UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended January 31, 2003
---------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from__________ to __________
Commission file number: 0 - 32093
---------------
HIENERGY TECHNOLOGIES, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
Washington 91-2022980
------------------------ --------------------------
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
1601 Alton Parkway, Unit B, Irvine, California 92606
-----------------------------------------------------
(Address of principal executive offices)
(949) 757-0855
-------------------------
(Issuer`s telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer`s classes of common
equity, as of the latest practicable date: As of March 14, 2003, the issuer had
24,174,605 shares of Common Stock, par value $0.001 per share, issued and
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
HIENERGY TECHNOLOGIES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED JANUARY 31, 2003
PART I - FINANCIAL INFORMATION PAGE
Item 1 Financial Statements..........................................................................1
Consolidated Balance Sheets as of April 30, 2002 and January 31, 2003 (unaudited)
Consolidated Statements of Operations for the three and nine months
ended January 31, 2003 and 2002 (unaudited) and for the Period from
August 21, 1995 (Inception) to January 31, 2003 (unaudited)
Consolidated Statements of Shareholders` Equity (Deficit) for the Period from
August 21, 1995 (Inception) to January 31, 2003
Consolidated Statements of Cash Flows for the nine months ended
January 31, 2003 and 2002 (unaudited) and for the Period from August
21, 1995 (Inception) to January 31, 2003 (unaudited)
Notes to the Consolidated Financial Statements (unaudited)
Item 2 Management`s Discussion and Analysis or Plan of Operation....................................38
Item 3 Controls and Procedures......................................................................45
PART II - OTHER INFORMATION
Item 1 Legal Proceedings............................................................................46
Item 2 Changes in Securities........................................................................47
Item 5 Other Information............................................................................48
Item 6 Exhibits and Reports on Form 8-K.............................................................48
SIGNATURES ........................................................................................ 50
CERTIFICATIONS ...................................................................................... 51
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
January 31, April 30,
2003 2002
---------------- ----------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 755,833 $ 1,078,136
Accounts receivable - 29,166
Other current assets 883,041 7,500
---------------- ----------------
Total current assets 1,638,874 1,114,802
PROPERTY AND EQUIPMENT, net 719,120 114,568
---------------- ----------------
TOTAL ASSETS $ 2,357,994 $ 1,229,370
================ ================
The accompanying notes are an integral part of these financial statements.
1
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS` EQUITY (DEFICIT)
January 31, April 30,
2003 2002
---------------- ----------------
(unaudited)
CURRENT LIABILITIES
Accounts payable $ 469,945 $ 209,895
Accrued expenses 6,400 151,567
Accrued payroll and payroll taxes 429,034 350,000
Accrued interest 32,973 29,767
Notes payable - related parties 135,000 621,691
Convertible notes payable - related parties 10,400 35,400
---------------- ----------------
Total current liabilities 1,083,752 1,398,320
---------------- ----------------
MINORITY INTEREST IN SUBSIDIARY 18,923 18,923
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
The accompanying notes are an integral part of these financial statements.
2
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS` EQUITY (DEFICIT)
January 31, April 30,
2003 2002
------------- ------------
(unaudited)
CONVERTIBLE, REDEEMABLE PREFERRED STOCK
Series A convertible, redeemable preferred stock
8% dividends, voting rights, liquidation preference
$10,000 per share, 345 shares authorized
96 (unaudited) and 0 shares issued and outstanding $ 1 $ -
Additional paid-in capital 783,152 -
------------- ------------
Total convertible, redeemable preferred stock 783,153 -
------------- ------------
SHAREHOLDERS` EQUITY (DEFICIT)
Preferred stock, $0.001 par value
20,000,000 shares authorized
0 (unaudited) and 0 issued and outstanding - -
Common stock, $0.001 par value
100,000,000 shares authorized
24,174,605 (unaudited) and 22,075,200 shares
issued and outstanding 24,174 22,075
Additional paid-in capital 10,390,628 2,514,616
Committed common stock, 51,348 (unaudited) and
0 outstanding 20,298 -
Deferred compensation (2,272,561) -
Deficit accumulated during the development stage (7,690,373) (2,724,564)
------------- ------------
Total shareholders` equity (deficit) 472,166 (187,873)
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS` EQUITY (DEFICIT) $ 2,357,994 $ 1,229,370
============ ============
The accompanying notes are an integral part of these financial statements.
3
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED),
AND FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2003
(UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
August 21,
1995
For the Three Months Ended For the Nine Months Ended (Inception) to
January 31, January 31, January 31,
--------------------------- --------------------------- ------------
2003 2002 2003 2002 2003
------------ ---------- ------------ ----------- -------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
CONTRACT REVENUES $ - $ - $ 40,834 $ 117,000 $ 366,750
OPERATING EXPENSES
General and administration 2,206,319 435,919 3,970,621 707,278 6,979,839
------------ ---------- ------------ ----------- -------------
LOSS FROM OPERATIONS (2,206,319) (435,919) (3,929,787) (590,278) (6,613,089)
------------ ---------- ------------ ----------- -------------
OTHER INCOME (EXPENSE)
Interest income 3,230 - 6,588 - 6,365
Other income 231 - 231 - 231
Interest expense (3,135) (6,483) (8,540) (7,647) (38,595)
Financing expense - - (223,710) - (223,710)
Forgiveness of accounts
payable - - 36,000 - 36,000
------------ ---------- ------------ ----------- -------------
Total other income
(expense) 326 (6,483) (189,431) (7,647) (219,709)
------------ ---------- ------------ ----------- -------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (2,205,993) (442,402) (4,119,218) (597,925) (6,832,798)
PROVISION FOR INCOME
TAXES 800 - 800 - 11,784
------------ ---------- ------------ ----------- -------------
NET LOSS (2,206,793) (442,402) (4,120,018) (597,925) (6,844,582)
BENEFICIAL CONVERSION
FEATURE GRANTED ON
PREFERRED STOCK - - (767,431) - (767,431)
The accompanying notes are an integral part of these financial statements.
4
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED),
AND FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2003
(UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
August 21,
1995
For the Three Months Ended For the Nine Months Ended (Inception) to
January 31, January 31, January 31,
--------------------------- --------------------------- ------------
2003 2002 2003 2002 2003
------------ ---------- ------------ ----------- -------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
PREFERRED STOCK
DIVIDENDS $ - $ - $ (78,360) $ - $ (78,360)
------------ ---------- ------------ ----------- -------------
NET LOSS AVAILABLE TO
COMMON
SHAREHOLDERS $ (2,206,793) $ (442,402) $ (4,965,809) $ (597,925) $(7,690,373)
============= =========== ============= =========== ============
NET LOSS PER SHARE $ (0.09) $ (0.03) $ (0.18) $ (0.04) $ (0.55)
BENEFICIAL CONVERSION
FEATURE GRANTED ON
PREFERRED STOCK
PER SHARE - - (0.03) - (0.06)
PREFERRED STOCK
DIVIDENDS PER SHARE - - - - (0.01)
------------ ---------- ------------ ----------- -------------
BASIC AND DILUTED LOSS
AVAILABLE TO COMMON
SHAREHOLDERS PER
SHARE $ (0.09) $ (0.03) $ (0.21) $ (0.04) $ (0.62)
============= =========== ============= =========== ============
BASIC AND DILUTED
WEIGHTED-AVERAGE
COMMON SHARES
OUTSTANDING 24,056,753 17,477,991 23,131,533 16,248,534 12,443,033
============= =========== ============= =========== ============
The accompanying notes are an integral part of these financial statements.
5
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS` EQUITY (DEFICIT)
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2003
- --------------------------------------------------------------------------------
Deficit
Accumulated
Common Stock Additional Committed during the
-------------------------- Paid-in Common Deferred Development
Shares Amount Capital Stock Compensation Stage Total
------------ ------------- ----------- ---------- --------------- ----------- ----------
BALANCE, AUGUST 21, 1995
(INCEPTION) - $ - $ - $ - $ - $ - $ -
RECAPITALIZATION UPON
REVERSE MERGER 6,470,000 6,470 (6,456) 14
ISSUANCE OF COMMON STOCK
FOR SERVICES 734,771 735 7,495 8,230
NET LOSS (39,387) (39,387)
------------ ------------- ----------- ---------- --------------- ----------- ----------
BALANCE, APRIL 30, 1996 7,204,771 7,205 1,039 - - (39,387) (31,143)
ISSUANCE OF COMMON STOCK
FOR SERVICES 3,219 3 33 36
NET LOSS (110,004) (110,004)
------------ ------------- ----------- ---------- --------------- ----------- ----------
BALANCE, APRIL 30, 1997 7,207,990 7,208 1,072 - - (149,391) (141,111)
ISSUANCE OF COMMON STOCK
FOR CASH 596,589 597 143,955 144,552
ISSUANCE OF COMMON STOCK
FOR SERVICES 1,451,928 1,452 15,598 17,050
NET LOSS (293,019) (293,019)
------------ ------------- ----------- ---------- --------------- ----------- ----------
The accompanying notes are an integral part of these financial statements.
6
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS` EQUITY (DEFICIT)
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2003
- --------------------------------------------------------------------------------
Deficit
Accumulated
Common Stock Additional Committed during the
-------------------------- Paid-in Common Deferred Development
Shares Amount Capital Stock Compensation Stage Total
------------ ------------- ----------- ---------- --------------- ----------- ----------
BALANCE, APRIL 30, 1998 9,256,507 $ 9,257 $ 160,625 $ - $ - $ (442,410) $(272,528)
ISSUANCE OF COMMON STOCK
FOR CASH 264,852 265 150,965 151,230
ISSUANCE OF COMMON STOCK
FOR SERVICES 2,167,620 2,167 47,592 49,759
NET LOSS (272,426) (272,426)
------------ ------------- ----------- ---------- --------------- ----------- ----------
BALANCE, APRIL 30, 1999 11,688,979 11,689 359,182 - - (714,836) (343,965)
ISSUANCE OF COMMON STOCK
FOR CASH 638,548 638 295,008 295,646
ISSUANCE OF COMMON STOCK
FOR SERVICES 1,914,570 1,915 83,322 85,237
NET LOSS (332,131) (332,131)
------------ ------------- ----------- ---------- --------------- ----------- ----------
BALANCE, APRIL 30, 2000 14,242,097 14,242 737,512 - - (1,046,967) (295,213)
ISSUANCE OF COMMON STOCK
FOR CASH 465,437 465 109,265 109,730
ISSUANCE OF COMMON STOCK
FOR SERVICES 371,035 371 36,097 36,468
NET LOSS (288,067) (288,067)
------------ ------------- ----------- ---------- --------------- ----------- ----------
The accompanying notes are an integral part of these financial statements.
7
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS` EQUITY (DEFICIT)
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2003
- --------------------------------------------------------------------------------
Deficit
Accumulated
Common Stock Additional Committed during the
-------------------------- Paid-in Common Deferred Development
Shares Amount Capital Stock Compensation Stage Total
------------ ------------- ----------- ---------- --------------- ----------- ----------
BALANCE, APRIL 30, 2001 15,078,569 $ 15,078 $ 882,874 $ - $ - (1,335,034) $(437,082)
ISSUANCE OF COMMON STOCK
FOR CASH 712,071 712 180,857 181,569
ISSUANCE OF COMMON STOCK
FOR SERVICES 5,059,560 5,060 227,110 232,170
PRIVATE PLACEMENT 1,225,000 1,225 1,223,775 1,225,000
NET LOSS (1,389,530) (1,389,530)
------------ ------------- ----------- ---------- --------------- ----------- ----------
BALANCE, APRIL 30, 2002 22,075,200 22,075 2,514,616 - - (2,724,564) (187,873)
ISSUANCE OF COMMON STOCK IN
PRIVATE PLACEMENT (unaudited) 500,000 500 499,500 500,000
ISSUANCE OF COMMON STOCK IN
PRIVATE PLACEMENT (unaudited) 1,349,934 1,350 1,821,057 1,822,407
OFFERING COSTS (unaudited) - (196,793) (196,793)
DIVIDENDS ON PREFERRED STOCK
(unaudited) 68,150 68 78,292 78,360
BENEFICIAL CONVERSION FEATURE
GRANTED IN CONNECTION WITH
ISSUANCE OF PREFERRED
STOCK (unaudited) - 767,431 767,431
The accompanying notes are an integral part of these financial statements.
