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 October 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)
Delaware 91-2022980
- ------------------------------ ---------------------------------
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
1601B Alton Parkway, 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 December 12, 2003, the issuer
had 31,218,611 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 OCTOBER 31, 2003
PART I - FINANCIAL INFORMATION PAGE
Item 1 Financial Statements..........................................................................1
Consolidated Balance Sheets as of April 30, 2003 and October 31, 2003 (unaudited)
Consolidated Statements of Operations for the three months and six
months ended October 31, 2003 and 2002 (unaudited) and for the Period
from August 21, 1995 (Inception) to October 31, 2003 (unaudited)
Consolidated Statements of Shareholders' Equity for the Period from
August 21, 1995 (Inception) to October 31, 2003 (unaudited)
Consolidated Statements of Cash Flows for the six months ended
October 31, 2003 and 2002 (unaudited) and for the Period from August
21, 1995 (Inception) to October 31, 2003 (unaudited)
Notes to the Consolidated Financial Statements (unaudited)
Item 2 Management's Discussion and Analysis or Plan of Operation....................................28
Item 3 Controls and Procedures......................................................................48
PART II - OTHER INFORMATION
Item 1 Legal Proceedings............................................................................47
Item 2 Changes in Securities........................................................................48
Item 3 Default Upon Senior Securities...............................................................49
Item 4 Submission of Matters to a Vote to Security Holders..........................................49
Item 5 Other Information............................................................................50
Item 6 Exhibits and Reports on Form 8-K.............................................................50
SIGNATURES .............................................................................................52
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2003 (UNAUDITED) AND APRIL 30, 2003
- -------------------------------------------------------------------------------
ASSETS
October 31, April 30,
2003 2003
------------ ------------
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 259,746 $ 35,774
Restricted cash -- 71,234
Subscription receivable -- 443,482
Accounts receivable 34,583 34,583
Other current assets 202,246 427,650
------------ ------------
Total current assets 496,575 1,012,723
PROPERTY AND EQUIPMENT, net 561,496 504,424
OTHER ASSETS -- 295,948
------------ ------------
TOTAL ASSETS $ 1,058,071 $ 1,813,095
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
October 31, April 30,
2003 2003
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 448,183 $ 670,895
Accrued expenses 65,961 1,600
Accrued payroll and payroll taxes 68,757 28,525
Accrued interest 46,000 35,288
Notes payable - related parties 85,000 85,000
Convertible notes payable - related parties 449,746 57,117
------------ ------------
Total current liabilities 1,163,647 878,425
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 18,923 18,923
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Series A convertible, redeemable preferred stock 8% dividends, voting
rights, liquidation preference $10,000 per share, 345 shares authorized
0 (unaudited) and 95.82 shares issued and outstanding -- 1
Common stock, $0.001 par value
100,000,000 shares authorized
30,868,666 (unaudited) and 25,525,882 shares
issued and outstanding 30,868 25,525
Additional paid-in capital 12,194,682 9,837,437
Committed common stock, 0 (unaudited) and
76,937 outstanding -- 34,404
Deficit accumulated during the development stage (12,350,049) (8,981,620)
------------ ------------
Total shareholders' equity (deficit) (124,499) 915,747
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,058,071 $ 1,813,095
============ ============
The accompanying notes are an integral part of these financial statements
1
HIENERGY TECHNOLOGIES, INC.
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2003 AND 2002 (UNAUDITED),
FOR THE SIX MONTHS ENDED OCTOBER 31, 2003 AND 2002 (UNAUDITED), AND
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO OCTOBER 31, 2003 (UNAUDITED)
- -------------------------------------------------------------------------------
For the
Period from
August 21,
Three Months Ended Six Months Ended 1995
------------------------------- ----------------------------- (Inception) to
October 31, October 31, October 31, October 31, October 31,
2003 2002 2003 2002 2003
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
OPERATING EXPENSES
General and administration 1,378,873 867,170 2,407,113 1,386,315 8,316,177
Research and development 238,755 134,558 337,077 301,153 2,294,756
------------ ------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,617,628 1,001,728 2,744,190 1,687,468 10,610,933
LOSS FROM OPERATIONS (1,617,628) (1,001,728) (2,744,190) (1,687,468) (10,610,933)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 519 1,200 883 3,358 8,769
Interest expense (7,701) (2,385) (12,926) (5,405) (53,836)
Financing expense -- -- -- (223,710) (223,710)
Other income -- -- -- -- 231
------------ ------------ ------------ ------------ ------------
Total other income
(expense) (7,182) (1,185) (12,043) (225,757) (268,546)
------------ ------------ ------------ ------------ ------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (1,624,810) (1,002,913) (2,756,233) (1,913,225) (10,879,479)
PROVISION FOR INCOME
TAXES -- -- 800 -- 13,383
------------ ------------ ------------ ------------ ------------
NET LOSS $ (1,624,810) $ (1,002,913) $ (2,757,033) $ (1,913,225) $(10,892,862)
BENEFICIAL CONVERSION
FEATURE GRANTED ON
PREFERRED STOCK -- (767,431) -- (767,431) (767,431)
PREFERRED STOCK
DIVIDENDS -- (78,360) (611,396) (78,360) (689,756)
------------ ------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO
COMMON
SHAREHOLDERS $ (1,624,810) $ (1,848,704) $ (3,368,429) $ (2,759,016) $(12,350,049)
============ ============ ============ ============ ============
NET LOSS PER SHARE $ (0.05) $ (0.04) $ (0.10) $ (0.08)
============ ============ ============ ============
BENEFICIAL CONVERSION
FEATURE GRANTED ON
PREFERRED STOCK
PER SHARE $ -- $ (0.03) $ -- $ (0.03)
============ ============ ============ ============
PREFERRED STOCK
DIVIDENDS PER SHARE $ -- $ (0.01) $ (0.02) $ (0.01)
============ ============ ============ ============
BASIC AND DILUTED LOSS
AVAILABLE TO COMMON
SHAREHOLDERS PER
SHARE $ (0.05) $ (0.08) $ (0.12) $ (0.12)
============ ============ ============ ============
BASIC AND DILUTED
WEIGHTED-AVERAGE
COMMON SHARES
OUTSTANDING 30,199,605 22,973,597 29,028,467 22,783,343
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
2
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO OCTOBER 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
Price per Series A Convertible,
Equity Redeemable Preferred Stock
Date Unit Shares Amount
-------- ------------- ------------ ------------
BALANCE, AUGUST 21, 1995 (INCEPTION) -- $ --
RECAPITALIZATION UPON REVERSE MERGER
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (1) $ 0.01
NET LOSS
------------- ------------ ------------
BALANCE, APRIL 30, 1996 -- --
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (2) $ 0.01
NET LOSS
------------- ------------ ------------
BALANCE, APRIL 30, 1997 -- --
ISSUANCE OF COMMON STOCK FOR CASH 03/23/98 $ 0.05
ISSUANCE OF COMMON STOCK FOR CASH 03/25/98 $ 0.11
ISSUANCE OF COMMON STOCK FOR CASH (3) $ 0.14
ISSUANCE OF COMMON STOCK FOR CASH 10/14/97 $ 0.22
ISSUANCE OF COMMON STOCK FOR CASH (3) $ 0.28
ISSUANCE OF COMMON STOCK FOR CASH 09/04/97 $ 0.35
ISSUANCE OF COMMON STOCK FOR CASH 12/17/97 $ 0.49
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (3) $ 0.01
NET LOSS
------------- ------------ ------------
BALANCE, APRIL 30, 1998 -- --
ISSUANCE OF COMMON STOCK FOR CASH (4) $ 0.28
ISSUANCE OF COMMON STOCK FOR CASH 10/01/98 $ 0.36
ISSUANCE OF COMMON STOCK FOR CASH 01/15/99 $ 0.38
ISSUANCE OF COMMON STOCK FOR CASH 10/30/98 $ 0.56
ISSUANCE OF COMMON STOCK FOR CASH 03/17/99 $ 0.57
ISSUANCE OF COMMON STOCK FOR CASH 01/08/99 $ 0.72
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 $ 0.75
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 $ 0.78
ISSUANCE OF COMMON STOCK FOR CASH 11/24/98 $ 0.89
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 $ 0.93
ISSUANCE OF COMMON STOCK FOR CASH 01/15/99 $ 1.41
ISSUANCE OF COMMON STOCK FOR CASH 05/05/98 $ 1.64
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 $ 2.80
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (4) $ 0.02
NET LOSS
------------- ------------ ------------
BALANCE, APRIL 30, 1999 -- --
ISSUANCE OF COMMON STOCK FOR CASH 06/28/99 $ 0.02
ISSUANCE OF COMMON STOCK FOR CASH 05/03/99 $ 0.10
ISSUANCE OF COMMON STOCK FOR CASH 07/14/99 $ 0.28
ISSUANCE OF COMMON STOCK FOR CASH 11/30/99 $ 0.39
ISSUANCE OF COMMON STOCK FOR CASH 07/12/99 $ 0.52
ISSUANCE OF COMMON STOCK FOR CASH (5) $ 0.56
ISSUANCE OF COMMON STOCK FOR CASH 04/03/00 $ 0.72
ISSUANCE OF COMMON STOCK FOR CASH 04/03/00 $ 0.89
ISSUANCE OF COMMON STOCK FOR CASH (5) $ 0.46
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (5) $ 0.04
NET LOSS
------------- ------------ ------------
BALANCE, APRIL 30, 2000 -- --
ISSUANCE OF COMMON STOCK FOR CASH 09/28/00 $ 0.24
ISSUANCE OF COMMON STOCK FOR CASH (6) $ 0.24
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (6) $ 0.10
NET LOSS
------------- ------------ ------------
BALANCE, APRIL 30, 2001 -- --
ISSUANCE OF COMMON STOCK FOR CASH (7) $ 0.22
ISSUANCE OF COMMON STOCK FOR CASH 03/13/02 $ 0.24
ISSUANCE OF COMMON STOCK FOR CASH (7) $ 0.45
ISSUANCE OF COMMON STOCK FOR CASH 07/31/01 $ 1.12
ISSUANCE OF COMMON STOCK FOR CASH (7) $ 0.26
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (7) $ 0.05
ISSUANCE OF COMMON STOCK IN PRIVATE
PLACEMENT FOR CASH 04/30/02 $ 1.00
NET LOSS
------------- ------------ ------------
BALANCE, APRIL 30, 2002 -- --
ISSUANCE OF PREFERRED STOCK
IN PRIVATE PLACEMENT FOR CASH 10/31/03 $ 8,173.18 97.93 $ 1
ISSUANCE OF COMMON STOCK
FOR SUBSCRIPTIONS RECEIVABLE 04/30/03 $ 0.32
ISSUANCE OF COMMON STOCK
FOR SUBSCRIPTIONS RECEIVABLE 04/30/03 $ 0.33
ISSUANCE OF COMMON STOCK
FOR SUBSCRIPTIONS RECEIVABLE 04/30/03 $ 0.40
ISSUANCE OF COMMON STOCK
IN PRIVATE PLACEMENT FOR CASH 10/07/03 $ 1.26
OFFERING COSTS
ISSUANCE OF COMMON STOCK
ON CASHLESS CONVERSION
OF THE SERIES A PREFERRED
STOCK 01/27/03 (2.11)
ISSUANCE OF COMMON STOCK
IN CASHLESS EXERCISE OF
WARRANTS 01/02/03
ISSUANCE OF COMMON STOCK
AND COMMON STOCK
COMMITTED AS A BONUS (8) $ 1.35
ISSUANCE OF COMMON STOCK
AND COMMON STOCK
COMMITTED FOR SERVICES
RENDERED 04/21/03 $ 0.65
DIVIDENDS ON PREFERRED STOCK 10/31/03
BENEFICIAL CONVERSION FEATURE
GRANTED IN CONNECTION WITH
ISSUANCE OF PREFERRED
STOCK 10/31/03
CONVERSION OF CONVERTIBLE
NOTES PAYABLE - RELATED
PARTIES INTO COMMON
STOCK 07/18/03 $ 1.00
FINANCING EXPENSE IN CONNECTION WITH
ISSUANCE OF WARRANTS 05/31/02 $ 1.49
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 07/12/02 $ 1.52
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 08/01/02 $ 0.47
STOCK OPTIONS ISSUED AS COMPENSATION 02/11/08 $ 0.13
STOCK OPTIONS ISSUED AS COMPENSATION 09/25/02 $ 1.10
STOCK OPTIONS ISSUED IN EXCHANGE FOR
SETTLEMENT OF ACCOUNTS PAYABLE 09/25/02 $ 1.10
STOCK OPTIONS ISSUED IN EXCHANGE FOR
SETTLEMENT OF ACCOUNTS PAYABLE 12/19/02 $ 0.55
WARRANTS ISSUED FOR SERVICES RENDERED 12/09/02 $ 0.65
WARRANTS ISSUED FOR SERVICES RENDERED 02/17/03 $ 1.63
WARRANTS ISSUED FOR SERVICES RENDERED 04/28/03 $ 0.37
WARRANTS ISSUED FOR TERMINATION OF CONTRACT 12/09/02 $ 1.56
AMORTIZATION OF DEFERRED COMPENSATION
REVERSAL OF DEFERRED COMPENSATION
EXERCISE OF STOCK OPTIONS IN SUBSIDIARY
NET LOSS
------------ ------------
BALANCE, APRIL 30, 2003 95.82 1
============ ============
Issuance of common stock for cash 06/24/03 $ 0.33
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED 06/24/03 $ 0.33
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED 05/13/03 $ 0.48
ISSUANCE OF COMMON STOCK ON CASHLESS CONVERSION
OF SERIES A PREFERRED STOCK 05/16/03 (95.82) $ (1)
DIVIDENDS ON PREFERRED STOCK 05/16/03
ISSUANCE OF COMMON STOCK AS PENALTY SHARES 05/16/03
ISSUANCE OF COMMITTED COMMON STOCK 05/21/03
ISSUANCE OF COMMITTED COMMON STOCK 06/19/03
ISSUANCE OF COMMON STOCK ON EXERCISE OF
WARRANTS 05/27/03
WARRANTS ISSUED FOR SERVICES RENDERED 05/16/03 $ 0.40
WARRANTS ISSUED FOR SERVICES RENDERED 05/01/03 $ 0.32
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 07/16/03 $ 0.45
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 05/16/03 $ 0.38
ISSUANCE OF COMMITTED COMMON STOCK 08/14/03
ISSUANCE OF COMMON STOCK FOR CASH 08/15/03 $ 0.45
ISSUANCE OF COMMON STOCK FOR CASH 08/20/03 $ 0.52
ISSUANCE OF COMMON STOCK FOR CASH 08/25/03 $ 0.69
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 08/27/03 $ 1.03
ISSUANCE OF COMMON STOCK FOR CASH 08/28/03 $ 0.69
ISSUANCE OF COMMON STOCK FOR CASH 08/29/03 $ 0.69
ISSUANCE OF COMMON STOCK FOR CASH, NET OF
COMMISSION OF $40,000 08/29/03 $ 0.69
ISSUANCE OF COMMON STOCK AS PENALTY SHARES 10/15/03
ISSUANCE OF COMMON STOCK FOR CASH 10/27/02 $ 0.95
NET LOSS
------------- ------------ ------------
BALANCE, OCTOBER 31, 2003 (UNAUDITED) -- $ --
------------- ------------ ------------
(1) Multiple transactions valued at the per share price in the year ended
April 30, 1996
(2) Multiple transactions valued at the per share price in the year ended
April 30, 1997
(3) Multiple transactions valued at the per share price in the year ended
April 30, 1998
(4) Multiple transactions valued at the per share price in the year ended
April 30, 1999
(5) Multiple transactions valued at the per share price in the year ended
April 30, 2000
(6) Multiple transactions valued at the per share price in the year ended
April 30, 2001
(7) Multiple transactions valued at the per share price in the year ended
April 30, 2002
(8) Multiple transactions valued at the per share price in the year ended
April 30, 2003
The accompanying notes are an integral part of these financial statements
3
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO OCTOBER 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
Additional Committed
Common Stock Paid-in Common
Date Shares Amount Capital Stock
-------- ------------ ------------ ------------ ------------
BALANCE, AUGUST 21, 1995 (INCEPTION) -- $ -- $ -- $ --
RECAPITALIZATION UPON REVERSE MERGER 6,470,000 6,470 (6,456)
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (1) 734,771 735 7,495
NET LOSS
------------ ------------ ------------ ------------
BALANCE, APRIL 30, 1996 7,204,771 7,205 1,039 --
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (2) 3,219 3 33
NET LOSS
------------ ------------ ------------ ------------
BALANCE, APRIL 30, 1997 7,207,990 7,208 1,072 --
ISSUANCE OF COMMON STOCK FOR CASH 03/23/98 45,603 46 2,206
ISSUANCE OF COMMON STOCK FOR CASH 03/25/98 4,470 4 496
ISSUANCE OF COMMON STOCK FOR CASH (3) 111,771 112 15,513
ISSUANCE OF COMMON STOCK FOR CASH 10/14/97 89,417 89 19,911
ISSUANCE OF COMMON STOCK FOR CASH (3) 293,466 293 81,757
ISSUANCE OF COMMON STOCK FOR CASH 09/04/97 8,942 9 3,115
ISSUANCE OF COMMON STOCK FOR CASH 12/17/97 42,920 43 20,957
(3) 1,451,928 1,452 15,598
NET LOSS
------------ ------------ ------------ ------------
BALANCE, APRIL 30, 1998 9,256,507 9,257 160,625 --
ISSUANCE OF COMMON STOCK FOR CASH (4) 116,241 116 32,364
ISSUANCE OF COMMON STOCK FOR CASH 10/01/98 13,815 14 4,986
ISSUANCE OF COMMON STOCK FOR CASH 01/15/99 9,389 9 3,591
ISSUANCE OF COMMON STOCK FOR CASH 10/30/98 13,413 13 7,487
ISSUANCE OF COMMON STOCK FOR CASH 03/17/99 17,883 18 10,182
ISSUANCE OF COMMON STOCK FOR CASH 01/08/99 44,708 45 32,355
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 3,353 3 2,497
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 8,942 9 6,991
ISSUANCE OF COMMON STOCK FOR CASH 11/24/98 11,177 11 9,989
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 2,683 3 2,497
ISSUANCE OF COMMON STOCK FOR CASH 01/15/99 4,471 4 6,296
ISSUANCE OF COMMON STOCK FOR CASH 05/05/98 17,883 18 29,232
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 894 1 2,499
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (4) 2,167,620 2,167 47,592
NET LOSS
------------ ------------ ------------ ------------
BALANCE, APRIL 30, 1999 11,688,979 11,688 359,182 --
ISSUANCE OF COMMON STOCK FOR CASH 06/28/99 4,471 $ 4 $ 96
ISSUANCE OF COMMON STOCK FOR CASH 05/03/99 35,767 36 3,631
