable.  The fair value of the warrants is 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 7) 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%


On August 12, 2014, 2,500,000 warrants were issued in conjunction with the Heartland Term Loan transaction disclosed above (see Note 8) and valued at $1,293,679 using the Black-Scholes pricing model. The 2,500,000 warrants are immediately exercisable. The relative fair value of the warrants is recorded as a



68





debt discount and amortized over the life of the Heartland Term Loan. The warrants have an exercise price of $1.00 and a 4 year term.


Significant assumptions used in the valuation include the following:


Expected term                      4 years

Expected volatility               169.51%

Risk free interest rate             1.63%

Expected dividend yield           0.00%


During the year ended December 31, 2014, 50,000 warrants were exercised for cash and 250,000 warrants were exercised on a cashless basis (see Note 11).  


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


 

 

 

 

 Weighted

 

 Weighted

 

Aggregate

 

 

 

 Weighted

 

 Weighted

 

 Aggregate

 

 

 

 

 Average

 

 Average

 

 Intrinsic

 

 

 

 Average

 

 Average

 

 Intrinsic

 

 

Options

 

 Remaining Life

 

 Exercise Price

 

 Value

 

Warrants

 

 Remaining Life

 

 Exercise Price

 

 Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2013

  1,989,000

 

       4.19

 

 $         0.17

 

 $701,345

 

   1,528,000

 

                   2.51

 

 $         0.14

 

 $ 590,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

  1,466,000

 

 

 

       0.60

 

 

 

4,550,000

 

 

 

1.00

 

 

 

Exercised

   (500,000)

 

 

 

       0.15

 

 

 

  (300,000)

 

 

 

0.29

 

 

 

Forfeited and cancelled

               -   

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2014

2,953,000

 

      4.22

 

 $         0.42

 

 $543,625

 

   5,778,000

 

                   2.91

 

 $         0.81

 

 $ 545,230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


NOTE 13 – RELATED PARTY TRANSACTIONS


During the year ended December 31, 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 December 31, 2014.  The outstanding amount is included in accounts payable and other liabilities - related parties in the consolidated balance sheets.


In connection with the acquisition of Hamilton (see Note 3), the Company incurred a working capital adjustment due to the former members of Hamilton in the amount of $2,428,871 for working capital in excess of the stock purchase agreement requirement at the acquisition date. The outstanding amount as of December 31, 2014 is included in accounts payable and other liabilities – related parties in the consolidated balance sheets.


On December 9, 2014, the Company’s chief financial officer purchased 95,456 shares of the Company’s common stock for an aggregate purchase price of $50,000.


Effective August 12, 2014, Hamilton Investment Group and HII Technologies, Inc. entered into an agreement with S&M Assets, LLC, an entity controlled by the president of Hamilton Investment Group, a frac water business and our wholly-owned subsidiary.  Under the agreement, we and Hamilton Investment Group agreed to purchase of 13 ½ miles of 10” and 12” layflat hose and aluminum pipe for $1,516,000 on or before August 12, 2015.  The purchase price will be offset by any amounts paid in excess of $100,000 under the equipment lease with S&M Assets referred to below.




69





Effective August 12, 2014, Hamilton Investment Group and HII Technologies Inc. entered into an equipment lease with S&M Assets, LLC for the equipment for 13 ½ miles of 10” and 12” layflat  hose and aluminum pipe for a flat fee of $10,000 per month.  This equipment will be leased until purchased on the terms set forth above.  The president of Hamilton Investment Group, our wholly-owned subsidiary controls S&M Assets LLC.


Effective August 12, 2014, Hamilton Investment Group entered into a 3-year property lease with S & M Assets, LLC for the premises located at 4564 E Hwy 105, Guthrie, Oklahoma at a rate of $4,500 per month. The president of Hamilton Investment Group, our wholly-owned subsidiary controls S&M Assets LLC.


Effective August 12, 2014 Hamilton Investment Group entered into a 6-month property lease for the premises located at 210 N. Buffalo Ave, Guthrie OK from Craig Hamilton, son of  the president of Hamilton Investment Group, our wholly-owned subsidiary, at rate of $850  per month.