8
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS` EQUITY (DEFICIT)
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2003
- --------------------------------------------------------------------------------
Deficit
Accumulated
Common Stock Additional Committed during the
-------------------------- Paid-in Common Deferred Development
Shares Amount Capital Stock Compensation Stage Total
------------ ------------- ----------- ---------- --------------- ----------- ----------
ISSUANCE OF COMMON STOCK TO
AN EMPLOYEE FOR A BONUS
(unaudited) 11,178 $ 11 $ 21,339 $ 21,350
COMMON STOCK COMMITTED TO
AN EMPLOYEE FOR A BONUS
(unaudited) $13,136 13,134
ISSUANCE OF COMMON STOCK ON
CONVERSION OF SERIES A
REDEEMABLE CONVERTIBLE
PREFERRED STOCK (unaudited) 18,336 18 17,228 17,246
ISSUANCE OF COMMON STOCK IN
LEGAL SETTLEMENT (unaudited) 80,000 80 124,920 125,000
CONVERSION OF CONVERTIBLE NOTES
PAYABLE - RELATED PARTIES INTO
COMMON STOCK (unaudited) 37,898 38 37,858 37,896
ISSUANCE OF COMMON STOCK IN
CASHLESS EXERCISE OF WARRANTS
(unaudited) 33,909 34 (34) -
FINANCING EXPENSE IN
CONNECTION WITH ISSUANCE
OF WARRANTS (unaudited) 223,710 223,710
The accompanying notes are an integral part of these financial statements.
9
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS` EQUITY (DEFICIT)
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2003
- --------------------------------------------------------------------------------
Deficit
Accumulated
Common Stock Additional Committed during the
-------------------------- Paid-in Common Deferred Development
Shares Amount Capital Stock Compensation Stage Total
------------ ------------- ----------- ---------- --------------- ----------- ----------
STOCK OPTIONS ISSUED TO A
CONSULTANT FOR SERVICES
TO BE RENDERED (unaudited) $ 761,007 $ 761,007
DEFERRED COMPENSATION IN
CONNECTION WITH ISSUANCE
OF STOCK OPTIONS TO
EMPLOYEE (unaudited) 3,305,542 $ (3,305,542) -
STOCK OPTIONS ISSUED TO A
CONSULTANT IN EXCHANGE FOR
ACCOUNTS PAYABLE (unaudited) 65,000 65,000
WARRANTS ISSUED TO A CONSULTANT
FOR SERVICES RENDERED OR TO BE
RENDERED (unaudited) 349,955 349,955
AMORTIZATION OF DEFERRED
COMPENSATION (unaudited) 1,032,981 1,032,981
EXERCISE OF STOCK OPTIONS
IN SUBSIDIARY (unaudited) $7,164 7,164
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS (unaudited) $(4,965,809) (4,965,809)
------------ ------------- ----------- ---------- --------------- ----------- ----------
BALANCE, JANUARY 31, 2003
(UNAUDITED) 24,174,605 $ 24,174 $10,390,628 $20,298 $(2,272,561) $(7,690,373) $ 472,166
============ ============= =========== ========== =============== ============ ==========
The accompanying notes are an integral part of these financial statements.
10
HIENERGY TECHNOLOGIES, INC. AND
SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31,
2003 AND 2002 (UNAUDITED), AND
FOR THE PERIOD FROM AUGUST 21, 1995
(INCEPTION) TO JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
August 21,
For the Nine Months Ended 1995
January 31, (Inception) to
--------------------------------------- January 31,
2003 2002 2003
-------------------- ----------------- ---------------------
(unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,120,018) $ (597,925) $ (6,844,582)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 72,556 5,829 79,988
Compensation expense relating to issuance of
common stock in exchange for services
rendered - 161,707 428,950
Compensation expense relating to issuance of
common stock in exchange for services
rendered to minority shareholders - - 18,923
Warrants issued for services rendered 349,955 - 349,955
Common stock issued to an employee for a
bonus 21,350 - 21,350
Common stock committed to an employee
for a bonus 13,134 - 13,134
Common stock issued to a former officer
as a settlement 125,000 - 125,000
Additional compensation to officer - - 42,171
Amortization of deferred compensation 1,032,981 - 1,032,981
Financing expense in connection with issuance
of warrants 223,710 - 223,710
Forgiveness of accounts payable 36,000 - 36,000
(Increase) decrease in
Accounts receivable 29,166 - -
Other current assets (114,534) - (122,034)
The accompanying notes are an integral part of these financial statements.
11
HIENERGY TECHNOLOGIES, INC. AND
SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31,
2003 AND 2002 (UNAUDITED), AND
FOR THE PERIOD FROM AUGUST 21, 1995
(INCEPTION) TO JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
August 21,
For the Nine Months Ended 1995
January 31, (Inception) to
--------------------------------------- January 31,
2003 2002 2003
-------------------- ----------------- ---------------------
(unaudited) (unaudited) (unaudited)
Increase (decrease) in
Accounts payable $ 289,488 $ 147,020 $ 499,385
Accrued expenses (145,167) 5,669 6,416
Accrued payroll and payroll taxes 79,034 75,000 429,034
Accrued interest 5,664 7,647 35,431
-------------------- ----------------- ---------------------
Net cash used in operating activities (2,101,681) (195,053) (3,624,188)
-------------------- ----------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (677,108) (44,818) (799,108)
-------------------- ----------------- ---------------------
Net cash used in investing activities (677,108) (44,818) (799,108)
-------------------- ----------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock in
private placement 2,322,407 - 3,547,407
Offering costs on common stock (196,793) - (196,793)
Proceeds from issuance of common stock - 153,000 882,723
Proceeds from issuance of preferred stock 979,301 - 979,301
Offering costs on preferred stock (178,902) - (178,902)
Exercise of stock options in subsidiary 7,164 - 7,164
Proceeds from notes payable - related parties - 183,468 579,520
Payments on notes payable - related parties (486,691) (38,528) (486,691)
The accompanying notes are an integral part of these financial statements.
12
HIENERGY TECHNOLOGIES, INC. AND
SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31,
2003 AND 2002 (UNAUDITED), AND
FOR THE PERIOD FROM AUGUST 21, 1995
(INCEPTION) TO JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
August 21,
For the Nine Months Ended 1995
January 31, (Inception) to
--------------------------------------- January 31,
2003 2002 2003
-------------------- ----------------- ---------------------
(unaudited) (unaudited) (unaudited)
Proceeds from convertible notes payable - related
parties $ 29,280 $ - $ 84,680
Payments on convertible notes payable - related
parties (19,280) (9,280) (39,280)
-------------------- ----------------- ---------------------
Net cash provided by financing activities 2,456,486 288,660 5,179,129
-------------------- ----------------- ---------------------
Net increase (decrease) in cash and cash
equivalents (322,303) 48,789 755,833
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 1,078,136 3,521 -
-------------------- ----------------- ---------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 755,833 $ 52,310 $ 755,833
=================== ================= ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 2,876 $ - $ 2,876
=================== ================= ====================
INCOME TAXES PAID $ 800 $ - $ 11,783
=================== ================= ====================
The accompanying notes are an integral part of these financial statements.
13
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED), AND
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO JANUARY 31, 2003
(UNAUDITED)
- --------------------------------------------------------------------------------
SUPPLEMENT SCHEDULE OF NON-CASH FINANCING ACTIVITIES (UNAUDITED)
During the nine months ended January 31, 2003 and 2002 and the period from
August 21, 1995 (inception) to January 31, 2003, the Company issued 37,898, 0,
and 37,898 shares, respectively, of common stock for the outstanding principal
on convertible notes payable - related parties and accrued interest of $37,896,
$0, and $37,896, respectively.
During the nine months ended January 31, 2003 and 2002 and the period from
August 21, 1995 (inception) to January 31, 2003, the Company converted accounts
payable due to a consultant of $65,000, $0, and $65,000, respectively, into
options to purchase 72,726, 0, and 72,726 shares, respectively, of common stock.
Of these options, 45,454 are exercisable at $1 per share, vest over a one-year
period, and expire in September 2012. The remaining options are exercisable at
$2.24 per share, vest over a one-year period, and expire in December 2012.
During the nine months ended January 31, 2003 and 2002 and the period from
August 21, 1995 (inception) to January 31, 2003, the Company issued 68,150, 0,
and 68,150 shares, respectively, of common stock for $78,360, $0, and $78,360,
respectively, of dividends accrued on the Series A convertible, redeemable
preferred stock.
During the nine months ended January 31, 2003 and 2002 and the period from
August 21, 1995 (inception) to January 31, 2003, the holders of 2, 0, and 2
shares, respectively, of the Series A convertible, redeemable preferred stock
converted their shares into 18,336, 0, and 18,336 shares, respectively, of
common stock.
During the nine months ended January 31, 2003 and 2002 and the period from
August 21, 1995 (inception) to January 31, 2003, warrants to purchase 47,000, 0,
and 47,000 shares, respectively, of common stock were exercised via a cashless
exercise, whereby the Company issued 33,909, 0, and 33,909 shares, respectively,
of common stock.
During the nine months ended January 31, 2003 and 2002 and the period from
August 21, 1995 (inception) to January 31, 2003, options to purchase 1,000,000,
0, and 1,000,000 shares, respectively, of common stock were issued to a
consultant for services to be rendered valued at $761,007, $0, and $761,007 (see
Note 8).
The accompanying notes are an integral part of these financial statements.
14
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
HiEnergy Technologies, Inc. ("HiEnergy") was incorporated on March 22,
2000 under the laws of the state of Washington. In October 2002,
HiEnergy reincorporated under the laws of the state of Delaware.
HiEnergy and its subsidiaries (collectively, the "Company") are
development stage companies that were organized to develop the
"Atometer," commercially known as the "Supersenzor," which is
technology for numerous governmental and commercial applications and
markets, including airport security screening; border patrol/customs
control drug and contraband detection; bomb, biological, and chemical
weapons detection, including landmine clearance; detecting of
impurities in crude oil, coal, and natural gas; and "fingerprinting" of
diamonds and other gemstones. This leading edge detection technology
can remotely and non-intrusively decipher (including through metal) the
chemical formulas of concealed biological agents, explosives, drugs,
and other substances and their locations.
As contemplated by the Securities and Exchange Commission under Item
310(b) of Regulation S-B, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all
disclosures required by accounting principles generally accepted in the
United States of America. The interim financial data is unaudited;
however, in the opinion of HiEnergy`s management, the interim data
includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the
interim periods. Results for the nine months ended January 31, 2003 are
not necessarily indicative of those to be expected for the year ended
April 30, 2003.
Merger
------
On April 25, 2002, HiEnergy Microdevices, Inc. ("Microdevices") entered
into a voluntary share exchange agreement, whereby it acquired 92% of
the outstanding common stock of HiEnergy in exchange for 14,380,200
shares of newly issued common stock. For accounting purposes, the
transaction has been treated as a recapitalization of HiEnergy, with
Microdevices as the accounting acquirer (reverse acquisition), and has
been accounted for in a manner similar to a pooling of interests.
Microdevices was incorporated on August 21, 1995 in the state of
Delaware. HiEnergy had minimal assets and liabilities at the date of
the acquisition and did not have significant operations prior to the
acquisition. Therefore, pro forma information is not presented.
15
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America which contemplate continuation of the Company as a going
concern. However, during the nine months ended January 31, 2003 and
2002 and the period from August 21, 1995 (inception) to January 31,
2003, the Company incurred net losses available to common shareholders
of $4,965,809 (unaudited), $597,925 (unaudited), and $7,690,373
(unaudited), respectively, and it had negative cash flows from
operations of $2,101,681 (unaudited), $195,053 (unaudited), and
$3,624,188 (unaudited), respectively. In addition, the Company had an
accumulated deficit of $7,690,373 (unaudited) and was in the
development stage as of January 31, 2003. These factors raise
substantial doubt about the Company`s ability to continue as a going
concern.
Recovery of the Company`s assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the
Company`s development program and its transition to the attainment of
profitable operations is dependent upon the Company achieving a level
of sales adequate to support the Company`s cost structure. In addition,
realization of a major portion of the assets on the accompanying
balance sheets is dependent upon the Company`s ability to meet its
financing requirements and the success of its plans to develop and sell
its products. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
In addition to the capital raised as of January 31, 2003 through a
private placement, the Company is currently negotiating with certain
investors about raising additional capital through private placement
offerings. Unless the Company raises additional funds, either by debt
or equity issuances, management believes that its current cash on hand
will be insufficient to cover its working capital needs until the
Company`s sales volume reaches a sufficient level to cover operating
expenses.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of HiEnergy
and its wholly owned subsidiaries, Microdevices and VWO II, Inc. All
significant inter-company accounts and transactions are eliminated in
consolidation.
