UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended January 31, 2004
/ / 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 March 12, 2004, the issuer had
32,154,466 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 PERIOD ENDED JANUARY 31, 2004
PART I - FINANCIAL INFORMATION
------------------------------
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of April 30, 2003 and January 31, 2004 (unaudited) 1
Consolidated Statements of Operations for the three and nine months ended January 31, 2004
and 2003 (unaudited) and for the Period from August 21, 1995 (Inception) to January 31, 2004 2-3
(unaudited)
Consolidated Statements of Shareholders' Equity (deficit) for the Period from August 21,
1995 (Inception) to January 31, 2004 (unaudited) 4-8
Consolidated Statements of Cash Flows for the nine months ended January 31, 2004 and 2003
(unaudited) and for the Period from August 21, 1995 (Inception) to January 31, 2004
(unaudited) 9-11
Notes to the Consolidated Financial Statements (unaudited) 12
Item 2 Management's Discussion and Analysis or Plan of Operation 32
Item 3 Controls and Procedures 48
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 48
Item 2 Changes in Securities 50
Item 3 Default Upon Senior Securities 51
Item 4 Submission of Matters to a Vote to Security Holders 51
Item 5 Other Information 51
Item 6 Exhibits and Reports on Form 8-K 52
SIGNATURES 54
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
January 31, 2004 (unaudited) and April 30, 2003
================================================================================
ASSETS
January 31, April 30,
2004 2003
------------ ------------
Current assets (unaudited)
Cash and cash equivalents $ 207,564 $ 35,774
Restricted cash -- 71,234
Subscription receivable 50,000 443,482
Accounts receivable 34,583 34,583
Other current assets 200,373 427,650
------------ ------------
Total current assets 492,520 1,012,723
PROPERTY AND EQUIPMENT, NET 583,176 504,424
OTHER ASSETS -- 295,948
------------ ------------
TOTAL ASSETS $ 1,075,696 $ 1,813,095
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 536,527 $ 670,895
Accrued expenses 56,413 1,600
Accrued payroll and payroll taxes 50,038 28,525
Accrued interest 57,357 35,288
Notes payable - related parties 141,094 85,000
Convertible notes payable - related parties 585,388 57,117
Notes payable 2,028 --
------------ ------------
Total current liabilities 1,428,845 878,425
LONG-TERM DEBT
Convertible notes payable - related parties, less unamortized
debt discount of $306,795(unaudited) and $0 78,205 --
Notes payable 2,450 --
------------ ------------
Total liabilities 1,509,500 878,425
------------ ------------
MINORITY INTEREST IN SUBSIDIARY, 20,540 SHARES ISSUED
AND OUTSTANDING 18,923 18,923
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Series A convertible, 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
31,557,419 (unaudited) and 25,525,882 shares
issued and outstanding 31,557 25,525
Additional paid-in capital 13,291,768 9,837,437
Committed common stock, 63,500 (unaudited) and
76,937 shares 59,395 34,404
Deficit accumulated during the development stage (13,835,447) (8,981,620)
------------ ------------
Total shareholders' equity (deficit) (452,727) 915,747
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,075,696 $ 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 and Nine Months Ended January 31, 2004 and 2003 (unaudited), and
for the Period from August 21, 1995 (Inception) to January 31, 2004 (unaudited)
======================================================================================================================
For the
Period from
August 21,
Three Months Ended Nine Months Ended 1995
-------------------------- --------------------------- (Inception) to
January 31, January 31, January 31, January 31, January 31,
2004 2003 2004 2003 2004
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Operating expenses
General and administration 1,186,415 2,342,991 3,593,528 3,729,272 9,502,592
Research and development 209,529 253,737 546,606 554,924 2,504,285
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,395,944 2,596,728 4,140,134 4,284,196 12,006,877
Loss from operations (1,395,944) (2,596,728) (4,140,134) (4,284,196) (12,006,877)
------------ ------------ ------------ ------------ ------------
Other income (expense)
Interest income 108 3,230 991 6,588 8,877
Interest expense (13,388) (3,135) (26,314) (8,540) (67,224)
Financing expense (76,174) -- (76,174) (223,710) (299,884)
Other income -- 231 -- 231 231
------------ ------------ ------------ ------------ ------------
Total other income
(expense) (89,454) 326 (101,497) (225,431) (358,000)
------------ ------------ ------------ ------------ ------------
Loss before provision
for income taxes (1,485,398) (2,596,402) (4,241,631) (4,509,627) (12,364,877)
Provision for income
taxes -- 800 800 800 13,383
------------ ------------ ------------ ------------ ------------
Net loss $ (1,485,398) $ (2,597,202) $ (4,242,431) $ (4,510,427) $(12,378,260)
The accompanying notes are an integral part of these financial statements.
2
HIENERGY TECHNOLOGIES, INC.
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended January 31, 2004 and 2003 (unaudited), and
for the Period from August 21, 1995 (Inception) to January 31, 2004 (unaudited)
======================================================================================================================
For the
Period from
August 21,
Three Months Ended Nine Months Ended 1995
--------------------------------------------------------- (Inception) to
January 31, January 31, January 31, January 31, January 31,
2004 2003 2004 2003 2004
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
BENEFICIAL CONVERSION
FEATURE GRANTED ON
PREFERRED STOCK -- -- -- (767,431) (767,431)
PREFERRED STOCK
DIVIDENDS -- -- (611,396) (78,360) (689,756)
------------ ------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO
COMMON
SHAREHOLDERS $ (1,485,398) $ (2,597,202) $ (4,853,827) $ (5,356,218) $(13,835,447)
============ ============ ============ ============ ============
NET LOSS PER SHARE $ (0.05) $ (0.11) $ (0.14) $ (0.20)
======= ======= ======= =======
BENEFICIAL CONVERSION
FEATURE GRANTED ON
PREFERRED STOCK
PER SHARE $ -- $ -- $ -- $ (0.03)
======= ======= ======= =======
PREFERRED STOCK
DIVIDENDS PER SHARE $ -- $ -- $ (0.02) $ --
======= ======= ======= =======
BASIC AND DILUTED LOSS
AVAILABLE TO COMMON
SHAREHOLDERS PER
SHARE $ (0.05) $ (0.11) $ (0.16) $ (0.23)
======= ======= ======= =======
BASIC AND DILUTED
WEIGHTED-AVERAGE
COMMON SHARES
OUTSTANDING 31,227,822 24,056,753 29,761,126 23,131,533
========== ========== ========== ==========
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 (DEFECIT)
For the Period from August 21, 1995 (Inception) to January 31, 2004 (unaudited)
==================================================================================================================================
Price per Convertible,
Equity Preferred Stock Common Stock
Date Unit Shares Amount Shares Amount
---- ---- ------- ------ ------ ------
Balance, August 21, 1995 (inception) -- $ -- $ -- $ -
Recapitalization upon reverse merger 6,470,000 6,470
Issuance of common stock for services rendered (1) $ 0.01 734,771 735
Net loss
------- ------ ----------- ------
Balance, April 30, 1996 -- -- 7,204,771 7,205
Issuance of common stock for services rendered (2) $ 0.01 3
Net loss 3,219
------- ------ ----------- ------
Balance, April 30, 1997 -- -- 7,207,990 7,208
Issuance of common stock for cash 03/23/98 $ 0.05 45,603 46
Issuance of common stock for cash 03/25/98 $ 0.11 4,470 4
Issuance of common stock for cash (3) $ 0.14 111,771 112
Issuance of common stock for cash 10/14/97 $ 0.22 89,417 89
Issuance of common stock for cash (3) $ 0.28 293,466 293
Issuance of common stock for cash 09/04/97 $ 0.35 8,942 9
Issuance of common stock for cash 12/17/97 $ 0.49 42,920 43
Issuance of common stock for services rendered (3) $ 0.01 1,451,928 1,452
Net loss
------- ------ ----------- ------
Balance, April 30, 1998 -- -- 9,256,507 9,257
Issuance of common stock for cash (4) $ 0.28 116,241 116
Issuance of common stock for cash 10/01/98 $ 0.36 13,815 14
Issuance of common stock for cash 01/15/99 $ 0.38 9,389 9
Issuance of common stock for cash 10/30/98 $ 0.56 13,413 13
Issuance of common stock for cash 03/17/99 $ 0.57 17,883 18
Issuance of common stock for cash 01/08/99 $ 0.72 44,708 45
Issuance of common stock for cash 12/02/98 $ 0.75 3,353 3
Issuance of common stock for cash 12/02/98 $ 0.78 8,942 9
Issuance of common stock for cash 11/24/98 $ 0.89 11,177 11
Issuance of common stock for cash 12/02/98 $ 0.93 2,683 3
Issuance of common stock for cash 01/15/99 $ 1.41 4,471 4
Issuance of common stock for cash 05/05/98 $ 1.64 17,883 18
Issuance of common stock for cash 12/02/98 $ 2.80 894 1
Issuance of common stock for services rendered (4) $ 0.02 2,167,620 2,167
Net loss
------- ------ ----------- ------
Balance, April 30, 1999 -- -- 11,688,979 11,688
Issuance of common stock for cash 06/28/99 $ 0.02 4,471 4
Issuance of common stock for cash 05/03/99 $ 0.10 35,767 36
Issuance of common stock for cash 07/14/99 $ 0.28 44,708 45
Issuance of common stock for cash 11/30/99 $ 0.39 53,650 54
Issuance of common stock for cash 07/12/99 $ 0.52 2,861 3
Issuance of common stock for cash (5) $ 0.56 232,484 232
Issuance of common stock for cash 04/03/00 $ 0.72 2,794 3
Issuance of common stock for cash 04/03/00 $ 0.89 8,383 8
Issuance of common stock for cash (5) $ 0.46 253,430 253
Issuance of common stock for services rendered (5) $ 0.04 1,914,570 1,915
Net loss
------- ------ ----------- ------
Balance, April 30, 2000 -- -- 14,242,097 14,242
Issuance of common stock for cash 09/28/00 $ 0.24 21,214 21
Issuance of common stock for cash (6) $ 0.24 444,223 444
Issuance of common stock for services rendered (6) $ 0.10 371,035 371
Net loss
------- ------ ----------- ------
The accompanying notes are an integral part of these financial statements.