ISSUANCE OF COMMON STOCK FOR CASH 07/14/99 44,708 45 12,455
ISSUANCE OF COMMON STOCK FOR CASH 11/30/99 53,650 54 20,946
ISSUANCE OF COMMON STOCK FOR CASH 07/12/99 2,861 3 1,497
ISSUANCE OF COMMON STOCK FOR CASH (5) 232,484 232 129,768
ISSUANCE OF COMMON STOCK FOR CASH 04/03/00 2,794 3 1,997
ISSUANCE OF COMMON STOCK FOR CASH 04/03/00 8,383 8 7,492
ISSUANCE OF COMMON STOCK FOR CASH (5) 253,430 253 117,126
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (5) 1,914,570 1,915 83,322
NET LOSS
------------ ------------ ------------ ------------
BALANCE, APRIL 30, 2000 14,242,097 14,242 737,512 --
ISSUANCE OF COMMON STOCK FOR CASH 09/28/00 21,214 21 4,979
ISSUANCE OF COMMON STOCK FOR CASH (6) 444,223 444 104,286
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (6) 371,035 371 36,097
NET LOSS
------------ ------------ ------------ ------------
BALANCE, APRIL 30, 2001 15,078,569 15,078 882,874 --
ISSUANCE OF COMMON STOCK FOR CASH (7) 517,723 518 115,282
ISSUANCE OF COMMON STOCK FOR CASH 03/13/02 10,283 10 2,410
ISSUANCE OF COMMON STOCK FOR CASH (7) 44,708 45 19,955
ISSUANCE OF COMMON STOCK FOR CASH 07/31/01 8,942 9 9,991
ISSUANCE OF COMMON STOCK FOR CASH (7) 130,415 130 33,219
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (7) 5,059,560 5,060 227,110
ISSUANCE OF COMMON STOCK IN PRIVATE
PLACEMENT FOR CASH 04/30/02 1,225,000 1,225 1,223,775
NET LOSS
------------ ------------ ------------ ------------
BALANCE, APRIL 30, 2002 22,075,200 22,075 2,514,616 --
ISSUANCE OF PREFERRED STOCK
IN PRIVATE PLACEMENT FOR CASH 10/31/03 $ 800,399
ISSUANCE OF COMMON STOCK
FOR SUBSCRIPTIONS RECEIVABLE 04/30/03 700,000 $ 700 219,800
ISSUANCE OF COMMON STOCK
FOR SUBSCRIPTIONS RECEIVABLE 04/30/03 700,000 700 228,300
ISSUANCE OF COMMON STOCK
FOR SUBSCRIPTIONS RECEIVABLE 04/30/03 10,000 10 3,972
ISSUANCE OF COMMON STOCK
IN PRIVATE PLACEMENT FOR CASH 10/07/03 1,849,934 1,850 2,320,556
OFFERING COSTS (196,793)
ISSUANCE OF COMMON STOCK
ON CASHLESS CONVERSION
OF THE SERIES A PREFERRED
STOCK 01/27/03 18,336 18 (18)
ISSUANCE OF COMMON STOCK
IN CASHLESS EXERCISE OF
WARRANTS 01/02/03 33,909 34 (34)
ISSUANCE OF COMMON STOCK
AND COMMON STOCK
COMMITTED AS A BONUS (8) 11,178 11 21,339 $ 17,549
ISSUANCE OF COMMON STOCK
AND COMMON STOCK
COMMITTED FOR SERVICES
RENDERED 04/21/03 21,277 21 10,288 9,691
DIVIDENDS ON PREFERRED STOCK 10/31/03 68,150 68 78,292
BENEFICIAL CONVERSION FEATURE
GRANTED IN CONNECTION WITH
ISSUANCE OF PREFERRED
STOCK 10/31/03 767,431
CONVERSION OF CONVERTIBLE
NOTES PAYABLE - RELATED
PARTIES INTO COMMON
STOCK 07/18/03 37,898 38 37,858
FINANCING EXPENSE IN CONNECTION WITH
ISSUANCE OF WARRANTS 05/31/02 223,710
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 07/12/02 761,007
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 08/01/02 187,163
STOCK OPTIONS ISSUED AS COMPENSATION 02/11/08 59,373
STOCK OPTIONS ISSUED AS COMPENSATION 09/25/02 3,305,542
STOCK OPTIONS ISSUED IN EXCHANGE FOR
SETTLEMENT OF ACCOUNTS PAYABLE 09/25/02 50,000
STOCK OPTIONS ISSUED IN EXCHANGE FOR
SETTLEMENT OF ACCOUNTS PAYABLE 12/19/02 15,000
WARRANTS ISSUED FOR SERVICES RENDERED 12/09/02 162,792
WARRANTS ISSUED FOR SERVICES RENDERED 02/17/03 $ 130,712
WARRANTS ISSUED FOR SERVICES RENDERED 04/28/03 18,284
WARRANTS ISSUED FOR TERMINATION OF CONTRACT 12/09/02 390,409
AMORTIZATION OF DEFERRED COMPENSATION
REVERSAL OF DEFERRED COMPENSATION (2,272,561)
EXERCISE OF STOCK OPTIONS IN SUBSIDIARY $ 7,164
NET LOSS
------------ ------------ ------------ ------------
BALANCE, APRIL 30, 2003 25,525,882 25,525 9,837,437 34,404
============ ============ ============ ============
Issuance of common stock for cash 06/24/03 600,000 $ 600 $ 199,400
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED 06/24/03 300,000 300 99,700
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED 05/13/03 45,000 45 21,555
ISSUANCE OF COMMON STOCK CASHLESS CONVERSION
OF SERIES A PREFERRED STOCK 05/16/03 2,191,878 2,192 (2,192)
DIVIDENDS ON PREFERRED STOCK 05/16/03 611,396
ISSUANCE OF COMMON STOCK AS PENALTY SHARES 05/16/03 91,526 92 (92)
ISSUANCE OF COMMITTED COMMON STOCK 05/21/03 20,000 20 9,671 $ (9,691)
ISSUANCE OF COMMITTED COMMON STOCK 06/19/03 11,178 11 17,538 (17,549)
ISSUANCE OF COMMON STOCK ON EXERCISE OF
WARRANTS 05/27/03 34,000 34 306
WARRANTS ISSUED FOR SERVICES RENDERED 05/16/03 60,518
WARRANTS ISSUED FOR SERVICES RENDERED 05/01/03 15,864
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 07/16/03 89,760
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 05/16/03 11,348
ISSUANCE OF COMMITTED COMMON STOCK 08/14/03 44,705 45 7,119 (7,164)
ISSUANCE OF COMMON STOCK FOR CASH 08/15/03 222,222 222 99,778
ISSUANCE OF COMMON STOCK FOR CASH 08/20/03 400,000 400 207,600
ISSUANCE OF COMMON STOCK FOR CASH 08/25/03 272,464 272 187,728
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 08/27/03 41,356
ISSUANCE OF COMMON STOCK FOR CASH 08/28/03 86,957 87 59,913
ISSUANCE OF COMMON STOCK FOR CASH 08/29/03 144,928 145 99,855
ISSUANCE OF COMMON STOCK FOR CASH, NET OF
COMMISSION OF $40,000 08/29/03 666,666 667 459,333
ISSUANCE OF COMMON STOCK AS PENALTY SHARES 10/15/03 148,260 148 (148)
ISSUANCE OF COMMON STOCK FOR CASH 10/27/02 63,000 63 59,939
NET LOSS
------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2003 (UNAUDITED) 30,868,666 $ 30,868 $ 12,194,682 $ --
------------ ------------ ------------ ------------
(1) Multiple transactions valued at the per share price in the year ended
April 30, 1996
(2) Multiple transactions valued at the per share price in the year ended
April 30, 1997
(3) Multiple transactions valued at the per share price in the year ended
April 30, 1998
(4) Multiple transactions valued at the per share price in the year ended
April 30, 1999
(5) Multiple transactions valued at the per share price in the year ended
April 30, 2000
(6) Multiple transactions valued at the per share price in the year ended
April 30, 2001
(7) Multiple transactions valued at the per share price in the year ended
April 30, 2002
(8) Multiple transactions valued at the per share price in the year ended
April 30, 2003
The accompanying notes are an integral part of these financial statements
4
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO OCTOBER 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
Accumulated
during the
Deferred Development
Date Compensation Stage Total
-------- ------------ ------------ ------------
BALANCE, AUGUST 21, 1995 (INCEPTION) $ -- -- $ --
RECAPITALIZATION UPON REVERSE MERGER 14
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (1) 8,230
NET LOSS $ (39,387) (39,387)
------------ ------------ ------------
BALANCE, APRIL 30, 1996 -- (39,387) (31,143)
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (2) 36
NET LOSS (110,004) (110,004)
------------ ------------ ------------
BALANCE, APRIL 30, 1997 -- (149,391) (141,111)
ISSUANCE OF COMMON STOCK FOR CASH 03/23/98 2,252
ISSUANCE OF COMMON STOCK FOR CASH 03/25/98 500
ISSUANCE OF COMMON STOCK FOR CASH (3) 15,625
ISSUANCE OF COMMON STOCK FOR CASH 10/14/97 20,000
ISSUANCE OF COMMON STOCK FOR CASH (3) 82,050
ISSUANCE OF COMMON STOCK FOR CASH 09/04/97 3,124
ISSUANCE OF COMMON STOCK FOR CASH 12/17/97 21,000
(3) 17,050
NET LOSS (293,019) (293,019)
------------ ------------ ------------
BALANCE, APRIL 30, 1998 -- (442,410) (272,528)
ISSUANCE OF COMMON STOCK FOR CASH (4) 32,480
ISSUANCE OF COMMON STOCK FOR CASH 10/01/98 5,000
ISSUANCE OF COMMON STOCK FOR CASH 01/15/99 3,600
ISSUANCE OF COMMON STOCK FOR CASH 10/30/98 7,500
ISSUANCE OF COMMON STOCK FOR CASH 03/17/99 10,200
ISSUANCE OF COMMON STOCK FOR CASH 01/08/99 32,400
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 2,500
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 7,000
ISSUANCE OF COMMON STOCK FOR CASH 11/24/98 10,000
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 2,500
ISSUANCE OF COMMON STOCK FOR CASH 01/15/99 6,300
ISSUANCE OF COMMON STOCK FOR CASH 05/05/98 29,250
ISSUANCE OF COMMON STOCK FOR CASH 12/02/98 2,500
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (4) 49,759
NET LOSS (272,426) (272,426)
------------ ------------ ------------
BALANCE, APRIL 30, 1999 -- (714,836) (343,965)
ISSUANCE OF COMMON STOCK FOR CASH 06/28/99 $ 100
ISSUANCE OF COMMON STOCK FOR CASH 05/03/99 3,667
ISSUANCE OF COMMON STOCK FOR CASH 07/14/99 12,500
ISSUANCE OF COMMON STOCK FOR CASH 11/30/99 21,000
ISSUANCE OF COMMON STOCK FOR CASH 07/12/99 1,500
ISSUANCE OF COMMON STOCK FOR CASH (5) 130,000
ISSUANCE OF COMMON STOCK FOR CASH 04/03/00 2,000
ISSUANCE OF COMMON STOCK FOR CASH 04/03/00 7,500
ISSUANCE OF COMMON STOCK FOR CASH (5) 117,379
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (5) 85,237
NET LOSS $ (332,131) (332,131)
------------ ------------ ------------
BALANCE, APRIL 30, 2000 -- (1,046,967) (295,213)
ISSUANCE OF COMMON STOCK FOR CASH 09/28/00 5,000
ISSUANCE OF COMMON STOCK FOR CASH (6) 104,730
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (6) 36,468
NET LOSS (288,067) (288,067)
------------ ------------ ------------
BALANCE, APRIL 30, 2001 -- (1,335,034) (437,082)
ISSUANCE OF COMMON STOCK FOR CASH (7) 115,800
ISSUANCE OF COMMON STOCK FOR CASH 03/13/02 2,420
ISSUANCE OF COMMON STOCK FOR CASH (7) 20,000
ISSUANCE OF COMMON STOCK FOR CASH 07/31/01 10,000
ISSUANCE OF COMMON STOCK FOR CASH (7) 33,349
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED (7) 232,170
ISSUANCE OF COMMON STOCK IN PRIVATE
PLACEMENT FOR CASH 04/30/02 1,225,000
NET LOSS (1,389,530) (1,389,530)
------------ ------------ ------------
BALANCE, APRIL 30, 2002 -- (2,724,564) (187,873)
ISSUANCE OF PREFERRED STOCK
IN PRIVATE PLACEMENT FOR CASH 10/31/03 $ 800,399
ISSUANCE OF COMMON STOCK
FOR SUBSCRIPTIONS RECEIVABLE 04/30/03 220,500
ISSUANCE OF COMMON STOCK
FOR SUBSCRIPTIONS RECEIVABLE 04/30/03 229,000
ISSUANCE OF COMMON STOCK
FOR SUBSCRIPTIONS RECEIVABLE 04/30/03 3,982
ISSUANCE OF COMMON STOCK
IN PRIVATE PLACEMENT FOR CASH 10/07/03 2,322,406
OFFERING COSTS (196,793)
ISSUANCE OF COMMON STOCK
ON CASHLESS CONVERSION
OF THE SERIES A PREFERRED
STOCK 01/27/03 --
ISSUANCE OF COMMON STOCK
IN CASHLESS EXERCISE OF
WARRANTS 01/02/03 --
ISSUANCE OF COMMON STOCK
AND COMMON STOCK
COMMITTED AS A BONUS (8) 38,899
ISSUANCE OF COMMON STOCK
AND COMMON STOCK
COMMITTED FOR SERVICES
RENDERED 04/21/03 20,000
DIVIDENDS ON PREFERRED STOCK 10/31/03 $ (78,360) --
BENEFICIAL CONVERSION FEATURE
GRANTED IN CONNECTION WITH
ISSUANCE OF PREFERRED
STOCK 10/31/03 (767,431) --
CONVERSION OF CONVERTIBLE
NOTES PAYABLE - RELATED
PARTIES INTO COMMON
STOCK 07/18/03 37,896
FINANCING EXPENSE IN CONNECTION WITH
ISSUANCE OF WARRANTS 05/31/02 223,710
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 07/12/02 761,007
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 08/01/02 187,163
STOCK OPTIONS ISSUED AS COMPENSATION 02/11/08 59,373
STOCK OPTIONS ISSUED AS COMPENSATION 09/25/02 $ (3,305,542) --
STOCK OPTIONS ISSUED IN EXCHANGE FOR
SETTLEMENT OF ACCOUNTS PAYABLE 09/25/02 50,000
STOCK OPTIONS ISSUED IN EXCHANGE FOR
SETTLEMENT OF ACCOUNTS PAYABLE 12/19/02 15,000
WARRANTS ISSUED FOR SERVICES RENDERED 12/09/02 162,792
WARRANTS ISSUED FOR SERVICES RENDERED 02/17/03 $ 130,712
WARRANTS ISSUED FOR SERVICES RENDERED 04/28/03 18,284
WARRANTS ISSUED FOR TERMINATION OF CONTRACT 12/09/02 390,409
AMORTIZATION OF DEFERRED COMPENSATION $ 1,032,981 1,032,981
REVERSAL OF DEFERRED COMPENSATION 2,272,561 --
EXERCISE OF STOCK OPTIONS IN SUBSIDIARY 7,164
NET LOSS $ (5,411,265) (5,411,265)
------------ ------------ ------------
BALANCE, APRIL 30, 2003 -- (8,981,620) 915,746
============ ============ ============
Issuance of common stock for cash 06/24/03 $ 200,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED 06/24/03 100,000
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED 05/13/03 21,600
ISSUANCE OF COMMON STOCK CASHLESS CONVERSION --
OF SERIES A PREFERRED STOCK 05/16/03 --
DIVIDENDS ON PREFERRED STOCK 05/16/03 $ (611,396) --
ISSUANCE OF COMMON STOCK AS PENALTY SHARES 05/16/03 --
ISSUANCE OF COMMITTED COMMON STOCK 05/21/03 --
ISSUANCE OF COMMITTED COMMON STOCK 06/19/03 --
ISSUANCE OF COMMON STOCK ON EXERCISE OF
WARRANTS 05/27/03 340
WARRANTS ISSUED FOR SERVICES RENDERED 05/16/03 60,518
WARRANTS ISSUED FOR SERVICES RENDERED 05/01/03 15,864
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 07/16/03 89,760
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 05/16/03 11,348
ISSUANCE OF COMMITTED COMMON STOCK 08/14/03 --
ISSUANCE OF COMMON STOCK FOR CASH 08/15/03 100,000
ISSUANCE OF COMMON STOCK FOR CASH 08/20/03 208,000
ISSUANCE OF COMMON STOCK FOR CASH 08/25/03 188,000
STOCK OPTIONS ISSUED FOR SERVICES RENDERED 08/27/03 41,356
ISSUANCE OF COMMON STOCK FOR CASH 08/28/03 60,000
ISSUANCE OF COMMON STOCK FOR CASH 08/29/03 100,000
ISSUANCE OF COMMON STOCK FOR CASH, NET OF
COMMISSION OF $40,000 08/29/03 460,000
ISSUANCE OF COMMON STOCK AS PENALTY SHARES 10/15/03 --
ISSUANCE OF COMMON STOCK FOR CASH 10/27/02 60,002
NET LOSS (2,757,033) (2,757,033)
------------ ------------ ------------
BALANCE, OCTOBER 31, 2003 (UNAUDITED) $ -- $(12,350,049) $ (124,499)
------------ ------------ ------------
(1) Multiple transactions valued at the per share price in the year ended
April 30, 1996
(2) Multiple transactions valued at the per share price in the year ended
April 30, 1997
(3) Multiple transactions valued at the per share price in the year ended
April 30, 1998
(4) Multiple transactions valued at the per share price in the year ended
April 30, 1999
(5) Multiple transactions valued at the per share price in the year ended
April 30, 2000
(6) Multiple transactions valued at the per share price in the year ended
April 30, 2001
(7) Multiple transactions valued at the per share price in the year ended
April 30, 2002
(8) Multiple transactions valued at the per share price in the year ended
April 30, 2003
The accompanying notes are an integral part of these financial statements
5
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2003 AND 2002 (UNAUDITED), AND
FOR THE PERIOD FROM AUGUST 21, 1995 (INCEPTION) TO OCTOBER 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
August 21,
Six Months Ended 1995
October 31, (Inception) to
------------------------------ October 31,
2003 2002 2003
------------ ------------ -----------
(unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,757,033) $ (1,913,225) (10,892,862)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 64,492 40,262 163,917
Compensation expense relating to issuance of
common stock in exchange for services
rendered -- -- 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
or to be rendered 76,382 349,955 388,170
Warrants issued for termination of contract -- -- 390,409
Issuance of common stock for services
rendered 121,600 -- 200,973
Stock options issued for services
rendered 142,465 -- 494,227
Issuance of common stock to an employee
for a bonus -- 21,350 38,899
Additional compensation to officer -- -- 42,171
Amortization of deferred compensation -- 84,556 1,032,981
Financing expense -- 223,710 223,710
(Increase) decrease in
Restricted cash 71,234 -- --
Accounts receivable -- (40,834) (34,583)
Subscription receivable 443,481 (213,221) 443,481
Other current assets 225,404 -- 404,162
Other assets 295,948 -- --
Increase (decrease) in
Accounts payable 180,317 365,641 962,931
Accrued expenses 64,361 (78,682) 65,977
Accrued payroll and payroll taxes 40,232 -- 68,757
Accrued interest 10,712 3,790 48,898
------------ ------------ ------------
Net cash used in operating activities (1,020,405) (1,156,698) (5,509,909)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (121,564) (422,121) (725,414)
------------ ------------ ------------
Net cash used in investing activities (121,564) (422,121) (725,414)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - related parties -- -- 604,160
Payments on notes payable - related parties -- (279,803) (546,331)
Proceeds from convertible notes payable - related
parties -- -- 60,400
Payments on convertible notes payable - related
parties (10,400) (19,280) (40,400)
Proceeds from issuance of common stock in
private placement -- 2,122,407 3,547,406
Proceeds from issuance of preferred stock -- 979,300 979,301
Offering costs on preferred stock -- (178,904) (178,902)
Proceeds from issuance of common stock 1,376,001 -- 2,258,724
Offering costs on common stock -- (180,793) (196,793)
Exercise of stock options in subsidiary -- 7,164 7,164
Proceeds from exercise of warrants 340 -- 340
------------ ------------ ------------
Net cash provided by financing activities 1,365,941 2,450,091 6,495,069
------------ ------------ ------------
Net increase in cash and cash
equivalents 223,972 871,272 259,746