Effective August 12, 2014, Hamilton Investment Group entered into a 3-year property lease with S & M Assets, LLC for the premises located at 37920 CRE1710, Colgate, Oklahoma at a rate of $1,500 per month. The president of Hamilton Investment Group, our wholly-owned subsidiary controls S&M Assets LLC.


NOTE 14 – INCOME TAXES


HII uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. HII has incurred significant net losses in past years and, therefore, has no tax liability.


During the year ended December 31, 2014, the Company recognized a tax benefit of $5,639,233 related to the reversal of a portion of the full valuation allowance recorded on the deferred tax asset resulting from cumulative net operating loss carryforwards as a result of the acquisition of Hamilton on August 12, 2014. Management’s analysis of the future use of the currently existing cumulative net operating loss carryforwards determined that it is more likely than not that a portion will be utilized prior to expiration. Accordingly, the valuation allowance on the deferred tax asset was reduced during the year ended December 31, 2014, and a tax benefit recognized.


The Company has evaluated the deferred income taxes with regards to Section 382 of the Internal Revenue Code and has determined no limitations on the use of net operating loss carryforwards exist at September 30, 2014.


The Company reported no uncertain tax liability as of December 31, 2014 and expects no significant change to the uncertain tax liability over the next twelve months.


The cumulative net operating loss carryforward is approximately $35,350,722 and $28,440,000 at December 31, 2014 and 2013, respectively, and will expire in the years 2022 through 2033.


 

 

 December 31, 2014

 

 December 31, 2013

 

 

 

 

 

Deferred tax asset

 

$        12,372,753

 

$             9,954,000

Valuation of allowance

 

     (6,733,520)

 

       (9,954,000)

 

 

 

 

 

Net deferred tax asset

 

$          5,639,233

 

$                         -   

 

 

70

 


A reconciliation of the expected US tax (benefit) / expense to income taxes is as follows:


 

 

12/31/2014

 

 

Expected tax expense/(benefit) at US Statutory rate

 

(2,733,298)

 

35.0%

 

 

 

 

 

Meals and entertainment

 

7,906

 

-0.1%

Stock for Services

 

(129,180)

 

1.7%

2013 Return to Provision

 

123,640

 

-1.6%

State tax, net of federal benefit

 

146,161

 

-1.9%

Change in valuation allowance

 

(2,829,599)

 

36.2%

Total Income Tax Expense

 

(5,414,370)

 

69.3%


NOTE 15 – COMMITMENTS AND CONTINGENCIES


Future maturities of debt and required payments under capital and operating leases as of December 31, 2014 are as follows:


 

Debt

Capital Leases

Operating Leases

2015

$           3,204,034

$       2,441,542

$              3,751,512

2016

         2,583,432

      1,687,699

          2,692,735

2017

       10,124,710

    1,044,927

         1,585,859

2018

                   -   

                  -   

       292,098

2019

                -   

            -   

           73,175

 

 

 

 

Totals

$         15,912,176

$       5,174,168

$            8,395,379


Litigation

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.


Leases

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 years ended December 31, 2014 and 2013 for these leases amounted to $221,993 and $118,156, respectively.


On December 7, 2012, as amended on July 19, 2013 and October 24, 2014, 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 was calculated as 50% of monthly rental revenue earned on the leased PRC equipment, and was amended in October 2014 to change the monthly lease payment to $45,000. 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. During the years ended December 31, 2014 and 2013, STP recognized $549,624 and $274,015 in lease expense, respectively.




71





In January 2013, the Company entered into a master lease agreement with Enterprise Leasing Company (“Enterprise”) for its rolling stock which is being accounted for as an operating lease. As of December 31, 2014 the Company leases 102 vehicles and 55 trailers under this master lease with monthly lease payments totaling approximately $123,570. Seven of the leased vehicles resulted from a sale/leaseback transaction with Enterprise in January 2013 where Enterprise purchased seven 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.


On May 17, 2013, the Company’s subsidiary, AES Water Solutions, entered into a lease agreement with Power Reserve Corp (“PRC”) to acquire lay flat hose and related equipment, which will be used in our frac water transfer service revenue activities, which is being accounted for as an operating lease. Under the agreement, the monthly lease payment to PRC is $50,000. The lease has an initial term of 12 months, with an option to extend for two additional one year terms. During the year ended December 31, 2014, we recognized $600,000 in lease expense.


