HII Technologies: An Over-Heated Stock With 36% And Possibly Much More Downside Risk

By Contributing Editor: Jay Thompson


HII Technologies, Inc. (OTCQB:HIIT) is a Houston, Texas-based oilfield services provider. AES Water Solutions ("AES"), the primary operating subsidiary of HIIT, provides frac water management services ("Frac Water") to large exploration and production ("E&P") companies in Texas and Oklahoma. These E&P companies are involved in hydraulic fracturing ("Frac Drilling"). Frac Drilling allows E&P companies access to crude and liquids-rich resources that in many cases were not previously feasible prior to recent advances in Frac Drilling technologies. Frac Drilling requires a substantial amount of water per well. According to AES' website, on average, 85,000 barrels of water are needed per well. AES' services involve the provision of water transfer piping, water pumps and related equipment. A summary of the Frac Water business opportunity was discussed in an article at Rigzone.com on May 3, 2013.

No Significant Barriers to Entry

AES does not claim any technological or other barriers to entry that AES can rely on to limit competition within the Frac Water sector. The provision of water transfer piping, water pumps and related equipment, which is how AES describes their services on their website, is not a unique oilfield service offering. Most large E&P companies have personnel who already possess this experience or they have acquired companies that have a diverse and valuable suite of services for use in the Frac Water segment. Schlumberger's (NYSE:SLB) MI-Swaco subsidiary is a primary example. A description of their services, which are clearly more robust than the services provided by AES, is outlined on MI-Swaco's website.

Highly Competitive Sector

AES is not first to market in Frac Water. An article by Environmental Leader on June 18, 2013 stated that Halliburton (NYSE:HAL), Baker Hughes (NYSE:BHI) and FTS International were already using recycled water and are highly focused on water management for Frac Drilling operations in Texas and Oklahoma. These are massive companies with almost unlimited resources. We cannot see how AES could ever expect to compete with these companies. These are also the same two states that AES claims to operate in primarily. In March 2013, American Water Intelligence, a provider of industry research for the American water industry, released a list of 13 Frac Water companies to watch in 2013. This list is included in this article for the following reasons:

  1. To showcase both the complexity and variety of niche services being offered within the Frac Water sector.
  2. To clearly show that AES was omitted from this list and does not appear to have any technological advantage over others in the Frac Water sector.
  3. To clearly show the variety of competitors and stage of evolution of the Frac Water sector. The sector may be in its infancy but AES has not shown it is a leader and is entrenched in a highly competitive sector where many other companies have unique niche technologies that allow them to thrive.

Questionable Management

Matthew Flemming is the CEO of HIIT. It appears that other than HIIT, Mr. Flemming has no other experience in the oil & gas services sector. He is also CFO of Kairos Transmedia, Inc. according to that company's website and according to HIIT's 2013 proxy statement. He appears to be very busy. It is not clear how much of his time he devotes to HIIT. Lastly, Mr. Flemming's track record as an executive officer is as follows:

  • Hemiwedge Valve Corp. (Previously part of HIIT) - Defaulted on $3M in debt, distressed asset sale in 2011
  • Excalibur Industries (Previously part of HIIT) - Bankruptcy in 2005

Mr. Flemming's LinkedIn biography includes Excalibur and Hemiwedge as prior experience. These businesses were actually part of HIIT at one time. Both of them failed. Mr. Flemming is on his third try with HIIT. He should be under a lot of pressure to succeed as HIIT's CEO when he has failed in every other incarnation of HIIT he has previously led. It is entirely unclear to us why he has been given yet another chance to lead this company after serving as an executive with each of the two previous failures.

Historical Financial Results

AES was acquired by HIIT on September 27, 2012. Since the acquisition of AES, HIIT has experienced solid revenue growth and wild swings in profitability. The wild swings in profitability suggest to us that HIIT is in a state of disorganization and is not operating smoothly. Given what we know about the Frac Water sector, we believe it may also be possible that HIIT's customer base is fluctuating and the business opportunity is likely changing every day within the Frac Water sector. The following is a quarterly synopsis of HIIT's reported financial results for the last four reporting periods. Operating expenses reported in HIIT's SEC filings have been reduced by excluding any one-time items and interest, taxes, depreciation, and amortization. We are referring to the figure generated by making these adjustments as "Adjusted Operating Expenses." The net of gross profit less adjusted operating expenses is referred to herein as "Adjusted EBITDA."