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 35,774 1,078,136 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 259,746 $ 1,949,408 $ 259,746
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ -- $ -- 2,888
============ ============ ------------
Income taxes paid $ 2,400 $ -- 14,183
============ ============ ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for convertible notes
payable-related parties and accrued interest $ 37,896 $ -- $ 37,896
============ ============ ------------
Preferred stock dividends $ 611,396 $ -- $ 689,756
============ ============ ------------
Issue convertible notes payable to legal counsel
for legal services $ 403,029 $ -- $ 449,746
============ ============ ------------
The accompanying notes are an integral part of these financial statements
6
SUPPLEMENT SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (continued)
During the six months October 31, 2003 and 2002 and the period from August 21,
1995 (inception) to October 31, 2003, the holders of 95.82, 0, and 97.93 shares,
respectively, of the Series A convertible, redeemable preferred stock converted
their shares into 2,191,878, 0, and 2,210,214 shares, respectively, which also
included 62,562 penalty shares as a result of the late registration of their
common stock.
During the six months ended October 31, 2003 and 2002 and the period from August
21, 1995 (inception) to October 31, 2003, the Company issued 239,786, 0, and
239,786 shares of common stock to certain shareholders who invested in a private
placement, dated October 29, 2002, and to certain other investors in the
Company's common stock, to compensate them for the late registration of the
common stock.
During the six months ended October 31, 2003 and 2002 and the period from August
21, 1995 (inception) to October 31, 2003, the Company issued 76,937, 0, and
76,937 shares, respectively, of committed common stock valued at $34,404; 0; and
$34,404, respectively.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (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 Microdevices, Inc. ("Microdevices"), a subsidiary of HiEnergy,
was incorporated on August 21, 1995 in the state of Delaware. In August
2003, HiEnergy Defense, Inc. ("Defense") was incorporated under the
laws of the state of Delaware. HiEnergy owns 85% of the outstanding
common stock of Defense.
HiEnergy and its subsidiaries (collectively, the "Company") are
development stage companies commercializing a proprietary technology
for assembling sensor systems for numerous governmental and commercial
applications and markets. The Company's technology has applications in
detecting almost every chemical element and compound, such as plastic
explosives, Anthrax and cocaine.
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 six months ended October 31, 2003 are
not necessarily indicative of those to be expected for the year ended
April 30, 2004.
Recapitalization between HiEnergy and Shareholders of Microdevices
On April 25, 2002, HiEnergy entered into a voluntary share exchange
agreement whereby it would exchange 92% of the outstanding shares of
common stock of Microdevices 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. HiEnergy had minimal assets and
liabilities at the date of the acquisition and did not have significant
operations prior to the acquisition. Since HiEnergy was a "public
shell" pro forma information is not presented.
8
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 six months ended October 31, 2003 and 2002
and the period from August 21, 1995 (inception) to October 31, 2003,
the Company incurred net losses available to common shareholders of
$3,368,000, $2,759,000, and $12,350,000, respectively, and it had
negative cash flows from operations of $1,020,000, $1,156,000, and
$5,510,000, respectively. In addition, the Company had an accumulated
deficit of $12,338,000 and was in the development stage as of October
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 October 31, 2003 through the
sales of equity, the Company intends to raise additional capital
through the sale of equity securities. 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, its 92% owned subsidiary, HiEnergy Microdevices, Inc. and
its 85% owned subsidiary, Defense. All significant inter-company
accounts and transactions are eliminated in consolidation.
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.
Reclassifications
Certain amounts included in the prior period financial statements have
been reclassified to conform with the current period presentation. Such
reclassifications did not have any effect on the reported net loss.
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.
9
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
The Company maintains its cash deposits at a bank located in
California. Deposits at the bank are insured by the Federal Deposit
Insurance Corporation up to $100,000. 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 October 31, 2003 and 2002 consisted of amounts
due from separate governmental development contracts. Contract amounts
are billed as monthly reports are submitted detailing work performed
under the contract and are generally due in 30 days.
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.
Patents
The Company has filed several patent applications within and outside
the United States. The outcome is indeterminable. Patent costs
consisting mainly of legal expenses are expensed as incurred.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, subscriptions receivable, accounts payable,
accrued expenses, accrued payroll and payroll taxes, and accrued
interest. The book value of all other financial instruments are
representative of their fair values.
Research and Development Costs
The Company accounts for research and development costs in accordance
with SFAS No. 2, "Accounting for Research and Development Costs".
Research and development costs are charged to operations as incurred.
As described in section 3.50 of the Government Contract Audit Guide for
Fixed-Price Best-Efforts Cost Sharing Arrangements, amounts earned
under the Company's development contracts with the Department of
Defense have been offset against research and development costs, in
accordance with the provisions of that section, in all periods
presented.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans in
accordance with the provisions of Accounting Principles Board ("APB")
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.
10
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company accounts for common stock issued for services rendered at
the fair value of the common stock issued on the date of issuance.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value-recognition
provisions of SFAS No. 123, to the stock-based employee compensation:
SIX MONTHS ENDED OCTOBER 31,
2003 2002
----------- -------------
Net loss, as reported $(2,757,033) $ (1,913,225)
Add: Stock-based employee compensation expense
included in reported net income determined under
APB No. 25, net of related tax effects -- --
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of related tax effects -- (85,952)
----------- -------------
Pro forma net loss $(2,757,033) $ (1,999,177)
Loss per share:
Basic and diluted - as reported $ (0.10) $ (0.08)
Basic and diluted - pro forma $ (0.10) $ (0.09)
Stock options or warrants issued to non-employees are accounted for in
accordance with SFAS No. 123, EITF Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services", and
related interpretations.
All warrants and options issued to non-employees for financing expenses
and services rendered have been valued using the fair value of the
equity instrument issued, as this was readily determinable. Stock
options issued in exchange for accounts payable have been valued using
the fair value of the goods or services provided, as this had already
been determined.
Warrants issued to investors in private placements, as offering costs,
have been valued using the fair value of the equity instrument issued,
as this was more readily determinable. As these warrants were issued as
a cost associated with raising capital through the private placements,
no entry was recorded to additional paid-in capital.
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.
11
Net Loss per Share
The Company calculates net loss per share in accordance with SFAS No.
128, "Earnings per Share." Basic loss per share is computed by dividing
the net loss available to common shareholders by the weighted-average
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.
12
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 six months
ended October 31, 2003 and 2002:
October 31,
2003 2002
------------------------
Stock Options 5,206,454 --
Warrants 2,365,903 --
Microdevices minority shareholders 459,222 459,222
Microdevices options and warrants 368,755 636,954
------------------------
Total 8,400,334 1,096,176
------------------------
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.
Recently Issued Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting and reporting for derivative
instruments and hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for derivative instruments and hedging activities entered
into or modified after June 30, 2003, except for certain forward
purchase and sale securities. For these forward purchase and sale
securities, SFAS No. 149 is effective for both new and existing
securities after June 30, 2003. Management does not expect adoption of
SFAS No. 149 to have a material impact on the Company's statements of
earnings, financial position, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that
embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 will be effective for financial instruments
entered into or modified after May 31, 2003 and otherwise will be
effective at the beginning of the first interim period beginning after
June 15, 2003.
13
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consisted of the following at:
October 31, 2003 April 30, 2003
---------------- --------------
Prepaid consulting $ 40,657 313,250
Prepaid insurance 64,160 6,400
Deposits on equipment 87,500 100,000
Other 9,929 8,000
-------- --------
$202,246 427,650
======== ========
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
October 31, 2003 April 30, 2003
---------------- --------------
Prototype equipment $111,114 $111,114
Laboratory equipment 556,507 436,340
Furniture and fixtures 43,392 41,995
Web site development 14,400 14,400
-------- --------
725,413 603,849
Less accumulated depreciation 163,917 99,425
-------- --------
$561,496 $504,424
======== ========
Property and equipment is recorded at cost and is depreciated using the
straight-line method over an estimated useful life of five years.
Depreciation expense for the six months ended October 31, 2003 and 2002
and the period from August 21, 1995 (inception) to October 31, 2003 was
$64,492, $40,262, and $163,917, respectively.
14
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consisted of the following at:
October 31, 2003 April 30, 2003
---------------- --------------
Unsecured notes payable 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 October 31, 2003 and April
30, 2003, the notes were in default $40,000 $40,000
Unsecured notes payable to a shareholder of the
Company, non-interest bearing, and payable
on demand 45,000 45,000
------- -------
85,000 85,000
Less current portion 85,000 85,000
------- -------
LONG-TERM PORTION $ -- $ --
======= =======
NOTE 7 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Convertible notes payable - related parties consisted of the following
at:
October 31, 2003 April 30, 2003
---------------- --------------
Unsecured notes payable to a shareholder of the Company, interest
payable at 8% per annum, $5,000 due in July 2001 and $5,400
due in July 2002. The notes payable are secured by the patent
applications for Europe, Canada and Japan. The holder of the
notes payable has the option to convert the principal and
interest into shares of common stock at the market price of
the Company's common stock at the conversion date. As of
April 30, 2003, the notes were in default
$ -- $ 10,400
Unsecured notes payable to legal counsel of the Company, interest
payable at 10% per annum and due in January 2004. The holder
of the note has the option to convert the principal and
interest into shares of common stock of the company at the
market price of the Company's common stock at the conversion
date 449,746 46,717
-------- --------
449,746 57,117
Less current
portion 449,746 57,117
-------- --------
LONG-TERM PORTION $ -- $ --
======== ========
15
NOTE 8 -RESEARCH AND DEVELOPMENT COSTS
The Company has been engaged in commercializing a proprietary
technology for assembling sensor systems for numerous governmental and
commercial applications and markets. The Company's technology has
applications in detecting almost every chemical element and compound,
such as plastic explosives, Anthrax and cocaine.
The Company's research and development expenses consist primarily of
salaries and benefits, facilities, depreciation, consulting services,
supplies and travel. Research and development costs are charged to
operations as incurred. Amounts earned under the Company's development
contracts with the Department of Defense have been offset against
research and development costs.
The Company accounts for research and development costs in accordance
with SFAS No. 2, "Accounting for Research and Development Costs".
Research and development costs are charged to operations as incurred.
As described in section 3.50 of the Government Contract Audit Guide for
Fixed-Price Best-Efforts Cost Sharing Arrangements, amounts earned
under the Company's grants with the Department of Defense have been
offset against research and development costs, in accordance with the
provisions of that section.
Since inception, the Company has been able to obtain various
governmental grants and development contracts. During the six months
ended October 31, 2003 and 2002, the Company worked on different phases
of two separate development contracts with the Department of Defense.
During the six months ended October 31, 2002 the Company completed work
on a different government development contract.
In August 2002, the Company was awarded an SBIR Phase II development
contract for up to $780,000 in funding over two years for Phase II
testing and development of an anti-tank landmine detection system. On
January 15, 2003, we executed the contract with the Department of
Defense. Work commenced in January 2003 under the first year of the
contract valued at $415,000. We estimate our costs of the first year of
the SBIR Phase II development contract to be $1,100,000. The second
year of the contract, valued at approximately $364,000, is under an
option that can be exercised by the Department of Defense at the end of
the first year. Under the terms of the contract, we are required to
submit monthly written reports detailing our progress under the
contract. The Company recognizes one-twelfth of the first-year contract
amount as an offset against research and development expenses each
month.
Below is a summary of research and development costs for the following
periods:
For the
Period from
August 21,
1995
(Inception)
to
Three Months Ended October Six Months Ended October October
October 31, October 31, 31,
---------------------------- ---------------------------- -----------
2003 2002 2003 2002 2003
----------- ----------- ----------- ----------- -----------
Research and development costs $ 342,504 $ 175,392 $ 544,575 $ 341,987 $ 2,972,757
Grant income earned (103,749) (40,834) (207,498) (40,834) (678,001)
----------- ----------- ----------- ----------- -----------
Net research and development
costs $ 238,755 $ 134,558 $ 337,077 $ 301,153 $ 2,294,756
----------- ----------- ----------- ----------- -----------
16
NOTE 9 - 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, which was
paid during the year ended April 30, 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.
o Microdevices granted options to purchase 111,040 shares of
common stock at an exercise price of $3.00 per share, vesting
immediately, and which are exercisable from time to time
within the period ending November 30, 2008. The stock options
were issued with the exercise price above the market price of
the common stock on the date of the grant. At the time of the
reverse take-over of HiEnergy by Microdevices, the Company
exchanged the Microdevices stock options at an exchange rate
of 22.3542 per share or 2,482,011 HiEnergy stock options with
an exercise price of $0.134 per share.