On January 1, 2014, the Company’s subsidiary, AES Water Solutions, entered into a lease agreement with Power Reserve Corp (“PRC”) to acquire lay flat hose and related equipment, which will be used in our frac water transfer service revenue activities, which is being accounted for as an operating lease. Under the agreement, the monthly lease payment to PRC is $20,000, and the lease has a term of 30 months. During the year ended December 31, 2014, we recognized $240,000 in lease expense.


On August 29, 2014, the Company, entered into a lease agreement with Power Reserve Corp (“PRC”) to acquire lay flat hose and related equipment, which will be used in our frac water transfer service revenue activities, which is being accounted for as an operating lease. Under the agreement, the monthly lease payment to PRC is $30,000, and the lease has a term of 6 months. During the year ended December 31, 2014, we recognized $120,000 in lease expense.


On December 15, 2014, the Company's subsidiary, STP, entered into a lease agreement with Nations Fund I, LLC (“NEF”) to acquire generators and trailers which will be used in our portable power service revenue activities, which is being accounted for as an operating lease. Under the agreement, the monthly lease payment to NEF is $30,228. The lease effectively started in January 2015 for a term of 36 months. During the year ended December 31, 2014, STP recognized $13,074 in lease expense for interim lease payments prior to the effective commencement date of the base lease term.


NOTE 16 – SUBSEQUENT EVENTS


From January 21, 2015 through March 20, 2015, the Company issued 1,228,572 shares of common stock for the conversion of 860 shares of the Series A Preferred Stock, pursuant to the terms of the Series A Certificate of Designation.


On January 21, 2015, 200,000 options were granted to three directors and valued at $73,589 using the Black-Scholes pricing model.  The 200,000 options vest over a 12 month period.


Significant assumptions used in the valuation include the following:


Expected term                      5 years

Expected volatility               161.31%

Risk free interest rate             1.35%

Expected dividend yield           0.00%




72





On January 30, 2015, 800,000 options were granted to an officer and valued at $349,610 using the Black-Scholes pricing model.  Of the total 800,000 options, 500,000 options vest immediately, 100,000 options vest upon the first fiscal quarter after date of grant in which the Company has positive net income, 100,000 options vest upon the second fiscal quarter after date of grant in which the Company has positive net income, and 100,000 options vest upon the third fiscal quarter after date of grant in which the Company has positive net income.


Significant assumptions used in the valuation include the following:


Expected term                     5 years

Expected volatility              160.64%

Risk free interest rate            1.18%

Expected dividend yield          0.00%


On February 18, 2015, a warrant holder exercised 400,000 warrants using the cashless provision of the warrant agreement for net shares issued of 359,153.




73






Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.


None.


Item 9A.  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 Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K.

 

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2014, our disclosure controls and procedures were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure. In particular, we have identified the following material weakness of our internal controls:

 

-      Lack of adequate review over our financial statement close process to account for prepaid insurance premiums and to evaluate and reserve for uncollectible accounts receivable and sales adjustments.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2014 due to a lack of adequate review over our financial statement close process. Management reviewed the results of its assessment with our Audit Committee and intends to take the following steps to remediate this material weakness:

 

We are committed to improving our financial organization. As part of this commitment, we intend to prepare and implement sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.  Management believes that preparing and implementing sufficient written policies and checklists will remedy ineffective controls over period end financial close and reporting processes.

 

This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report as not subject to attestation of our registered public accounting firm pursuant to the temporary rules of the Securities and Exchange Commission that permits us provide only management’s report in this annual report

 

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.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



74






Item 9B. OTHER INFORMATION.


None.






75






PART III


Item 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE


The information required by this item will be included in our Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2014 (2014 Proxy Statement) and is incorporated herein by reference.


Item 11. EXECUTIVE COMPENSATION


The information required by this item will be included in the 2015 Proxy Statement and is incorporated herein by reference.


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MAATERS


The information required by this item will be included in the 2015 Proxy Statement and is incorporated herein by reference.


Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


The information required by this item will be included in the 2015 Proxy Statement and is incorporated herein by reference.


Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.


The information required by this item will be included in the 2015 Proxy Statement and is incorporated herein by reference.




76






Item 15. EXHIBITS.


(a)

Exhibits


Exhibit No.

Description


2.1

Agreement and Plan of Merger by and among Global Realty Management Group, Inc., GRMG Acquisition Corporation, Excalibur Holdings, Inc., and Michael D. Farkas, incorporated by reference to Amendment No. 1 to Hemiwedge’s Registration Statement on Form SB-2 filed on September 5, 2002 (File No. 333-88974).

2.2

Agreement and Plan of Merger by and among Shumate Machine Works, Inc., Larry C. Shumate, Russ Clark, Excalibur Holdings, Inc., and Excalmergeco, Inc., incorporated by reference to Amendment No. 1 to Hemiwedge’s Registration Statement on Form SB-2 filed on September 5, 2002 (File No. 333-88974).

2.3

Asset Purchase Agreement by and among Hemiwedge Valve Corporation, Soderberg Research and Development, Inc., Inprop, Inc., and Jeanette Soderberg, incorporated by reference to Hemiwedge’s Current Report on Form 8-K filed on December 6, 2005.

2.4

Asset Purchase Agreement dated August 29, 2008, by and among HII Technologies, Inc., American International Industries, Inc. and Shumate Machine Works, Inc., incorporated by reference to our Current Report on Form 8-K filed on September 5, 2008.

2.5

Asset Purchase Agreement dated May 10, 2011by and among Chromatic Industries, Inc., a Texas corporation, Hemiwedge Industries, Inc., a Delaware corporation, Hemiwedge Valve Corporation, a Texas corporation, incorporated by reference to our Registration Statement on Form 10 filed on September 14, 2011(File No. 000-30291)

2.6

Securities Purchase Agreement dated as of September 26, 2012 by and among HII Technologies, Inc., Brent Mulliniks, Billy Cox and Apache Energy Services, LLC, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

2.7

Securities Purchase Agreement dated as of November 11, 2013 by and among HII Technologies, Inc., Branden Brewer, Chris George and Aqua Handling of Texas, LLC, incorporated by reference to our Current Report on Form 8-K dated October 31, 2013 and filed on November 13, 2013.

2.8

Stock Purchase Agreement dated August 11, 2014 by and among HII Technologies, Inc., William M. Hamilton, Sharon M. Hamilton and Hamilton Investment Group, Inc., incorporated by reference to our Current Report on Form 8-K dated August 11, 2014 and filed on August 15, 2014.

3.1

Certificate of Incorporation of Excalibur Industries, Inc. (now known as HII Technologies, Inc.), incorporated by reference to Amendment No. 1 to Hemiwedge’s Registration Statement on Form SB-2 filed on September 5, 2002 (File No. 333-88974).

3.2

Certificate of Amendment to Certificate of Incorporation of Excalibur Industries, Inc. (now known as HII Technologies, Inc.), incorporated by reference to our Current Report on Form 8-K filed on October 26, 2005.

3.3

Bylaws of Excalibur Industries, Inc. (now known as HII Technologies, Inc.), incorporated by reference to Amendment No. 1 to our Registration Statement on Form SB-2 filed on September 5, 2002 (File No. 333-88974).

3.4

Certificate of Amendment to Certificate of Incorporation, incorporated by reference to our Current Report on Form 8-K filed on February 18, 2009.

3.5

Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on June 3, 2011 incorporated by reference to our Registration Statement on Form 10 filed on September 14, 2011(File No. 000-30291)



77





3.6

Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on August 31, 2011 incorporated by reference to our Registration Statement on Form 10 filed on September 14, 2011(File No. 000-30291)

3.7

Certificate of Designation—Series A Convertible Preferred Stock filed with the Delaware Secretary of State on June 11, 2014, incorporated by reference to our Current Report on Form 8-K dated June 11 2014 and filed on June 17, 2014.

3.8

Certificate of Increase to Certificate of Designation – Series A Convertible Preferred Stock filed with the Delaware Secretary of State on June 27, 2014, incorporated by reference to our Current Report on Form 8-K dated June 21, 2014 and field on July 3, 2014.