4
Balance, April 30, 2001 -- $ -- $15,078,569 $15,078
Issuance of common stock for cash (7) $ 0.22 517,723 518
Issuance of common stock for cash 03/13/02 $ 0.24 10,283 10
Issuance of common stock for cash (7) $ 0.45 44,708 45
Issuance of common stock for cash 07/31/01 $ 1.12 8,942 9
Issuance of common stock for cash (7) $ 0.26 130,415 130
Issuance of common stock for services rendered (7) $ 0.05 5,059,560 5,060
Issuance of common stock in private
placement for cash 04/30/02 $ 1.00 1,225,000 1,225
Net loss
------- ------ ----------- ------
Balance, April 30, 2002 -- -- 22,075,200 22,075
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 $ 0.32 700,000 700
Issuance of common stock
for subscriptions receivable 04/30/03 $ 0.33 700,000 700
Issuance of common stock
for subscriptions receivable 04/30/03 $ 0.40 10,000 10
Issuance of common stock
in private placement for cash 10/07/03 $ 1.26 1,849,934 1,850
Offering costs
Issuance of common stock
on cashless conversion
of the Series A preferred
stock 01/27/03 (2.11) 18,336 18
Issuance of common stock
in cashless exercise of
warrants 01/02/03 33,909 34
Issuance of common stock
and common stock
committed as a bonus (8) $ 1.35 11,178 11
Issuance of common stock
and common stock
committed for services
rendered 04/21/03 $ 0.65 21,277 21
Dividends on preferred stock 10/31/03 68,150 68
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 37,898 38
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 25,525,882 25,525
Stock options issued for services rendered 05/16/03 $ 0.38
Issuance of common stock for cash 06/24/03 $ 0.33 600,000 600
Issuance of common stock for services rendered 06/24/03 $ 0.33 300,000 300
Issuance of common stock for services rendered 05/13/03 $ 0.48 45,000 45
Issuance of common stock in cashless conversion
of Series A preferred stock 05/16/03 (95.82) (1) 2,191,878 2,192
Dividends on preferred stock 05/16/03
Issuance of common stock as penalty shares 05/16/03 91,526 92
Issuance of committed common stock 05/21/03 20,000 20
Issuance of committed common stock 06/19/03 11,178 11
Issuance of common stock on exercise of
warrants 05/27/03 34,000 34
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
Issuance of committed common stock 08/14/03 44,705 45
Issuance of common stock for cash 08/15/03 $ 0.45 222,222 222
Issuance of common stock for cash 08/20/03 $ 0.52 400,000 400
Issuance of common stock for cash 08/25/03 $ 0.69 272,464 272
Stock options issued for services rendered 08/27/03 $ 1.03
Issuance of common stock for cash 08/28/03 $ 0.69 86,957 87
Issuance of common stock for cash 08/29/03 $ 0.69 144,928 145
Issuance of common stock for cash, net of
commission of $40,000 08/29/03 $ 0.69 666,666 667
Issuance of common stock as penalty shares 10/15/03 148,260 148
Issuance of common stock for cash 10/27/03 $ 0.95 63,000 63
Issuance of common stock for cash 11/05/03 $ 0.71 70,424 70
Stock options issued for services rendered 11/07/03 $ 0.90
Stock options issued for services rendered 11/07/03 $ 1.19
Issuance of common stock as penalty shares 11/15/03 44,187 44
Issuance of common stock for cash, net of
commission of $5,250 11/21/03 $ 0.72 200,000 200
Common stock issued as offering costs 11/21/03 $ 0.75 2,000 2
Issuance of common stock for cash 12/02/03 $ 0.75 33,334 34
Stock options issued for services rendered 12/04/03 $ 0.80
Issuance of common stock as penalty shares 12/15/03 61,242 61
Issuance of common stock for cash 12/22/03 $ 0.71 42,254 42
Committed common stock for services rendered 01/06/04 $ 0.89
Warrants issued for services rendered 01/06/04
Issuance of common stock as penalty shares 01/15/04 78,259 79
Issuance of common stock in cashless
exercise of warrants 01/15/04 54,053 54
Relative fair value of warrants issued to holders
of convertible promissory notes 01/22/04
Beneficial conversion feature upon issuance of
convertible promissory notes 01/22/04
Relative fair value of warrants issued to holders
of convertible promissory notes 01/28/04
Beneficial conversion feature upon issuance of
convertible promissory notes 01/28/04
Issuance of common stock in cashless
exercise of warrants 01/30/04 48,000 48
Issuance of common stock for services rendered 01/30/04 $ 1.18 55,000 55
Committed common stock for services rendered 01/31/04 $ 0.97
Relative fair value of warrants issued to holders
of convertible promissory notes 01/31/04
Beneficial conversion feature upon issuance of
convertible promissory notes 01/23/04
Net Loss
------- ------ ----------- --------
Balance, January 31, 2004 (unaudited) -- $ -- $31,557,419 $ 31,557
------- ------ ----------- --------
The accompanying notes are an integral part of these financial statements.
5
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFECIT)
For the Period from August 21, 1995 (Inception) to January 31, 2004 (unaudited)
=====================================================================================================================
Deficit
Accumulated
Additional Committed during the
Paid-in Common Deferred Development
Capital Stock Compensation Stage Total
------------- ---------- ------------ -------------- ---------
Balance, August 21, 1995 (inception) $ -- $ -- $ -- -- $ --
Recapitalization upon reverse merger (6,456) 14
Issuance of common stock for services rendered 7,495 8,230
Net loss $ (39,387) (39,387)
------------- ---------- ------------ -------------- ---------
Balance, April 30, 1996 1,039 -- -- (39,387) (31,143)
Issuance of common stock for services rendered 33 36
Net loss (110,004) (110,004)
------------- ---------- ------------ -------------- ---------
Balance, April 30, 1997 1,072 -- -- (149,391) (141,111)
Issuance of common stock for cash 2,206 2,252
Issuance of common stock for cash 496 500
Issuance of common stock for cash 15,513 15,625
Issuance of common stock for cash 19,911 20,000
Issuance of common stock for cash 81,757 82,050
Issuance of common stock for cash 3,115 3,124
Issuance of common stock for cash 20,957 21,000
Issuance of common stock for services rendered 15,598 17,050
Net loss (293,019) (293,019)
------------- ---------- ------------ -------------- ---------
Balance, April 30, 1998 160,625 -- -- (442,410) (272,528)
Issuance of common stock for cash 32,364 32,480
Issuance of common stock for cash 4,986 5,000
Issuance of common stock for cash 3,591 3,600
Issuance of common stock for cash 7,487 7,500
Issuance of common stock for cash 10,182 10,200
Issuance of common stock for cash 32,355 32,400
Issuance of common stock for cash 2,497 2,500
Issuance of common stock for cash 6,991 7,000
Issuance of common stock for cash 9,989 10,000
Issuance of common stock for cash 2,497 2,500
Issuance of common stock for cash 6,296 6,300
Issuance of common stock for cash 29,232 29,250
Issuance of common stock for cash 2,499 2,500
Issuance of common stock for services rendered 47,592 49,759
Net loss (272,426) (272,426)
------------- ---------- ------------ -------------- ---------
Balance, April 30, 1999 359,182 -- -- (714,836) (343,965)
Issuance of common stock for cash 96 100
Issuance of common stock for cash 3,631 3,667
Issuance of common stock for cash 12,455 12,500
Issuance of common stock for cash 20,946 21,000
Issuance of common stock for cash 1,497 1,500
Issuance of common stock for cash 129,768 130,000
Issuance of common stock for cash 1,997 2,000
Issuance of common stock for cash 7,492 7,500
Issuance of common stock for cash 117,126 117,379
Issuance of common stock for services rendered 83,322 85,237
Net loss (332,131) (332,131)
------------- ---------- ------------ -------------- ---------
Balance, April 30, 2000 737,512 -- -- (1,046,967) (295,213)
Issuance of common stock for cash 4,979 5,000
Issuance of common stock for cash 104,286 104,730
Issuance of common stock for services rendered 36,097 36,468
Net loss (288,067) (288,067)
------------- ---------- ------------ -------------- ---------
The accompanying notes are an integral part of these financial statements.
6
Balance, April 30, 2001 882,874 -- -- (1,335,034) (437,082)
Issuance of common stock for cash 115,282 115,800
Issuance of common stock for cash 2,410 2,420
Issuance of common stock for cash 19,955 20,000
Issuance of common stock for cash 9,991 10,000
Issuance of common stock for cash 33,219 33,349
Issuance of common stock for services rendered 227,110 232,170
Issuance of common stock in private
placement for cash 1,223,775 1,225,000
Net loss (1,389,530) (1,389,530)
------------- ---------- ------------ -------------- ---------
Balance, April 30, 2002 2,514,616 -- -- (2,724,564) (187,873)
Issuance of preferred stock
in private placement for cash 800,399 800,399
Issuance of common stock
for subscriptions receivable 219,800 220,500
Issuance of common stock
for subscriptions receivable 228,300 229,000
Issuance of common stock
for subscriptions receivable 3,972 3,982
Issuance of common stock
in private placement for cash 2,320,556 2,322,406
Offering costs (196,793) (196,793)
Issuance of common stock
on cashless conversion
of the Series A preferred
stock (18) --
Issuance of common stock
in cashless exercise of
warrants (34) --
Issuance of common stock
and common stock
committed as a bonus 21,339 17,549 38,899
Issuance of common stock
and common stock
committed for services
rendered 10,288 9,691 20,000
Dividends on preferred stock 78,292 (78,360) --
Beneficial conversion feature
granted in connection with
issuance of preferred
stock 767,431 (767,431) --
Conversion of convertible
notes payable - related
parties into common
stock 37,858 37,896
Financing expense in connection with
issuance of warrants 223,710 223,710
Stock options issued for services rendered 761,007 761,007
Stock options issued for services rendered 187,163 187,163
Stock options issued as compensation 59,373 59,373
Stock options issued as compensation 3,305,542 (3,305,542) --
Stock options issued in exchange for
settlement of accounts payable 50,000 50,000
Stock options issued in exchange for
settlement of accounts payable 15,000 15,000
Warrants issued for services rendered 162,792 162,792
Warrants issued for services rendered 130,712 130,712
Warrants issued for services rendered 18,284 18,284
Warrants issued for termination of contract 390,409 390,409
Amortization of deferred compensation 1,032,981 1,032,981
Reversal of deferred compensation (2,272,561) 2,272,561 --
Exercise of stock options in subsidiary 7,164 7,164
Net loss (5,411,265) (5,411,265)
------------- ---------- ------------ -------------- ---------
The accompanying notes are an integral part of these financial statements.
7
Balance, April 30, 2003 9,837,437 34,404 -- (8,981,620) 915,746
Stock options issued for services rendered 11,348 11,348
Issuance of common stock for cash 199,400 200,000
Issuance of common stock for services rendered 99,700 100,000
Issuance of common stock for services rendered 21,555 21,600
Issuance of common stock cashless conversion --
of Series A preferred stock (2,192) --
Dividends on preferred stock 611,396 (611,396) --
Issuance of common stock as penalty shares (92) --
Issuance of committed common stock 9,671 (9,691) --
Issuance of committed common stock 17,538 (17,549) --
Issuance of common stock on exercise of
warrants 306 340
Warrants issued for services rendered 60,518 60,518
Warrants issued for services rendered 15,864 15,864
Stock options issued for services rendered 89,760 89,760
Issuance of committed common stock 7,119 (7,164) --
Issuance of common stock for cash 99,778 100,000
Issuance of common stock for cash 207,600 208,000
Issuance of common stock for cash 187,728 188,000
Stock options issued for services rendered 41,356 41,356
Issuance of common stock for cash 59,913 60,000
Issuance of common stock for cash 99,855 100,000
Issuance of common stock for cash, net of
commission of $40,000 459,333 460,000
Issuance of common stock as penalty shares (148) --
Issuance of common stock for cash 59,939 60,002
Issuance of common stock for cash 49,932 50,002
Stock options issued for services rendered 90,000 90,000
Stock options issued for services rendered 249,849 249,849
Issuance of common stock as penalty shares (44) --
Issuance of common stock for cash, net of
commission of $5,250 144,550 144,750
Common stock issued as offering costs 1,498 1,500
Issuance of common stock for cash 24,966 25,000
Stock options issued for services rendered 32,191 32,191
Issuance of common stock as penalty shares (61) -
Issuance of common stock for cash 29,958 30,000
Committed common stock for services rendered 24,475 24,475
Warrants issued for services rendered 24,583 24,583
Issuance of common stock as penalty shares (79) --
Issuance of common stock in cashless
exercise of warrants (54) --
Relative fair value of warrants issued to holders
of convertible promissory notes 115,434 115,434
Beneficial conversion feature upon issuance of
convertible promissory notes 34,566 34,566
Relative fair value of warrants issued to holders
of convertible promissory notes 148,531 148,531
Beneficial conversion feature upon issuance of
convertible promissory notes 36,469 36,469
Issuance of common stock in cashless
exercise of warrants (48) --
Stock options issued for services rendered 64,845 64,900
Committed common stock for services rendered 34,920 34,920
Relative fair value of warrants issued to holders
of convertible promissory notes 44,861 44,861
Beneficial conversion feature upon issuance of
convertible promissory notes 5,139 5,139
Net Loss (4,242,431) (4,242,431)
------------- ---------- ------------ -------------- ---------
Balance, January 31, 2004 (unaudited) $ 13,291,768 $ 59,395 $ -- $ (13,835,447) $ (452,727)
------------- ---------- ------------ -------------- ---------
(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.