16
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Development Stage Enterprise
----------------------------
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
all of its present efforts to its formation and to fundraising, and its
planned principal operations have not yet commenced. All losses
accumulated since inception have been considered as part of the
Company`s development stage activities.
Comprehensive Income
--------------------
The Company presents comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income." This statement establishes
standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation
adjustments and unrealized gains and losses on available-for-sale
securities. Comprehensive income is not presented in the Company`s
financial statements since the Company did not have any of the items of
comprehensive income in any period presented.
Cash and Cash Equivalents
--------------------------
The Company maintains its cash deposits at several banks located
throughout California. Deposits at each bank are insured by the Federal
Deposit Insurance Corporation up to $100,000. As of April 30, 2002 and
January 31, 2003, uninsured portions of the balances at those banks
aggregated to $1,125,206 and $640,357 (unaudited), respectively. The
Company has not experienced any losses in such accounts and believes it
is not exposed to any significant risk on cash and cash equivalents.
For the purpose of the statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents.
Accounts Receivable
-------------------
Accounts receivable at April 30, 2002 consisted of an amount due from a
governmental contract.
Property and Equipment
----------------------
Property and equipment are recorded at cost and are depreciated using
the straight-line method over an estimated useful life of five years.
17
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Patents
--------
The Company has filed several patent applications within and outside
the United States. The outcome is indeterminable.
Fair Value of Financial Instruments
------------------------------------
For certain of the Company`s financial instruments, including cash and
cash equivalents, accounts receivable, other current assets, accounts
payable, accrued expenses, accrued payroll and payroll taxes, and
accrued interest, the carrying amounts approximate fair value due to
their short maturities. The amounts shown for notes payable - related
parties and convertible notes payable - related parties also
approximate fair value because current interest rates offered to the
Company for debt of similar maturities are substantially the same.
Stock-Based Compensation
------------------------
The Company accounts for its stock-based compensation plans in
accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock
exceeds the exercise price. The Company adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under SFAS No. 123, the Company must disclose certain
pro forma information related to employee stock option grants as if the
fair value-based method defined in SFAS No. 123 had been applied.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
18
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss per Share
--------------
The Company calculates loss per share in accordance with SFAS No. 128,
"Earnings per Share." Basic loss per share is computed by dividing the
loss available to common shareholders by the weighted-average number of
common shares outstanding. Diluted loss per share is computed similar
to basic loss per share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. Because the Company has
incurred net losses, basic and diluted loss per share are the same.
The following potential common shares have been excluded from the
computation of diluted net loss per share for the periods presented
because the effect would have been anti-dilutive for the nine months
ended January 31, 2003 and 2002:
2003 2002
--------------- ----------------
(unaudited) (unaudited)
Stock options outstanding 6,649,185 -
Warrants outstanding 1,918,686 -
Series A convertible, redeemable preferred stock 833,217 -
Microdevices minority shareholders 459,222 459,222
Microdevices option and warrant holders 951,507 952,557
--------------- ----------------
TOTAL 10,811,817 1,411,779
=============== ================
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
19
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements
------------------------------------------
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit
cost, as defined, was recognized at the date of an entity`s commitment
to an exit plan. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002
with earlier application encouraged. This statement is not applicable
to the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS
No. 72 and Interpretation 9 thereto, to recognize and amortize any
excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those
transactions be accounted for in accordance with SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." In addition, this statement amends SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," to
include certain financial institution-related intangible assets. This
statement is not applicable to the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of
SFAS No. 123. SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. SFAS No.
148 will not have any impact on the Company`s financial statements as
management does not have any intention to change to the fair value
method.
20
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - OTHER CURRENT ASSETS
Other current assets at April 30, 2002 and January 31, 2003 consisted
of the following:
January 31, April 30,
2003 2002
--------------- ----------------
(unaudited)
Restricted cash held in escrow $ 125,000 $ -
Prepaid consulting 706,515 -
Other 51,526 7,500
--------------- ----------------
TOTAL $ 883,041 $ 7,500
=============== ================
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at April 30, 2002 and January 31, 2003
consisted of the following:
January 31, April 30,
2003 2002
--------------- ----------------
(unaudited)
Micro sensor $ 53,115 $ 42,127
Laboratory equipment 666,121 -
Web site development 14,400 14,400
Furniture and equipment 7,473 7,473
Neutron generator 58,000 58,000
--------------- ----------------
799,109 122,000
Less accumulated depreciation 79,989 7,432
--------------- ----------------
TOTAL $ 719,120 $ 114,568
=============== ================
Depreciation expense for the nine months ended January 31, 2003 and
2002 and the period from August 21, 1995 (inception) to January 31,
2003 was $72,556 (unaudited), $5,829 (unaudited), and $79,988
(unaudited), respectively.
21
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties at April 30, 2002 and January 31,
2003 consisted of the following:
January 31, April 30,
2003 2002
--------------- ----------------
(unaudited)
Unsecured notes to a majority shareholder/officer/ director of
the Company, interest payable at 6% per annum, maturing in
December 2002. During the nine months ended January 31,
2003, the notes were paid in full (unaudited). $ - $ 59,083
Unsecured note to a majority shareholder/officer/ director of
the Company as a signing bonus. Amount is
non-interest-bearing, $50,000 payable upon receipt of
$1,000,000 or more from any source, and $50,000 payable
upon revenue in excess of $500,000 or $1,000,000 of
additional funds from any source. During the nine months
ended January 31, 2003, $50,000 (unaudited) was repaid. 50,000 100,000
Unsecured notes to a shareholder of the Company, interest
payable at 10.5% per annum, or 15% per annum if in
default, and due in November 1997. As of January 31, 2003,
the notes were in default (unaudited). 40,000 40,000
Unsecured notes to a former officer of the Company, interest
payable at 6% per annum, and payable in February and March
2002. The Company was in litigation regarding these
amounts, but a settlement was reached, and the full amount
was paid in January 2003 (unaudited) (see Note 8). - 27,608
Secured note to an officer/director of the Company,
non-interest-bearing, and due in March 2002. The note is
secured by 7,857 shares of common stock. As of April 30,
2002, the note was in default. During the nine months
ended January 31, 2003, the note was paid in full (unaudited). - 50,000
22
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE - RELATED PARTIES (CONTINUED)
January 31, April 30,
2003 2002
--------------- ----------------
(unaudited)
Secured notes to a shareholder/former officer/ director of the
Company, non-interest-bearing, and due in March 2002. The
notes are secured by 23,571 shares of common stock. As of
April 30, 2002, the notes were in default. During the nine
months ended January 31, 2003, the notes were paid in full
(unaudited). In addition, since the notes were in default
and the principal balance of $150,000 was paid late, the
Company granted the holder of the notes warrants to
purchase 150,000 shares of common stock (unaudited)
(see Note 11). $ - $ 150,000
Unsecured amount to a former officer of the Company as
severance, non-interest-bearing, and payable upon demand.
The Company was in litigation regarding this amount, but a
settlement was reached, and the full amount was paid in
January 2003 (unaudited) (see Note 8). - 150,000
Unsecured notes to an unrelated party, non-interest-
bearing, and payable upon demand. 45,000 45,000
--------------- ----------------
135,000 621,691
Less current portion 135,000 621,691
--------------- ----------------
LONG-TERM PORTION $ - $ -
=============== ================
23
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 7 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Convertible notes payable - related parties at April 30, 2002 and
January 31, 2003 consisted of the following:
January 31, April 30,
2003 2002
--------------- ----------------
(unaudited)
Secured note to a shareholder/director of the Company,
interest payable at 8% per annum, and due in July 2001.
The note is secured by the patent application for Europe,
Canada, and Japan. The holder of the note had the option
to convert the principal and interest into shares of
common stock. During the nine months ended January 31,
2003, this note plus accrued interest of $780 was
converted into 5,780 shares of common stock (unaudited). $ - $ 5,000
Secured notes to a shareholder/director of the Company,
interest payable at 8% per annum, $5,000 due in July 2001,
and $5,400 due in July 2002. The notes are secured by the
patent application for Europe, Canada, and Japan. The
holder of the notes has the option to convert the
principal and interest into shares of common stock. As of
January 31, 2003, the notes were in default (unaudited). 10,400 10,400
Secured note to a shareholder/director of the Company,
interest payable at 8% per annum, and due in July 2001.
The note is secured by the patent application for Europe,
Canada, and Japan. The holder of the note had the option
to convert the principal and interest into shares of
common stock. During the nine months ended January 31,
2003, this note plus accrued interest of $1,678 was
converted into 11,678 shares of common stock (unaudited). - 10,000
24
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 7 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES (CONTINUED)
January 31, April 30,
2003 2002
--------------- ----------------
(unaudited)
Secured note to a shareholder/director/former officer of the
Company, interest payable at 8% per annum, and due in July
2001. The note is secured by the patent application for
Europe, Canada, and Japan. The holder of the note had the
option to convert the principal and interest into shares
of common stock. During the nine months ended January 31,
2003, the note was paid in full (unaudited). $ - $ 5,000
Unsecured note to a shareholder/director/former officer of the
Company, interest payable at 7% per annum, and due in
January 2002. The holder of the note had the option to
convert the principal and interest into shares of common
stock. During the nine months ended January 31,
2003, the note was paid in full (unaudited). - 5,000
--------------- ----------------
10,400 35,400
Less current portion 10,400 35,400
--------------- ----------------
LONG-TERM PORTION $ - $ -
=============== ================
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
---------------------
In March 2002, the Company entered into an employment agreement with
its Chief Scientist/Chairman of the Board. Major terms of the agreement
are as follows:
o The Company must pay a signing bonus of $100,000, of which $50,000
(unaudited) was paid during the nine months ended January 31, 2003.
o The Company must pay an annual bonus, which must not be less than 20%
of the total amount of bonuses paid to officers of the Company. If the
pretax profit in any fiscal year exceeds $0.20 per share, then his
bonus in that year must not be less than $50,000.
25
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements (Continued)
---------------------
o The Company granted options to purchase 2,482,011 shares of common
stock at an exercise price of $0.134 per share, vesting
immediately, and which are exercisable from time to time within
the period ending November 30, 2008.
o The Company will grant its Chief Scientist/Chairman of the Board
annually during the term of five years 1% per annum of the
Company`s stock issued and outstanding with an exercise price of
the average price for the preceding 30 days. He must not receive
less than 10% of the total number of options granted by the
Company for services in that year. As of January 31, 2003, the
Company is required to grant options to purchase 405,492 shares
(unaudited) of common stock.
o The Company will provide its Chief Scientist/Chairman of the Board
a car, pay his and his family`s health insurance, provide life and
disability insurance and will reimburse him for reasonable
out-of-pocket expenses, not to exceed $20,000 in any one year, and
reimburse him for any personal tax liabilities arising up to
$75,000. During the nine months ended January 31, 2003, the
Company paid $17,500 (unaudited) for an automobile deposit on
behalf of its Chief Scientist/Chairman of the Board.
o The Company must pay a base salary payable in cash as follows:
o January 1, 2002 to December 31, 2002 $125,000 per year
o January 1, 2003 to December 31, 2003 $175,000 per year
o January 1, 2004 to December 31, 2004 $175,000 per year
o January 1, 2005 to December 31, 2005 $175,000 per year
o January 1, 2006 to December 31, 2006 $283,013 per year
o In December 2002, the Company increased its Chief
Scientist/Chairman of the Board`s base salary to $175,000 per
year, effective November 2002.
o If the agreement is terminated by the Company without cause, the
Company must pay its Chief/Scientist/Chairman of the Board, on the
termination date, an amount equal to two years of the minimum
annual base salary.
26
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements (unaudited)
- --------------------
In September 2002, the Company entered into a three-year employment
agreement with its President/Chief Executive
Officer/Treasurer/Director. Major terms of the agreement are as
follows:
o The Company must pay a base salary as follows:
o $135,000 per year
o $175,000 per year when the Company receives new revenue and/or
new financing in excess of $2,000,000
o $250,000 per year when the Company receives new revenue and/or
new financing in excess of $4,000,000
o The officer is entitled to a bonus equal to $250,000 once the Company
achieves two consecutive quarters of positive cash flows from operations.
o The Company granted options to purchase 3,005,038 shares of common stock,
which represents an amount equal to 10% of the Company`s outstanding common
stock on a fully diluted basis as of September 30, 2002. Of these options,
75% vest 1/12 on a quarterly basis over the next 36 months. The remaining
25% vest on the earlier of a) the date when the Company`s closing price of
its common stock has equaled or exceeded $1.75 for 90 consecutive calendar
days, b) the date immediately preceding a sale of the Company for $1.75 per
share of common stock or more, or c) if the Company`s common stock ceased
to be publicly traded on the date following the closing of an offering at a
deemed price per share of common stock of $1.75 or more.