4.1

Specimen Certificate of common stock, incorporated by reference to our Annual Report on Form 10-KSB for the year ended December 31, 2005.

4.2

Form of 5% Subordinated Secured Promissory Note issued by HII Technologies, Inc. and Apache Energy Services, LLC, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

4.3

Form of Class A Warrant, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

4.4

Form of Class B Warrant, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

4.5

10% Subordinated Promissory Note dated October, 31, 2012, incorporated by reference to our Quarterly Report on Form 10-Q for the period ended September 30, 2012.

4.6

10% Secured Promissory Note dated November 5, 2012, incorporated by reference to our Quarterly Report on Form 10-Q for the period ended September 30, 2012.

4.7

10% Subordinated Secured Promissory Note dated December 17, 2012, incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2012.

4.8

Warrant dated December 17, 2012, incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2012.

4.9

Form of 10% Convertible Note, incorporated by reference to our Current Report on Form 8-K dated October 31, 2013 and filed on November 13, 2013

4.10

Form of 5% Subordinated Secured Promissory Note issued by HII Technologies, Aqua Handling of Texas, LLC, incorporated by reference to our Current Report on Form 8-K dated October 31, 2013 and filed on November 13, 2013.

4.11

10% Promissory Note dated January 15, 2014 issued by HII Technologies, Inc. and Apache Energy Services, LLC in the amount of $370,000, incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2013.

4.12

10% Promissory Note dated February 17, 2014 issued by HII Technologies, Inc. in the principal amount of $130.000, incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2013.

4.13

Form of Warrant issued under Series A Preferred Stock Financing, incorporated by reference to our Current Report on Form 8-K dated June 21, 2014 and field on July 3, 2014.

4.14

Form of Term Loan Note issued under Heartland Credit Facility, incorporated by reference to our Current Report on Form 8-K dated August 11, 2014 and filed on August 15, 2014.

4.15

Form of Warrant issued under Heartland Credit Facility, incorporated by reference to our Current Report on Form 8-K dated August 11, 2014 and filed on August 15, 2014.

10.1

2001 Stock Option Plan of Excalibur Holdings, Inc., incorporated by reference to Amendment No. 1 to our Registration Statement on Form SB-2 filed on September 5, 2002 (File No. 333-88974).

10.2

2005 Stock Incentive Plan, incorporated by reference to our Registration Statement on Form S-8, filed on May 3, 2005 (File No. 333-124568).

10.3

Employment Agreement dated January 30, 2014 between Matthew C. Flemming and HII Technologies, Inc., incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2013.



78





10.4

2012 Stock Incentive Plan, incorporated by reference to our Registration Statement on Form S-8 filed on April 16, 2012 (File No 333-180751).

10.5

Mutual Settlement and Release Agreement, incorporated by reference to our Quarterly Report on Form 10-Q for the period ended June 30, 2012.

10.6

Security Agreement by and among HII Technologies, Inc., Apache Energy Services, LLC, Brent Mulliniks and Billy Cox, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

10.7

Employment Agreement dated as of September 27, 2012 between Apache Energy Services, LLC and Brent Mulliniks, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

10.8

Employment Agreement dated as of September 27, 2012 between Apache Energy Services, LLC and Billy Cox, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

10.9

Registration Rights Agreement dated as of September 27, 2012, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

10.10

Form of Restricted Stock Agreement, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

10.11

Subscription Agreement dated as of September 26, 2012 by and among HII Technologies, Inc. and the purchaser set forth therein, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

10.12

Security Agreement dated as of September 26, 2012 by and among HII Technologies, Inc. and the secured parties set forth therein, incorporated by reference to our Current Report on Form 8-K dated September 26, 2012 and filed on October 2, 2012.

10.13

Security Agreement with Reserve Financial Corp, incorporated by reference to our Quarterly Report on Form 10-Q for the period ended September 30, 2012.

10.14

Strategic Alliance Agreement with Power Reserve Financial Corp. incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2012.

10.15

Security Agreement dated December 17, 2012 incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2012.