8
HIENERGY TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended January 31, 2004 and 2003 (unaudited), and
for the Period from August 21, 1995 (Inception) to January 31, 2004 (unaudited)
===================================================================================================================================
For the
Period from
August 21, 1995
Nine Months Ended (Inception) to
January 31, January 31,
----------------------------
2004 2003 2004
---- ---- ----
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (4,242,431) $ (4,510,427) (12,378,260)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 102,895 72,556 202,320
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 100,965 740,364 412,753
Warrants issued for termination of contract -- -- 390,409
Issuance of common stock for services
rendered 188,000 -- 208,000
Stock options issued for services
rendered 514,506 -- 866,268
Issuance of common stock to an employee
for a bonus -- 21,350 38,899
Common stock committed to an employee
for a bonus -- 13,134 --
Common stock committed for services rendered 59,395 -- 59,395
Additional compensation to officer -- -- 42,171
Issuance of common stock to a former officer
as a settlement -- 125,000 --
Amortization of deferred compensation -- 1,032,981 1,032,981
Financing expense -- 223,710 223,710
Amortization of debt discount on
Convertible Promissory Notes -
Related Parties 2,031 -- 2,031
Beneficial Conversion Feature on convertible
promissory notes - related parties 76,174 -- 76,174
(Increase) decrease in
Restricted cash 71,234 -- --
Accounts receivable -- 29,166 (34,583)
Subscription receivable -- -- --
Other current assets 227,277 (114,534) 406,035
Other assets 295,948 -- --
Increase (decrease) in
Accounts payable 404,302 325,488 1,186,916
Accrued expenses 54,813 (145,167) 56,429
Accrued payroll and payroll taxes 21,513 79,034 50,038
Accrued interest 42,163 5,664 80,349
------------ ------------ ------------
Net cash used in operating activities (2,081,215) (2,101,681) (6,570,719)
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
9
Cash flows from investing activities
Purchase of property and equipment (181,647) (677,108) (785,497)
------------ ------------ ------------
Net cash used in investing activities (181,647) (677,108) (785,497)
------------ ------------ ------------
Cash flows from financing activities
Proceeds from notes payable - related parties 36,000 -- 604,160
Payments on notes payable - related parties -- (486,691) (546,331)
Proceeds from convertible notes payable - related
parties 335,000 29,280 395,400
Payments on convertible notes payable - related
parties (10,400) (19,280) (40,400)
Proceeds from notes payable 4,478 -- 4,478
Proceeds from issuance of common stock in
private placement -- 2,322,407 3,547,406
Proceeds from issuance of preferred stock -- 979,301 979,301
Offering costs on preferred stock -- (178,902) (178,902)
Proceeds from issuance of common stock 1,671,002 -- 2,553,725
Offering costs on common stock (45,250) (196,793) (242,043)
Exercise of stock options in subsidiary -- 7,164 7,164
Collection of subscription receivable 443,482 -- 443,482
Proceeds from exercise of warrants 340 -- 340
------------ ------------ ------------
Net cash provided by financing activities 2,434,652 2,456,486 7,563,780
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 171,790 (322,303) 207,564
The accompanying notes are an integral part of these financial statements.
10
Cash and cash equivalents, beginning of
period 35,774 1,078,136 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 207,564 $ 755,833 $ 207,564
============ ============ ============
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
============ ============ ------------
Issuance of common stock for dividends accrued on the
Series A Preferred stock $ -- $ 78,360 $ 78,360
============ ============ ------------
Issue convertible notes payable to legal counsel
for legal services $ 538,671 $ -- $ 538,671
============ ============ ------------
Issuance of stock options for accounts payable due to
a consultant $ -- $ 65,000 $ 65,000
============ ============ ------------
Issuance of common stock or Conversion of Series
A Preferred Stock $ 611,396 $ -- $ 611,396
============ ============ ------------
Debt discount recorded on relative fair value of
warrants issued with Convertible Promissory
Notes - Related Parties $ 308,826 $ -- $ 308,826
============ ============ ------------
Issuance of Note Payable - Related Party to relieve
accrued bonus Subscription receivable on Convertible
promissory note - related party outstanding $ 50,000 $ -- $ 50,000
============ ============ ------------
During the nine months ended January 31, 2004 and 2003 and the period from
August 21, 1995 (inception) to January 31, 2004, the holders of 95.82, 2, and
97.93 shares, respectively, of the Series A convertible preferred stock
converted their shares into 2,191,878, 18,336, 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 nine months ended January 31, 2004 and 2003 and the period from
August 21, 1995 (inception) to January 31, 2004, the Company issued 423,474, 0,
and 423,474 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 nine months ended January 31, 2004 and 2003 and the period from
August 21, 1995 (inception) to January 31, 2004, the Company issued 76,937, 0,
and 76,937 shares, respectively, of committed common stock valued at $34,404,
$0, and $34,404, respectively.
During the nine months ended January 31, 2004 and 2003 and the period from
August 21, 1995 (inception) to January 31, 2004, warrants to purchase 185,620,
47,000 and 232,620 shares, respectively of common stock were exercised via a
cashless exercise, whereby the Company issued 102,053, 33,909 and 135,962 common
shares, respectively.
The accompanying notes are an integral part of these financial statements.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
GENERAL
HiEnergy Technologies, Inc. ("HiEnergy") and its subsidiaries (collectively,
with HiEnergy, the "Company") is a nuclear technologies-based inventions company
focused on researching, developing and marketing fast neutron-based
"stoichiometric" sensor devices. In January 2004, HiEnergy introduced to market
its first product, the Stoichiometric CarBomb Finder 3C3. HiEnergy's
stoichiometric technology also has potential application in various other
related and discrete markets, including the detection of smaller bombs,
unexploded ordinance detection, landmine detection, airport security screening,
bio-weapons detection, contraband detection, and chemical and petrochemical
industry applications. HiEnergy currently has under development stoichiometric
products for some of these markets. HiEnergy has no product sales or product
sales revenues to date, and thus remains a development stage company.
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 has one wholly-owned subsidiary, HiEnergy Defense, Inc.
("Defense"), which was incorporated under the laws of the state of Delaware in
August 2003. HiEnergy also holds an approximate 92% interest in HiEnergy
Microdevices, Inc. ("Microdevices"), which was incorporated under the laws of
the state of Delaware in August 1995, and which originally developed the
stoichiometric technology.
As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, the accompanying financial statements and footnotes have been
consolidated and therefore do not contain all disclosures required by accounting
principles generally accepted in the United States of America. While the interim
financial data is unaudited; in the opinion of HiEnergy's management the interim
data includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Results
for the nine months ended January 31, 2004 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 approximately 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.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, during the
nine months ended January 31, 2004 and 2003 and the period from August 21, 1995
(inception) to January 31, 2004, the Company incurred net losses available to
common shareholders of approximately $4,854,000, $5,356,000, and $13,835,000,
respectively, and it had negative cash flows from operations of approximately
$2,081,000, $2,102,000, and $6,570,719, respectively. In addition, the Company
had an accumulated deficit of approximately $13,835,000 and was in the
development stage as of January 31, 2004. 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
12
products. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
In addition to the capital raised as of January 31, 2004 through the sales of
equity, the Company intends to raise additional capital in one or more
increments through one or more of contract advances, loans, public or private
sales of debt or equity securities for cash, or satisfaction of indebtedness
with equity securities. Unless the Company raises additional funds, the Company
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, Microdevices, and its 100% 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.
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 January 31, 2004 and April 30, 2003 consisted of amounts
due from a governmental development contract. 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
13
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.
CONVERTIBLE PROMISSORY NOTES WITH BENEFICIAL CONVERSION FEATURES
The Company accounts for convertible promissory notes with non-detachable
conversion options that are in the money ("beneficial conversion features") at
the commitment date in accordance with EITF Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF Issue No. 00-27, "Application of Issue
No. 98-5 to Certain convertible Instruments".
The Company has granted convertible promissory notes with beneficial conversion
features and detachable warrants during the quarter ended January 31, 2004.
See Note 7 & Note 11 to the Consolidated Financial Statements.
In accordance with EITF No.'s 98-5 and 00-27, the difference between the
conversion price and the Company's stock price on the date of issuance of the
notes is considered to be financing expense. It will be recognized in the
statement of operations during the period from the issuance of the notes to the
time at which the notes first become convertible. The Company allocates the
proceeds received from convertible promissory notes with detachable warrants
using the relative fair value of the individual elements at the time of
issuance. The amount allocated to the warrants as a debt discount will be
recognized as interest expense over the period until the notes mature or are
converted. In the event the debt is settled prior to the maturity date, an
expense will be recognized based on the difference between the carrying amount
and the amount of the payment.
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.
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:
Nine Months Ended January 31,
2004 2003
---- ----
Net loss, as reported $ (4,242,431) $ (4,510,427)
Add: Stock-based employee compensation expense included
in reported net income determined under APB No. 25, net
of related tax effects 514,506 1,032,981
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects (765,167) (1,494,861)
------------ -----------
Pro forma net loss $ (4,493,092) $ (4,972,307)
Loss per share:
Basic and diluted - as reported $ (0.14) $(0.20)
Basic and diluted - pro forma $ (0.15) $(0.21)
14
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.
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.
The following potential common shares have been excluded from the computation of
diluted net loss per share for the periods presented because the effect would
have been anti-dilutive for the nine months ended January 31, 2004 and 2003:
2004 2003
------------------- -------------------
Stock Options 6,669,675 7,005,902
Warrants 4,056,909 1,595,686
Convertible promissory notes and accrued interest 1,414,745 -
Microdevices minority shareholders 459,222 459,222
Microdevices options and warrants 368,725 368,725
------------------- -------------------
12,969,276 9,429,535
------------------- -------------------
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
15
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 believe 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 became effective for financial instruments entered
into or modified after May 31, 2003 and otherwise became effective at the
beginning of the first interim period beginning after June 15, 2003, which was
the quarter ended October 31, 2003.