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 April
30, 2003, the Company is required to grant options to purchase
456,717 shares of common stock at an exercise price of $2.81
per share. In the fiscal year ended April 30, 2003, the
Company recorded $59,373 in compensation expense because these
stock options were issued with an exercise price below the
market price of the Company's common stock on the date of
grant.
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 year ended April
30, 2003, the Company paid $17,500 for an automobile deposit
on behalf of its Chief Scientist/Chairman of the Board. In
addition, the Company reimbursed the Chief Scientist/Chairman
of the Board for $29,900 in other expenses covered under the
terms of the employment agreement.
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 plus an expense allowance of $17,200 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.
In July 2003, the Board of Directors increased the Chief
Scientist/Chairman of the Board's salary to $208,600 per year.
17
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 paid 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. During the year ended April 30, 2003, 11,178
shares of common stock were issued, and 11,178 shares of common stock
were committed. Each quarterly bonus of 5,589 shares of common stock
was valued using the Company's stock price on the date the bonus was
earned. The fair value of the quarterly bonuses totaled $38,899 and was
included in general and administration expenses during the year ended
April 30, 2003. In March 2003, the Vice President/Corporate Secretary
resigned her positions. During the six months ended October 31, 2003,
11,178 committed shares were issued.
Consulting Agreements
In April 2003, the Company entered into a one-year consulting agreement
with an investor relations firm. Under the terms of the agreement, the
Company agreed to pay $6,500 per month, plus approved expenses.
In July 2002, the Company entered into a three-year consulting
agreement, whereby the consultant would assist the Company with
business development, product and corporate image advertising, and
access to government grants and purchases. The Company has paid 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 were to vest one year after the Company's MiniSenzor product
was 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 vested 500,000 stock options were valued at $761,000. The fair
value of the options were determined using the Black Scholes model. The
assumptions used to determine the valuation are as follows:
Value of warrants per share $ 0.52
Stock price on date of grant $ 2.13
Exercise price $ 1.00
Expected life of option 2.0 years
Risk-free rate of return 3.07%
Expected annual volatility 105%
Annual rate of dividends 0%
In October 2003, the Company terminated the agreement with the
consultant and expensed the remaining unamortized portion of the asset
attributable to the stock options. During the six months ended October
31, 2003 and 2002, the Company expensed and included in general and
administration expenses $550,000 and $85,000, respectively.
On November 24, 2003, Yeffet Security Consultants initiated binding
arbitration proceedings with the Rhode Island office of the American
Arbitration Association claiming that $59,541 in expense reimbursements
and $400,000 in future consulting fees for the period from October 16,
2003 through June 30, 2005 are owed by the Company to Yeffet Security
Consultants under a terminated Consulting Agreement with Yeffet
Security Consultants, Inc. We are in the process of studying the
matter.
18
NOTE 9 - COMMITMENTS AND CONTINGENCIES (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 options to purchase 400,000 shares of common stock, vesting
immediately at an exercise price of $2 per share, exercisable for two
years. The options were valued at $187,000. During the six months ended
October 31, 2003 and 2002, the Company expensed and included in general
and administration expenses $47,000 and $0, respectively. This
agreement was terminated after six months. The fair value of the
options were determined using the Black Scholes model. The assumptions
used to determine the valuation are as follows:
Value of warrants per share $ 0.47
Stock price on date of grant $ 1.76
Exercise price $ 2.00
Expected life of option 1.0 years
Risk-free rate of return 1.75%
Expected annual volatility 105%
Annual rate of dividends 0%
In November 2002, the Company entered into a month-to-month consulting
agreement with a public relations firm. Under the terms of the
agreement, the Company agreed to pay $12,500 per month, plus
out-of-pocket expenses.
Lease Agreement
In September 2002, the Company entered into a three-year operating
lease agreement with one of its former directors for its corporate
offices in Irvine, California. The lease provides for monthly rent of
$8,000 for the first 18 months and $8,320 for the remaining term of the
lease, expiring in September 2005. In July 2003, the Company entered
into a five-month lease for a 2,400 square feet test site ending
December 1, 2003 with a monthly lease rate of $1,200. The lease
agreement is with the same Director as the office lease. Rent expense
for the six months ended October 31, 2003 and 2002 was $54,000 and
$13,200, respectively. Future minimum payments at October 31, 2003
under these lease agreements were as follows:
Year Ending
October 31,
-----------
2004 $115,920
2005 87,360
2006 --
--------
TOTAL $203,280
--------
19
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 was to pay an additional $25,000 on March
1, 2003. As of October 31, 2003, the additional $25,000 was
not yet paid.
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.
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.
The Company terminated its agreement with the placement agent in July
2003.
Investment Banking Relationship
In August 2003, the Company signed and agreement with an investment
bank to support its bid to obtain a $1,600,000 grant contract with the
U.S. Navy to develop a prototype SuperSenzor for detection of
biological agents in sealed containers. The investment bank has
confirmed to the Navy that it would provide the necessary funding of a
minimum of $2,500,000 and a maximum of $4,000,000, by purchasing common
stock of the Company to guarantee that the Company will have sufficient
funding through the performance of an 18-month contract. The Company
estimates that its costs to execute the contract will be in a range
from $800,000 to $1,200,000.
In exchange for the guarantee, the Company owes fees to the investment
bank ranging from $50,000 (if the contract is not awarded to the
Company) to $150,000 (upon the award of the contract). The Company had
been approved for a grant of $1,600,000; however, the Contracting
Office of the Naval Surface Warfare Center denied the contract due to
the Company's financial condition. As of October 31, 2003 the Company
recorded a liability as an accrued expense to the investment bank for
$50,000 because the investment bank provided the guarantee to the U.S.
Navy on behalf of the Company.
SEC Investigation
In February 2003, the Enforcement Division of the SEC opened an
investigation requesting the Company's cooperation on a voluntary
basis. 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
continue to cooperate with the Enforcement Division's investigation. It
has also agreed to voluntarily provide the Enforcement Division with
other documents they have requested in its informal investigation. In
April 2003, the Enforcement Division of the SEC commenced a formal
investigation.
In connection with the SEC investigation, the Company may be subject to
a claim by a former Chief Executive Officer/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.
20
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
The company received a letter dated December 5, 2002, from an attorney
representing a former consultant, demanding payment for accounting
services allegedly performed by the consultant pursuant to a Letter
Agreement dated November 7, 2001, between the consultant and HiEnergy
Microdevices, Inc. The Letter Agreement provides that the consultant
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. Mr. Eckhouse filed a
lawsuit against the Company, Microdevices and the Chairman and CEO of
the Company on May 2, 2003 in the Superior Court of the State of
California, County of Orange, Central Justice Center, and an amended
complaint on June 20, 2003, alleging that Microdevices owes the
consultant a total of $313,580 for services rendered, plus interest,
attorney's fees and costs. The company denies these allegations and is
vigorously defending this lawsuit.
On or about May 27 , 2003, a former director and officer of the Company
filed a complaint against the Company for advancement of fees in the
State Court of Delaware. The plaintiff was seeking the reimbursement of
his legal fees associated with a pending SEC investigation. Through
negotiations, the Company was successful in getting the complaint
dismissed without prejudice on or about June 17, 2003. If and when the
plaintiff re-files his lawsuit, the Company intends to vigorously
defend itself in this matter.
On November 24, 2003, Yeffet Security Consultants initiated binding
arbitration proceedings with the Rhode Island office of the American
Arbitration Association claiming that $59,541 in expense reimbursements
and $400,000 in future consulting fees for the period from October 16,
2003 through June 30, 2005 are owed by the Company to Yeffet Security
Consultants under a terminated Consulting Agreement with Yeffet
Security Consultants, Inc. We are in the process of studying the
matter.
In addition, the Company is also involved in certain other 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.
Minority Shareholders
Microdevices has 20,540 minority shares issued and outstanding. The
Company may agree 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 shares of common stock in the
Company were issuable in a merger or other consolidation, the minority
shareholders would receive an aggregate of 459,222 shares of common
stock.
Warrant and Option Holders
During the six months ended October 31, 2003 and 2002 and the period
from August 21, 1995 (inception) through April 30, 2003, Microdevices
granted to non-employees stock options and warrants to purchase 0, 0
and 35,743 shares, respectively, of common stock. The Company
determined using the Black-Scholes option pricing model that the fair
value of the options and warrants issued to non-employees for services
rendered was immaterial.
During the six months ended October 31, 2003, and 2002 and the period
from August 21, 1995 (inception) through April 30, 2003, Microdevices
granted to employees stock options to purchase 0, 0 and 123,909 shares,
respectively, of common stock. The Company accounted for these options
in accordance with APB Opinion No. 25 and related interpretations. As
such, no compensation expense was recorded at the date of grant as the
exercise price of the stock options exceeded the market price of the
underlying common stock . The disclosure requirements of SFAS No. 123
have not been made for these options and warrants as part of Note 9 to
the financial statements, as these options and warrants are considered
immaterial.
21
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Warrant and Option Holders (Continued)
As of October 31, 2003, Microdevices has stock options and warrants to
non-employees to purchase 16,496 shares of common stock, and no stock
options outstanding to employees. If the stock option and warrant
holders exercise their stock options and warrants, the Company may
agree, 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 a range of $0.22 to $0.32 per
share, resulting in the issuance of 368,755 additional shares of common
stock.
During the year ended April 30, 2003, stock options issued to
non-employees were exercised for the purchase of 2,047 shares of
Microdevices' common stock via a cash payment of $7,164, or $3.50 per
share. Variable plan accounting has not been applied to these stock
options as the difference was immaterial. 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 of common stock.
In April and May 2002, in conjunction with the reverse take-over (see
Note 1) by Microdevices of HiEnergy, stock options issued to employees
to purchase 111,040 and 4,000 shares of Microdevices' common stock were
exchanged by the Company for HiEnergy stock options at an exchange rate
of 22.3524 per share. Therefore, the Company issued options to purchase
2,482,011 and 89,410 shares of its common stock at an exercise price of
$0.134 and $0.156 per share, respectively. In accordance with EITF
Issue No. 00-23, "Accounting for Stock Compensation under APB Opinion
No. 25 and FASB Interpretation No. 44" as the merger of HiEnergy and
Microdevices was accounted for as a pooling of interest, no
modification to the original accounting for these stock options was
recorded.
NOTE 10 - SHAREHOLDERS' EQUITY
COMMON STOCK ISSUED FOR CASH AND SERVICES
Six Months ended October 31, 2003 Six Months ended October 31, 2002
----------------------------------- -----------------------------------
No. of Shares Amount No. of Shares Amount
------------- ------ -------------- ------
Common stock issued for cash 2,456,237 $1,376,002 -- $ --
Common stock issued in
private placement -- -- 1,849,934 2,322,407
Common stock issued for
services rendered 345,000(1) 121,600 -- --
Common stock issued for
dividends on Series A
preferred stock 68,150 78,340
Common stock issued for
a bonus to an employee 11,178 21,350
Common stock issued to
convert preferred stock 2,191,878 -- -- --
Common stock issued as
penalty shares 239,786 -- -- --
Common stock issued for
committed stock 75,883 34,404 -- --
Common stock issued for
exercise of warrants 34,000 340 -- --
Common stock issued for
exchange convertible
notes payable -- -- 37,898 37,896
---------- ---------- ---------- ----------
5,342,784 $1,532,346 1,967,160 $2,459,993
---------- ---------- ---------- ----------
(1) In May 2003, the Company issued 45,000 shares of common stock to its legal
counsel as payment for $15,000 of legal services. In June 2003, the Company
issued 300,000 shares of common stock to its legal counsel as payment for
$100,000 of legal services.
22
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUED FOR CASH AND SERVICES (CONTINUED)
Period from August 21, 1995 to
October 31, 2003
------------------------------------
No. of Shares Amount
------------------------------------
Recapitalization upon reverse
merger 6,470,000 $ 14
Common stock issued for cash 6,543,734 2,712,210
Common stock issued in
private placement 3,074,934 2,126,838
Common stock issued for
services rendered 12,068,980 560,859
Common stock issued for
dividends on Series A
preferred stock 68,150 78,340
Common stock issued for
a bonus to an employee 11,178 21,350
Common stock issued to
convert preferred stock 2,210,217 --
Common stock issued as
penalty shares 239,786 --
Common stock issued for
committed stock 75,883 34,404
Common stock issued for
exercise of warrants 67,906 340
Common stock issued to
exchange convertible
notes payable 37,898 37,896
------------------------------------
30,868,666 $ 5,572,251
------------------------------------
23
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK WARRANTS AND OPTIONS ISSUED
Six Months ended October 31, 2003 Six Months ended October 31, 2002
------------------------------------------ ------------------------------------
Exercise Price Exercise Price
Number Range Number Range
---------- -------------- ---------- --------------
WARRANTS
Warrants issued as
financing expense -- 150,000 $ 1.50
Warrants issued for services
rendered 200,000 (2) (3) $ 0.45 to $ 0.50 530,000 $ 0.60 to $ 2.48
Warrants issued in sales of
common stock 604,217 (4) $ 0.50 to $ 1.25
Warrants issued in
private placements 1,015,686 $ 0.01 to $ 2.50
STOCK OPTIONS
Employee stock options 315,000 $ 0.75 to $ 1.02 5,576,669 $ 0.13 to $ 1.75
Non-employee stock options
issued to outside directors 210,000 $ 0.75 --
Non-employee stock options
issued for services rendered 270,000(5)(6)(7) $ 0.50 to $ 1.02 1,445,454 $ 1.00 to $ 2.24
-------------------- -----------
1,599,217 8,717,809
-------------------- -----------
(2) In May 2003, the Company issued warrants to purchase 150,000 shares of
common stock to a placement agent for placement services. The warrants vest
immediately, have an exercise price of $0.45 per share, and expire in May 2005.
The Company recorded $60,518 in the six months ended October 31, 2003 as
compensation expense. The fair value of the warrants were determined using the
Black Scholes model. The assumptions used to determine the valuation are as
follows:
Value of warrants per share $ 0.40
Stock price on grant date $ 0.45
Exercise price $ 0.45
Expected life 2.0 years
Risk-free rate of return 1.44%
Expected annual volatility 100%
Annual rate of dividends 0%
(3) In May 2003, the Company issued warrants to purchase 50,000 shares of common
stock to a placement agent for placement services. The warrants vest
immediately, have an exercise price of $0.50 per share, and expire in May 2008.
The Company recorded $15,864 in the six months ended October 31, 2003 as
compensation expense. The fair value of the warrants were determined using the
Black Scholes model. The assumptions used to determine the valuation are as
follows:
Value of warrants per share $ 0.32
Stock price on grant date $ 0.36
Exercise price $ 0.50
Expected life 2.0 years
Risk-free rate of return 1.59 %
Expected annual volatility 100%
Annual rate of dividends 0%
24
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock Warrants and Options Issued (Continued)
(4) In the period of May 2003 to October 2003, the Company issued warrants to
purchase 604,217 shares of common stock to investors in common stock of the
Company during the six months ended October 31, 2003. The Company allocated
$569,121 to the warrants issued as a cost of raising capital. The fair value of
the warrants were determined using the Black Scholes model. The assumptions used
to determine the valuation are as follows:
Value of warrants per share $ 0.41 to $1.26
Stock price on date of grant $0.50 to $1.30
Exercise price $0.50 to $1.25
Expected life of option 2.0 years
Risk-free rate of return 1.45 % to 1.98%
Expected annual volatility 140%
Annual rate of dividends 0%
(5) In July 2003, the Company issued stock options to purchase 200,000 shares of
common stock to two consultants for business development services. The stock
options vest over 18 months, have an exercise price of $0.50 per share, and
expire in July 2009. The Company recorded $89,761 in the six months ended
October 31, 2003 as compensation expense. The fair value of the stock options
were determined using the Black Scholes model. The assumptions used to determine
the valuation are as follows:
Value of option per share $ 0.45
Stock price on grant date $ 0.50
Exercise price $ 0.50
Expected life 2.0 years
Risk-free rate of return 1.45 %
Expected annual volatility 100%
Annual rate of dividends 0%
(6) In May 2003, the Company issued stock options to purchase 30,000 shares of
common stock to consultants for business development services. The stock options
vest over 18 months, have an exercise price of $0.75 per share, and expire in
May 2009. The Company recorded $11,348 in the six months ended October 31, 2003
as compensation expense. The fair value of the stock options were determined
using the Black Scholes model. The assumptions used to determine the valuation
are as follows:
Value of options per share $ 0.38
Stock price on grant date $ 0.45
Exercise price $ 0.75
Expected life 2.0 years
Risk-free rate of return 1.44 %
Expected annual volatility 100%
Annual rate of dividends 0%
(7) In August 2003, the Company issued stock options to purchase 40,000 shares
of common stock to members of the Company's Scientific Advisory Board as
compensation for services. The stock options over 18 months, have an exercise
price of $1.02 per share, and expire in August 2009. The Company recorded
$41,356 in the six months ended October 31, 2003 as compensation expense. The
fair value of the stock options were determined using the Black Scholes model.