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The following is a synopsis of Sky Tides' financial forecasting for the next four reporting periods. This financial forecast was developed only to estimate the potential value of the company's stock based on a forward price to earnings/adjusted EBITDA multiple. We consider this is a "best-case scenario." The assumptions utilized in this financial forecast are described in greater detail below.

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This financial forecast depicts a company that is growing its top line but struggling to grow its bottom line. We believe the top line growth metrics used in the forecast are reasonable given what data we have available to us today. We have asked HIIT's CEO Matthew Fleming for his input on this forecast. He did not respond to us. We consider a complete lack of a response from management to potentially indicate transparency issues, which should be a significant concern to any investor considering investing in HIIT.

Excessive Valuation

As of the date before this article was published, the price per share of HIIT's stock was $0.60. HIIT reported 48,351,379 shares outstanding in its most recent quarterly filing. This figure appears to include the 1,443,696 shares issued to Aqua in order to consummate the Aqua acquisition. HIIT did not disclose its common stock equivalents in the most recent quarterly filing. As a result, the forward price to earnings calculation included herein may be understated as the vesting or issuance of any additional shares of HIIT common stock to personnel and investors is scheduled or is possible during the next four reporting periods.

The following table calculates the adjusted price to earnings of HIIT as of the date before this article was published. Adjusted Price to Earnings is defined as the market capitalization of HIIT divided by the trailing twelve months Adjusted EBITDA of HIIT. A traditional price to earnings calculation, which would normally be based off of net income, was not possible as HIIT has a net loss for the trailing twelve months. Forward Adjusted Price to Earnings is calculated in the same manner with the exception of the denominator, which is the forecasted Adjusted EBITDA for the next four reporting periods.

The table below displays a comparison of the current valuations of a variety of both mature and high-growth oilfield services companies. This analysis, combined with our adjusted price to earnings calculation above, suggests that HIIT is significantly overvalued - if the best case scenario we outlined above for the next 12 months occurs.

Reasons for Downside Risk

  1. We do not believe HIIT's questionable management can deliver on the best case scenario we have outlined above, the downside risk could actually be much larger than 36%.
  2. Barriers to entry appear to be extremely minimal.
  3. HIIT has no technological advantages.
  4. It appears as though there is an abundance of competitors that may have technological advantages.
  5. Frac Water is already an extremely competitive sector in Texas and Oklahoma.
  6. Frac Water providers in other geographies could enter AES' markets in Texas and Oklahoma at any time and without much advance warning to AES.
  7. An apparent lack of long-term service agreements puts all current business at risk - customers have no need to be loyal to AES. Significant losses of business with key customers could occur at any time.
  8. Hot sector has inflated HIIT's stock price, valuation is excessive by any measure.
  9. Increasing market awareness may not be a good thing. As more investors find and examine HIIT, it is likely more questions will be asked and possibly more issues will be raised than just the issues that have been raised in this article alone.

Upside Argument

  1. AES' actual customer base is unknown. The customers' intent to use or not use AES' services is unclear due to the lack of long-term service agreements. Management could be downplaying their relationships with large E&P companies and could release strong news related to its customer base at any time.
  2. The impact of the recently announced Aqua Handling of Texas, LLC is unclear. Detailed information related to Aqua Handling is not yet readily available. This could impact HIIT's stock in either a negative or positive way in the short term.

HIIT is an over-heated stock that has a trailing twelve months price to earnings ratio that cannot be justified and a forward twelve months price to earnings ratio, based on our best-case scenario assumptions, that is still excessive by 36%. At some point soon the market is going to realize this mispricing. We have outlined what we consider a best case scenario for HIIT in 2014. We don't expect that scenario to play out due to the reasons set forth in this article, namely questionable management, competition and a lack of technological advantage. We see no upside in the stock whatsoever, especially at these levels. We see an increasing likelihood, as 2014 unfolds, that HIIT begins to encounter increased highly-technologically advanced well-funded competition that will ultimately overwhelm HIIT and possibly even force HIIT to curtail operations in 2014 or 2015.

SkyTides Financial Forecasting

Sky Tides is unaware of any current financial projections that have been provided by management subsequent to the September 30, 2013 quarterly report and announcement of the Aqua Handling of Texas, LLC ("Aqua") acquisition. As a result, Sky Tides has completed its own forecasting, which is based on the following assumptions.