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consisted of the following at:
JANUARY 31, 2004 APRIL 30, 2003
-------------------- -------------------
Prepaid consulting $ 87,945 $ 313,250
Prepaid insurance 38,266 6,400
Deposits on equipment 65,000 100,000
Other 9,162 8,000
-------------------- -------------------
$ 200,373 $ 427,650
==================== ===================
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
JANUARY 31, 2004 APRIL 30, 2003
-------------------- -------------------
Prototype equipment $ 146,611 $ 111,114
Laboratory equipment 568,375 436,340
Furniture and fixtures 51,110 41,995
Leasehold improvements 5,000 -
Web site development 14,400 14,400
-------------------- -------------------
785,496 603,849
Less accumulated depreciation 202,320 99,425
-------------------- -------------------
$ 583,176 $ 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 nine months ended January 31, 2004 and 2003 and the period from
August 21, 1995 (inception) to January 31, 2004 was $102,895, $72,556, and
$202,320, respectively.
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consisted of the following at:
JANUARY 31, 2004 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
16
JANUARY 31, 2004 APRIL 30, 2003
------------------- ------------------
Unsecured notes payable to a shareholder of the
Company, non-interest bearing, and payable on demand 45,000 45,000
Unsecured notes payable to the Chairman of the
Company, interest payable at 5% per annum, payable
on demand. 56,094 --
----------------- ------------------
141,094 85,000
Less current portion 141,094 85,000
----------------- ------------------
LONG-TERM PORTION $ -- $ --
================= ==================
NOTE 7 - CONVERTIBLE NOTES PAYABLE - RELATED PARTIES
Convertible notes payable - related parties consisted of the following at:
JANUARY 31, 2004 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.
Note was repaid in cash in October 2003. $ -- $ 10,400
Unsecured notes payable to legal counsel of the Company, interest
payable at 10% per annum and due in April 2004. The holder of the note
has the option to convert the principal and interest into shares of
common stock of the company at between $0.85 and $1.00 per share at
any time ($64,851 of that principal amount is convertible at $0.85
the balance is convertible at $1.00). 585,388 46,717
Unsecured notes payable for $385,000 to various investors, interest
payable at 5% per annum and due in January 2006. The holders of the
notes have the option to convert the principal and interest into
shares of common stock of the company at $0.45 per share at any time
after the effectiveness of the Company's registration statement.
Reduced by the unamortized debt discount of $306,795 for the relative
value of detachable warrants issued with notes payable. 78,205 --
----------------- ------------------
663,593 57,117
Less current portion 585,388 57,117
----------------- ------------------
LONG-TERM PORTION $ 78,205 $ --
================= ==================
17
NOTE 8 - NOTES PAYABLE
Note payable consisted of the following at:
JANUARY 31, 2004 APRIL 30, 2003
------------------- ------------------
Secured note payable to an equipment supplier, secured by
equipment, interest payable at 18% per annum, due in January
2007. Monthly payments $169. $ 4,478 $ --
------------------- ------------------
Less current portion 2,028 --
LONG-TERM PORTION $ 2,450 $ --
=================== ==================
18
NOTE 9 -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 nine months ended January 31, 2004 and
2003, the Company worked on different phases of two separate development
contracts with the Department of Defense. During the nine months ended January
31, 2003 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. In January 2004,
the Department of Defense informed the Company that it will exercise its option
for the second year of the contract, valued at approximately $364,000. Work will
commence on the second year of the contract on or about March 1, 2004.
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
THREE MONTHS ENDED NINE MONTHS ENDED AUGUST 21,
JANUARY 31, JANUARY 31, 1995
------------------------------- ----------------------------- INCEPTION)
(TO JANUARY
2004 2003 2004 2003 31, 2004
--------------- --------------- ------------- --------------- ------------
Research and development costs $ 313,278 $ 253,737 $ 857,853 $ 595,758 $ 3,286,035
Grant income earned (103,749) -- (311,247) (40,834) (781,750)
--------------- --------------- ------------- --------------- ------------
Net research and development costs $ 209,529 $ 253,737 $ 546,606 $ 554,924 $ 2,504,285
--------------- --------------- ------------- --------------- ------------
NOTE 10 - 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 paid a signing bonus of $100,000 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
19
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. In December 2003, the Company granted Dr.
Maglich 313,221 stock options with an exercise price of $0.87 required
under the terms of his employment agreement for calendar year 2003.
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. During the nine months ended January 31, 2004, the Company paid
$5,400 as an automobile allowance which is included in the annual
expense allowance $19,200 covered below. 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:
January 1, 2002 to December 31, 2002 $125,000 per year
January 1, 2003 to December 31, 2003 $208,600 per year
January 1, 2004 to December 31, 2004 $208,600 per year
January 1, 2005 to December 31, 2005 $208,600 per year
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 $19,200 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.
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
20
positions. During the nine months ended January 31, 2004, 11,178 committed
shares were issued.
CONSULTING AGREEMENTS
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 grant date $ 2.13
Exercise price $ 1.00
Expected life 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 Yeffet Security
Consultants and expensed the remaining unamortized portion of the asset
attributable to the stock options. During the nine months ended January 31, 2004
and 2003, the Company expensed and included in general and administration
expenses $550,000 and $148,000, respectively.
On November 24, 2003, Yeffet Security Consultants initiated binding arbitration
proceedings with the Rhode Island office of the American Arbitration Association
claiming that $49,541 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. The Company has retained legal
counsel and is preparing for the arbitration.
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 nine
months ended January 31, 2004 and 2003, 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 grant date $ 1.76
Exercise price $ 2.00
Expected life 1.0 years
Risk-free rate of return 1.75%
Expected annual volatility 78%
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.
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. The agreement with the investor
relations firm was terminated in December 2003.
21
In January 2004, the company signed a three month agreement covering January,
February and March 2004 with a company to provide Edgar services to help the
Company with electronic filing of all of its reports to the Securities and
Exchange Commission. The agreement also includes elimination of prior accounts
payable for $9,700. In exchange for these services, the Company agreed to issue
27,500 shares of common stock and warrants to purchase 30,000 shares of common
stock at an exercise price of $1.25. The common stock had a fair value of
$24,475 or $0.89 per share, the fair value of the common stock on the date of
the agreement. The Company also determined that the 30,000 warrants had a fair
value of $24,583. The fair value of the warrants was determined using the Black
Scholes model. The assumptions used to determine the valuation are as follows:
Value of warrants per share $ 0.83
Stock price on grant date $ 0.89
Exercise price $ 1.25
Expected life 2.0 years
Risk-free rate of return 1.83%
Expected annual volatility 150%
Annual rate of dividends 0%
In January 2004, the Company signed a six month agreement with an investor
relations firm. The minimum monthly fee will be $5,000 for up to 30 hours per
month, plus additional expenses. After the Company's registration statement is
effective, the minimum monthly fee will increase to $7,500 for up to 50 hours
per month, plus additional expenses. The agreement can be terminated upon
90-days written notice.
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 months 19 through 36. In January 2004, the Company
executed an addendum to the lease agreement to lease an additional 4,570 square
feet of space within the same building in which the Company's offices are
located. The new space will be used for production and testing of our products.
The addendum begins on February 1, 2004 and expires in September 2005. The
additional monthly rent will be $4,373 for months 17 and 18 and $4,548 for
months 19 through 36. 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. The test site agreement will continue on a month-to-month basis.
Rent expense for the nine months ended January 31, 2004 and 2003 was $81,600
and $41,200, respectively. Future minimum payments at January 31, 2004 under
these lease agreements were as follows:
YEAR ENDING
JANUARY 31,
------------------
2005 $ 162,525
2006 105,023
------------
TOTAL $ 267,548
------------
TENANT IMPROVEMENTS AND EQUIPMENT
In January 2004, the Company signed an agreement with a contractor to build
tenant improvements in the newly acquired production and testing space. The
Company expects to spend approximately $50,000 on the tenant improvements which
should be completed in March 2004 and $100,000 for additional prototype
equipment ordered in February 2004.
22
PLACEMENT AGENT AGREEMENTS
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
January 31, 2004, 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 an 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 at prices to be negotiated to guarantee
that the Company will have sufficient funding through the performance of an
18-month contract. The Company estimates that its costs consisting mainly of
research and development personnel costs and prototype equipment purchases to
execute the proposed contract with the U.S. Navy will be in a range from
$800,000 to $1,200,000. If the Company is awarded the proposed contract, we
anticipate that the contract payments would finance the contract expenses.
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 January 31,
2004 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 AND RELATED LITGATION
After reading news reports that connected our reverse takeover 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
23
team engaged in any wrongdoing.
2. The independent investigators have not identified any evidence of
wrongdoing following the April 2002 reverse takeover 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 takeover
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 takeover. The independent investigators obtained
evidence that some of our stockholders who purchased significant amounts of
HiEnergy shares prior to the reverse takeover 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.
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 the 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 notified
us that this action had been voluntarily dismissed without prejudice.
LITIGATION
The Company 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
Microdevices at $5.00 per share. On May 2, 2003, Mr. Eckhouse filed a lawsuit
against the Company, HiEnergy Microdevices and Dr. Bogdan Maglich 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
24
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.
HiEnergy is currently arbitrating a dispute with former consultant, Yeffet
Security Consultants, Inc. ("YSCI"). HiEnergy entered into a consulting
agreement with YSCI in July of 2002. Under the terms of this agreement, YSCI was
to provide consulting services to HiEnergy to further the company's marketing
and business objectives. On October 29, 2003, HiEnergy notified YSCI that it was
terminating its contract. YSCI alleges that HiEnergy breached the consulting
agreement and seeks to recover $449,540.91. HiEnergy denies this allegation and
intends to vigorously defend itself in arbitration.
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
As of January 31, 2004, Microdevices has 20,540 minority shares issued and
outstanding. In November 2003, the Board of Directors approved a voluntary share
exchange for the remaining outstanding stock of Microdevices. The Company would
issue 459,222 share of common stock (exchange rate of 22.3524 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.
WARRANT AND OPTION HOLDERS
During the nine months ended January 31, 2004 and 2003 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 nine months ended January 31, 2004, and 2003 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 these options and warrants are considered immaterial.
As of January 31, 2004, Microdevices has stock options and warrants to
non-employees to purchase 16,496 shares of common stock, and no stock options
outstanding to employees. As part of the voluntary share exchange approved by
the Board of Directors, the Company has agreed to allow these stock option and
warrant holders, to voluntarily exchange their shares in Microdevices for shares
of the Company at an exchange rate of 22.3524 per share resulting in the
issuance of 368,725 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.
25
CASHLESS EXERCISE OF WARRANTS
During the nine months ended January 31, 2004, the company issued warrants to
purchase common stock to certain holders whereby the holders would be entitled
to exercise the warrants via a cashless exercise when the exercise price was
less than the market price of the Company's common stock ("in-the-money"). As of
January 31, 2004, holders of the warrants to purchase 913,620 shares of common
stock are subject to this provision, of which warrants to purchase 537,401
shares are in-the-money and therefore can be converted into 254,760 shares of
common stock at the election of the holders.