The exercise price is fixed six months after September 25, 2002 at the
lesser of a) $1 per share or b) for any offering of preferred or common
stock that closes within six months from September 25, 2002, the following
percentage of price per unit: (i) for preferred with warrants - 70%, (ii)
for preferred without warrants - 80%, (iii) for common with warrants - 90%,
(iv) for common without warrants - 100%. The Company granted the stock
options below the fair market on the date of grant; therefore, the Company
recorded deferred compensation of $3,305,542.
As of January 31, 2003, options to purchase 939,703 shares of common stock
had vested, and $1,032,981 of the deferred compensation was expensed and is
included in general and administration expenses on the accompanying
statement of operations.
27
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements (unaudited) (Continued)
---------------------
o If the agreement is terminated without cause, the Company must
pay its President/Chief Executive Officer/Treasurer/Director an
amount equal to the executive`s annual salary, payable in 12
monthly installments following the termination date, and health
insurance benefits for 12 months.
In March 2003, the President/Chief Executive
Officer/Treasurer/Director resigned his position (see Note 13.)
In February 2002, Microdevices entered into a one-year employment
agreement with its Vice President/Corporate Secretary. In May 2002,
the Company assumed the employment agreement. Under the agreement, the
Company will pay a salary of $91,000 per year, a car allowance of $100
per week, a quarterly bonus of 5,589 shares of the Company`s common
stock, starting May 2002, and a non-qualified stock option to purchase
89,410 shares of common stock at $0.157 per share, vesting immediately
and having a five-year term. As of January 31, 2003, 11,178 shares of
common stock were issued, and 5,589 shares of common stock were
committed. The shares were valued at $34,484, which approximates the
fair value of the shares.
In March 2003, the Vice President / Corporate Secretary resigned her
positions (see Note 13).
Consulting Agreements (unaudited)
---------------------
In July 2002, the Company entered into a three-year consulting
agreement, whereby the consultant will assist the Company with
business development, product and corporate image advertising, and
access to government grants and purchases. The Company will pay the
consultant $20,000 per month, plus 5% of any gross revenues collected
in cash from government grants or business and other third-party
business that the consultant produces for the Company. Furthermore,
the consultant was granted options to purchase 1,000,000 shares of
common stock. Of these options, 500,000 vested immediately, and the
remaining 500,000 vest one year after the Company`s Minisenzor product
is operational and ready to be shown. The stock options have an
exercise price of $1 per share and are exercisable for six years from
the date of grant.
The stock options were valued at $761,007, of which $148,073 was
expensed and is included in general and administration expenses on the
accompanying statement of operations. The remaining balance of
$612,934 is included in prepaid consulting in other current assets,
which will be amortized over the remaining term of the consulting
agreement.
28
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting Agreements (unaudited) (Continued)
---------------------
In August 2002, the Company entered into a one-year consulting
agreement with an investor and media relations firm. Under the terms of
the agreement, the Company will pay $10,000 per month, plus approved
expenses. In addition, upon execution of the agreement, the Company
issued warrants to purchase 400,000 shares of common stock, vesting
immediately at an exercise price of $2 per share, exercisable for two
years. The warrants were valued at $187,163, of which $93,582 was
expensed and is included in general and administration expenses on the
accompanying statement of operations. The remaining balance of $93,581
is included in prepaid consulting in other current assets, which will
be amortized over the term of the consulting agreement. Either party
may terminate the agreement six months after the commencement of this
agreement.
In September 2002, the Company entered into a one-year consulting
agreement with its former Chief Executive Officer. Under the terms of
the agreement, the Company will pay $5,000 per month, plus
out-of-pocket expenses. Effective February 2003, the Company terminated
this consulting agreement by mutual written consent.
In November 2002, the Company entered into a four-month consulting
agreement with a public relations firm. Under the terms of the
agreement, the Company will pay $12,500 per month, plus out-of-pocket
expenses.
Lease Agreement (unaudited)
---------------
In September 2002, the Company entered into a three-year operating
lease agreement for its corporate officers in Irvine, California. The
lease provides for monthly rent of $8,000, expiring in October 2005.
Future minimum payments at January 31, 2003 under this lease agreement
were as follows:
12 Months
Ending
January 31,
------------
2004 $ 96,000
2005 96,000
2006 72,000
------------
TOTAL $ 264,000
============
29
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Placement Agent Agreements (unaudited)
--------------------------
In August 2002, the Company entered into an exclusive one-year
agreement with a placement agent to arrange for the sale of debt or
equity securities. Major terms of the agreement are as follows:
o Upon execution of the agreement, the Company issued warrants to
purchase 100,000 shares of common stock, exercisable at $0.01 per
share. The warrants vest immediately and expire five years from
date of grant.
o The Company paid a placement fee equal to 8% of any gross
proceeds received by the Company.
o The Company issued warrants to purchase 10% of the amounts of
securities issued to investors. The exercise price of the
warrants will be equal to the price at which the security was
issued. The warrants vest immediately and expire five years from
the date of grant. Upon the closing of the preferred stock
private placement and closing of the common stock private
placement, the Company issued warrants to purchase 117,994 and
161,994 shares of common stock, respectively at an exercise price
of $1.15 per share and $1.35 per share, respectively.
o In December 2002, to cancel the remainder of the terms of this
agreement, the Company issued warrants to purchase 150,000 shares
of common stock. The warrants vest immediately, with an exercise
price of $2.48 per share, and expire five years from the date of
grant.
In December 2002, the Company entered into an exclusive one-year
agreement with a placement agent to arrange for the sale of debt or
equity securities. Major terms of the agreement are as follows:
o Upon execution of the agreement, the Company paid a retainer fee
of $25,000 and will pay an additional $25,000 on March 1, 2003.
o The Company will pay a placement fee equal to 8% of any gross
proceeds received by the Company.
o The Company will issue warrants to purchase 10% of the amounts of
securities issued to investors. The exercise price of the
warrants will be equal to the price at which the security was
issued. The warrants vest immediately, expire five years from the
date of grant, and include piggyback registration rights.
30
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Placement Agent Agreements (unaudited) (Continued)
-------------------------
o The placement agent has the right to participate in any equity
transaction under the same terms as other investors. Its
investment will be limited to 10% of the total capital raised.
o The placement agent will act as a financial advisor to the
Company with respect to any potential business combinations. Upon
the closing of such business combination, the Company will pay a
minimum transaction fee of $250,000.
Tax Returns
-----------
Microdevices has not filed its federal and state tax returns for the
years ended April 30, 1995, 2000, and 2001; however, management reports
that the minimum tax for the state of California has been paid. While
the estimated tax owed has been accrued, the Company will not be in
compliance until such reporting is made. The Board of Directors has
approved the Company`s filing these tax returns.
In addition, the Company seemingly has not filed certain of its
1099`s, W-2`s, and payroll tax returns for the calendar years ended
December 31, 1995 through 2001. As of January 31, 2003, federal and
state taxing authorities have not assessed the Company any additional
amounts due for payroll taxes, penalties, and interest. The Company
has reserved $350,000 and $350,000 for any potential taxes due for
payroll taxes, penalties, and interest that may have accrued as of
April 30, 2002 and January 31, 2003, respectively. The Board of
Directors has approved the Company`s filing these forms and payroll
tax returns, and the Company is in the process of determining what
needs to be filed and what amount, if any, is due.
Litigation
-----------
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe
that the outcome of these matters will have a material effect on the
Company`s financial position or results of operations.
In addition, the Company was sued by a former officer of the Company
for failure to pay wages, breach of contract, false representations,
and fraud. In January 2003, the Company entered into a settlement
agreement with this former officer. The settlement agreement provides
that the Company will pay its former officer $25,000 (unaudited) in
salary owed, $25,000 (unaudited) to reimburse legal and moving
expenses, plus issue 80,000 shares (unaudited) of the Company`s
restricted common stock. The shares are to be included in the next
registration statement filed by the Company. If the 80,000 shares are
not sold through the registered offering before April 1, 2003, the
former officer has the option of tendering the shares to the Company
and demanding payment of $125,000.
31
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation (Continued)
-----------
Furthermore, if the former officer receives less than $125,000 upon the
sale of the 80,000 shares with 30 days of the effective date of the
registration statement, he is entitled to payment of the difference
between $125,000 and the amount he received from the sale of the stock.
Under the terms of the agreement, the $125,000 has been deposited into
an escrow account acceptable to the former officer and is included in
other current assets on the accompanying balance sheet.
Minority Shareholders
---------------------
Microdevices has 20,540 minority shares issued and outstanding. The
Company has agreed that in the event of any merger or other
consolidation of Microdevices with HiEnergy, each remaining
Microdevices shareholder will receive the greater of the market value
of his/her Microdevices shares or shares in the Company on the same
terms as the voluntary share exchange. If all minority shareholders
convert, the Company will be required to issue 459,222 additional
shares of common stock to the minority shareholders.
Warrant and Option Holders
--------------------------
Microdevices has granted stock options and warrants to purchase 12,365
and 32,247 shares, respectively, of common stock. These stock options
and warrants are exercisable at $3.50 per share. If the stock option
and warrant holders exercise their stock options and warrants, the
Company has agreed to allow these stock option and warrant holders to
voluntarily exchange their shares in Microdevices for shares in
HiEnergy at an exchange rate of 22.3524 per share (or $0.157 per
share). If these stock option and warrant holders exercise and convert
their shares, the Company will be required to issue 997,272 additional
shares of common stock to the stock option and warrant holders.
During the nine months ended January 31, 2003, 2,047 (unaudited) of the
above stock options were exercised via a cash payment of $7,165
(unaudited), or $3.50 per share. The Company has agreed to exchange
these shares in Microdevices for shares in HiEnergy at an exchange rate
of 22.3524 per share, or 45,759 shares (unaudited) of common stock.
During the nine months ended January 31, 2003, options to purchase
4,000 (unaudited) shares of Microdevices` common stock were assumed by
the Company at an exchange rate of 22.3524 per share (or $0.157 per
share). Therefore, the Company issued options to purchase 89,410 shares
(unaudited) of its common stock at an exercise price of $0.157 per
share.
32
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 9 - PREFERRED STOCK
Series A Convertible, Redeemable Preferred Stock (unaudited)
------------------------------------------------
In August 2002, the Board of Directors approved an amendment to the
Company`s Articles of Incorporation to establish Series A convertible
preferred stock (the "Series A"), par value $0.001 per share. The
Company is authorized to issue 345 shares of the Series A. Each share
is convertible on either of these events a) any time at the option of
the holder at $1.15 per share or b) mandatorily convertible two years
following the issuance date at $1.15 per share. Under certain
circumstances the conversion price is subject to adjustment.
Furthermore, upon a certain major transaction or triggering event, the
holder of the Series A has the right to require the Company to redeem
all or a portion of the Series A at a price per share equal to the
liquidation preference, plus any accrued but unpaid dividends and
liquidated damages.
The liquidation preference is $10,000 per share. The holders of the
Series A are entitled to receive, when and as declared by the Board of
Directors, dividends at a rate of 8%, or $800 per share in advance for
each of the first two years. The dividends may be paid in cash or
common stock at the election of the Board of Directors. The Series A
has certain class voting rights and general voting rights.
In October 2002, the Company sold 98 shares of the Series A for net
cash proceeds of $800,396. At the time of issuance, the conversion
price of the preferred stock was less than the fair market value of
the common stock. Since the Series A was convertible immediately, the
Company recorded a beneficial conversion feature upon issuance of
$767,431.
In January 2003, two shares of the Series A were converted into 18,336
shares of the Company`s common stock.
As of March 2003, the Company may be in default with a triggering
event; therefore, the holders of the Series A may be able to request
the Company to redeem their shares in cash at $10,000 per share. If
all holders were to request redemption, the Company would be required
to make a cash payment of $958,200. In addition, the Company could be
subject to paying penalties of approximately $28,000 for the first
month (ending in December 2002) and approximately $42,000 per month
thereafter.
NOTE 10 - SHAREHOLDERS` EQUITY (DEFICIT)
Common Stock Issued for Cash (unaudited)
----------------------------
During the nine months ended January 31, 2003 and 2002 and the period
from August 21, 1995 (inception) to January 31, 2003, the Company
issued 0, 344,255, and 2,677,497, shares, respectively, of common stock
in exchange for cash of $0, $153,000, and $882,723, respectively.