  1. Revenues grew at an average of 23% over the last two reporting periods. We do not believe HIIT can continue to grow at this rate given the market conditions, lack of technological advantages and likely increase in competition in 2014. We have assumed a top line growth rate of 15% for each of the next four reporting periods before consideration of Aqua. We believe the higher growth rate in Q1 2013 was an aberration. We have very little information about Aqua. However, it is a younger business that may have some short-term high growth ahead of it. We have assumed Aqua will generate growth at 20% per quarter for each of the next four reporting periods.
  2. Gross profit averaged 28% for the last two reporting periods. We have assumed gross profit will decrease as competition increases, along with other issues. We have assumed a 25% gross profit rate for each of the next four reporting periods before consideration of Aqua. Given the only historical financial information that has been released about Aqua thus far, it does not appear to be a highly profitable business. We have assumed Aqua will generate gross profits at 15% of revenues for each of the next four reporting periods.
  3. Adjusted operating expenses for all prior periods include an "add back" for depreciation, bad debt expense and any one-time items included in operating expenses as reported to the SEC. Adjusted operating expenses for each of the last two reporting periods averaged 27%. We have assumed a 22% rate for each of the next four reporting periods based on the assumption that revenues will increase for each of the next four reporting periods prior to the consideration of Aqua's impact on adjusted operating expenses. We have assumed Aqua will generate operating expenses equal to 10% of Aqua's revenues for each of the next four reporting periods. This assumption is based on cost savings achieved as a result of the merger of HIIT and Aqua.

All financial forecasting included herein is based on data available to Sky Tides at the time the financial forecast was prepared, which is the date before this article was published. Sky Tides has attempted to consult with management regarding its forecasting. No response was received from management. SkyTides is not privy to the internal operations of the company discussed herein. As a result, the accuracy of this financial forecast is limited based on the limited financial data available to us. We make no claims that this financial forecast is reliable. An investor should consult directly with the company's management rather than rely on this financial forecast when making any investment decisions. Sky Tides is under no obligation to update its financial forecast in the future.

About Sky Tides

SkyTides is a research organization dedicated to assisting the market in its attempt to be efficient. SkyTides searches for arbitrages that generally present themselves to us in the form of mispriced securities. We attempt to gather as much information from public sources and management or other sources as possible. We then attempt to value a security at a fair price using the information we have on hand at the time and utilize the most reasonable valuation methodologies available.

SkyTides was founded under the premise that the market became horribly inefficient and erratic in 2013 and as a result, the investment opportunity and relevant risks in the market have become far greater than normal. Ultimately, subsequent to completing its research, SkyTides looks to capitalize on those opportunities and risks.

The founder of SkyTides has served as an executive of a variety of publicly-traded companies in the U.S., has led several going public transactions, and is a former auditor at one of the Big 4 professional services firms.

Stocks covered by SkyTides are generally risky investments. An investor in these stocks should always be willing to lose their entire investment in the stock. No publication by SkyTides should be seen as an offer or suggestion to buy or sell any stocks covered by SkyTides. An investor should always review the stock's SEC filings at sec.gov and all other publicly-available information about the stock before investing. SkyTides is under no obligation to update its research at any time.



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Their last quarterly report was pretty strong, i am giving them a couple of quarters to see how their acquisitions go..

I like their sector (this is an exploding new devloping side of the oil and gas industry)... Also like their presence in Eagleford play which runs into mexico (which is just opening up to non mexican cos).. too bad about high managment risks though -- although I knew it was a risk at some level. I was hoping this would/could be another MCR (Canadian exchange) , a small diameter oil pipeline co ( went from .20 to 6.30) .... I bought into HIIT right after last earnings release, but was not really comfortable for lack of information... Anyways 1 hr after your story was posted that was me smacking the bid and out now... will follow it a bit still.... If anyone finds a small micro cap oil pipline co (or any oil service for that matter) with good (exp[erienced) management let us know...

We like the sector as well. However, simply put, we don't believe in a company that has management with that track record, no technological advantages, and is up against the big boys, i.e. HAL, SLB etc. There are other companies that can compete in this sector because they have unique and powerful technology to do so. HIIT is not one of those companies...and no we do not know any of them that are public and are still unknown. We're looking though.