NOTE 11 - SHAREHOLDERS' EQUITY
COMMON STOCK ISSUED FOR CASH AND SERVICES
Nine Months ended January 31, 2004 Nine Months ended January 31, 2003
------------------------------------------------ ---------------------------------------
No. of Shares Amount No. of Shares Amount
------------------------------------------------ ---------------------------------------
Common stock issued for cash 2,802,249 $ 1,625,752(4) -- $ --
Common stock issued in
private placement -- -- 1,849,934 2,322,407
Common stock issued for
services rendered 402,000(1)(2)(3) 188,000 -- --
Common stock issued for
dividends on Series A
preferred stock -- -- 68,150 --
Common stock issued for
a bonus to an employee -- -- 11,178 21,350
Common stock issued as
penalty shares 423,474 -- -- --
Common stock issued for
committed stock 75,883 34,404 -- --
Common stock issued for
exercise of warrants 34,000 340 -- --
Cashless exercise of warrants 102,053 -- 33,909 --
Common stock issued for
exchange convertible
notes payable -- -- 37,898 37,896
Common stock issued on legal
Settelment -- -- 80,000 125,000
Common stock issued on
Conversion of Series A
prefered stock 2,191,878 -- 18,336 --
------------------------------------------------ ---------------------------------------
6,031,537 $ 1,848,496 2,099,405 $ 2,506,653
------------------------------------------------ ---------------------------------------
(1) includes 45,000 shares of common stock to its legal counsel as payment
for $21,600 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.
(2) includes 55,000 shares of common stock issued to a consultant for
business services valued at $64,900
(3) includes 2,000 shares of common stock to a consultant for payment of
finders fee valued at $1,500
(4) Amount is net of cash paid to a consultant for finders fee of $45,250.
COMMON STOCK ISSUED FOR CASH AND SERVICES (CONTINUED)
PERIOD FROM AUGUST 21, 1995 TO
JANUARY 31, 2004
---------------------------
NO. OF SHARES AMOUNT
---------------------------
Recapitalization upon reverse merger 6,470,000 $ 14
26
Common stock issued for cash 6,889,746 2,961,961
Common stock issued in private placement 3,074,934 2,126,838
Common stock issued for Preferred stock 68,150 --
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 for committed stock 75,883 34,404
Common stock issued for exercise of warrants 67,906 340
Common stock issued as penalty shares 423,474 --
Cashless exercise of warrants 102,053 --
Common stock issued for services rendered 12,125,980 627,259
Common stock issued to exchange convertible notes payable 37,898 37,896
---------------------------
31,557,419 $ 5,810,062
---------------------------
COMMON STOCK WARRANTS AND OPTIONS ISSUED
NINE MONTHS ENDED JANUARY 31, NINE MONTHS ENDED JANUARY
2004 31, 2003
----------------------------------- -----------------------------------
EXERCISE PRICE EXERCISE PRICE
NUMBER RANGE NUMBER RANGE
--------------- ------------------ ------------ --------------------
WARRANTS
Warrants issued for services rendered 230,000(1) $0.45 to $1.25 739,770 $ 0.60 to $ 2.48
Warrants issued in sales of common
stock 572,979(2) $0.50 to $1.25 825,916 $ 0.01 to $ 2.50
Warrants issued with convertible notes
Payable 1,811,333(3) $0.45 to $1.50 -- ---
STOCK OPTIONS
Employee stock options 898,221 $0.75 to $1.02 3,094,448 $ 0.16 to $ 1.75
Non-employee stock options issued to
directors 740,000 $0.75 to $1.25 -- --
Non-employee stock options issued for
services rendered 620,000(4) $0.35 to $1.25 1,472,726 $ 1.00 to $ 2.24
--------------- ------------
4,872,533 6,132,860
--------------- ------------
27
(1) The fair value of the following warrants were determined using the Black
Scholes model. The assumptions used to determine the valuation are as follows:
NO. OF WARRANTS 150,000 50,000 30,000
---------------- ---------------- ------------------
Grant date May 2003 May 2003 January 2004
Term Two years Five Years Three Years
Expense recorded $ 60,518 $ 15,864 $24,583 (a)
Value of warrants per share $ 0.40 $ 0.32 $ 0.83
Stock price on grant date $ 0.45 $ 0.36 $ 0.89
Exercise price $ 0.45 $ 0.50 $ 1.25
Expected life 2.0 years 2.0 years 2.0 years
Risk-free rate of return 1.44% 1.59% 1.83%
Expected annual volatility 100% 100% 150%
Annual rate of dividends 0% 0% 0%
Services provided Placement Placement SEC filing
services Services services
(a) Fair value of warrant is $24,583. During the nine months ended
January 31, 2004, the Company expensed $8,194 for these services
and deferred $16,389 as an other current asset because such
amount inapplicable to a future period.
(2) In the period of May 2003 to January 2004, the Company issued warrants to
purchase 572,979 shares of common stock to investors in common stock of
the Company. The Company allocated $642,173 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 grant date $ 0.50 to $ 1.30
Exercise price $0.50 to $ 1.25
Expected life 2.0 years
Risk-free rate of return 1.45% to 2.04%
Expected annual volatility 140% to 150%
Annual rate of dividends 0%
(3) In January 2004, the Company issued warrants to purchase 1,811,333 shares
of common stock to investors in convertible notes payable. The Company
allocated $308,826 to the warrants as a discount for the relative fair
value of the detachable warrants. 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 $ 0.68 to $ 1.22
Stock price on grant date $ 1.13 to $ 1.31
Exercise price $0.45 to $ 1.50
Expected life .33 to 2.0 years
Risk-free rate of return 1.69%
Expected annual volatility 150%
Annual rate of dividends 0%
(4) During the nine months ended January 31, 2004, the Company issued 620,000
options to purchase common stock of the company to various non-employee
consultants to the Company as partial compensation for
28
services rendered. The fair value of the stock options were determined
using the Black Scholes model. The assumptions used to determine the
valuation are as follows:
NO. OF OPTIONS 30,000 200,000 40,000 310,000 40,000
----------------------------------------------------------------------------
Grant date May 2003 July 2003 August 2003 November 2003 December 2003
Term 6 Years 6 Years 6 Years 6 Years 6 Years
Expense recorded $ 11,348 $ 89,761 $41,356 $339,851 $32,191
Value of options per
share $ 0.38 $ 0.45 $ 1.04 $ 1.19 $ 0.86
Stock price on grant date $ 0.45 $ 0.50 $ 1.02 $ 1.25 $ 0.90
Exercise price $ 0.75 $ 0.50 $ 1.02 $ 1.25 $ 0.90
Expected life 2.0 years 2.0 years 2.0 years 2.0 years 2.0 years
Risk-free rate of return 1.44% 1.45% 2.05% 2.04% 2.06%
Expected annual
volatility 100% 100% 140% 150% 150%
Annual rate of dividends 0% 0% 0% 0% 0%
Services provided Business Business Scientific Business Financial &
development development Advisors development business
CONVERTIBLE NOTES PAYABLE
In January 2004, the Company sold $385,000 of convertible notes payable to
various investors, of which $50,000 was in subscription receivable at January
31, 2004. The notes payable are due in two years, unless converted, and accrue
interest at 5% per annum. The notes payable convert into 855,555 shares of the
company's common stock or $0.45 per share. Each investor can convert the notes
into common stock under certain conditions upon the effectiveness of the
company's registration statement. The investors in the convertible notes payable
also receive 1,811,333 warrants to purchase the company's common stock at
exercise prices of $0.45 to $1.50. The exercise term of the warrants are between
120 days and three and one-half years after the effectiveness of the company's
registration statement. The investors of the convertible notes payable also have
the option to purchase an additional $1,550,000 worth of convertible notes
payable on the same terms as described above. The additional purchases can be
made at any time after the effectiveness of the company's registration statement
and if the price of the company's common stock is above $0.92. One of the
investors has a mandatory obligation to buy an additional $850,000 of
convertible notes payable. The additional convertible notes payable also contain
9,174,815 warrants to purchase the company's common stock at exercise prices of
$0.45 to $1.50. The exercise term of the warrants are between 120 days and three
and one-half years after purchase.
COMMITTED COMMON STOCK
In November 2003, the Board of Directors approved compensation for Directors as
follows: Each Director is 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. If a director elects to receive common stock as compensation for
participation at each meeting, the Company will use the fair value of the common
stock to determine compensation on the date of the meeting. If a director elects
to receive stock options as compensation for participation at each meeting, then
no recognition of compensation will be made at the date of the grant unless the
stock options are issued "in-the-money". During the nine months ended January
31,2004, our directors made no election to receive common stock or stock
options. The Company assumed that each director would elect to receive common
stock as of the date of each meeting and recorded $34,920 as compensation
expense. As of January 31, 2004, 36,000 shares of common stock and the expense
related to the directors compensation is recorded as committed common stock.
In January 2004, the company signed a three month agreement covering January,
February and March 2004 with a company to provide Edgar services to help the
Company with electronic filing of all of its reports to the Securities and
Exchange Commission. The agreement also includes forgiveness of $9,700 of prior
accounts payable. In
29
exchange for these services, the Company agreed to issue 27,500 shares of common
stock and warrants to purchase 30,000 shares of common stock at an exercise
price of $1.25. The Company is not required to issue the common stock until the
common stock and warrants have been registered. The committed common stock had a
fair value of $24,475 or $0.89 per share, the fair value of the common stock on
the date of the agreement. During the nine months ended January 31, 2004, the
Company expensed $8,158 related to the committed common stock and deferred
$16,317 as an other current asset because such amount is applicable to a future
period. Also during the nine months ended January 31, 2004, the Company expensed
$8,194 related to the warrant issuance and deferred $16,389 as an other current
asset because such amount is applicable to a future period. The fair value of
the warrants were determined using the Black Scholes model. The assumptions used
to determine the valuation are included in Common Stock Warrants and Options
Issued above.
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 January 31, 2004, the Board of Directors
also approved the issuance of options to purchase 1,845,000 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 nine months ended January 31, 2004, the Company issued a total of
423,474 shares of common stock as penalty shares to certain investors in the
Company's common stock to compensate them for the late registration of the
common stock.
SALES OF COMMON STOCK SUBJECT TO BUY-BACK
During the year ended April 30, 2003 and six months ended October 31, 2003, the
Company sold approximately 2,300,000 shares of its common stock through
prospectus that did not include the fixed pricing information required by the
Securities Act of 1933. The Company negotiated these sales with individual
purchasers who paid slightly different prices for the shares under a prospectus
that did not include one fixed price for the sale of such shares. If the Company
fixes one price per registration statement, it is eligible to conduct a primary
offering under the federal securities laws and rules. The Company has ceased
sales of the negotiated-price type and intends to re-file a registration
statement with the SEC that, as of or at the time of effectiveness, has an
established price before consummating a primary offering of its shares. Because
the Company had conducted an offering for which it is not eligible, the
purchasers of its common stock in that offering could be entitled for a period
of approximately two years from the date of purchase to sell their shares of
common stock back to the Company at the purchase price plus interest. The
purchase prices were all between $0.33 and $0.35 per share. However, the Company
is in the process of obtaining waivers and consents from all of the purchasers,
and, thus, does not anticipate any obligation or liability for repurchase of
these shares.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the nine months ended January 31, 2004 and 2003 and the period from
August 21, 1995 (inception) to January 31, 2004, the Company purchased $0, $0,
and $4,767, respectively, of property and equipment from a Board member.
See Notes 6, 7, 10 and 11 for additional related party transactions.