33
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS` EQUITY (DEFICIT) (CONTINUED)
Common Stock Issued for Services Rendered (unaudited)
-----------------------------------------
During the nine months ended January 31, 2003 and 2002 and the period
from August 21, 1995 (inception) to January 31, 2003, the Company
issued 0, 1,051,318, and 11,702,703 shares, respectively, of common
stock in exchange for services rendered valued at the fair market value
of the stock given of $0, $161,707, and $428,950, respectively.
Notes Payable Converted into Common Stock (unaudited)
-----------------------------------------
During the nine months ended January 31, 2003 and 2002 and the period
from August 21, 1995 (inception) to January 31, 2003, the Company
issued 37,898, 0, and 37,898 shares, respectively, of common stock for
the outstanding principal on convertible notes payable - related
parties and accrued interest of $37,896, $0, and $37,896, respectively.
Common Stock Issued in Private Placements
------------------------------------------
In April 2002, the Company completed its first closing of its first
private placement, whereby 1,225,000 shares of common stock were issued
in exchange for cash of $1,225,000. The private placement offering was
originally slated to close at the same time as the voluntary share
exchange. HiEnergy extended the term of the offering and increased the
size to a maximum of 2,000,000 shares of common stock at $1 per share.
In June 2002, the Company completed its second closing of its first
private placement, whereby 500,000 shares (unaudited) of common stock
were issued in exchange for cash of $500,000 (unaudited). This private
placement has been closed.
In October 2002, the Company completed its second private placement,
issuing 1,349,934 shares (unaudited) of common stock in exchange for
net cash proceeds of $1,625,614 (unaudited), of which $184,000
(unaudited) was recorded as a subscription receivable and collected in
November 2002.
Common Stock Issued for Dividends (unaudited)
---------------------------------
In October 2002, the Company issued 68,150 shares of common stock for
$78,360 of dividends accrued on the Series A.
Common Stock Issued for Employee Bonus (unaudited)
--------------------------------------
The Company issued 11,178 shares of common stock and committed to issue
5,589 shares of common stock to an employee of the Company in lieu of a
cash bonus. The shares were valued at $34,484, which approximates the
fair value of the shares.
34
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS` EQUITY (DEFICIT) (CONTINUED)
Accounts Payable Converted into Stock Options (unaudited)
---------------------------------------------
During the nine months ended January 31, 2003 and 2002 and the period
from August 21, 1995 (inception) to January 31, 2003, the Company
converted accounts payable due to a consultant of $65,000, $0, and
$65,000, respectively, into options to purchase 72,726, 0, and 72,726
shares, respectively, of common stock. Of these options, 45,454 are
exercisable at $1 per share, vest over a one-year period, and expire in
September 2012. The remaining options are exercisable at $2.24 per
share, vest over a one-year period, and expire in December 2012.
Cashless Exercise of Warrants (unaudited)
------------------------------
In December 2002, warrants to purchase 47,000 shares of common stock
were exercised via a cashless exercise, whereby the Company issued
33,909 shares of common stock.
Common Stock Issued to a Former Officer as a Settlement (unaudited)
-------------------------------------------------------
In February 2003, the Company issued 80,000 shares of restricted common
stock valued at $125,000 in connection with a settlement agreement with
a former officer.
Stock Splits
------------
In September 1998 and May 1999, the Company effectuated 2-for-1 stock
splits. All share and per share data have been retroactively restated
to reflect these stock splits.
NOTE 11 - FINANCING EXPENSE - RELATED PARTY (UNAUDITED)
In May 2002, the Company issued warrants to purchase 150,000 shares of
common stock to a shareholder/former officer/director of the Company.
The warrants vest immediately, are exercisable at $1 per share, and
expire on May 31, 2005. Since the Company was in default on the note
payable for $150,000 to this shareholder/former officer/director of the
Company, the Company granted these warrants (see Note 6). Accordingly,
the Company recorded financing expense of $223,710 during the nine
months ended January 31, 2003.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the nine months ended January 31, 2003 and 2002 and the period
from August 21, 1995 (inception) to January 31, 2003, the Company
purchased $4,767 (unaudited), $0 (unaudited), and $4,767 (unaudited),
respectively, of property and equipment from a Board member.
See Notes 6, 7, and 11 for additional related party transactions.
35
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 13 - SUBSEQUENT EVENTS (UNAUDITED)
Management Changes
------------------
Appointments
In February 2003, the Company appointed Mr. David R. Baker to the
Board of Directors of the Company.
In March 2003, the Company appointed Mr. Robert Drysdale and Mr. Bruce
Del Mar to its Board of Directors.
In March 2003, Ms. Ioana C. Nicodin was appointed Secretary of the
Company.
In March 2003, Dr. Bogdan C. Maglich was appointed Chief Executive
Officer, President, and Treasurer of the Company.
Resignations
At the request of the Chief Scientist/Chairman of the Board, Mr.
Gregory Gilbert and Mr. Barry Alter, both of whom were directors of the
Company, resigned their positions in March 2003.
In March 2003, Mr. Thomas Pascoe resigned his positions as
President/Chief Executive Officer/Treasurer/Director of the Company.
In March 2003, Ms. Michal Levy resigned her positions as Secretary and
Vice President of the Company.
SEC Investigation
-----------------
In February 2003, the Enforcement Division of the Securities and
Exchange Commission opened an investigation requesting the Company`s
cooperation on a voluntary basis and we have not been notified of any
formal investigation. The Company has supplied the Enforcement
Division`s attorneys with the reports developed by the Company`s
independent investigators. The Company has cooperated promptly and
continuously and intends to cooperate with the Enforcement Division`s
investigation and has agreed to voluntarily provide the Enforcement
Division with other documents they have requested in its informal
investigation. At this time, the Enforcement Division`s attorneys have
not indicated whether they intend to recommend action against the
Company or any of its officers or directors and has not commenced a
formal investigation.
In connection with the SEC investigation, the Company may be subject
to a claim by a former Chief Executive Officer and director for an
alleged right to indemnification from expenses incurred by him in
connection with the investigation under the indemnification provisions
of the Company`s Certificate of Incorporation and Bylaws. The Company
is in the process of considering the request for indemnification and
has not made a determination that he is entitled to it.
Consulting Agreement
--------------------
Effective February 21, 2003, the Company terminated the consulting
agreement with a former Chief Executive Officer by mutual written
consent.
36
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2002 AND JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 13 - SUBSEQUENT EVENTS (UNAUDITED)
Employment Agreement
--------------------
In February 2003, the Company paid $50,000 due on a promissory note to
its Chief Scientist/Chairman of the Board and issued options to
purchase 416,712 shares of common stock in connection with his
employment agreement.
Stock Options
-------------
In February 2003, the Company issued warrants to purchase 80,000 shares
of common stock to a placement agent. The options vest immediately,
have an exercise price of $1.50 per share, and expire in February 2006.
37
ITEM 2. MANAGEMENT`S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for the historical information presented in this document, the matters
discussed in this Form 10-QSB, and specifically in "Management`s Discussion and
Analysis or Plan of Operation," or otherwise incorporated by reference into this
document contain "forward looking statements" (as such term is defined in the
Private Securities Litigation Reform Act of 1995). These statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "intends," "should," or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. The safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, apply to forward-looking statements
made by HiEnergy Technologies, Inc. (the "Company"). You should not place undue
reliance on forward-looking statements. Forward-looking statements involve risks
and uncertainties. The actual results that we achieve may differ materially from
any forward-looking statements due to such risks and uncertainties. These
forward-looking statements are based on current expectations, and we assume no
obligation to update this information. Readers are urged to carefully review and
consider the various disclosures made by us in this report on Form 10-QSB and in
our other reports filed with the Securities and Exchange Commission ("SEC") that
attempt to advise interested parties of the risks and factors that may affect
our business.
The following discussion and analysis of our financial condition and plan of
operation should be read in conjunction with the unaudited financial statements
and accompanying notes and the other financial information appearing elsewhere
in this report and with the audited financial statements contained in our Form
10-KSB for the year ended April 30, 2002.
OVERVIEW
We were incorporated under the laws of the State of Washington on March 22,
2000, under the name SLW Enterprises Inc. On April 30, 2002, SLW changed its
name to HiEnergy Technologies, Inc. in conjunction with the acquisition of an
approximately 92% interest in HiEnergy Microdevices, Inc., a Delaware
corporation based in Irvine, California in the business of developing a
stoichiometric-based technology that can remotely determine the empirical
chemical composition of substances, including explosives, biological weapons and
illegal drugs. HiEnergy Microdevices was formed on August 21, 1995.
The acquisition of HiEnergy Microdevices by SLW occurred on April 25, 2002. SLW
acquired HiEnergy Microdevices pursuant to a Voluntary Share Exchange Agreement
that provided the framework for the exchange of outstanding common stock of
HiEnergy Microdevices for shares of common stock of SLW. Pursuant to the
voluntary share exchange, SLW offered to exchange 22.3524 shares of its common
stock for each outstanding share of HiEnergy Microdevices` common stock. On the
closing date of the offering, 14,380,200 shares of common stock of SLW were
issued in exchange for approximately 92% of HiEnergy Microdevices` outstanding
shares of common stock in a reverse take-over transaction. As a result of this
transaction, SLW changed its name to HiEnergy Technologies, Inc., the former
stockholders of HiEnergy Microdevices came to own approximately 65% of the
outstanding equity of the parent public company and the five directors of
HiEnergy Microdevices comprised five of the six directors of the parent public
company. The composition of our board of directors has subsequently evolved due
to resignations and appointments and currently consists of five directors.
On October 22, 2002, we reincorporated under the laws of the State of Delaware.
Our name remains HiEnergy Technologies, Inc., and our common shares continue to
trade on the NASD`s Over-the-Counter Bulletin Board(R) under the symbol "HIET".
We plan to develop three detection systems based on our innovative
stoichiometric technology, which has been proven in the laboratory to remotely
and non-intrusively determine the chemical formulas of certain concealed
substances in controlled situations and "see through" metals and other
materials.
38
BASIS OF PRESENTATION
For accounting purposes, the voluntary share exchange transaction between SLW
and HiEnergy Microdevices has been treated as a recapitalization of SLW, with
HiEnergy Microdevices as the accounting acquiror (reverse acquisition), and has
been accounted for in a manner similar to a pooling of interests.
We have prepared our unaudited Consolidated Financial Statements on a going
concern basis in accordance with generally accepted accounting principles in the
United States. This going concern basis of presentation assumes that we will
continue operations for the foreseeable future and will be able to realize our
assets and discharge our liabilities and commitments in the normal course of
business. As described below under Liquidity and Capital Resources, there is
substantial uncertainty about our ability to continue as a going concern. Our
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based on our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis of making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
OPERATING RESULTS
For the nine months ended January 31, 2003, we incurred a net loss of
approximately $4.1 million, as compared to a net loss of approximately $600,000
for the same period in 2002. For the three months ended January 31, 2003, we
incurred a net loss of approximately $2.2 million, as compared to a net loss of
approximately $440,000 for the same period in 2002. For the nine months ended
January 31, 2003, we had negative cash flows from operations of approximately
$2.1 million. In addition, we had an accumulated deficit of approximately $7.7
million and were in the development stage as of January 31, 2003. These factors,
among others, raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
THREE MONTHS ENDED JANUARY 31, 2003 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 2002
- ------------------------------------------------------------------
REVENUE
We had no revenues during the three-month periods ended January 31, 2003 or
2002. Our only revenues have been derived from government grants for development
and testing of our remote detection technology. We have not commenced selling
our products. Until we complete development of one of our detector systems, our
revenues will most likely be limited to government grants. We cannot predict
exactly when we will complete development of our planned detection systems and
begin production for specific applications, but we expect that it will not be
within the fiscal year that will end on April 30, 2003.
OPERATING EXPENSES
Our operating expenses consist primarily of salaries and benefits, costs for
general corporate functions, including finance, accounting and facilities, and
fees for professional services.
Our general and administration expenses increased to approximately $2.2 million
during the three-month period ended January 31, 2003, from approximately
$436,000 during the same period in 2002. The increase in operating expenses was
primarily due to increases in scientific administrative personnel, general
office, legal, accounting and investor relations expenses, as well as research
and development expenses.
39
NINE MONTHS ENDED JANUARY 31, 2003 COMPARED TO NINE MONTHS ENDED
JANUARY 31, 2002
- ----------------------------------------------------------------
REVENUE
We had revenues of approximately $41,000 during the nine-month period ended
January 31, 2003, as compared to revenues of approximately $117,000 during the
same period last year. Our revenues were derived from government grants for
development and testing of our remote detection technology.