The assumptions used to determine the valuation are as follows:
Value of warrants per share $ 1.04
Stock price on date of grant $ 1.02
Exercise price $ 1.02
Expected life of option 2.0 years
Risk-free rate of return 2.05%
Expected annual volatility 140%
Annual rate of dividends 0%
25
NOTE 10 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Incentive Plan
In May 2003, the Board of Directors approved the establishment of the
2003 Stock Incentive Plan and reserved 2,000,000 shares of authorized
and unissued shares of common stock for such plan. As of October 31,
2003, the Board of Directors also approved the issuance of options to
purchase 795,000 shares of common stock to various directors, employees
and non-employee consultants of the Company at various exercise prices.
The plan was approved by the Company's shareholders at its annual
meeting held on November 7, 2003.
Issue Penalty Shares
During the six months ended October 31, 2003, the Company issued a
total of 239,786 shares of common stock as penalty shares to certain
shareholders who invested in a private placement, dated October 29,
2002, to the Series A holders who converted their shares into common
stock and to certain other investors in the Company's common stock to
compensate them for the late registration of the common stock.
NOTE 11 - RELATED PARTY TRANSACTIONS
During the six months ended July 31, 2003 and 2002 and the period from
August 21, 1995 (inception) to October 31, 2003, the Company purchased
$0, $0, and $4,767, respectively, of property and equipment from a
Board member.
See Notes 6, 7, 9, 11 and 12 for additional related party
transactions.
NOTE 12 - SUBSEQUENT EVENTS
In November and December 2003, the Company sold 303,758 shares of its
common stock and raised $219,751, net of commissions. In connection
with these sales, the Company also issued 75,940 warrants to purchase
its common stock at exercise prices ranging from $0.75 to $1.00.
In November 2003, the Board of Directors approved the compensation of
its Directors for their service on the Board of Directors by an annual
grant of 100,000 stock options each, with the exercise price equal to
the market price on the date of the grant, in exchange for service on
the Board for the coming year. The Board also approved the compensation
of two of its Directors for their service on the Audit & Finance
Committee by an annual grant of 50,000 shares of common stock of the
Company with the exercise price equal to the market price on the date
of the grant, in exchange for service on the committee. The Board also
approved the compensation of two of its Directors for their service on
the Compensation Committee by an annual grant of 15,000 shares of
common stock of the Company with the exercise price equal to the market
price on the date of the grant, in exchange for service on the
committee. There were 740,000 stock options granted at an exercise
price of $1.25 per share in connection with these actions. In addition
we granted 100,000 stock options at an exercise price of $0.35 per
share in exchange for termination of previously granted options to
acquire HiEnergy Microdevices stock.
In November 2003, the Board of Directors also approved the compensation
for Directors as follows: Each Director are compensated for each
directors meeting through the receipt, at the election of each
attending Director, of either 3,000 shares of common stock of the
Company fully vested; or the issuance of stock options to purchase
3,000 shares of common stock exercisable at $1.25 per share for a term
of five years.
26
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
In November 2003, the Board of Directors approved a voluntary share
exchange for the remaining outstanding stock of Microdevices. HiEnergy
would issue 459,222 share of common stock (exchange rate of 22.3542
to 1) for the remaining outstanding shares of Microdevices. After the
exchange has been completed, the Company would transfer the remaining
assets of Microdevices into HiEnergy and dissolve Microdevices.
In November 2003, the Company issued 44,187 shares of common stock as
penalty shares to certain shareholders who invested in a private
placement, dated October 29, 2002, to the Series A holders who
converted their shares into common stock and to certain other investors
in the Company's common stock to compensate them for the late
registration of the common stock.
In December 2003, the Company issued 310,000 shares of common stock to
various employees and consultants with an exercise price equal to the
market price on the date of the grant of $0.90. The stock options vest
in 18 months.
27
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, are "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, 2003.
OVERVIEW
We are a development stage company commercializing a proprietary technology for
assembling sensor systems that utilize a neutron emitter to send neutrons, a
gamma-ray spectrometer to read reflected gamma ray photons and proprietary
technology that derives an empirical molecular formula from the gamma-ray
spectrograph.
Our technology identifies the chemical formula (e.g., CO2; C6H2O6) of a chemical
element or compound, as does a spectroscope. However, testing with a
spectroscope requires handling and burning the chemical. Our technology has
applications in detecting almost every chemical element and compound, such as
plastic explosive, Anthrax and cocaine. Our beta-models can, within a few inches
of physical proximity, but without touching, sampling or oxidizing, and through
solid matter, determine the quantitative chemical formula of a concealed
substance. Our prototype sensors have successfully identified explosives,
biological weapons and illegal drugs in previous government-supervised trials.
We were originally incorporated under the laws of the State of Washington on
March 22, 2000, under the name SLW Enterprises Inc. On April 30, 2002, we
changed our name to HiEnergy Technologies, Inc. following our merger with
HiEnergy Microdevices, Inc. in a transaction treated as a recapitalization of
HiEnergy, with Microdevices as the Accounting acquirer (reverse acquisition). We
reincorporated in Delaware on October 22, 2002. HiEnergy Microdevices, Inc., is
a Delaware corporation formed in 1995. Dr. Bogdan Castle Maglich, our Chairman
of the Board, Chief Executive Officer, President, Treasurer and Chief Scientific
Officer, founded HiEnergy Microdevices in 1995 to commercialize the technology
he developed to determine the chemical composition of substances
non-intrusively, from a modest distance, even through solid matter and despite a
hermetically sealed container. HiEnergy Defense, Inc., is a Delaware corporation
formed in 2003.
The merger of HiEnergy Microdevices with SLW occurred on April 25, 2002. SLW
merged with 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.
28
SLW Enterprises was a "public shell company" on the date of the reverse
take-over. The transaction was accounted for as a re-capitalization of HiEnergy
Microdevices. The costs of the transaction were approximately $451,000 and were
expensed as a general and administration expense in the periods incurred.
Our common shares continue to trade on the NASD's Over-the-Counter Bulletin
Board(R) under the symbol "HIET".
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 accounting principles generally accepted in the
United States of America. 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 POLICIES AND 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 of
America. 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.
Long-lived Assets
Property and equipment are recorded at cost and depreciated using the
straight-line method over an estimated life of five years. Determining the
estimated life of our property and equipment requires judgment and changes to
the estimated life could materially impact the amount of depreciation expense
recognized in the statement of operations and the amount recognized as property
and equipment in the consolidated balance sheet.
Stock-based compensation
We account for stock-based awards to employees and directors using the intrinsic
value method of accounting in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under
the intrinsic value method, where the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized in the Company's
Consolidated Statements of Operations. Where the exercise price of the Company's
employee stock options is less than the market price of the underlying stock on
the date of grant ("in-the-money"), compensation expense is recorded in the
Company's Consolidated Statement of Operations. The application of APB No. 25
requires judgment, including the fair value of underlying stock. During the year
ended April 30, 2002, Microdevices granted 123,909 stock options to employees
with exercise prices of between $3.00 and $5.00. We estimated the fair value of
the underlying stock of Microdevices, a private company, to be $0.97. Changes in
the estimated fair value of the underlying Microdevices stock could materially
impact the amount of stock-based compensation expense recognized in the
consolidated statement of operation, if the change in the estimated fair value
of the underlying Microdevices stock resulted in stock options that were
in-the-money.
29
We account for stock options and warrants issued to non-employees in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123),
EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" ("EITF 96-18"), and related interpretations. In accordance with SFAS
No. 123 Stock options and warrants issued to non-employees for goods and
services received can be valued at the fair value of the goods and services
received or the fair value of the equity instruments, whichever is more readily
determinable. Historically we have found the fair value of the equity instrument
granted has been more readily determinable, and expect this to be true in the
future.
The application of SFAS No. 123 in determining the fair value of the equity
instruments granted requires judgment, including the expected life, stock price
volatility for stock options and warrants and expected dividends. Changes in any
of these factors could materially impact the amount of expense recognized in the
consolidated statement of operations for goods and services received from
non-employees. Furthermore, if the fair value of the goods and services received
had been more readily determinable than the fair value of the equity instruments
granted then the amount of expense recognized in the statement of operations
could also be materially different.
Research and Development Costs
We account for research and development costs in accordance with SFAS No. 2,
"Accounting for Research and Development Costs". Research and development costs
are charged to operations as incurred. As described in section 3.50 of the
Government Contract Audit Guide for Fixed-Price Best-Efforts Cost Sharing
Arrangements, amounts earned under the Company's development contracts with the
Department of Defense have been offset against research and development costs,
in accordance with the provisions of that section, in all periods presented.
OPERATING RESULTS
THREE MONTHS ENDED OCTOBER 31, 2003 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
2002
For the three months ended October 31, 2003, we incurred a net loss of
$1,625,000, as compared to a net loss of $1,003,000 for the same period in 2002.
OPERATING EXPENSES
GENERAL AND ADMINISTRATION
Our general and administration expenses consist primarily of salaries and
benefits, costs for general corporate functions, including finance, accounting
and facilities, professional services such as legal, accounting, investor and
public relations and stock based compensation.
Our general and administration expenses were $1,379,000 for the three months
ended October 31, 2003 versus $867,000 for the same period in 2002 or an
increase of $512,000. A comparison of the major components of the increase in
general and administration expenses follows:
30
Three Months Ended
October 31, 2003 October 31, 2002 Increase
---------------- ---------------- --------
Stock based compensation 654,000 273,000 381,000
Legal fees 194,000 108,000 86,000
Accounting fees 35,000 25,000 10,000
Public relations 60,000 53,000 7,000
Investor relations 65,000 78,000 (13,000)
Consultants 21,000 83,000 (62,000)
Facilities 13,000 4,000 9,000
Directors liability insurance 38,000 25,000 13,000
Salaries and benefits 128,000 131,000 (3,000)
Travel 71,000 21,000 50,000
All other 100,000 66,000 34,000
--------- --------- ---------
Total 1,379,000 867,000 512,000
--------- --------- ---------
Warrant and stock option compensation expense relates to warrant or stock option
grants to non-employee consultants of the Company. Non-employee consultants that
received warrants or stock options for services include business development,
investor relations and capital placement services. The compensation expense
recorded for various option and warrant grants are amortized over the life of
the agreements to which they pertain. During the quarter ended October 31, 2003,
an agreement was terminated between a business development consultant and the
Company. The remaining balance of the option compensation of $423,000 was
expensed during the current quarter.
Legal and accounting fess increased due to increased SEC filing activity in the
current fiscal quarter compared to the previous fiscal years quarter.
Public and investor relations increased because a new public relations firm was
hired and there were several new public relations initiatives executed during
the current quarter compared to the same period of the prior year.
As detailed in Note-9 Commitment and Contingencies, the Company entered into a
three-year business development consulting agreement in July 2002. The monthly
cost is $20,000 per month plus expenses. For the quarter ended October 31, 2003,
the expenses under the agreement were $40,000 compared to $60,000 for the fiscal
year 2002 quarter. The Company terminated the agreement with the consultant in
October 2003.
The Company moved into new office space in November 2002. Under the terms of the
three-year lease agreement, the Company pays $8,000 per month in rent, of which
$4,000 per month is for office space and the remaining $4,000 is allocated to
research and development activities. The Company's prior facilities contained
substantially less square footage and the cost was $1,200 per month.
The Company maintains $2,000,000 of Directors and Officers liability insurance.
The current policy which began on May 30, 2003 was obtained at a much higher
rate that the policy that expired in May 2003.
Travel expenses for the current period were higher due to a significant increase
in travel related to public and investor relations activity, which did not occur
in the prior period.
RESEARCH AND DEVELOPMENT
Our research and development expenses consist primarily of salaries and
benefits, facilities, consulting services and travel.
Our research and development expenses were $239,000 for the three months ended
October 31, 2003 versus $134,000 for the same period in 2002 or a decrease of
$105,000. A comparison of the major components of the increase in research and
development expenses follows:
Three Months Ended
October 31, 2003 October 31, 2002 Increase
---------------- ---------------- --------
Salaries and benefits 184,000 103,000 81,000
Travel 4,000 21,000 (17,000)
Consultants 15,000 1,000 14,000
Depreciation 32,000 26,000 6,000
Facilities 16,000 -- 16,000
Supplies 62,000 4,000 58,000
Other 30,000 20,000 10,000
Grant income (104,000) (41,000) (63,000)
-------- ------- -------
239,000 134,000 105,000
-------- ------- -------
31
Salaries and benefits increased in the current fiscal quarter compared to the
same quarter in the prior fiscal year because the Company added additional
scientific personnel to advance to development of its detection systems. The use
of consultants decreased during the same period because the work formerly done
by consultants was done by Company personnel.
During the first and second quarter in fiscal 2002, the Company demonstrated its
detection system to the Department of Defense on the east coast in the US. The
Company incurred much higher travel expenses during the prior year quarter in
order to ship equipment and personnel to the site for the demonstration.
The Company added $482,000 of equipment during the year ended April 30, 2003 and
$122,000 during the six months ended October 31, 2003. Most of the equipment
purchased was for research and development purposes. Depreciation expenses
increased in the current fiscal quarter compared to the same quarter in the
prior year due to the increased purchases of research and development equipment.
The Company moved into new office space in November 2002. Under the terms of the
three-year lease agreement, the Company pays $8,000 per month in rent, of which
$4,000 per month is allocated to research and development activities. The
Company also leases a test site and incurred $4,000 during the current quarter
and did not have a similar facility during prior years quarter.
The Company incurred $62,000 in research and development supplies during the
current quarter to prepare our prototype detector systems to be demonstrated to
various potential customers.
In August 2002, our project to develop and test an anti-tank landmine detection
system 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 the system. On January 15, 2003,
we executed the development contract with the Department of Defense. We have
commenced work under the first year of the contract valued at $415,000. The
second year of the contract, valued at approximately $364,000, is under an
option that can be exercised by the Department of Defense at the end of the
first year. Prior to August 2002, we completed Phase I of the SBIR contract for
$70,000 for testing out MiniSenzor technology for landmine detection.
Under the terms of the contract, we are required to submit monthly written
reports detailing our progress under the contract. We accompany those written
reports with an invoice for one-twelfth of the first-year contract amount or
$34,583. When the written report is accepted by the Department of Defense, we
receive payment in about 30 to 45 days after invoice. We had income attributable
to Phase II of the development contract of $104,000 during the three months
ended October 31, 2003 and $41,000 during the same period in 2002, which was
attributable to Phase I of the development contract.
DEPRECIATION
Accumulated depreciation for property and equipment at October 31, 2003 was
$164,000. Depreciation expense for the three months ended October 31, 2003 and
2002 was $34,000 and $26,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the intervening period.
OTHER INCOME AND EXPENSE
Interest expense for the current fiscal quarter was $8,000 compared to $2,000 in
the same period in the prior year. Interest expense increased in the current
fiscal quarter because the convertible notes payable with the Company's legal
counsel with an interest rate of 10% was outstanding. No comparable interest
bearing debt was outstanding during same period of the prior year.
Interest income during the current fiscal quarter was $500 compared to $1,200 in
the same period in the prior year. During the current quarter the Company had an
average balance of $200,000 in its cash investment account compared to $400,000
in the same period of the previous year.
32
SIX MONTHS ENDED OCTOBER 31, 2003 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 2002
For the six months ended October 31, 2003, we incurred a net loss of $2,757,000,
as compared to a net loss of $1,913,000 for the same period in 2002.
OPERATING EXPENSES
GENERAL AND ADMINISTRATION
Our general and administration expenses were $2,407,000 for the six months ended
October 31, 2003 versus $1,386,000 for the same period in 2002 or an increase of
$1,021,000. A comparison of the major components of the increase in general and
administration expenses follows:
Six Months Ended
-------------------------------------
October 31, 2003 October 31, 2002 Increase
---------------- ---------------- --------
Stock based compensation 815,000 294,000 521,000
Legal fees 442,000 309,000 133,000
Accounting fees 89,000 60,000 29,000
Public relations 105,000 77,000 28,000
Investor relations 109,000 120,000 (11,000)
Consultants 247,000 119,000 128,000
Facilities 38,000 9,000 29,000
Directors liability insurance 68,000 37,000 31,000
Salaries and benefits 214,000 165,000 49,000
Travel 123,000 61,000 62,000
All other 157,000 135,000 22,000
--------- --------- ---------
Total 2,407,000 1,386,000 1,021,000
--------- --------- ---------
Warrant and stock option compensation expense relates to warrant or stock option
grants to non-employee consultants of the Company. Non-employee consultants that
received warrants or stock options for services include business development,
investor relations and capital placement services. The compensation expense
recorded for various option and warrant grants are amortized over the life of
the agreements to which they pertain. During the six months ended October 31,
2003, an agreement was terminated between a business development consultant and
the Company. The remaining balance of the option compensation of $550,000 was
expensed during the period.