NOTE 13 - SUBSEQUENT EVENTS
In March 2004 the Company incorporated HiEnergy Europe Ltd., a wholly owned
subsidiary under the laws of the state of Delaware.
In March 2004, the Company sold 40,000 shares of its common stock and raised
$30,000, net of cash commisions. In connection with this sale the Company also
issued 13,333 warrants to purchase its common stock at an exercise price of
$1.00. As a finders fee for this sale the Company also issued 267 warrants with
an exercise price of $1.00.
In February 2004, the Company sold 466,666 shares of its common stock and raised
$237,750, net of cash commissions. In connection with these sales, the Company
also issued 742,450 warrants to purchase its common stock at exercise prices
ranging from $0.49 to $1.65. The Company allocated $166,000 to the warrants
issued as a cost of raising capital. The fair value of the warrants was
determined using the Black Scholes model. As a finders fee for these sales, the
company also issued 6,000 shares of common stock valued at $7,460 and 41,667
warrants with weighted average exercise price of $0.64
30
In February 2004, the Company collected $50,000 from the January 2004 sale of a
convertible note payable described in Note 11-Shareholders' Equity.
In February 2004, the Company issued 99,332 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 February 2004, the Company issued 25,049 shares of common stock to a
stockholder for the cashless exercise of 73,855 common stock warrants.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
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 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 (the "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 OF COMPANY
HiEnergy is a nuclear technologies-based inventions company focused on
researching, developing and marketing fast neutron-based "stoichiometric" sensor
devices that inspect objects and have the ability to determine automatically in
a matter of tens of seconds, with a high degree of accuracy, whether the object
contains selected dangerous or illicit substances, such as explosives,
biological agents or illicit drugs. Since our technology allows the
identification of these substances through metal, soil and other barriers, our
technology is non-invasive, meaning that the substances being inspected need not
be physically tested or otherwise handled. Because our technology is fully
automated, it can operate remotely without the need for operator interpretation
of the results.
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.
SLW Enterprises was a "public shell company" on the date of the reverse
take-over. The transaction was accounted
32
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.
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-
33
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 JANUARY 31, 2004 COMPARED TO THREE MONTHS ENDED JANUARY 31,
2003
For the three months ended January 31, 2004, we incurred a net loss of
$1,485,000, as compared to a net loss of $2,597,000 for the same period in 2003.
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. Some of the expense categories include amounts for stock-based
compensation for common stock, warrants and stock options issued to
non-employees as partial compensation for services rendered.
Our general and administration expenses were $1,186,000 for the three months
ended January 31, 2004 versus $2,343,000 for the same period in 2003 or a
decrease of $1,157,000. A comparison of the major components of the decrease in
general and administration expenses follows:
Three Months Ended
------------------------------------ Increase/
January 31, 2004 January 31, 2003 (Decrease)
---------------- ---------------- ------------
Legal fees $ 145,000 $ 9,000 $ 136,000
Accounting fees 75,000 45,000 30,000
Public relations 55,000 79,000 (24,000)
Investor relations 39,000 387,000 (348,000)
Consultants 532,000 356,000 176,000
Facilities 13,000 33,000 (20,000)
Directors liability insurance 39,000 26,000 13,000
Salaries and benefits 145,000 1,166,000 (1,021,000)
Travel 43,000 31,000 12,000
All other 100,000 211,000 (111,000)
---------------- ---------------- ------------
Total $ 1,186,000 $ 2,343,000 $(1,157,000)
---------------- ---------------- ------------
Legal and accounting fees increased due to increased SEC filing activity in the
current fiscal quarter compared to the
34
previous fiscal year's quarter.
Investor relations decreased in the current period compared to the same period
last year because of two stock option grants issued to two different investor
relations firms in the prior year, resulting in $210,000 of additional
compensation expense related to the stock option grants. In the fiscal year 2003
period, the company's investor relations firm initiated an investor out-reach
program which cost $100,000. We had no comparable expense in the current period.
The Company has various arrangements with consultants to provide services such
as business development, business and financial consulting.
Some of these consultants agree to accept common stock, warrants and options for
partial payment for their services. For the three months ended January 31, 2004
the Company incurred $45,000 in cash and accrued compensation for services
provided compared to $112,000 for the same period in 2003. During the same
periods, the Company recognized $487,000 and $244,000, respectively in
stock-based compensation.
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 cash and accrued salaries and benefits were higher in the current
period because of scheduled salary and benefit increases contained in the
employment agreement with the Company's Chairman and CEO and increases for other
employees. During the quarter ended January 31, 2003, the Company issued a
significant number of stock options to a former CEO and recognized $1,067,000 in
stock-based compensation during the 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 $209,000 for the three months ended
January 31, 2004 versus $254,000 for the same period in 2003 or a decrease of
$45,000. A comparison of the major components of the decrease in research and
development expenses follows:
Three Months Ended
----------------------------------------- Increase/
January 31, 2004 January 31, 2003 (Decrease)
------------------- --------------------- ------------------
Salaries and benefits $ 170,000 $ 110,000 $ 60,000
Travel 1,000 15,000 (14,000)
Consultants 9,000 54,000 (45,000)
Depreciation 36,000 32,000 4,000
Facilities 16,000 3,000 13,000
Supplies 64,000 19,000 45,000
Other 17,000 21,000 (4,000)
Grant income (104,000) - (104,000)
------------------- --------------------- ------------------
$ 209,000 $ 254,000 $ (45,000)
------------------- --------------------- ------------------
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 the 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.
The Company added $482,000 of equipment during the year ended April 30, 2003 and
$182,000 during the nine months ended January 31, 2004. 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.
35
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 $64,000 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. In
January 2004, the Department of Defense informed the Company that it will
exercise its option for the second year of the contract, valued at approximately
$364,000. Work will commence on the second year of the contract on or about
March 1, 2004.
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 January 31, 2004 and no grant income during the same period in 2003.
DEPRECIATION
Depreciation expense for the three months ended January 31, 2004 and 2003 was
$36,000 and $32,000, 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 $3,000
in the same period in the prior year. Interest expense increased in the current
fiscal quarter because the convertible notes payable to the Company's legal
counsel with an interest rate of 10% were outstanding. No comparable interest
bearing debt was outstanding during same period of the prior year. The company
also recorded as financing expense a beneficial conversion of $76,000 related to
convertible notes payable to related parties during the current quarter.
Interest income during the current fiscal quarter was $100 compared to $3,200 in
the same period in the prior year. During the current quarter the Company had an
average balance of $75,000 in its cash investment account compared to $500,000
in the same period of the previous year.
NINE MONTHS ENDED JANUARY 31, 2004 COMPARED TO NINE MONTHS ENDED
JANUARY 31, 2003
For the nine months ended January 31, 2004, we incurred a net loss of
$4,242,000, as compared to a net loss of $4,510,000 for the same period in 2003.
OPERATING EXPENSES
GENERAL AND ADMINISTRATION
Our general and administration expenses were $3,594,000 for the nine months
ended January 31, 2004 versus $3,729,000 for the same period in 2003 or a
decrease of $135,000. A comparison of the major components of the increase in
general and administration expenses follows:
Nine Months Ended
---------------------------------------- Increase/
January 31, 2004 January 31, 2003 (Decrease)
------------------ -------------------- ------------------
Legal fees $ 587,000 $ 319,000 $ 268,000
Accounting fees 164,000 105,000 59,000
Public relations 160,000 156,000 4,000
Investor relations 194,000 506,000 (312,000)
36
Consultants 1,548,000 810,000 738,000
Facilities 52,000 43,000 9,000
Directors liability insurance 107,000 63,000 44,000
Salaries and benefits 342,000 1,330,000 (988,000)
Travel 167,000 92,000 75,000
All other 273,000 305,000 (32,000)
---------------------------------------- ------------------
Total $3,594,000 $3,729,000 $ (135,000)
---------------------------------------- ------------------
Legal and accounting fees increased due to increased SEC filing activity in the
current fiscal period compared to the same period in the previous year.
Investor relations decreased in the current period compared the same period last
year because of two stock option grants issued to two different investor
relations firms in the prior year, resulting in $357,000 of additional
compensation expense related to the stock option grants.
The Company has various arrangements with consultants to provide services such
as business development or business and financial consulting.
Some of these consultants agree to accept common stock, warrants and options for
partial payment for their services. For the nine months ended January 31, 2004
the Company incurred $291,000 in cash and accrued compensation for services
provided compared to $292,000 for the same period in 2003. During the same
periods, the Company recognized $1,257,000 and $518,000, respectively in
stock-based compensation.
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.
The Company's cash and accrued salaries and benefits were higher in the current
period because of scheduled salary and benefit increases contained in the
employment agreement with the Company's Chairman and CEO and increases for other
employees. During the year ended January 31, 2003, the Company issued a
significant number of stock options to a former CEO and recognized $1,067,000 in
stock-based compensation during the period.
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 $547,000 for the nine months ended
January 31, 2004 versus $555,000 for the same period in 2003, or a decrease of
$8,000. A comparison of the major components of the research and development
expenses follows:
Nine Months Ended
---------------------------------------- Increase/
January 31, 2004 January 31, 2003 (Decrease)
---------------------------------------- ------------------
Salaries and benefits $ 469,000 $ 264,000 $ 205,000
Travel 7,000 58,000 (51,000)
Consultants 43,000 86,000 (43,000)
Depreciation 97,000 73,000 24,000
Supplies 149,000 41,000 108,000
37
Moving 20,000 2,000 18,000
Other 73,000 72,000 1,000
Grant income (311,000) (41,000) (270,000)
---------------------------------------- ------------------
$ 547,000 $ 555,000 $ (8,000)
---------------------------------------- ------------------
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.
The Company added $482,000 of equipment during the year ended April 30, 2003 and
$182,000 during the nine months ended January 31, 2004. Most of the equipment
purchased was for research and development purposes. Depreciation expenses
increased in the current period compared to the same period in the prior year
due to the increased purchases of research and development equipment.
The Company incurred $149,000 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. In
January 2004, the Department of Defense informed the Company that it will
exercise its option for the second year of the contract, valued at approximately
$364,000. Work will commence on the second year of the contract on or about
March 1, 2004.
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
$311,000 during the nine months ended January 31, 2004 and $41,000 during the
same period in 2003, which was attributable to Phase I of the development
contract.
DEPRECIATION
Depreciation expense for the nine months ended January 31, 2004 and 2003 was
$103,000 and $72,000, 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 $26,000 compared to $9,000
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 the same period of the prior year.
Interest income during the current fiscal quarter was $1,000 compared to $6,600
in the same period in the prior year. During the current fiscal period, the
Company had an average balance of $100,000 in its cash investment account
compared to $475,000 in the same period of the previous year.
During the nine months ended January 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, 2003.
38
The fair value of the warrants were determined using the Black Scholes model.
The company also recorded as financing expense a beneficial conversion of
$76,000 related to convertible notes payable to related parties during the
current fiscal year.