10.16

Financing Agreement dated June 26, 2013 between Apache Energy Services, LLC, KMHVC, Inc. and Rosenthal & Rosenthal, incorporated by reference to our Current Report on Form 8-K dated June 26, 2013 and filed on July 1, 2013.

10.17

Equipment Security Agreement dated June 26, 2013 between Apache Energy Services, LLC, KMHVC, Inc. and Rosenthal & Rosenthal Inc., incorporated by reference to our Current Report on Form 8-K dated June 26, 2013 and filed on July 1, 2013.

10.18

Guarantee dated June 26, 2013 made by HII Technologies in favor of Rosenthal and Rosenthal Inc., incorporated by reference to our Current Report on Form 8-K dated June 26, 2013 and filed on July 1, 2013.

10.19

General Security Agreement dated June 26, 2013 made by HII Technologies in favor of Rosenthal and Rosenthal Inc., incorporated by reference to our Current Report on Form 8-K dated June 26, 2013 and filed on July 1, 2013.

10.20

Security Agreement dated as of November 12, 2013 by and among HII Technologies, Inc. Aqua Handling of Texas, LLC and the secured parties set forth therein, incorporated by reference to our Current Report on Form 8-K dated October 31, 2013 and filed on November 12, 2013.

10.21

Employment Agreement dated November 12, 2013 between Chris George and Aqua Handling of Texas, LLC, incorporated by reference to our Current Report on Form 8-K dated October 31, 2013 and filed on November 12, 2013.

10.22

Assumption Agreement dated November 20, 2013 made by Aqua Handling of Texas, LLC in favor of Rosenthal and Rosenthal, Inc., incorporated by reference to our Current Report on Form 8-K dated November 20, 2013 and filed in November 26, 2013.



79





10.23

Equipment Security Agreement dated November 20, 2013 between Aqua Handling of Texas LLC and Rosenthal & Rosenthal, Inc., incorporated by reference to our Current Report on Form 8-K dated November 20, 2013 and filed on November 26, 2013.

10.24

Guarantee dated November 20, 2013 made by HII Technologies in favor of Rosenthal and Rosenthal Inc., incorporated by reference to our Current Report on Form 8-K dated November 20, 2013 and filed on November 26, 2013.

10.25

Amendment to Financing Agreement dated January 27, 2014 between Apache Energy Services LLC, Aqua Handling of Texas, LLC, KMHVC, Inc. and Rosenthal & Rosenthal, Inc., incorporated by reference to our Current Report on Form 8-K dated January 27, 2014 and filed on January 30, 2014

10.26

Waiver and Amendment Agreement dated March 26, 2014 by and among Apache Energy Services, LLC, Aqua Handling of Texas, LLC, KMHVC, Inc. and Rosenthal & Rosenthal, Inc.

10.27

Amendment to Rosenthal & Rosenthal, Inc. Financing Agreement dated April 7, 2014, incorporated by reference to our Current Report on Form 8-K dated April 7, 2014 and filed on April 8, 2014.

10.28

Security Agreement-Conditional Sale Contract dated February 27, 2014 between KMHVC, Inc. and Komatsu Financial Limited Partnership, incorporated by reference to our Quarterly Report on Form 10-Q for the period ended March 31, 2014 and filed on May 14, 2014.

10.29

Guaranty dated February 27, 2014 issued by HII Technologies, Inc. in favor of Komatsu Financial Limited Partnership, incorporated by reference to our Quarterly Report on Form 10-Q for the period ended March 31, 2014 and filed on May 14, 2014.

10.30

Form of Subscription Agreement for Series A Preferred Stock and Warrant Offering, incorporated by reference to our Current Report on Form 8-K dated June 21, 2014 and filed on July 3, 2014.

10.31

Security Agreement - Conditional Sales Contract dated April 18, 2014 between KMHVC, Inc. and Komatsu Financial Limited Partnership, incorporated by reference to our Quarterly Report on Form 10-Q for the period ended June 30, 2014 and filed on August 7, 2014.

10.32

Security Agreement-Conditional Sales Contract dated May 19, 2014 between KMHVC, Inc. and Komatsu Financial Limited Partnership, incorporated by reference to our Quarterly Report on Form 10-Q for the period ended June 30, 2014 and filed on August 7, 2014.