Legal and accounting fess increased due to increased SEC filing activity in the
current fiscal period compared to the same period in the previous year.
Public and investor relations increased because a new public relations firm was
hired and a new public relations initiative was launched during the current
period.
As detailed in Note-9 Commitment and Contingencies, the Company entered into a
three-year business development consulting agreement in July 2002. The monthly
cost was $20,000 per month plus expenses. For the six months ended October 31,
2003, the expenses under the agreement were $110,000 compared to $80,000 for the
fiscal year 2002 quarter. The Company terminated the agreement with the
consultant in October 2003. There was also increased use of consultants by the
Company for business development and finance and accounting matters.
The Company moved into new office space in November 2002. Under the terms of the
three-year lease agreement, the Company pays $8,000 per month in rent, of which
$4,000 per month is for office space and the remaining $4,000 is allocated to
research and development activities. The Company's prior facilities contained
substantially less square footage and the cost was $1,200 per month.
33
The Company maintains $2,000,000 of Directors and Officers liability insurance.
The current policy which began on May 30, 2003 was obtained at a much higher
rate that the policy that expired in May 2003.
The Company's salaries and benefits were higher in the current period because
scheduled salary and benefit increases contained in the employment agreement
with the Company's Chairman and CEO. There were also salary increases included
for other general and administration employees.
Travel expenses for the current period were higher due to a significant increase
in travel related to public and investor relations activity, which did not occur
in the prior period.
RESEARCH AND DEVELOPMENT
Our research and development expenses were $337,000 for the six months ended
October 31, 2003 versus $301,000 for the same period in 2002 or an increase of
$36,000. A comparison of the major components of the increase in research and
development expenses follows:
Six Months Ended
----------------------------------- Increase/
October 31, 2003 October 31, 2002 (Decrease)
---------------- ---------------- ----------
Salaries and benefits 299,000 153,000 146,000
Travel 5,000 43,000 (38,000)
Consultants 33,000 32,000 1,000
Depreciation 61,000 40,000 21,000
Supplies 84,000 22,000 62,000
Insurance -- 18,000 (18,000)
Moving 40,000 -- 40,000
Other 22,000 34,000 (12,000)
Grant income (207,000) (41,000) (166,000)
-------- ------- --------
337,000 301,000 36,000
-------- ------- --------
Salaries and benefits increased in the current period compared to the same
period in the prior fiscal year because the Company added additional scientific
personnel to advance to development of its detection systems. The use of
consultants was about the same during the same period.
During the period in fiscal 2002, the Company demonstrated its detection system
to the Department of Defense on the east coast in the US. The Company incurred
much higher travel expenses during the prior year quarter in order to ship
equipment and personnel to the site for the demonstration.
The Company added $482,000 of equipment during the year ended April 30, 2003 and
$122,000 during the six months ended October 31, 2003. Most of the equipment
purchased was for research and development purposes. Depreciation expenses
increased in the current period compared to the same quarter in the prior year
due to the increased purchases of research and development equipment.
The Company incurred $84,000 in research and development supplies during the
period to prepare our prototype detector systems to be demonstrated to various
potential customers.
In August 2002, our project to develop and test an anti-tank landmine detection
system 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 the system. On January 15, 2003,
we executed the development contract with the Department of Defense. We have
commenced work under the first year of the contract valued at $415,000. The
second year of the contract, valued at approximately $364,000, is under a option
that can be exercised by the Department of Defense at the end of the first year.
Prior to August 2002, we completed Phase I of the development contract for
$70,000 for testing out MiniSenzor technology for landmine detection.
34
Under the terms of the contract, we are required to submit monthly written
reports detailing our progress under the contract. We accompany those written
reports with an invoice for one-twelfth of the first-year contract amount or
$34,583. When the written report is accepted by the Department of Defense, we
receive payment in about 30 to 45 days after invoice.
We had grant income attributable to Phase II of the development contract of
$207,000 during the six months ended October 31, 2003 and $41,000 during the
same period in 2002, which was attributable to Phase I of the development
contract.
DEPRECIATION
Accumulated depreciation for property and equipment at October 31, 2003 was
$164,000. Depreciation expense for the six months ended October 31, 2003 and
2002 was $64,000 and $40,000, respectively. The increase in depreciation expense
reflects additional equipment put into service during the intervening period.
OTHER INCOME AND EXPENSE
Interest expense for the current fiscal quarter was $13,000 compared to $5,000
in the same period in the prior year. Interest expense increased in the current
fiscal period because the convertible notes payable with the Company's legal
counsel with an interest rate of 10% was outstanding. No comparable interest
bearing debt was outstanding during same period of the prior year.
Interest income during the current fiscal quarter was $900 compared to $3,400 in
the same period in the prior year. During the current fiscal period, the Company
had an average balance of $175,000 in its cash investment account compared to
$450,000 in the same period of the previous year.
During the six months ended October 31, 2003, 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 $1.50 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. Accordingly, the Company recorded financing
expense of $223,710 during the three months ended July 31, 2002. The fair value
of the warrants were determined using the Black Scholes model. There was no
comparable expense in the current fiscal quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
The subsection of Note 3 to the unaudited Notes to the Financial Statements
entitled "Recently Issued Accounting Pronouncements" is incorporated herein.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2003, we had unrestricted cash and cash equivalents of
$260,000. We used $1,020,000 for operating activities and approximately $122,000
to acquire equipment in the six months ended October 31, 2003. Of our $2,757,000
net loss, we recorded approximately $636,000 in non-cash expenses related to the
issuance of common stock and stock based securities as compensation for
services. During the six months ended October 31, 2003, we raised approximately
$1,376,000 from sales of common stock. As of October 31, 2003, we had current
liabilities of approximately $1,164,000 which exceeded our cash on hand. The
Company has to continue to sell equity in order to pay for on-going operations
and pay its present liabilities.
In November and December 2003, the Company sold 303,758 shares of its common
stock and raised $219,751, net of commissions. In connection with these sales,
the Company also issued 75,940 warrants to purchase its common stock at exercise
prices ranging from $0.75 to $1.00.
35
As of October 31, 2003 the Company was in default of a note payable totaling
$40,000 with a shareholder and related party. The note payable have been in
default since November 1997. Also, the Company was in default of a convertible
notes payable as of July 31, 2003 of $10,400 with a former director and related
party. The convertible note payable was paid in full in August 2003.
In August 2003, the Company signed and agreement with an investment bank to
support its bid to obtain a $1,600,000 grant contract with the U.S. Navy to
develop a prototype SuperSenzor for detection of biological agents in sealed
containers. The investment bank has confirmed to the Navy that it would provide
the necessary funding of a minimum of $2,500,000 and a maximum of $4,000,000, by
purchasing common stock of the Company to guarantee that the Company will have
sufficient funding through the performance of an 18-month contract. The Company
estimates that its costs to execute the contract will be in a range from
$800,000 to $1,200,000.
In exchange for the guarantee, the Company will owe fees to the investment bank
ranging from $50,000 (if the contract is not awarded to the Company) to $150,000
(upon the award of the contract). The Company had been approved for a grant of
$1,600,000; however, the Contracting Office of the Naval Surface Warfare Center
denied the contract due to the Company's financial condition. During the six
months ended October 31, 2003, the Company recorded a liability for $50,000
under this agreement.
As of October 31, 2003, we issued unsecured convertible promissory notes at 10%
interest totaling $450,000 to our legal counsel for legal services provided to
the Company. The legal fees were expensed as a general and administration
expense in the periods incurred. The amount of the notes totaled $47,000 and
$450,000 at April 30, 2003 and October 31, 2003, respectively. The notes are due
on January 15, 2004 unless converted into common stock. Also in June 2003, the
Company issued 300,000 shares of common stock to its legal counsel to pay
$100,000 worth of legal fees. The numbers of shares of common stock and the
price per share issued to our legal counsel was negotiated by the parties in
order to offset $100,000 of legal services.
In August 2003, the Company announced the incorporation of HiEnergy Defense,
Inc. an 85% owned subsidiary that will focus on developing and marketing defense
applications of the Company's SuperSenzor technology. During the six months
ended October 31, 2003, we invested $50,000 in HiEnergy Defense, Inc.
Below is a summary of our agreements presently in effect showing the monthly and
annual minimum cost:
Minimum Minimum
Beginning Ending Monthly Annual
Services Provided Date Date Cost Cost Status
- ----------------------------------------------------------------------------------------------------------------------------
Business Development July 2002 November 2003 $ 20,000 $240,000 Terminated in October 2003
Public Relations November 2002 February 2003 $ 12,500 $150,000 Currently month to month
Investor Relations April 2003 March 2004 $ 6,500 $ 78,000 Terminated in December 2003
PLAN OF OPERATION
GENERAL
Our strategic goal is to capture a third of the market for secondary, or
confirmation, detectors. In order to achieve this goal quickly, we are pursuing
partnerships with security equipment manufacturers, with whom we are interested
in pursuing strategic alliances, joint ventures, or partnerships. The goal of
these industrial partnerships is to establish the Company as an equipment
supplier to an existing manufacturer of primary scanning systems, such as an
X-ray manufacturer. This would allow the X-ray manufacturer, for example, to
supply an integrated, improved product to their customer, and allow faster
access to the market. We would supply an original equipment manufacturer (OEM)
version of its technology to the industrial partner. In other words, the
industrial partner incorporates in its final unit an OEM version of our
technology. We intend to begin assembling and selling beta models of our systems
in calendar year 2004. We intend to begin with the MiniSenzor.
36
PRODUCTION AND SALES
The CarBomb Finder is currently available as a commercial beta model using the
MiniSenzor. We hope to begin selling systems to customers in Europe as soon as
our field tests by the Spanish Aviation Security Agency have been completed. In
addition, we have signed an agreement with Electronic Equipment Marketing
Company, an ISO 9001 certified electronic company in Saudi Arabia, to sell the
product to companies in the Middle East and Africa.
The Anti-Tank Landmine Confirmation Sensor uses the SuperSenzor and will be
available in a beta model in 2004. We hope to begin selling beta models to the
U.S. Army in 2004. We also hope to enter into a joint venture with another
company to use our detection products as part of an integrated system to screen
cargo containers at ports of entry. If we were to enter into an agreement in
calendar year 2004, a beta model system could be available in late calendar year
2004.
We intend to sell our False Alarm Eliminator as a false alarm reduction system
to accompany a primary scanning system such as an X-ray machine. In addition, we
also intend to establish a joint venture with an existing manufacturer of X-ray
systems for development of an integrated system.
FACILITIES AND PERSONNEL
We intend to assemble these units at our facilities in Irvine, California. Our
landlord has indicated the availability of an additional 8,000 square feet of
manufacturing space that is adjacent to our offices. We may choose to lease this
space to support our growth, which would require that we install testing
facilities, shielding, and work areas. We will also need to hire additional
people to assemble and test our products. We will need to develop customer
installation and training systems to include additional personnel and written
manuals about our products.
GOVERNMENT CONTRACTS
We intend to pursue government contracts which are outlined in the section
entitled "Government Grants and Contracts" under "Description of Business"
below. We are presently working on the completion of the first year of the Small
Business Innovation Research Phase II contract for $415,000 in contract income.
We anticipate the U.S. Army will exercise its option in January 2004 for the
second year for $364,000 in contract income. We have applied for other
government contracts and expect we will be awarded one or more in 2004 or 2005.
ADDITIONAL CAPITAL REQUIREMENTS
We intend to sell common or preferred stock in order to fund our operations
until we become cash flow positive. We have included $10 to $15 million in sales
of equity in our plans. If we are unsuccessful in obtaining government grant
revenue or our product sale plans are delayed, we will have to increase the
amount of equity raised in the public markets. During the remaining period of
our current fiscal year ending April 30, 2004, we intend to spend approximately
$2.1 million on operating expenses and approximately $2.4 million on capital
expenditures for equipment needed to continue our development of the technology.
37
RISKS RELATED TO OUR BUSINESS
WE UNDERSTAND THERE PRESENTLY IS A FORMAL SEC INQUIRY THAT RELATES TO INVESTORS
IN OUR PREDECESSOR COMPANY ABOUT THE TIME OF THE REVERSE TAKEOVER TRANSACTION
BETWEEN SLW ENTERPRISES INC. AND HIENERGY MICRODEVICES, INC.
We were first made aware by a reporter with the Dow Jones News Service that
there may be an alleged relationship between an individual by the name of Phil
Gurian, who had previously been convicted and awaits sentencing for previous
alleged stock manipulation schemes, and a former director and Chief Executive
Officer of each of SLW and HiEnergy Technologies, Barry Alter. 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
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 SLW or HiEnergy
Technologies or HiEnergy Microdevices. However, we believe that Mr. Gurian
introduced other investors to SLW 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 the section entitled "Legal
Proceedings." 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.
We continue the development of our technology and products. Thus far our efforts
are proceeding undisturbed and without interruption. Naturally, we cooperated
fully with the SEC's every request. We feel that we have fully complied with the
request by the SEC for information. For instance, we have provided over 3,000
pages of documents. As to the conclusions of the independent committee, please
see "Legal Proceedings." We will also rely upon the SEC's investigation to help
us determine whether and what kind of corporate legal action is appropriate. We
anticipate that the SEC will not swiftly conclude its investigation.
The price of our stock declined sharply in connection with the news story and
our announcements concerning our independent investigation and the SEC
investigation. A loss of value is understandable based on the incident itself.
For instance, if Mr. Alter committed any wrongful act while serving as our
agent, we could have liability for any resulting damages. Also, our shareholders
could lose confidence in us if they believe this incident is a result of
unresolved problems. There may be material additional costs and expenses, such
as legal expenses, that could be involved in sorting out these issues and
assisting the SEC with such work. Much worse yet, this incident could materially
damage the public's perception of us, and adverse public sentiment can
materially adversely affect the market price of our common stock and our
financial results. One of the possible effects on us could be a continuing
depressed stock price, which may result in difficulty raising equity capital or
the sale of equity at prices that are unfavorable to us. Current management 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. These costs may include the cost of indemnifying the
defendants or advancing costs to the defendants pending the outcome of the suit.
DUE TO OUR LOSSES AND ACCUMULATED DEFICIT, OUR AUDITORS HAVE RAISED CONCERNS
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our independent certified public accountants qualify their opinion contained in
our consolidated financial statements as of and for the years ended April 30,
2003, 2002 and 2001 to include an explanatory paragraph related to our ability
to continue as a going concern, stating that "during the year ended April 30,
2003, the Company incurred a net loss of $5,411,265, and it had negative cash
flows from operations of $2,942,480. In addition, the Company had an accumulated
deficit of $8,981,620 and was in the development stage as of April 30, 2003.
These factors, among others, as discussed in Note 2 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern." Analysts and investors generally view reports of independent auditors
that mention substantial doubt about a company's ability to continue as a going
concern unfavorably. This qualified audit report, and the facts underlying the
qualification, may make it challenging and difficult for us to raise additional
debt or equity financing to the extent needed for our continued operations or
for planned increases, 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. We urge potential investors to review the report
of our independent certified public accountants and our consolidated financial
statements before making a decision to invest in HiEnergy Technologies, and not
to invest in our common stock unless they can afford the potential loss of their
investment.
38
IF OUR LOSSES CONTINUE INTO THE FUTURE, OUR BUSINESS AND OUR STOCKHOLDERS WILL
BE ADVERSELY AFFECTED AND OUR DEPENDENCE ON GOVERNMENTAL CUSTOMERS, AS WE
ANTICIPATE, CAN REQUIRE LONGER THAN AVERAGE LEAD TIMES BEFORE SALES ARE MADE.
We have incurred net losses since our inception. For the six months ended
October 31, 2003, we reported a net loss available to common shareholders of
approximately $3,368,429, as compared to a net loss available to common
shareholders of approximately $2,759,016 for the six months ended October 31,
2002. Our accumulated deficit through October 31, 2003 was approximately
$12,350,049. We have financed operations to date through a combination of
government funding and equity financing. As of October 31, 2003, we had received
an aggregate of approximately $678,001 in government grant funding as from the
U.S. Department of Defense, U.S. Energy Department and U.S. Customs Service. We
expect that our losses will continue in fiscal year 2004 and further into the
future. We cannot assure you that we will attain profitable operations in the
future. In the past, the cash available from financial sources has funded
operations with aggregate losses of $12,350,049 and has left a small deficit of
at October 31, 2003 of $124,499. It appears that our financial requirements
until we can become breakeven are at least $15,000,000. One of the reasons for
the continuation of such anticipated losses is that we are highly dependent on
governmental customers, which typically require long lead times.
ONE OF OUR FORMER DIRECTORS HAS DEMANDED THAT WE ADVANCE HIM EXPENSES OF DEALING
WITH THE SEC'S INVESTIGATION.