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 January 31, 2004, we had unrestricted cash and cash equivalents of
$208,000. We used $1,845,000 for operating activities and approximately $182,000
to acquire equipment in the nine months ended January 31, 2004. Of our current
net loss, we recorded approximately $1,044,000 in non-cash expenses related to
the issuance of common stock and stock based securities as compensation for
services. During the nine months ended January 31, 2004, we raised approximately
$1,626,000 from sales of common stock, net of commissions and $335,000 from the
sale of convertible notes payable - related parties. During the current fiscal
year, we also collected $443,000 of common stock sales subscribed during the
year ended April 30, 2003. Our Chairman and CEO also loaned the Company $36,000
and agreed to take a note payable for certain salary and expense reimbursements
which total $20,000. As of January 31, 2004, we had liabilities of approximately
$1,510,000 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.
During the nine months ended January 31, 2004, the Company's other current
assets decreased by $227,000. The decrease is due to write-off of $219,000 of
the current portion of unamortized stock -based compensation for non-employee
consultants. The long term portion of $296,000 for option grants was also
written-off during the same period as the agreement to which the option grant
applied was terminated. Also during the nine months ended January 31, 2004,
accounts payable and accrued expenses when combined increased by $459,000. This
increase is due primarily to the increase in convertible notes payable - related
party to the Company's legal counsel of $538,000 during the period offset by a
reduction of trade accounts payable and accrued expenses of $100,000 during the
period due to increased sources of cash during the period.
In February 2004, the Company sold 466,666 shares of its common stock and raised
$237,750, net of cash commissions. In connection with these sales, the Company
also issued 784,117 warrants to purchase its common stock at exercise prices
ranging from $0.49 to $1.65. The Company allocated $166,000 to the warrants
issued as a cost of raising capital. In connection with these sales, the company
also issued 6,000 shares of common stock valued at $7,460 and 41,667 warrants
with weighted average exercise price of $0.64
In February 2004, the Company collected $50,000 from the January 2004 sale of a
convertible note payable described in Note 11-Shareholders' Equity.
As described in Note 11-Shareholders' Equity, the investors of the convertible
notes payable also have the option to purchase an additional $1,550,000 worth of
convertible notes payable on the same terms as described above. The additional
purchases can be made at any time after the effectiveness of the company's
registration statement and if the price of the company's common stock is above
$0.92. One of the investors has a mandatory obligation to buy an additional
$850,000 of convertible notes payable. The additional convertible notes payable
also contain 9,174,815 warrants to purchase the company's common stock at
exercise prices of $0.45 to $1.50. The exercise term of the warrants are between
120 days and three and one-half years after purchase.
As of January 31, 2004 the Company was in default of a note payable totaling
$40,000 with a shareholder and related party. The note payable has been in
default since November 1997.
The Company instituted cost-cutting measures in March 2003 that included a
reduction in head count and replacement of an investor relations firm. These
cost cutting measures would have resulted in annual savings of $400,000 through
January 31, 2004. These savings have been more than offset by other increased
costs of operations summarized above.
In August 2003, the Company signed an agreement with an investment bank to
support its bid to obtain a
39
$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 free trading common
stock of the Company at prices to be negotiated to guarantee that the Company
will have sufficient funding through the performance of an 18-month contract.
The Company estimates that its costs consisting mainly of research and
development personnel costs and prototype equipment purchases to execute the
proposed contract with the U.S. Navy will be in a range from $800,000 to
$1,200,000. If the Company is awarded the proposed contract, we anticipate that
the contract payments would finance the contract expenses.
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 nine
months ended January 31, 2004, the Company recorded a liability for $50,000
under this agreement.
As of January 31, 2004, we issued unsecured convertible promissory notes at 10%
interest totaling $538,000 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 notes are due on April 30, 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. a subsidiary that will focus on developing and marketing defense
applications of the Company's SuperSenzor technology. During the nine months
ended January 31, 2004, we invested $95,000 in HiEnergy Defense, Inc.
In January 2004, the Company signed an agreement with a contractor to build
tenant improvements in the newly acquired production and testing space. The
Company expects to spend approximately $50,000 on the tenant improvements which
should be completed in March 2004 and $100,000 for additional prototype
equipment ordered in February 2004.
Below is a summary of our agreements presently in effect showing the monthly and
annual minimum cost:
MINIMUM MINIMUM
BEGINNING ENDING MONTHLY ANNUAL
COMMITMENTS DATE DATE COST COST STATUS
- -----------------------------------------------------------------------------------------------------------------------
Employment agreement
with Chairman and CEO January 2002 December 2006 $ 18,800 $ 225,600 In effect
Building lease agreement September 2002 September 2005 $ 12,623 $ 151,476 In effect
Test site lease agreement July2003 June 2004 $ 1,200 $ 14,400 In effect
Public relations services November 2002 February 2003 $ 12,500 $ 150,000 Month to month
Investor relations services January 2004 June 2004 $ 5,000 $ 60,000 In effect
Business development services July 2002 October 2003 $ 20,000 $ 240,000 Terminated in October 2003
Investor relations services April 2003 December 2003 $ 6,500 $ 78,000 Terminated in December 2003
PLAN OF OPERATION
Our overriding corporate focus through April 30, 2005 will be to ramp-up our
marketing activities for our C3C CarBomb Finder. In the meantime, we will reduce
other research and development efforts to achieve that goal. The principal
research and development projects affected will be on our 3B3 Bomb Squad
Detector, 3UXO3 Unexploded Ordinance Sensor and 7AT7 Anti-tank Landmine
Detector, which are the furthest along in the development stage.
We believe that we will incur costs of between $6,370,000, assuming we have no
sales, and $8,860,000, based upon projected sales as we ramp-up sales volumes
for the C3C CarBomb Finder, from February 1, 2004 through April 30, 2005. The
$6,380,000 includes approximately $5,250,000 in general and administrative,
sales and marketing, and research and development costs, $120,000 in capital
expenditures and $1,000,000 in one-time development
40
costs. The increase in costs from $6,370,000 to $8,860,000 is based primarily
upon the cost of materials related to 3C3 sales, as opposed to labor costs or
indirect costs since they are fixed and already included as part of the general
and administrative and research and development costs.
We anticipate that the employees and consultants currently engaged by the
company will be able to handle any additional administrative, research and
development, sales and marketing, and manufacturing requirements through this
period, and therefore do not anticipate that we will need to employ any
significant number of additional employees or consultants. Our current
facilities will also be adequate to conduct all of our operations, including
manufacturing, during this period. If we experience significant demand, however,
we will expand both our personnel and facilities accordingly.
As of January 31, 2004, we had $208,000 in cash available to fund the aforesaid
costs. Although we expect to receive sales revenues from the sale of our 3C3
CarBomb Finder through the April 30, 2005 period, our product pricing is based
upon competitive conditions and certain minimum sales volumes, and we do not
anticipate that the sale of the 3C3 product will generate profits on a
unit-over-unit basis until after April 30, 2005. We have no current arrangements
for obtaining this additional capital, and will seek to raise it in one or more
increments through one or more of contract advances, loans, public or private
sales of debt or equity securities for cash, or satisfaction of indebtedness
with equity securities. Since our research and development costs are generally
fixed, we will also be able to offset a portion of these costs from the proceeds
of any government grants or research and development contracts we may be able to
obtain. In the longer term, we do not anticipate that we will be cash flow
positive based solely on projected sales revenues less operating costs until
after April 30, 2005. We anticipate that we will need to raise between
$10,000,000 and $15,000,000 in equity or debt financing until such time as we
become cash flow positive from product sales and government grants.
We cannot give assurance that we will be able to secure the additional capital
we require to continue our operations at all, or on terms which will not be
objectionable to our company or our shareholders, including substantial dilution
or the sale or licensing of our technologies on terms we would not otherwise
consider. Our inability to raise sufficient additional working capital to carry
us beyond the point of receipt of meaningful revenues would likely force us to
suspend our operations, and possibly even liquidate our assets and wind-up and
dissolve our company. These factors, among others, as discussed in Note 3 to our
financial statements contained in this report, raise substantial doubt about our
ability to continue as a going concern.
RISKS RELATED TO OUR BUSINESS
An investment in our common stock involves a high degree of risk. In addition to
the other information in this report, you should carefully consider the
following risk factors before deciding to invest in shares of our common stock.
Any of the following risks could actually harm our business, financial condition
and operating results to a very material extent. As a result, the trading price
of our common stock could decline rapidly, and you could lose all of your
investment.
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 Mr.
Phil Gurian, who had previously been convicted and awaits sentencing for
previous alleged stock manipulation schemes, and Mr. Barry Alter, who was a
former director and Chief Executive Officer of each of SLW and HiEnergy
Technologies. 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 takeover 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
takeover 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. 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
41
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. 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 qualified 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 $2,966,997. 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 3 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern." The auditors recognize that the cash flow uncertainty makes their
basic assumptions about value uncertain. When it seems uncertain whether an
asset will be used in a "going concern" or sold at auction, the auditors assume
that the business is a "going concern" for purposes of all their work, and then
they disclose that there is material uncertainty about that assumption. It is
definitely a consequence of our negative cash flows from operations that we
continually need additional cash. At any time, a serious deficiency in cash
flows could occur any time. It is not always possible or convenient to raise
additional capital. A problem in raising capital could result in temporary or
permanent insolvency and consequently potential lawsuits by unpaid creditors and
perhaps closure of the business. All these things are possibilities. It is
certain, in any case, that analysts and investors view unfavorably any report of
independent auditors mentioning substantial doubt about a company's ability to
continue as a going concern. Consequently, 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 the Company, and not
to invest in our common stock unless they can afford the potential loss of their
entire investment.
IF OUR LOSSES CONTINUE INTO THE FUTURE, OUR BUSINESS AND OUR STOCKHOLDERS WILL
BE ADVERSELY AFFECTED THUS WE ARE REDUCING OUR DEPENDENCE ON GOVERNMENTAL
CUSTOMERS, WHICH CAN REQUIRE LONGER THAN AVERAGE LEAD TIMES BEFORE SALES ARE
MADE.
We have incurred net losses since our inception. For the nine months ended
January 31, 2004, we reported a net loss available to common shareholders of
approximately $4,854,000, as compared to a net loss available to common
shareholders of approximately $5,356,000 for the nine months ended January 31,
2003. Our accumulated deficit through January 31, 2004 was approximately
$13,835,000. We have financed operations to date through a combination of
government funding and equity financing. As of January 31, 2004, we had received
an aggregate of approximately $690,000 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 2004-5 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 that has left a deficit at January
42
31, 2004 of $453,000. It appears that our financial requirements until we can
generate sufficient revenues from sales to cover our operating costs are between
$10,000,000 and $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.
WE MAY OWE INDEMNIFICATION OBLIGATIONS TO OUR CURRENT AND FORMER DIRECTORS AND
OFFICERS.
Our certificate of incorporation and bylaws contain provisions that provide for
indemnification of officers and directors, in each instance to the maximum
extent permitted by law. To the extent indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of HiEnergy Technologies under the above provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In May 2003, our former director Barry
Alter engaged his own separate legal counsel with respect to the SEC
investigation regarding SLW Enterprises and demanded that we advance him in
excess of $24,000 in connection with the investigation that the SEC has
conducted. We did not advance him these expenses, and he brought an action
against us in Delaware seeking payment of his costs and expenses, then he
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. See "Legal
Proceedings" for more information. A stockholder's investment in our company may
be adversely affected to the extent that we pay costs of settlement and damage
awards against directors or officers under the indemnification provisions of the
certificate of incorporation and bylaws. The impact on a stockholder's
investment in terms of the costs of defending a lawsuit on behalf of a director
or officer may also deter us from bringing suit against former directors or
officers. Claims for indemnification under our certificate of incorporation or
bylaws may also dissuade us from bringing lawsuits against current or former
directors or officers.