10.33

Master Lease Agreement dated June 27, 2014 between BCL-Equipment Leasing, LLC and HII Technologies, Inc., incorporated by reference to our Quarterly Report on Form 10-Q for the period ended June 30, 2014 and filed on August 7, 2014.

10.34.

Master Lease Agreement dated July 10, 2014 between Nations Fund I, LLC and HII Technologies, Inc., incorporated by reference to our Quarterly Report on Form 10-Q for the period ended June 30, 2014 and filed on August 7, 2014.

10.35

Credit Agreement dated August 12, 2014 with Heartland Bank, incorporated by reference to our Current Report on Form 8-K dated August 11, 2014 and filed on August 15, 2014.

10.36

Account Purchase Agreement dated August 12, 2014 with Heartland Bank, incorporated by reference to our Current Report on Form 8-K dated August 11, 2014 and filed on August 15, 2014.

10.37

Form of Security Agreement under Heartland Bank Credit Facility, incorporated by reference to our Current Report on Form 8-K dated August 11, 2014 and filed on August 15, 2014.

10.38

Employment Agreement with William M. Hamilton, incorporated by reference to our Current Report on Form 8-K dated August 11, 2014 and filed on August 15, 2014.

10.39

Equipment Purchase Agreement dated August 12, 2014 among S&M Assets, LLC, HII Technologies, Inc., and Hamilton Investment Group, Inc., incorporated by reference to our Current Report on Form 8-K dated August 11, 2014 and filed on August 15, 2014.



80





10.40

Equipment Lease dated August 12, 2014 between S&M Assets, LLC, HII Technologies, Inc. and Hamilton Investment Group, Inc., incorporated by reference to our Current Report on Form 8-K dated August 11, 2014 and filed on August 15, 2014.

10.41

Office Building Lease between HII Technologies, Inc. and Ten-Voss Ltd. effective September 15, 2014 for the premises located at 8588 Katy Freeway, Suite 430, Houston, Texas 77024, incorporated by reference to our Current Report on Form 8-K dated September 15, 2014 and filed on October 1, 2014.

10.42

First Modification Agreement (Credit Agreement) dated August 15, 2014 with Heartland Bank, incorporated by reference to our Current Report on Form 8-K dated September 15, 2014 and filed on October 1, 2014.

10.43

First Modification Agreement (Account Purchase Agreement) dated August 15, 2014 with Heartland Bank, incorporated by reference to our Current Report on Form 8-K dated September 15, 2014 and filed on October 1, 2014.

10.44

Second Modification Agreement dated October 2014 with Heartland Bank (1)

10.45

Employment Agreement between Acie Palmer and HII Technologies, Inc. (1)

10.46

Sale Agreement with HydroFLOW Holdings USA. (1)

21.1

Subsidiaries (1)

23.

Consent of MaloneBaileyLLP (1)

31.1

Certification of Matthew C. Flemming pursuant to Rule 13a-14(a). (1)

31.2

Certification of Acie Palmer pursuant to Rule 13a-14(a). (1)

32.1

Certification of Matthew C. Flemming and Acie Palmer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

(1) Filed herewith.





81





SIGNATURES


In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.



HII TECHNOLOGIES, INC.



By:   /s/ Matthew C. Flemming

Matthew C. Flemming

President, Chief Executive Officer, Secretary, Treasurer and Director

(Principal Executive Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this amended report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.  



Signatures

Title

Date



/s/Matthew C. Flemming

President, Chief Executive Officer,

April 15, 2015

Matthew C. Flemming

Secretary, Treasurer and Director

(Principal Executive Officer)



/s/Acie Palmer

Chief Financial Officer,

April 15, 2015

Acie Palmer

(Principal Financial And

Accounting Officer)



/s/ Kenton C. Chickering III

Director

April 15, 2015

Kenton C. Chickering III


/s/ Leo B. Womack

Director

April 15, 2015

Leo B. Womack


/s/ Brent Mulliniks

Director

April 15, 2015

Brent Mulliniks


/s/ Thomas Alex Newton

Director

April 15, 2015

Thomas Alex Newton



82