Our former director Barry Alter has engaged his own separate legal counsel with
respect to the SEC investigation regarding SLW Enterprises and is a recipient of
what we understand to be an informal request from the SEC as to a desire to
obtain documents from him in its investigation. Mr. Alter demanded that we
advance him in excess of $24,000 in connection with the informal investigation
that the SEC has conducted. Mr. Alter brought an action against us in Delaware
seeking payment of his costs and expenses, and then subsequently informed us
that the action had been voluntarily dismissed without prejudice. Mr. Alter
could make further demands for advancement of expenses, and the voluntary
dismissal of his action does not prevent him from initiating a new action to
recover past, present, and future expenses from us. We will, if financially
able, vigorously contest any such action by Mr. Alter and could also bring
action against Mr. Alter for indemnity, breach of fiduciary duty, fraud and
other relief. If it is determined that Mr. Alter's claim satisfies the
conditions for advancement of expenses incurred in the SEC investigation, we may
be obligated to advance any expenses, liabilities or losses incurred by him in
connection with the investigation prior to a final determination whether Mr.
Alter has satisfied the standard of conduct to justify indemnification. We could
be subject to indemnification demands by Mr. Alter until there is a final
judgment, which could be years away. See "Legal Proceedings" for more
information.
FORMER DIRECTOR FAILED TO DISCLOSE OUTSIDE LEGAL PROCEEDINGS.
If certain legal proceedings involve a director of ours, and do not involve us
whatsoever, we nevertheless are required to disclose them in Form 10-KSB
pursuant to Item 401(d) of Regulation S-B. This Item relates specifically to any
involvement of directors in outside legal proceedings, such as serving as an
executive officer of any company declaring bankruptcy or, for instance, being
subjected to certain kinds of judgments and injunctions. Gregory F. Gilbert, a
former director of ours, had not disclosed to us, during the course of our
preparation of our annual report on Form 10-KSB for the year ended April 30,
2002 and subsequent reports up to February 2003, that he was involved in certain
legal proceedings. Because Mr. Gilbert had not disclosed the information to us,
and we did not otherwise become aware of it, we could not include the
information in any filings with the SEC prior to filing, on March 11, 2003, an
amendment to our annual report on Form 10-KSB for the year ended April 30, 2002.
The amendment disclosed additional biographical information about Mr. Gilbert.
Mr. Gilbert was involved in several legal proceedings that were unknown to us at
the times when we filed various reports with the SEC. Afterward we were made
aware of a judgment that 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. Specifically, we base our
information on 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; and 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.
We also determined, based on an SEC Litigation Release No. 16182 (June 9, 1999),
that a predecessor to Hamilton-Biophile Companies, of which Mr. Gilbert is Chief
Executive Officer, was affirmatively required to file its quarterly and annual
reports under the Securities Exchange Act of 1934. Additionally,
Hamilton-Biophile, including its predecessors, reported in its filings with the
SEC that it had filed or had filed against it petitions for voluntary and
involuntary bankruptcy during Mr. Gilbert's tenure as its Chief Executive
Officer. We have seen no official evidence of a waiver of the filing
requirements during the bankruptcy.
39
Certain kinds of legal proceedings perhaps may be considered especially relevant
to a person's suitability to serve as a director of any public company.
Shareholders could potentially assert that we acted negligently in failing to
uncover an involvement of a director personally in such legal proceedings. We
did unwittingly fail to apprise ourselves of the existence of these legal
proceedings, but we feel we acted with a reasonable amount of caution, in that
we circulated a standard questionnaire to directors and nominees and exercised
due care. These matters never came to our attention. Nonetheless, our
shareholders could lose confidence in our corporate governance practices if they
believe this incident is a result of an unresolved problem of inadequate
screening of potential nominees for the Board of Directors. Much worse yet, this
incident could materially damage the public's perception of us, and adverse
public sentiment can materially adversely affect the market price of our common
stock and our financial results. Finally, the purchasers of common stock prior
to our disclosure of the legal proceedings could claim that we are responsible
for alleged monetary damages related to a decline in the market price of our
stock.
PREVIOUS PURCHASERS OF OUR SECURITIES AND STOCKHOLDERS COULD ATTEMPT TO ASSERT
CLAIMS AGAINST US FOR INADEQUATE DISCLOSURE.
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 outside legal proceedings," "We understand
there is presently a formal 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." and "Legal
Proceedings," were not known to us and were not disclosed in sales materials or
filings with the SEC until February 2003. 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 Exchange Act of 1934 and other state
and federal securities laws. However, if a court decides to the contrary, that
could result in liability under the Securities Act or under the Securities
Exchange Act, or under state securities laws. State securities laws may apply
similar or different standards as the federal laws. In such case, we would
pursue all of our rights and remedies, if any, against our former officers and
directors to the extent, if any, they were culpable. Obviously, we have
disclosed these matters to the stockholders and the public. Therefore,
purchasers in this offering, and any other purchasers of shares of our common
stock subsequent to our making such disclosure in February 2003 would have no
basis to bring any cause of action for our previously having failed to ascertain
and disclose such facts. In April, June and October 2002, we sold 5,204,248
shares of our presently outstanding common stock for gross proceeds of
approximately $4,455,000 in private equity offerings and these persons and some
other stockholders of ours during calendar year 2002 could make such
allegations.
WE MAY BE ADVERSELY AFFECTED BY PRIOR WEAKNESSES IN OUR INTERNAL CONTROLS AND
LACK OF SEGREGATION OF DUTIES THAT IS IN THE PROCESS OF IMPROVEMENT.
Notwithstanding generally adequate present internal controls and procedures,
previously we had a general weakness in our segregation of duties and other
internal controls over equity transactions. We have now addressed the weakness
in our internal controls over equity transactions and continue to improve our
segregation of duties. These improvements will occur over time as and when
additional personnel are identified, authorized, hired and trained.
WE HAVE A SINGLE INDIVIDUAL SERVING AS OUR CHAIRMAN, CHIEF EXECUTIVE OFFICER,
PRESIDENT AND TREASURER.
The potential success of our business depends to a great extent on the
capability and capacity of Dr. Bogdan Maglich, the Chairman of our Board of
Directors, Chief Executive Officer, President, Treasurer, and Chief Scientific
Officer. In such capacities, Dr. Maglich is not only responsible for monitoring
the research and development of our technology, but also actively involved in
negotiating transactions on behalf of the Company and marketing the Company's
technology through various presentations to the scientific community. We have
not sought key man insurance with respect to Dr. Maglich or any of our executive
officers. We also do not have succession plans. We do anticipate hiring
additional senior personnel. As a result, our future growth and success will
depend in large part upon our need and ability to attract additional qualified
management, scientific and professional personnel. The competition for qualified
personnel in the technological industry is intense, and our inability to attract
and retain additional key personnel could adversely affect our business and
financial operations.
40
WE MUST PREDICT THE AMOUNT OF PHYSICAL SHIELDING REQUIRED IN OUR PRODUCT TO
SATISFY PRESENT AND FUTURE NATIONAL, STATE AND LOCAL REGULATIONS.
For the time being, we will try to maintain a strategy to segregate the
deployment of our technology from the general public. We anticipate a possible
adverse public reaction to the associated level of neutron radiation exposure
that may accompany operation of our technology. We anticipate the need for
neutron shielding to make our equipment satisfactory as a matter of health and
safety in certain applications, such as airports, to shield personnel from
anticipated levels of radiation exposure. We have not determined the levels of
shielding that are required, which may vary tremendously depending on the
applicable regulations of the jurisdiction in which the system is installed. We
believe that any public objections can ultimately be overcome through education.
Our Chief Scientific Officer, Dr. Maglich, believes that our equipment's
anticipated level of neutron radiation dose will result in 10 times less tissue
damage than the level of x-ray radiation dose needed to accomplish baggage
security screening. Fast neutrons, which are used in our technology, do not
produce the same radioactive environment as thermal neutrons. Despite the
relative safety of our technology, we propose to use it initially only for
screening procedures that are remote from the general public, such as screening
checked baggage, to avoid this adverse public reaction, instead of for check-in
procedures, such as carry-on baggage screening. As public knowledge and
awareness increase, we believe that the broader array of uses for our technology
will become available. Concerns about safety may challenge our ability to
generate revenues and adversely affect our financial position, cash flows and
results of operations.
WE ARE A DEVELOPMENT STAGE COMPANY THAT HAS NOT COMMENCED COMMERCIAL OPERATIONS;
WE ALSO EXPECT TO HAVE COMPETITION IN OUR FIELD; WE EXPECT OUR COMPETITORS TO
HAVE MORE THOROUGHLY DEVELOPED FINANCIAL, SALES AND MARKETING PLANS THAN US; AND
WE MAY NOT BE ABLE TO ACHIEVE POSITIVE CASH FLOWS.
We are a development stage company. As a result, we have limited resources.
Also, our business model is still in an evolving stage. Since we have not
commenced commercial operations, we do not have the benefit of the many years of
experience that some other companies have. We anticipate responding to the
markets that present themselves at the time our products are ready to be sold,
and as such, our business and marketing approach may change from time to time.
No assurances can be made that the changes in the marketing of our products will
meet with success. Our business plan might benefit from modification and
optimization if we had more past experience executing our own business
strategies. Our potential ability to generate income is unproven. Our
competitors are established companies with operating histories and substantial
existing contracts and relationships with the potential customers for our
products.
COMPETITION MAY ARISE AND OVERTAKE US BEFORE WE COMPLETE THE DEVELOPMENT AND
TESTING OF OUR STOICHIOMETRIC TECHNOLOGY AND OUR DETECTION SYSTEMS ARE NOT
COMPLETED WITHIN A REASONABLE PERIOD OF TIME.
Our competitors and potential competitors have greater financial resources.
Other enterprises are seeking to develop products with similar capabilities. If
we are unable to complete the development of our technology and commence
manufacturing at least one of our models of detection systems within a
reasonable period of time and if other stoichiometric technologies are
developed, we may miss the opportunity to capitalize on our lead-time to market.
A delay in development or testing of our prototypes may result in foregone
potential sources of investment or revenue. Laboratory experiments have
demonstrated the basic capability of our stoichiometric technology, and our
technology has been converted into prototype products. Our technology must now
be converted into additional saleable products. Experiments to increase the
effectiveness of our technology are ongoing. The development of products based
on our technology may take longer, cost more or be more difficult than expected.
Our directed neutron device is complicated, and we have been protected by
skepticism that such an instrument can be successfully made into an industrial
product because the concept upon which our product is based was previously
considered impractical. However, as our competitors learn that we have
successfully demonstrated our product, they may be further encouraged to pursue
similar devices. Please see the separate section entitled "Competition" under
the major heading "Description of Business."
41
OUR COMPETITORS MAY HAVE ACCESS TO INFORMATION RELATING TO OUR TECHNOLOGY, OR
MAY OBTAIN LICENSES TO OUR TECHNOLOGY FROM THE GOVERNMENT, BECAUSE WE HAVE SMALL
BUSINESS INNOVATION RESEARCH GRANTS.
Also we anticipate that our competitors will have access to information relating
to our technology because we have Small Business Innovation Research grant
contracts. The federal government does not undertake to protect data or
inventions from public disclosure beyond four years after the term of our Small
Business Innovation Research grant contract. The federal government might also
create competition by utilizing its own right and license to our technology
developed under the Small Business Innovation Research contract. The U.S.
federal government has royalty-free rights in the products and data resulting
from our federal government Small Business Innovation Research grants. We
nevertheless own the data and title to the products resulting from our Small
Business Innovation Research grants and are permitted to obtain patent
protection. SBIR grants previously obtained by HiEnergy Microdevices, Inc.
expired as early as 1997, and HiEnergy Microdevices filed for patent protection
of methods and systems related to such SBIR grants consistent with the terms of
these grants. The SBIR grant obtained by HiEnergy Technologies in 2002 for
anti-tank landmine detection has not expired.
IF WE ARE UNABLE TO SECURE ANTICIPATED FUNDING, WE MAY BE FORCED TO CURTAIL
SPENDING FURTHER THAN ANTICIPATED.
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 part of the needed funding for
our operations in 2004. 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. However, the government contracting process
involves further steps, such as financial capability evaluations, that have
caused the loss of such contracts to second bidders. Raising investment capital
is a near-term necessity in order to pursue any government contracts. If we
finance our needs with debt, the stockholders could receive nothing upon any
foreclosure or material default. If we sell shares of preferred equity, the
rights of the present stockholders would be subject to any senior rights of the
preferred series of shares. The use of common equity financing in order to raise
additional working capital will dilute the ownership interests of our existing
stockholders.
We have successfully obtained a total of seven government development contracts
from the U.S. Department of Defense, U.S. Energy Department and U.S. Customs
Service to finance our research and development. We have failed to obtain three
government contracts for which we had made proposals, although one of these is
currently under a second review by the U.S. Navy, and we have applied for
additional government grants that are pending a decision. These grants may de
denied for reasons that include funding of the program (presently at issue in
our Navy proposal), our financial position and abilities (which has twice before
been the basis for declining our proposals), or other reasons. Our government
grants and equity financings have been sufficient to finance our research and
development and operating activities to date; however, at certain times we have
been compelled to slow research and development to conserve our cash.
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.
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 the
capability and capacity of 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 that we are developing, and his services are critical to our success.
We have not sought key man insurance with respect to Dr. Maglich. 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. Dr. Maglich is 75 years
of age. We do not have a succession plan or a policy for succession; the Board
of Directors of the Company would meet and name a successor or successors to
offices held now by Dr. Maglich. We have not sought key man insurance with
respect to Dr. Maglich or any of our executive officers. We also do not have
succession plans. We do anticipate hiring additional senior personnel. As a
result, our future growth and success will depend in large part upon our need
and ability to attract additional qualified management, scientific and
professional personnel. The competition for qualified personnel in the
technological industry is intense, and our inability to attract and retain
additional key personnel could adversely affect our business and financial
operations.
42
WE MAY HAVE INCREASING DIFFICULTY IN ATTRACTING AND INTERESTING OUTSIDE MEMBERS
OF OUR BOARD OF DIRECTORS.
The directors and management of publicly traded corporations are increasingly
concerned with the extent of their personal exposure to lawsuits and shareholder
claims, as well as governmental and creditor claims which may be made against
them in connection with their positions with publicly-held companies. Outside
directors are becoming increasingly concerned with the availability of directors
and officers' liability insurance to pay on a timely basis the costs incurred in
defending shareholder claims. Directors and officers liability insurance has
recently become much more expensive and difficult to obtain than it had been. If
we are unable to obtain directors and officers liability insurance at affordable
rates, it may become increasingly more difficult to attract and retain qualified
outside directors to serve on our Board. The fees of directors will rise in
response to increased exposure to such risks.
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE ONE OF THE MATERIAL FACTORS TO
OUR SUCCESS, THEIR VARIOUS LIMITATIONS, POTENTIAL FOR AVOIDANCE,
MISAPPROPRIATION OF THOSE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS
RELATED TO INTELLECTUAL PROPERTY OR MATERIAL LIMITATIONS OF OUR RIGHTS COULD
ADVERSELY IMPACT OUR FINANCIAL CONDITION, EXCEPT TO THE EXTENT WE OTHERWISE CAN
PROTECT OUR INTERESTS.
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 six pending patent
applications: two pending with the United States Patent and Trademark Office;
one pending under the Patent Cooperation Treaty; and one pending in each of
Canada, Japan, and Europe, only. 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 and utilize it where
we have no patents. The failure or inability to protect these rights and to
fully exploit 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
anticipated products under development and related 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.
IF WE FAIL TO MANAGE EFFECTIVELY, IT COULD IMPAIR OUR HOPEFULLY SUCCESSFUL
PROSPECTS IN BUSINESS OR OF A FINANCIAL NATURE.
Our strategy envisions a period of increasing operations that may put a strain
on our administrative and operational resources. To effectively manage this
process will require us to continue to expand the capabilities of our
operational and management systems and to attract, train, manage and retain
qualified management, engineers, technicians, salespeople and other personnel.
We cannot assure you that we will be able to do so. If we do not succeed in
this, our business, prospects, financial condition, results of operations and
cash flows could be adversely affected.
43
WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF TERRORISM AND
THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT, BUSINESS AND THE PUBLIC
MAY HAVE ON OUR FINANCIAL CONDITION AND ABILITY TO CONTINUE TO IMPLEMENT OUR
BUSINESS PLAN.
The terrorist attacks in the United States and other countries have brought
devastation to many people, shaken consumer confidence and disrupted commerce
throughout the world. The continuing threat of terrorism in the United States
and other countries and heightened security measures, as well as current and any
future military and civil action in response to such threat, may cause
significant disruption to the global economy, including widespread recession. We
are unable to predict whether the continuing threat of terrorism or the
responses to such threat will interfere with our efforts to raise additional
capital to fund our operations through the development stage. If we are unable
to raise a sufficient amount of capital due to economic conditions, we will not
be able to finalize development of our detection systems under government
contracts and to bring them to military, civil or commercial markets as planned.
INTERRUPTIONS, DELAYS OR COST INCREASES AFFECTING OUR MATERIALS, PARTS,
EQUIPMENT OR SUPPLIERS MAY ADVERSELY AFFECT OUR OPERATIONS, AND RELIANCE UPON A
SINGLE SUPPLIER FOR PARTICLE ACCELERATORS INCREASES THIS RISK.