OPERATING EXPENSES
Our general and administration expenses increased to approximately $4.0 million
during the nine-month period ended January 31, 2003, from approximately $707,000
during the same period in 2002. The increase in operating expenses was primarily
due to increases in scientific and administrative personnel, amortization of
deferred compensation and prepaid consulting, general office, legal, accounting
and investor relations expenses, as well as research and development expenses.
OTHER EXPENSES
We incurred finance expenses of $223,710 during the nine months ended January
31, 2003 as discussed in Note 10, page 35 of the Notes to Consolidated Financial
Statements.
DEPRECIATION
Accumulated depreciation for property and equipment at January 31, 2003 was
approximately $80,000. Depreciation expense for the nine-month periods ended
January 31, 2003 and 2002 was approximately $72,500 and $5,800, respectively.
OTHER MATTERS
- -------------
TAX RETURNS
The Company`s subsidiary, HiEnergy Microdevices, has not filed certain of its
Forms 1099 and W-2 and payroll tax returns for the years ended April 30, 1996
through 2002. HiEnergy Microdevices has reserved $350,000 as of April 30, 2002,
and $350,000 as of January 31, 2003 for any potential taxes due for payroll
taxes, penalties and interest that may have accrued as of such dates. The Boards
of Directors of HiEnergy Microdevices and HiEnergy Technologies have directed
that any delinquent Forms 1099 and W-2 and payroll tax returns be filed.
RECENT ACCOUNTING PRONOUNCEMENTS
The subsection of Note 3 to the unaudited Notes to the Financial Statements
entitled "Recently Issued Accounting Pronouncements" is incorporated herein by
reference.
LIQUIDITY AND CAPITAL RESOURCES; PLAN OF OPERATION
During the nine months ended January 31, 2003, we used approximately $2.1
million for operating activities, approximately $677,000 to acquire equipment
and approximately $506,000 to repay related party liabilities. These uses of
cash were funded principally through opening cash on April 30, 2002 of
approximately $1.1 million and private placement offerings of common and
preferred stock that provided net proceeds of approximately $2.9 million. As of
January 31, 2003, we had cash of approximately $756,000 and current liabilities
of approximately $1.1 million.
We raised approximately $2.5 million in net proceeds (after commissions) during
the three months ended October 31, 2002. On October 7, 2002, we closed an
offering of our Series A Convertible Preferred Stock, providing net proceeds
(after commissions) of approximately $855,000. We issued approximately 98 Series
A Preferred shares at a face value of $10,000 per share. The Series A Preferred
shares are convertible into common stock at a fixed rate of $1.15 per share.
Each investor also received 30% warrant coverage, based on the number of common
shares their Series A Preferred can be converted into, with an exercise price of
$1.50 per share. We also paid an 8% dividend on the Series A Preferred in
advance by issuing approximately 68,000 common shares to the investors. On
October 31, 2002, we completed an offering of our common stock, providing net
proceeds (after commissions) of approximately $1.7 million. We issued
approximately 1.3 million common shares at a price per share of $1.35. Each
investor also received 20% warrant coverage, based on the number of common
shares purchased, with an exercise price of $2.50 per share. The offerings and
sales of our Series A Preferred Stock and our common stock were not registered
under the Securities Act and were conducted pursuant to applicable exemptions
from the Securities Act`s registration requirements. This disclosure is not an
40
offer of securities by us or a solicitation of an offer to buy securities from
us. Placements were made only to accredited investors with preexisting contacts
with HiEnergy Technologies and its authorized representatives.
On February 7, 2003, we repaid approximately $50,000 of the approximately
$145,000 of related party notes payable that were outstanding on January 31,
2003. The remaining unpaid balance of approximately $95,000 is in default or due
on demand. As discussed in the section entitled "Legal Proceedings", on January
15, 2003, we executed a settlement agreement with Keith Cowan, a former
executive officer of HiEnergy Microdevices, that contains a maximum cash
exposure of $175,000. The settlement agreement provides that we will pay Mr.
Cowan $50,000. In addition, Mr. Cowan received 80,000 shares of restricted
HiEnergy Technologies common stock with registration rights. If the 80,000
shares are not sold through a registered offering before April 1, 2003, then Mr.
Cowan has the option of tendering the shares to HiEnergy Technologies and
demanding payment of $125,000. The $125,000 is being held in escrow. In the
alternative, if Mr. Cowan receives less than $125,000 upon the sale of the
80,000 shares within 30 days of the effective date of the registration
statement, he is entitled to payment of the difference between $125,000 and the
amount he received from the sale of the stock. Once HiEnergy Technologies has
fulfilled its obligations under the settlement agreement, Mr. Cowan has agreed
to request dismissal, with prejudice, of the lawsuit.
After filing our payroll tax returns, we intend to negotiate payment schedules
with relevant taxing authorities. The Company`s subsidiary, HiEnergy
Microdevices, has reserved $350,000 as of April 30, 2002, and $350,000 as of
January 31, 2003 for any potential taxes due to payroll taxes, penalties and
interest that may have accrued as of such dates.
On November 6, 2002, we filed a registration statement on Form SB-2 to register
an offering of common stock by some of our shareholders on a delayed and
continuous basis. The Securities and Exchange Commission notified us that it
would not review the registration statement. During the course of our ongoing
due diligence in connection with this filing, we determined that certain
disclosures should be updated prior to requesting that the Securities and
Exchange Commission declare the registration statement effective. On February
25, 2003, we filed a pre-effective amendment to the registration statement that
updates these disclosures and includes updated financial statements. We will
have to file a second pre-effective amendment because the February 25, 2003
filing now contains outdated financial statements and does not accurately
reflect the current composition of our Board of Directors. Certain shareholders
may have rights under their respective registration rights agreements to demand
payment of penalties because we did not request the Securities and Exchange
Commission to declare our registration statement effective. Although we believe
we have valid reasons for amending our registration statement, we may be liable
for these penalties nonetheless. If a court determines us liable for these
penalties, or if we agree to pay them to avoid litigation, the penalties would
be approximately $28,000 for the first month (ending in December) and
approximately $42,000 per month thereafter. We cannot predict whether the
Securities and Exchange Commission will decide to review our second
pre-effective amendment, but a decision to review our filing could substantially
lengthen the period during which we will be exposed to liability for penalties.
We have the option to pay a portion of these penalties in common stock that
would be included in the registration statement. Although we believe we have
valid reasons for amending our registration statement, it may be possible for
our Series A shareholders to claim a right to redeem their Series A Convertible
Preferred Stock by alleging that our decision to update and amend our
registration statement is a material breach of our registration rights agreement
with them. If all of our Series A shareholders made such a claim and prevailed,
we would have to redeem their Series A shares in an amount of approximately $1.0
million (this amount is in addition to the penalties discussed above). Although
this claim is a reasonable possibility, we believe we have defenses against it.
The SEC has initiated an investigation which includes an investigation of the
relationship of certain of our directors and stockholders to an individual who
has previously been involved in stock manipulation schemes and our
relationships, contracts and press releases. The SEC has requested our
cooperation on a voluntary basis. We had previously conducted an independent
investigation of such relationships with that individual, the conclusions of
which are discussed further below in the section entitled "Legal Proceedings."
We intend to cooperate with the ongoing investigation of this matter by the SEC
and may be required to incur additional expenses related to the investigation.
We may also be subject to a claim by Barry Alter, a former Chief Executive
Officer and director of HiEnergy Technologies, for an alleged right to
indemnification from expenses incurred by him in connection with the
investigation under the indemnification provisions of our Certificate of
Incorporation and Bylaws. We are in the process of considering the request for
41
indemnification and have not made a determination that Mr. Alter is entitled to
it. If it is determined that Mr. Alter`s claim satisfies the conditions for
indemnification, we may be obligated to pay for any expenses, liabilities or
losses incurred by him in connection with the investigation. In a determination
of Mr. Alter`s right to indemnification, we will bear the burden of proof in
demonstrating that he is not entitled to indemnification under the provisions of
the Certificate of Incorporation and Bylaws.
During the quarter ended January 31, 2003, our monthly cash used in operations
was around $265,000, excluding the $50,000 paid to and the $125,000 held in
escrow for Keith Cowan in connection with the settlement agreement. We are now
working to conserve our cash. As a result of cost cutting measures, we are
trying to limit our monthly cash used in operations to approximately $150,000
per month. We have no contractual obligations to make capital expenditures.
During the nine-month period ended January 31, 2003, we have made capital
expenditures of approximately $677,000. We intend to make additional capital
expenditures of approximately $30,000 through April 30, 2003, for a total of
approximately $700,000 during the fiscal year, to further the development and
testing of our technology and proposed products. If we make all of these capital
expenditures and our cash used in operations remains steady at approximately
$150,000 per month, we expect to have enough cash to support our operations,
with continued cost-cutting measures, for approximately three to four months.
Our cash on hand, however, may not be sufficient to fund our operations for a
period of four months and we will need to raise additional funds to support our
operations beyond four months.
The continued development and testing of our technology to create market-ready
products depends upon raising additional funds. We anticipate needing an
additional $2.0 million for the year ending April 30, 2004, in order to continue
our operations at their current level. We believe we have sufficient authorized
capital to raise approximately $2.0 million during the coming fiscal year, as
our Certificate of Incorporation authorizes 100,000,000 shares of common stock
and 20,000,000 shares of preferred stock. As of March 14, 2003, there were
24,174,605 shares of common stock and approximately 95.82 shares of preferred
stock outstanding. There can, however, be no assurance that we will be able to
continue as a going concern or achieve material revenues or profitable
operations.
In August 2002, our project to develop the SuperSenzor was competitively
selected by the Department of Defense Small Business Innovation Research
("SBIR") program to receive up to $780,000 in funding over two years for Phase
II testing and development of an anti-tank landmine detection system. The total
cost of the project is $1,400,000, which includes private matching funds of
$550,000 and $70,000 granted by the Department of Defense for Phase I testing of
the system currently being completed. The private contribution consists of
approximately $200,000 in matching funds from private individuals and
approximately $350,000 worth of HiEnergy Technologies` hi-tech equipment. On
January 15, 2003, the contract with the Department of Defense was executed by
the parties. We have commenced work under year one of the $415,000 contract. We
are contractually scheduled to receive $34,585 per month under the contract
commencing in February 2003 and have submitted invoices to the DOD for the
February and March 2003 payments, but have not yet received them. The second
year of the contract, valued at approximately $364,000, is under an option that
can be exercised by the DOD at the end of the first year.
We plan to continue to utilize a combination of equity financings and government
grants to fund our short-term growth. Negative publicity surrounding the matters
discussed in the section entitled "Legal Proceedings" could increase the
challenge of raising additional capital. However, the lower stock price could
make the stock more attractive to private investors. There is no assurance that
additional capital will be available when or if required.
The forecast of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement that involves
risks and uncertainties. Our actual funding requirements may differ materially
as a result of a number of factors, including unknown expenses associated with
the development and testing of our products, the cost of production of our
products and the timing of bringing our products to market. There can be no
guarantee that financing adequate to carry out our business plan will be
available on terms acceptable to us, or at all.
42
RISKS RELATED TO OUR BUSINESS
THERE HAS BEEN AN INFORMAL SEC INQUIRY THAT RELATES TO INVESTORS IN OUR
PREDECESSOR COMPANY ABOUT THE TIME OF THE REVERSE ACQUISITION TRANSACTION
BETWEEN SLW ENTERPRISES INC. AND HIENERGY MICRODEVICES, INC.
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We were made aware by a reporter with the Dow Jones News Service that there may
be a relationship between a former director and Chief Executive Officer of each
of SLW and HiEnergy Technologies, Barry Alter, and an individual by the name of
Phil Gurian, who had previously been convicted and awaits sentencing for stock
manipulation schemes. We initiated an independent investigation into whether
such relationship existed, and if so, to determine further whether we or any of
our directors or officers engaged in any wrongdoing. The investigation concluded
that Mr. Alter had contact with Mr. Gurian in connection with the reverse
acquisition of HiEnergy Microdevices by SLW in April 2002. Mr. Gurian was never
a record stockholder of HiEnergy Technologies. However, we believe that Mr.
Gurian introduced other investors who did own our stock or do own our stock. Our
investigation revealed that some stockholders who purchased significant amounts
of SLW shares shortly prior to the reverse acquisition knew or had other
business dealings with Mr. Gurian. One of these stockholders was a company
reportedly owned by Mr. Gurian`s mother, which disposed of its shares in April
2002 at a substantial profit. We believe that, innocently or intentionally, Mr.