I had 29,500 shares to sell today and this drove the share price down about 8% -- in otherwords for a company with 30 mil market cap, this equates to over a $2 million loss in market cap for $17,000 in selling...and this was with limit orders... I think the majority of pink sheet stocks trade like this.. if you sell on a non liquid normal day... Buying is almost as bad... but the opposite..

I will give the management team a chance to prove me wrong (I have not entirely walked), but not replying to enquiries; and the pres being a cfo of a media company on the side has made this stock short term too risky (and as the author noted the stock is valuation rich).... In my opinion the most important thing you need in this space to succeed and excell, is fantastic service, and be great at schmoozing -- and of course get the job done quickly and efficently.. Jump when they say jump,,,and ask how high...

I have noticed a lot of promotion for such an early start up company ... hiring a pr firm, presenting so much at the petro group and small cap conferences... Not necessarily bad but all in all a bad sign I think... This company should have all its efforts focused on growing its business ... having the stock get ahead of itself serves no useful purpose to the bus... This company should trade around 10 times earnings or if too early for earnings, then about 1 to 1.5 times sales...

I disagree, small companies utilizing company stock to aquire assets and other entities want a firm SP to reduce dillution and maximize share holder value with in those aquisitions. Management in my opinion has done an excellent job for it's share holders by doing so. They are not selling shares to the street they are gaining assets, revenues and investing in technology which will be reflected in near term growth. This is no NES and the niche they are working is not highly served by the "big boys"... Stay tuned

On a positive note , one thing I really like (cudos to management for this), was how management has financed the generators and portable lighting and other equipment in their newer equipment rental divison ... they partnered with a finance company who paid for the equipment and share the revenue (I think 50-50) and with HIIT running the rental bus and using their relationships with the drillers and oil cos to rent and service the equipment... This not only elimates share dilution but offloads some financial risk in a start up endevor...Perfect I think..

One last point that I am still watching (but so far looks good), is managements ability to integrate aquisitions.... this seems to be going well from what I can see on the initial aquisitions, this is very important, as it proves and developes the skills needed for future aquisitions... which would enrich shareholders potentially....

Actually, Brent Mulliniks is the brains behind the company and AES now and making it successful. That is why they bought his company. This individual is extremely smart from what I hear. Brent is the one that is running things so I would not panic over this other guy's past performance. There are good things coming with this company. I see north of a $1 a share soon! The earnings and revenues for HIIT is very impressive during the past 12 months. Don t fight the trend!

JohnDavid1, just a quick note, HIIT has not had earnings in the last 12 months. They had a loss. You make no useful points in your note here. Smart people don't equal success in business or the stock market. We are actually still doing our due diligence on Mr. Mulliniks. His background is even harder to figure than Mr. Flemmings - which is not a good sign. But just a few quick notes we have so far on him don't appear too encouraging. You can see here http://bit.ly/Kin4XH that he was hired by another small cap company back in late 2003. Then in the next two years while he was with Angus, the stock went up to $3.8 and then down to around $0.35 a share. See http://bit.ly/Kin4XJ. His bio at AES doesn't seem to mention the position at Angus and is generally very vague as to dates and other specific details. See http://bit.ly/Kin5dX. Again, this all makes one wonder what his true background is all about. We'll update everyone once we complete our review of him and also the individuals at AquaTex.

Also, just to be clear...Angus looks to be a total failure and is barely trading nowadays. Hopefully Mr. Mulliniks was not at fault there, though the press release Angus released about him suggests he was a key individual at Angus.

Just because Management does not respond to your request for a statement doesn't mean they have something to hide, or as you state "transparency issues"...I agree with johndavid1's comments.

Larsky, we said this led us to consider that there were "potential transparency issues." We didn't make the claim as strong as you seem to suggest but when a management team is unable or unwilling to respond to what we consider as basic questions we tend to consider that a negative. Its very simple. This is a public company. Questions that are asked by shareholders and any other party attempting to get to the bottom of significant issues surrounding the company should be answered by management. Hopefully management is willing to respond to the questions we raised now that they have been made public.

A agree with barn find and would like to thank Sky Tides for their article. It would appear the company's marketing dept. is aimed at gaining shareholders rather than customers for the business. I owned the company for a short time, made a small profit but am also glad not to be involved with the business any more. As with any stock, buyer be aware.

IMO, The rev growth speaks for itself ....fantastic for a startup...Had they not kept plowing money back into growth, HIIT would have shown a profitable quarter.....Reinvesting company cashflow back into the company is the right thing to do right now

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