Our operations depend upon obtaining adequate supplies of materials, parts and
equipment, including particle accelerators, on a timely basis from third
parties. Our reliance on third party suppliers limits our control over product
delivery schedules or product quality. Our results of operations could be
adversely affected if we are unable to obtain adequate supplies of materials,
parts and equipment of adequate quality in a timely manner or if the costs of
materials, parts or equipment increase significantly. From time to time,
suppliers may extend lead times, limit supplies or increase prices due to
capacity constraints or other factors. In the event that any of our suppliers
were to experience financial, operational, production or quality assurance
difficulties resulting in a reduction or interruption in supply to us, our
operating results could suffer until alternate suppliers, if any, were to become
available.
Particle accelerators are a central component of our sensors. Particle
accelerators are scientific instrument that increase the kinetic energy of
charged particles. There are many suppliers of the particle accelerator used in
our MiniSenzor. There are only three suppliers of the particle accelerator used
in our SuperSenzor, and we are currently using only one supplier. This supplier
has limited production capacity, also supplies one of our competitors, and has
delayed delivery of components on three occasions. The supplier re-designed the
unit we are using per our request, and this has led to delays recently in
delivery. While we believe that alternate suppliers for this particle
accelerator are available, further interruption could materially impair our
operations.
PARTICLE ACCELERATORS ARE SUBJECT TO REGULATION BY THE U.S. NUCLEAR REGULATORY
COMMISSION AND OTHER FEDERAL AND STATE AGENCIES, AND THE BURDEN OF COMPLYING
WITH THESE REGULATIONS MAY IMPAIR OUR ABILITY TO TEST AND DEMONSTRATE OUR
PRODUCTS.
The detector systems incorporated within our products utilize particle
accelerator equipment. Particle accelerators are scientific instrument that
increase the kinetic energy of charged particles. Various governmental agencies,
such as the U.S. Nuclear Regulatory Commission, the U.S. Department of
Transportation and state health departments, regulate the sale and use of
particle accelerator equipment. There are also federal, state and local
regulations covering the occupational safety and health of our employees. We
believe that we are in compliance with all applicable governmental requirements.
The primary aspect of the equipment or protocol associated with our products or
activities that require licensing is the use of particle accelerator radiation
sources. Use of the systems in-house or at a customer facility or demonstration
location requires the operating party to obtain a license from the appropriate
state agency or federal agency, including the U.S. Nuclear Regulatory
Commission, regulating the use of radiation producing systems. These licensing
requirements and other regulatory burdens associated with the use of particle
accelerator radiation sources makes the testing and demonstration of our
products substantially more difficult, and may from time to time delay or
prevent the testing or demonstration of our products.
44
WE ARE INEXPERIENCED IN DOING BUSINESS IN THE MIDDLE EAST, EUROPEAN UNION AND
OTHER POTENTIAL MARKETS FOR OUR PRODUCTS, AND OUR PLANS MAY RELY ON LEVERAGING
THE SKILLS OF STRATEGIC PARTNERS.
Our management is inexperienced in doing business in many overseas markets in
which we plan to sell our products. We may experience unexpected difficulties in
our overseas marketing and sales efforts, and such efforts may depend upon
leveraging the skills of strategic partners with experience in these markets. We
have entered into an Exclusive International Distribution Agreement for our
beta-model CarBomb Finder with the Electronic Equipment Marketing Company, based
in London and Riyadh, for our marketing and sales efforts in the Middle East and
certain European Union nations. Presently, we have not pursued any relationships
with other strategic partners.
LARGE LONG-TERM PROJECTS ARE OFTEN UP FOR BIDDING AND WE MAY BE HAMPERED FROM
PARTICIPATING IN THOSE PROJECTS IF OUR OWN FINANCIAL POSITION PROVES INADEQUATE.
Bidding for large long-term government or private sector production contracts
may require a demonstration of adequate financial position for the term of the
contract, and we may be unable to satisfy such requirements without successfully
obtaining substantial additional financing. Our plan of operation for the next
twelve months calls for additional financing in order to satisfy stringent
requirements that would apply in obtaining a long-term full production contract.
OUR COMPETITORS COULD PURCHASE THE SAME COMPONENTS FROM OUR SUPPLIERS AND
ATTEMPT TO COPY OUR PRODUCTS TO THE EXTENT NOT COVERED BY PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS.
We, like most companies, purchase components for our products from third party
suppliers. We have patent applications pending that are directed to various
combinations of some of these components, but do not cover any of these
components separately. Competitors could purchase the same components from the
same suppliers and assemble similar products to the extent not prevented by our
patent or other intellectual property rights. We cannot assure you that our
competitors will not independently develop comparable or superior technologies
using similar or identical components, or that our competitors will not obtain
unauthorized access to our proprietary technology and utilize it where we have
no patents or where our patents do not cover the competitor's technology. Areas
of the world where we do not have patent applications include, for instance, the
Middle East, Russia, Africa, and South America. We believe that we have applied
for patents in countries where we expect the largest markets for our products
and we intend to expand our patent portfolio. We have applied for patents in the
United States, the European Union, Canada, and Japan and as improvements are
made we intend to file also elsewhere for any potential patent protection.
45
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 personnel, have evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, he has concluded that 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 CONTROL OVER FINANCIAL REPORTING
During the period covered by this report, there have been no significant changes
in our internal control over financial reporting that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
46
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We received a letter dated December 5, 2002, from an attorney representing
Richard T. Eckhouse, a consultant, demanding payment for accounting services
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. Mr. Eckhouse filed a lawsuit against
the Company, Microdevices and Dr. Bogdan Maglich on May 2, 2003 in the Superior
Court of the State of California, County of Orange, Central Justice Center, and
an amended complaint on June 20, 2003, alleging that Microdevices owes Mr.
Eckhouse a total of $313,580 for services rendered, plus interest, attorney's
fees and costs. The Company and Dr. Maglich were successful on their demurrer
and motion to strike. As such, Dr. Maglich individually is no longer a party to
this action. The Company will be filing a cross-complaint against Richard
Eckhouse and discovery. Trial is set for May 3, 2004. The Company intends to
vigorously defend itself in this matter. We deny these allegations and are
vigorously defending this lawsuit.
After reading news reports that connected our reverse acquisition of HiEnergy
Microdevices with known stock manipulators, our Board of Directors directed our
President to hire a team of independent investigators to investigate whether the
company or any of its officers and directors had 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 we have made, reviewed other publicly available information, and
conducted a number of interviews, including interviews with a person who had
previously been involved in stock manipulation schemes and two of our directors
who know him. The independent investigators have completed their investigation.
Except as discussed in the next paragraph, 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 acquisition by
HiEnergy of HiEnergy Microdevices
3. The independent investigators believe there is insufficient
evidence to fully conclude that there was no wrongdoing by
HiEnergy prior to the reverse merger.
4. Our current officers and directors responded promptly and
cooperated fully with the investigation.
As mentioned in item 3, above, the independent investigators believe there is
insufficient evidence to fully conclude that there was no wrongdoing by HiEnergy
prior to the April 2002 reverse acquisition. The independent investigators
obtained evidence that some of our stockholders who purchased significant
amounts of HiEnergy shares prior to the reverse acquisition knew or had business
dealings with Phil Gurian, a person who had previously been involved in stock
manipulation, and that one of these stockholders was a company reportedly owned
by Mr. Gurian's mother, which disposed of its shares in April 2002 at a profit
believed to be between $500,000 and $600,000. Mr. Barry Alter, a person who
later served as a director of the Company and for a short time as our interim
President, was aware of these purchases of HiEnergy shares. The independent
investigators believe the evidence is inconclusive whether Phil Gurian had
control over these HiEnergy shares and whether, if so, our former President and
director had any knowledge of such control.
47
On May 27, 2003, Mr. Alter brought a lawsuit against us in the New Castle County
Court of Chancery in Delaware to recover the advancement of expenses he
allegedly incurred in response to an SEC investigation that was exactly the same
investigation that the Company answered, but Mr. Alter obtained separate legal
counsel to represent him in connection with the investigation. That action was
identified as Civil Action No. 20320NC. On June 17, 2003, Mr. Alter voluntarily
dismissed his action without prejudice.
On November 24, 2003, Yeffet Security Consultants initiated binding arbitration
proceedings with the Rhode Island office of the American Arbitration Association
claiming that $59,540.91 in expense reimbursements and $390,000 in future
consulting fees for the period from November 16, 2003 through June 30, 2005 are
owed by the Company to Yeffet Security Consultants under a terminated Consulting
Agreement with Yeffet Security Consultants, Inc. We are in the process of
studying the matter.
From time to time, we may be subject to other routine litigation incidental to
the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES
LIST OF SALES OF UNREGISTERED SECURITIES DURING THE THREE-MONTH PERIOD ENDED
OCTOBER 31, 2003
o In December 2003, we issued 33,334 shares of our common stock to James
Herzog and Barbara Tawil in exchange for $25,000 in cash. We believe
these issuances of securities were exempt under Rule 506 of Regulation D
and/or Section 4(2) under the Securities Act.
o In November 2003, we issued 200,000 shares of our common stock to Robert
J. Neborsky in exchange for $150,000 in cash, and we issued warrants to
acquire 10,000 shares of our common stock at a price of $0.75 per share
to Brian Corday as compensation for facilitating the sale. We believe
these issuances of securities were exempt under Rule 506 of Regulation D
and/or Section 4(2) under the Securities Act.
o In November 2003, we issued 35,212 shares of our common stock to each of
Keith Moore and Ryan Patch in exchange for $25,000.50 in cash from each.
We believe these issuances of securities were exempt under Rule 506 of
Regulation D and/or Section 4(2) under the Securities Act.
o In October 2003, we issued 31,500 shares of our common stock to each of
Carlos S. De la Cuesta Nazabal and Luis Lopez Echeto in exchange for
$60,001 in cash, and in October 2003, we issued warrants to acquire
15,750 shares of our common stock at a price of $1.25 per share to
Julian Eguizabal Echeverria as compensation for facilitating the sale.
We believe these issuances of securities were exempt from registration
under Regulation S of the Securities Act.
o In September 2003, we agreed to issue 76,923 shares of our common stock,
and warrants to acquire an additional 25,641 shares of our common stock
at a price of $1.30 per share to SBI-USA LLC in exchange for $100,000 in
cash. We believe these issuances of securities is exempt under Rule 506
of Regulation D and/or Section 4(2) under the Securities Act.
o In August 2003, we issued 666,666 shares of our common stock, and
warrants to acquire 220,000 shares of our common stock at a price of
$0.75 per share, to Platinum Partners Value Arbitrage Fund LP for gross
proceeds of $500,000, and we issued warrants to acquire 60,000 shares of
our common stock at a price of $0.8625 per share to Dunwoody Brokerage
Services as compensation for facilitating the sale. We also issued 86,957
shares of our common stock, and warrants to acquire 28,697 shares of our
common stock at a price of $0.75 per share, to Nicholas Yocca, Danny
Beadle and Patrick Bevilacqua for gross proceeds of $60,000. We believe
these issuances of securities were exempt under Rule 506 of Regulation D
and/or Section 4(2) under the Securities Act.
o In August 2003, we issued 600,000 shares of our common stock, and
warrants to acquire an additional 100,000 shares of our common stock at a
price of $0.65 per share and 50,000 shares at $0.69 per share, to
Bullbear Capital Partners LLP in exchange for $346,000 in cash. We also
issued 217,392 shares of common stock and warrants to acquire 65,942
shares to Richard Melnick in exchange for $150,000 in cash. We believe
these issuances of securities were exempt under Rule 506 of Regulation D
and/or Section 4(2) under the Securities Act.
48
o In August 2003, we issued a total of 222,222 shares of our common stock,
and warrants to acquire an additional 55,556 shares of our common stock
at a price of $0.60 per share, to Mark Yocca, Nicholas Yocca, Paul Kim
and Central Answering Service, Inc. in exchange for $100,000 in cash.
Mark Yocca, Nicholas Yocca and Paul Kim are each attorneys associated
with Yocca Patch & Yocca, LLP, counsel to the Company. 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 August 2003, we issued 44,705 shares of common stock to a Director for
an exercise of a stock option in HiEnergy Microdevices, Inc. which was
converted common stock of HiEnergy Technologies, Inc. upon the reverse
merger, but the common stock was never issued. We believe the issuance of
securities was exempt under Section 4(2) under the Securities Act.
o In August 2003, we issued options to purchase an aggregate of 65,000
shares of common stock to employees and 40,000 to other service
providers, with an exercise price of $1.02 and a term of six years,
pursuant to the HiEnergy Technologies 2003 Stock Incentive Plan. We
believe the issuance of securities was exempt under Section 4(2) under
the Securities Act.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 7, 2002, we held our annual meeting of stockholders in Irvine,
California. At the meeting, our stockholders were asked to vote on the election
of members to the Board of Directors. All of the directors nominated for
election served as directors immediately prior to the annual meeting. The
following directors were elected by our stockholders as a result of the
following votes:
- -----------------------------------------------------------------------------------------------------------
NAME VOTES "FOR" ELECTION VOTES "AGAINST" ELECTION VOTES
"WITHHELD"
- -----------------------------------------------------------------------------------------------------------
Bogdan C. Maglich 21,640,207 73,880
- -----------------------------------------------------------------------------------------------------------
David R. Baker 21,672,887 41,200
- -----------------------------------------------------------------------------------------------------------
Robert H. Drysdale 21,672,887 41,200
- -----------------------------------------------------------------------------------------------------------
Harb S. Al Zuhair 21,662,887 51,200
- -----------------------------------------------------------------------------------------------------------
Whitney E. Stanbury 21,662,587 51,200 300
- -----------------------------------------------------------------------------------------------------------
In addition to the election of directors, the following matter was voted upon at
the annual meeting:
o Approval, ratification, adoption and authorization of the HiEnergy
Technologies, Inc. 2003 Stock Incentive Plan.
- ----------------------------------------------------------------------------------------------------
FOR AGAINST ABSTAINED
- ----------------------------------------------------------------------------------------------------
15,209,728 273,855 98,882
- ----------------------------------------------------------------------------------------------------
No other matters were submitted to our stockholders at the annual meeting.
ITEM 5. OTHER INFORMATION
None
49
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------
10.40.3 Amendment of the Promissory Notes issued to
Yocca Patch & Yocca, LLP
10.52 (10) Form of Stock Purchase Agreement dated August 2003 between
HiEnergy Technologies, Inc. and the purchasers of common stock
and warrants
10.53 (10) Form of Warrant Certificate dated August 2003 between HiEnergy
Technologies, Inc. and the purchasers of common stock and
warrants
10.57 (11) Memorandum of Understanding between HiEnergy Technologies, Inc.
and Aeropuertos Espanoles y Navegacion Aerea, Edificio La Piovera
- Peonias dated October 6, 2003
10.58 Form of Stock Purchase Agreement dated October 15 - December 2,
2003 between HiEnergy Technologies, Inc. and the purchasers of
common stock and warrants.
10.59 Form of Warrant Agreement dated October 28 - December 2, 2003
between HiEnergy Technologies, Inc. and the purchasers of common
stock and warrants.
10.60 Letter Agreement between SBI - USA LLC and HiEnergy Technologies,
Inc. dated August 1, 2003.
31.1 Certification of Chief Executive Officer and Treasurer pursuant
to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
32.1 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
* Indicates a management compensatory plan or arrangement.
(10) Filed on September 3, 2003 as an exhibit to HiEnergy Technologies'
post-effective amendment no. 1 to its registration statement on Form SB-2 (File
No. 333-101055), and incorporate herein by reference.
(11) Filed on October 7, 2003 as an exhibit to HiEnergy Technologies' Form 8-K
dated October 7, 2003.
50
(b) REPORTS ON FORM 8-K
On September 12, 2003, we filed a report on Form 8-K dated September 11, 2003.
The report disclosed under Item 9 pursuant to Regulation FD. The purpose of this
report is to respond to questions from investors and to comment on whether we
are owned or controlled by associates of Philip Gurian.
On September 15, 2003, we filed a report on Form 8-K dated September 16, 2003.
The report disclosed under Item 9 pursuant to Regulation FD. The purpose of this
report is to announce that HiEnergy Technologies, Inc. has been cleared by the
US Army to present two scientific papers at the International Conference on
Requirements and Technologies for the Detection, Removal and Neutralization of
Landmines and UXO, which is taking place in Brussels, Belgium, September 15-18,
2003. HiEnergy's patent application for the SuperSenzor had been under US Army
Secrecy Orders from October 22, 2002 until February 25, 2003.
On October 8, 2003, we filed a report on Form 8-K dated October 7, 2003. The
report disclosed under Item 5 Other Events and Regulation FD that the Company
has executed a Memorandum of Understanding with the Directorate of Spanish
Airports and Navigation known as AENA (Aeropuertos Espanoles y Navegacion
Aerea), to form a collaborative effort with HiEnergy to use HiEnergy's
Stoichiometer technology to improve the security of Spain's airports.
Additionally the Memorandum outlines an in-field demonstration in Spain of
HiEnergy's Stoichiometer technology as used in the CarBomb Finder TM, and
potentially a demonstration of the False Alarm Eliminator(TM) for the Department
of Security of AENA.
51
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: December 16, 2003 By: /s/ B. C. Maglich
-------------------- ----------------------------------------
Name: Bogdan C. Maglich
Title: Chief Executive Officer and President
52