Alter knew of these purchases. Please see "Legal Proceedings." Mr. Alter has
engaged his own separate legal counsel and is a recipient of an informal inquiry
by the SEC as to this matter. Mr. Alter has also requested that we advance him
legal counsel retainer against future expenses in connection with that
investigation. After our independent investigation concluded, the Dow Jones News
Service has developed further its story about various connections that allegedly
may have existed between these and other investors and Mr. Gurian himself and
other connections including some between a former market maker and Mr. Gurian.
Despite the ongoing investigation by the SEC, the development of our technology
and products is proceeding undisturbed and without interruption. Naturally, we
have cooperated fully with the SEC. We feel that we have fully complied with the
request by the SEC for information. For instance, we have provided approximately
3,000 pages of documents. There will be a few additional documents supplied as
and when requested. As to the conclusions of the independent investigators,
please see "Legal Proceedings."
The price of our stock declined precipitously in connection with the news story
and our announcements concerning our investigation. Nevertheless, current
management is highly confident of the Company`s ability to raise financing. The
SEC has not made or filed any allegations as it is still a matter of informal
investigation. One of the possible effects on us could be a depressed stock
price, which may result in difficulty raising equity capital or the sale of
equity at prices that are less than the price of our common stock on the market.
We also would be subject to indemnification claims by Mr. Alter, who claims that
we are required to advance his expenses until there is a final judgment, which
could be years away. We are in the process of considering the request for
indemnification and have not made a determination that Mr. Alter is entitled to
it. There may be costs and expenses in addition to these, such as legal expenses
and other incremental expenses that could be involved in sorting out these
issues and assisting the SEC with such work.
We may also consider instituting litigation as a result of any wrongdoing that
is found. Such litigation could also involve material costs that could affect
our financial position. We will rely upon the SEC`s investigation to help us
determine whether and what action is appropriate.
FORMER DIRECTOR FAILED TO DISCLOSE COURT JUDGMENT.
- --------------------------------------------------
We filed on March 11, 2003 an amendment to our annual report on Form 10-KSB for
the year ended April 30, 2002 disclosing additional biographical information
about Gregory F. Gilbert, a former director. Specifically, we obtained a copy of
a "Final Judgment as to Gregory Gilbert" from the United States District Court
for the District of Columbia dated May 7, 1999, in SEC v. Bio-Tech Industries,
Inc., et al., Case No. 98 Civ. 2298. Based on a review of the civil docket for
this case, we do not believe this judgment, as reinstated on or about July 20,
1999, has been reversed, suspended or vacated. Therefore, this involvement by a
director in such legal proceedings was not known by the Company or disclosed in
the Form 10-KSB pursuant to Item 401(d) of Regulation S-B.
43
The judgment permanently restrains and enjoins Mr. Gilbert from violating the
anti-fraud provisions of the Securities Exchange Act of 1934 and imposes a civil
penalty of $100,000 on him. Mr. Gilbert did not disclose this judgment to us
during the course of our preparation of our annual report on Form 10-KSB for the
year ended April 30, 2002. We also determined, based on SEC Litigation Release
No. 16182 (June 9, 1999), that a predecessor to Hamilton-Biophile Companies, of
which Mr. Gilbert is Chief Executive Officer, was enjoined to file its quarterly
and annual reports due under the Securities Exchange Act of 1934. Based on
entries on the SEC`s EDGAR database, it does not appear that either
Hamilton-Biophile or the predecessor has complied with this injunction.
Additionally, Hamilton-Biophile, including its predecessors, has filed or had
filed against it petitions for voluntary and involuntary bankruptcy during Mr.
Gilbert`s tenure as its Chief Executive Officer.
Because the information had not been disclosed by Mr. Gilbert to us, we could
not include the information in any filings with the SEC prior to the filing on
March 11, 2003 of the amendment to our annual report on Form 10-KSB for the year
ended April 30, 2002.
PURCHASERS OF OUR SECURITIES AND STOCKHOLDERS COULD ATTEMPT TO ASSERT CLAIMS
AGAINST US FOR INADEQUATE DISCLOSURE.
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In April, June and October 2002, we sold 1,725,000 shares of Common Stock, 97.93
shares of Series A Convertible Preferred Stock and 1,349,934 shares of Common
Stock in three separate private equity offerings. Facts related to Gregory
Gilbert and a separate investigation by the SEC involving persons suspected of
stock manipulation, which are described under "Former Director Failed to
Disclose Court Judgment" "There Has Been an Informal SEC Inquiry ... SLW
Enterprises Inc. and HiEnergy Microdevices, Inc." and "Legal Proceedings," were
not known to us and were not disclosed in sales materials or filings with the
SEC. We do not believe that the information was material, and we believe that we
have valid defenses against liability under the Securities Act of 1933 (the
"Securities Act"), the Securities Exchange Act of 1934 (the "Exchange Act") and
other state and federal securities laws. However, if a court decides to the
contrary, that could result in liability under the Securities Act to such
purchasers or under the Securities Exchange Act of 1934 to stockholders, or
under other state securities laws that may apply similar or different standards
as the federal law. In such case, we would pursue all of our rights and
remedies, if any, against our former officers and directors to the extent they
were involved.
IF WE ARE UNABLE TO SECURE ANTICIPATED GOVERNMENTAL FUNDING, WE MAY BE FORCED TO
CURTAIL SPENDING FURTHER THAN ANTICIPATED.
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We must secure enough funds to pay our current liabilities and fund the research
and development of our products. We are currently in the process of negotiating
several proposals with various government agencies for the development and use
of our technology, which we believe will provide adequate sources of funding for
our operations for the foreseeable future. The government review and procurement
process can be slow and unpredictable at times. However, management is highly
confident as our products have performed well in all tests and demonstrations to
date and been well received by these agencies.
We may instead raise capital funds through other sources. If equity financing is
used to raise additional working capital, the ownership interests of our
existing stockholders will be diluted. There is no assurance that funds will be
available from any source or, if available, that they can be obtained on terms
acceptable to us. If unavailable, our operations could be severely limited, and
we may not be able to implement our business plan in a timely manner or at all.
IF WE ARE UNABLE TO RETAIN KEY TECHNICAL AND SCIENTIFIC PERSONNEL, IT MAY
PREVENT US FROM IMPLEMENTING OUR BUSINESS PLAN, LIMIT OUR PROFITABILITY AND
DECREASE THE VALUE OF YOUR STOCK.
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We are dependent on the talent and resources of our key managers and employees.
In particular, the success of our business depends to a great extent on Dr.
Bogdan Maglich, the Chairman of our Board of Directors, Chief Executive Officer
and Chief Scientific Officer. Dr. Maglich is the inventor of the stoichiometric
technology and the three detection system prototypes being developed by us, and
his services are critical to our success. We have not obtained key man insurance
with respect to Dr. Maglich or any of our executive officers. The loss of Dr.
Maglich may prevent us from implementing our business plan, which may limit our
profitability and decrease the value of your stock.
44
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE ONE OF THE MATERIAL FACTORS TO
OUR SUCCESS, MISAPPROPRIATION OF THOSE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL
ACTIONS RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT OUR FINANCIAL
CONDITION, EXCEPT TO THE EXTENT WE OTHERWISE CAN PROTECT OUR INTERESTS.
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We do not solely rely on contractual rights, patents, copyrights or other legal
protection of intellectual property for any aspect of our technology. Because
the combination of contractual rights, patents and copyrights may only provide
narrow protection of our proprietary rights, we also rely on the protection
afforded by our trade secrets, rapid innovation and advancement of technology
and scientific expertise. However, we believe that our products in development
could benefit from patent protection. As a result, we have filed patent
applications for various products with the United States Patent and Trademark
Office. Although we rely to a great extent on trade secret protection for much
of our technology and plan to rely in the future on patents to protect a portion
of our technology, we cannot assure you that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop comparable or superior technologies or obtain unauthorized
access to our proprietary technology. The failure or inability to protect these
rights could have a material adverse effect on our operations due to increased
competition or the expense of prosecuting infringements of our intellectual
property. Any litigation could result in substantial costs and diversion of
management and other resources with no assurance of success and could seriously
harm our business and operating results. Investors could lose their entire
investment.
We may receive infringement claims from third parties relating to our products
under development and technologies. We intend to investigate the validity of any
infringement claims that may be made against us and, if we believe the claims
have merit, to respond through licensing or other appropriate actions. To the
extent claims relate to technology included in components purchased from third
party vendors for incorporation into the products we are developing, we would
forward those claims to the appropriate vendor. If we or our component
manufacturers were unable to license or otherwise provide any necessary
technology on a cost-effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in redesigning
products incorporating that technology, or incur substantial costs in defending
any legal action taken against us.
OUR AUDITORS INCLUDED A GOING CONCERN QUALIFICATION IN THEIR REPORT ON OUR
AUDITED FINANCIAL STATEMENTS
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Our recurring losses, our accumulated deficit, and our working capital
deficiency, among other factors, raises substantial doubt about our ability to
continue as a going concern and led our independent certified public accountants
to qualify their opinion contained in our consolidated financial statements as
of and for the years ended April 30, 2002 and 2001 to include an explanatory
paragraph related to our ability to continue as a going concern. Reports of
independent auditors questioning a company`s ability to continue as a going
concern are generally viewed unfavorably by analysts and investors. This report
may make it difficult for us to raise additional debt or equity financing to the
extent needed for our continued operations or for planned expansion,
particularly if we are unable to attain and maintain profitable operations in
the future. Consequently, future losses may have a material adverse effect on
our business, prospects, financial condition, results of operations and cash
flows.
ITEM 3. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Treasurer, Dr. Bogdan C. Maglich, with the
assistance of other management, has evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as such term is defined
in Rules 13a -14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"). Based on such evaluation,
he has concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective to ensure that he is alerted on a timely basis to
material information relating to HiEnergy Technologies (including its
consolidated subsidiaries) required to be included in our reports filed or
submitted under the Exchange Act and that such information is recorded,
processed and reported as and when required.
(B) CHANGES IN INTERNAL CONTROLS
The finding of the evaluation of our internal controls is that they need
improvements, and we are in the process of addressing these issues. In March
2003, our Board of Directors revised the procedures for monetary payments by the
Company to require that all monetary payments made by the Company or its
subsidiaries be first approved in writing by Dr. Maglich and that Dr. Maglich
has sole authority to sign checks, notes or drafts for the Company and its
subsidiaries.
45
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As we reported in our February 25, 2003, amendment to our Form SB-2 registration
statement, we have become aware of rumors regarding certain stockholders and
their relationship to a person who has previously been involved in stock
manipulation schemes. Our general policy is not to respond to rumors, but we
believe that these rumors may have contributed to a decline in the market price
of our common stock and may continue to contribute to a further decline. Our
Board of Directors directed our President to hire a team of independent
investigators to investigate whether the Company or any of our officers and
directors engaged in any wrongdoing. The core team of independent investigators
consisted of two former federal prosecutors, a former Assistant United States
Attorney in the civil division who has been in private practice since 1981 with
experience in securities litigation and regulatory and investigative
proceedings, and a former supervisory agent from the Federal Bureau of
Investigation. The independent investigators reviewed disclosures HiEnergy
Technologies has made, reviewed disclosures made by SLW Enterprises prior to the
April 2002 reverse merger, reviewed other publicly available information, and
conducted a number of interviews, including interviews with the person who had
previously been involved in stock manipulation schemes and two of HiEnergy
Technologies` former directors who know him.
The independent investigators have completed their investigation. Except as
discussed in the next two paragraphs, the independent investigators have
concluded the following:
1. The independent investigators have not identified any evidence
that our current executive management team engaged in any
wrongdoing.
2. The independent investigators have not identified any evidence of
wrongdoing following the April 2002 reverse merger of SLW
Enterprises and HiEnergy Microdevices that resulted in our public
company, HiEnergy Technologies.
3. The independent investigators believe there is insufficient
evidence to fully conclude that there was no wrongdoing by SLW
Enterprises prior to the reverse merger.
4. Our post-merger officers and directors responded promptly and
cooperated fully with the investigation.
Concerning item 3, above, the independent investigators obtained evidence that
some of HiEnergy Technologies` stockholders who purchased significant amounts of
SLW Enterprises shares prior to the reverse merger then had know or had business
dealings with the person who had previously been involved in stock manipulation
and that one of these stockholders was a company reportedly owned by his mother,
which disposed of its shares in April 2002 at a profit believed to be between
$500,000 and $600,000. A person who later served as HiEnergy Technologies`
interim President and was a director was aware of at least some aspect of these
purchases of SLW Enterprises shares. The independent investigators believe the
evidence is inconclusive whether the person who had previously been involved in
stock manipulation had control over these SLW Enterprises shares and whether, if
so, HiEnergy Technologies` former President and director had any knowledge of
such control.
Subsequent to the conclusion of the independent investigation, we obtained
information concerning former director Gregory Gilbert`s past that should have
been included in his biographical information in the Form 10-KSB for the year
ended April 30, 2002. We filed an amendment to our Form 10-KSB on March 11,
2003, to include this information.
The Enforcement Division of the Securities and Exchange Commission has opened an
investigation requesting HiEnergy Technologies` cooperation on a voluntary
basis. We have supplied the Enforcement Division attorneys with the reports
developed by our independent investigators. We intend to cooperate with the
Enforcement Division`s investigation and have voluntarily provided the
Enforcement Division with documents they have requested. At this time the
Enforcement Division attorneys have not indicated whether they intend to
recommend action against the Company or any of its officers or directors or
former officers or directors.
We received a letter dated December 5, 2002, from an attorney representing
Richard T. Eckhouse, a consultant, demanding payment for accounting services
46
allegedly performed by Mr. Eckhouse pursuant to a Letter Agreement dated
November 7, 2001, between Mr. Eckhouse and HiEnergy Microdevices, Inc. The
Letter Agreement provides that Mr. Eckhouse was to be paid $350 per hour, which
was to be paid as follows: (i) one-third or $117 in cash; (ii) one-third or $117
paid by a Promissory Note at 10% annual interest, maturing when HiEnergy
Technologies receives government funding of $900,000 or an investment totaling
$300,000 or more; and (iii) one-third or $117 paid by Class A (common stock) of
HiEnergy Microdevices at $5.00 per share. The demand letter received by us does
not specify a specific amount of damages but states that such amount is
"considerable". No lawsuit has been filed by Mr. Eckhouse as of February 1,
2003.
In March, 2002, Keith Cowan, a former CEO and President of HiEnergy
Microdevices, filed a lawsuit against HiEnergy Microdevices, Dr. Maglich, and
Mr. Richard Alden in the Superior Court of the State of California, County of
Orange, Central Justice Center. Mr. Cowan sought damages in the amount of
$873,455, plus interest, penalties, attorney`s fees, and costs based on the
following claims: (a) failure to pay wages due in violation of the Labor Code
against HiEnergy Microdevices and Dr. Maglich; (b) breach of contract against
HiEnergy Microdevices and Dr. Maglich; (c) false representation regarding the
kind and character of the work against all three defendants; and (d) fraud
against all three defendants. The parties to the lawsuit executed a settlement
agreement on January 15, 2003. The settlement agreement provides that HiEnergy
Technologies will pay Mr. Cowan $50,000: $25,000 in the form of wages that will
be subject to payroll taxes and $25,000 in the form of a reimbursement for
moving expenses and legal fees. In addition, Mr. Cowan received 80,000 shares of
restricted common stock of HiEnergy Technologies with registration rights. If
the 80,000 shares are not sold through a registered offering before April 1,
2003, then Mr. Cowan has the option of tendering the shares to HiEnergy
Technologies and demanding payment of $125,000. In the alternative, if Mr. Cowan
receives less than $125,000 upon the sale of the 80,000 shares within 30 days of
the effective date of the registration statement, he is entitled to payment of
the difference between $125,000 and the amount he received from the sale of the
stock. Once HiEnergy Technologies has fulfilled its obligations under the
settlement agreement, Mr. Cowan has agreed to request dismissal, with prejudice,
of the lawsuit.
As discussed more fully above under Management`s Discussion and Analysis or Plan
of Operation, the Company`s subsidiary, HiEnergy Microdevices, has reserved
$350,000 as of April 30, 2002, and $350,000 as of January 31, 2003 for any
potential taxes due to payroll taxes, penalties and interest that may have
accrued as of such dates.
Except as described above, to the knowledge of our executive officers and
directors, neither we nor our subsidiaries are party to any legal proceeding or
litigation and none of our property is the subject of a pending legal proceeding
and our executive officers and directors know of no other threatened or
contemplated legal proceedings or litigation.
ITEM 2. CHANGES IN SECURITIES
LIST OF SALES OF UNREGISTERED SECURITIES DURING THE THREE-MONTH PERIOD ENDED
JANUARY 31, 2003
o In January 2003, we issued 80,000 shares of common stock to Keith Cowan, a
former director and executive officer of HiEnergy Microdevices, in
connection with a settlement agreement. Mr. Cowan is an accredited
investor. We believe the issuance of securities was exempt under Rule 506
of Regulation D and/or Section 4(2) under the Securities Act.
o As an accommodation to adjust amounts owing to QED Law Group, P.L.L.C., on
December 19, 2002, we issued stock options to Shea Wilson and Derek
Woolston to purchase an aggregate of 27,272 shares of common stock at $2.24
per share. December 19, 2002 was the third trading day following our filing
of a report on Form 10-QSB for the quarterly period ended October 31, 2002.
The closing sales price on December 19, 2002 was $2.79. We believe the
issuance of securities was exempt under Rule 506 of Regulation D and/or
Section 4(2) under the Securities Act.
o In December 2002, we issued warrants to purchase 250,000 shares of common
stock, with an exercise price of $2.12 and a termination date of May 1,
2007, to Wolfe Axelrod Weinberger Associates in connection with the
termination of a consulting agreement with HiEnergy Technologies. We
believe the issuance of securities was exempt under Rule 506 of Regulation
D and/or Section 4(2) under the Securities Act.
47
ITEM 5. OTHER INFORMATION
RESIGNATIONS AND APPOINTMENTS OF DIRECTORS AND OFFICERS
In February 2003, HiEnergy Technologies appointed David R. Baker to its Board of
Directors.
Mr. Baker has been an attorney for over 45 years and is currently Of Counsel to
the firm Haskell Slaughter Young & Rediker, LLC, of Birmingham, Alabama and New
York City, and is a Retired Partner of Jones, Day, Reavis & Pogue from its New
York City office. Mr. Baker is a graduate of Harvard Law School. He is a member
of the Alabama and New York State Bar Associations, serves on the Liaison
Committee of the American Bar Association to the Financial Accounting Standards
Board and is the International Bar Association`s principal representative in New
York to the United Nations. In addition, he serves as Chairman of the New York
Legislative Service.
Subsequent to the quarter that is the subject of this report, and as first
reported by us in an amendment to our Annual Report on Form 10-KSB for the year
ended April 30, 2002 which was filed with the SEC on March 11, 2003, the
following directors and officers resigned at the request of Dr. Bogdan C.
Maglich, Chairman of our Board of Directors. Gregory Gilbert and Barry Alter
resigned their positions on the HiEnergy Technologies Board of Directors,
effective March 3, 2003, and March 7, 2003, respectively. In addition, Mr.
Gilbert resigned his position on the HiEnergy Microdevices, Inc. Board of
Directors. Tom Pascoe also resigned his positions as President, Chief Executive
Officer and Director on March 7, 2003.
Dr. Maglich has been elected Chief Executive Officer, President and Treasurer on
an interim basis.
In March 2003, Mr. Robert Drysdale and Mr. Bruce Del Mar were appointed to the
Board of Directors.
Also in March 2003, Ms. Michal Levy resigned her positions as Vice President and
Secretary of the Company and Ms. Ioana C. Nicodin was appointed Secretary of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------------------ ---------------------------------------------------------------------------------------------------
10.29* Termination Agreement dated November 27, 2002 between HiEnergy Technologies, Inc. and H.C.
Wainwright & Co., Inc.
10.30* Termination Agreement dated December 2, 2002 between HiEnergy Technologies, Inc. and Wolfe
Axelrod Weinberger Associates LLC
10.31* Form of Warrant Certificate dated December 9, 2002 issued by HiEnergy Technologies, Inc. to H.C.
Wainwright & Co., Inc. and Assigns
10.32* Placement Agent Agreement dated December 16, 2002 between HiEnergy Technologies, Inc. and Seabury
Transportation Advisors LLC
10.33* Nonqualified Stock Option dated December 19, 2002 issued by HiEnergy Technologies, Inc. to Chapin
E. Wilson
10.34* Nonqualified Stock Option dated December 19, 2002 issued by HiEnergy Technologies, Inc. to Derek
W. Woolston
10.35* Settlement Agreement dated January 15, 2003 between HiEnergy Technologies, Inc. and Keith Cowan
10.36* Settlement Agreement dated February 14, 2003 among HiEnergy Technologies, Inc., Columbus
Group/cFour Partners, Robert W. Bellano and Shaun Corrales
48
10.37* Form of Warrant Certificate dated February 17, 2003 between HiEnergy Technologies, Inc. and the
principals of Columbus Group/cFour Partners
10.38* Award Contract dated January 15, 2003 by the U.S. Department of Defense to HiEnergy Technologies,
Inc. (Confidential Treatment Requested)
10.39 Letter Agreement dated November 18, 2002 between HiEnergy Technologies, Inc. and HWH Enterprises,
Inc.
99.1 Certification of Chief Executive Officer and Treasurer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed on February 25, 2003 as an exhibit to HiEnergy Technologies`
registration statement on Form SB-2/A (File No. 333-101055) and incorporated
herein by reference.
(B) REPORTS ON FORM 8-K
In connection with the filing of our quarterly report on Form 10-QSB for the
period ended October 31, 2002, on December 16, 2002, we filed the periodic
report certifications required by Section 906 of the Sarbanes-Oxley Act of 2002
under Item 7 and Item 9 of a report on Form 8-K dated December 16, 2002.
On November 12, 2002, we filed a report on Form 8-K dated October 7, 2002. The
report contained an Item 5, disclosing the closing of a Series A Convertible
Preferred Stock private placement offering, the closing of a Common Stock
private placement offering, and the Company`s reincorporation from Washington to
Delaware. The report also contained an Item 7 listing exhibits.
49
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HIENERGY TECHNOLOGIES, INC.
Date: MARCH 21, 2003 By: /S/ B. C. MAGLICH
-------------------- --------------------------------
Name: Bogdan C. Maglich
Title: Chief Executive Officer and President
50
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND TREASURER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Bogdan C. Maglich, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of HiEnergy
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant`s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant`s disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant`s other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant`s auditors and the audit committee of
registrant`s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant`s ability to record,
process, summarize and report financial data and have identified for the
registrant`s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant`s internal
controls; and
6. The registrant`s other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003 /s/ B.C. Maglich
------------------------------ -----------------------------------
Bogdan C. Maglich
Chief Executive Officer and
Treasurer
51
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------------------ ---------------------------------------------------------------------------------------------------
10.29* Termination Agreement dated November 27, 2002 between HiEnergy Technologies, Inc. and H.C.
Wainwright & Co., Inc.
10.30* Termination Agreement dated December 2, 2002 between HiEnergy Technologies, Inc. and Wolfe
Axelrod Weinberger Associates LLC
10.31* Form of Warrant Certificate dated December 9, 2002 issued by HiEnergy Technologies, Inc. to H.C.
Wainwright & Co., Inc. and Assigns
10.32* Placement Agent Agreement dated December 16, 2002 between HiEnergy Technologies, Inc. and Seabury
Transportation Advisors LLC
10.33* Nonqualified Stock Option dated December 19, 2002 issued by HiEnergy Technologies, Inc. to Chapin
E. Wilson
10.34* Nonqualified Stock Option dated December 19, 2002 issued by HiEnergy Technologies, Inc. to Derek
W. Woolston
10.35* Settlement Agreement dated January 15, 2003 between HiEnergy Technologies, Inc. and Keith Cowan
10.36* Settlement Agreement dated February 14, 2003 among HiEnergy Technologies, Inc., Columbus
Group/cFour Partners, Robert W. Bellano and Shaun Corrales
10.37* Form of Warrant Certificate dated February 17, 2003 between HiEnergy Technologies, Inc. and the
principals of Columbus Group/cFour Partners
10.38* Award Contract dated January 15, 2003 by the U.S. Department of Defense to HiEnergy Technologies,
Inc. (Confidential Treatment Requested)
10.39 Letter Agreement dated November 18, 2002 between HiEnergy Technologies, Inc. and HWH Enterprises,
Inc.
99.1 Certification of Chief Executive Officer and Treasurer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed on February 25, 2003 as an exhibit to HiEnergy Technologies`
registration statement on Form SB-2/A (File No. 333-101055) and incorporated
herein by reference.