UNDER THE FEDERAL SECURITIES LAWS, PURCHASERS OF OUR COMMON STOCK IN A PRIOR
PRIMARY OFFERING WOULD HAVE THE WAIVABLE RIGHT TO SELL THEIR SHARES BACK TO THE
COMPANY.
We were a small company as compared with most public companies. Rules and
regulations under the Securities Act of 1933 do not permit us to conduct a
public offering on a continuous basis at varying prices or a negotiable price.
Under the federal securities laws, purchasers of our common stock in the public
primary offering would have the waivable right to sell their shares back to the
Company.
We sold approximately 2,300,000 shares of our common stock through a prior
offering with a prospectus that did not include the fixed pricing information
required by the Securities Act (unless expressly permitted pursuant to Rule
415). We negotiated these sales with individual purchasers who paid between
$0.33 and $0.35 per share for the shares under a prospectus that did not include
one fixed price for the sale of these shares. The Company raised $748,000, net
of offering costs from five sales of common stock during April and June 2003. If
we fix one price per registration statement, we are eligible to conduct a
primary offering under the federal securities laws and rules. We have ceased
sales of the negotiated-price type and intend to re-file a registration
statement with the SEC that, as of or at the time of effectiveness, has an
established price before consummating a primary offering of our shares. Because
we previously had conducted an offering for which we are not eligible, the
purchasers of our common stock in that offering could be entitled for a period
of approximately two years from the date of purchase to sell their shares of
common stock back to the Company at the purchase price plus interest. We are in
the process of obtaining waivers and consents from all of the purchasers, and,
thus, do not anticipate any obligation or liability for repurchase of these
shares.
PREVIOUS PURCHASERS OF OUR SECURITIES AND STOCKHOLDERS COULD ATTEMPT TO ASSERT
CLAIMS AGAINST US FOR INADEQUATE DISCLOSURE.
Facts related to Mr. Gregory Gilbert and a separate investigation by the SEC
involving persons suspected of stock manipulation, which are described below in
the Risk Factors sections captioned "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." and "Former director's outside legal proceedings were not
promptly disclosed to the public," 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
43
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.
We believe that our current system of internal controls is generally adequate
and we have a program in place to make periodic assessments of the adequacy of
our internal control systems. We previously had a general weakness in recording
equity transactions involving the grants of options and warrants which caused us
to record these transactions at a later date than incurred, although this
weakness did not result in any improper reporting on our financial statements.
During the year ended April 30, 2003 we implemented additional internal controls
to address this weakness. We now have a full time person responsible for the
control of agreements involving equity. Our Chairman and CEO and Board of
Directors must approve all agreements regarding the sale of equity and the
issuance of warrants and stock options. The Company has a very small finance and
accounting staff and due to the limited resources of the Company and the small
accounting staff, it is not always possible to have optimum segregation of
accounting and finance duties. However, we believe that our current system of
segregation of duties which affect control over cash, acquisition and disposal
of assets and equity transactions are generally adequate and do not have any
negative impact on our financial reporting system.
WE HAVE ONE INDIVIDUAL SERVING AS OUR CHAIRMAN, CHIEF EXECUTIVE OFFICER,
PRESIDENT AND TREASURER.
Although our Chairman has had thirty years experience as Chief Executive Officer
with private companies, this is his first public company. Dr. Maglich is not
only responsible for the research and development of our technology, but is also
continuously making inventions in the field and while actively involved in
critical business initiatives, decisions, and negotiations on financing and
marketing the Company's technology through various presentations to the
scientific and business community. We have not sought key man insurance with
respect to Dr. Maglich or any of our executive officers. We do not have a
formally approved succession plan.
OUR PRODUCTS ARE SUBJECT TO RADIATION SAFETY REGULATIONS AND LICENSING
REQUIREMENTS. COMPLYING WITH THESE REQUIREMENTS MAY RESULT IN DELAYS IN THE
DEPLOYMENT OF OUR PRODUCTS
Our products utilize a process that results in neutron radiation. As the
manufacturer of a fast neutron emitting device, we must comply with applicable
governmental laws and regulations and licensing requirements, such as those
promulgated by the Nuclear Regulatory Commission and the Food and Drug
Administration, governing radiation exposure in the design and operation of our
products, including appropriate shielding. Although fast neutron radiation
demonstrates some properties different than other forms of radiation, we do not
believe that fast neutron radiation presents any difficulties or creates any
risks beyond those ordinarily encountered in connection with the fabrication and
operation of other forms of radiation emitting devices commonly used in the
general population, such as x-ray machines. Further, we believe that the design
and incorporation of appropriate shielding in our products and the development
of appropriate operating procedures in view of their intended use are, as an
engineering and public safety matter, relatively straight-forward matters.
Nevertheless, compliance with the licensing requirements of these rules and
regulations entails additional costs, effort and time in bringing our products
to market.
WE ARE A DEVELOPMENT STAGE COMPANY, AND WE MAY NOT BE ABLE TO ACHIEVE POSITIVE
CASH FLOWS.
We are a development stage company. While we have commercially introduced our
first commercial product to date, our Stoichiometric CarBomb Finder 3C3 in
January 2004, we have no contracts or sales revenues to date. As a result, we
have limited resources. Also, our business model is still in an evolving stage.
We have responded to the markets that present themselves at the time, and as
such, our business and marketing approach may change from time to time while
there is a significant interest in our product. 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
44
optimization if we had more past experience executing our own business
strategies. Our potential ability to generate income is unproven.
OUR COMPETITORS HAVE STRONGER FINANCIAL RESOURCES; HOWEVER, OUR STOICHIOMETRIC
CARBOMB FINDER IS TECHNICALLY INTRINSICALLY SUPERIOR TO OTHER DETECTORS USING
FAST NEUTRONS.
Our competitors are established companies with operating histories and existing
contracts and relationships with the potential customers. Other enterprises may
be seeking to develop products with similar capabilities. However, they do not
currently have the capability to decipher chemical formulas. Also we do have
some patents pending, proprietary firmware designs and know-how that gives us
the technical advantage over them. If we are unable to commence serial
manufacturing CarBomb Finders 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 sales may result in foregone
potential sources of investment or revenue. Field tests have demonstrated the
capability of our stoichiometric technology. Experiments to increase the
effectiveness of our technology are ongoing. The development of future products
based on our technology may take longer, cost more or be more difficult than
expected. We believe that our competition had been discouraged from duplicating
our research because of general skepticism that such an instrument can be
successfully made into an industrial product. The concept upon which our product
is based was previously considered impractical for industrial production by a
review committee in 1989, but has been revived by Dr. Maglich with the
state-of-the art technology 10 years later. However, as our competitors learn
that we have successfully demonstrated our product, they may be further
encouraged to pursue similar devices.
INFORMATION RELATING TO ANY INVENTION THAT IS INVENTED UNDER A SMALL BUSINESS
INNOVATION RESEARCH AND DEVELOPMENT CONTRACT MAY BECOME PUBLIC AT SOME FUTURE
TIME.
A portion of our research and development costs relating to the development of
our advanced SuperSenzor technology for anti-tank landmine identification
purposes is being funded under a Small Business Innovation Research (SBIR)
contract. This development work essentially involves the incorporation of
sophisticated directional features into our core MiniSenzor technology.
If an invention is made under an SBIR contract, it must be reported to the
granting agency. The U.S. federal government has royalty-free rights in the
products and data resulting from our federal government SBIR contracts. We
nevertheless own the data and title to the products resulting from those
contracts and are permitted to obtain patent protection. The U.S. federal
government does not contractually undertake to protect data or inventions from
public disclosure beyond four years after the term of an SBIR contract. Also,
the federal government might also create competition by utilizing its own right
and license to any technology developed under the SBIR contract if it is not
being developed by the inventor. Therefore, our competitors possibly could gain
access to certain information relating to our SuperSenzor advancements or any
other technologies we develop under SBIR contracts.
WE MAY BE UNABLE TO SECURE ANTICIPATED GOVERNMENTAL FUNDING FOR FUTURE PRODUCTS.
We plan to apply for several government contracts for the development of future
projects in the future; however, such contracts may or may not be obtained. We
have successfully obtained a total of seven government development contracts to
date from the U.S. Department of Defense, U.S. Department of Energy and U.S.
Customs Service to finance our research and development. We have failed to
obtain other government contracts for which we had made proposals, although one
of these is currently under a second review by the U.S. Navy. These contracts
may be 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.
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.
RETAINING AND HIRING KEY TECHNICAL AND SCIENTIFIC PERSONNEL IS A CHALLENGE.
The potential success of our business depends to a great extent on the talent
and resources of our key managers and employees. Our Chairman is cultivating a
product development team that will be self sufficient and can work with minimal
supervision. 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 and retain qualified personnel.
45
WE MAY HAVE INCREASING DIFFICULTY TO ATTRACT AND RETAIN 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 continue obtaining 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.
LIKE ANY TECHNOLOGY COMPANY, PROPRIETARY RIGHTS MUST BE ONE OF THE MATERIAL
FACTORS TO OUR SUCCESS. PROPRIETARY RIGHTS ARE SUBJECT TO VARIOUS LIMITATIONS,
POTENTIAL FOR AVOIDANCE, MISAPPROPRIATION OF THOSE RIGHTS OR CLAIMS OF
INFRINGEMENT OR LEGAL ACTIONS.
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, and have to date filed six pending patent
applications in the United States, the European Union, Canada, and Japan.
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. Should an
infringement claim be filed, we would investigate the validity of the claim and,
if we believed the claims to have merit, respond through licensing or other
appropriate actions. To the extent claims relate to technology included in
components purchased from third party vendors for incorporation into the
products we are developing, we would forward those claims to the appropriate
vendor. If we or our component manufacturers were unable to license or otherwise
provide any necessary technology on a cost-effective basis, we could be
prohibited from marketing products containing that technology, incur substantial
costs in redesigning products incorporating that technology, or incur
substantial costs in defending any legal action taken against us.
OUR SUCCESS IN THE FUTURE WILL DEPEND UPON CONTINUING OUR DILIGENT MANAGEMENT.
Our strategy envisions a period of expansion of operations that may put a strain
on our administrative and operational resources. To effectively manage this
process will require us to continue and 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 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
46
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.
Our operations depend upon obtaining adequate supplies of materials, parts and
equipment on a timely basis from third parties. In particular, there are only a
few manufacturers worldwide of particle accelerators and gamma ray detectors,
sophisticated and expensive equipment which are the key components of our
products. 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.
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 the
initial model of our CarBomb Finder with an 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.
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.
FORMER DIRECTOR'S OUTSIDE LEGAL PROCEEDINGS WERE NOT PROMPTLY DISCLOSED TO THE
PUBLIC.
Mr. Gregory F. Gilbert, a former director of ours, was involved in several legal
proceedings that were not disclosed by us in various reports with the SEC until
February 2003 when we became aware of them. Details of these legal proceedings
are available in those filings. Shareholders could potentially assert that we
acted negligently in failing to uncover an involvement of a director personally
in such legal proceedings.
CONCENTRATION OF OWNERSHIP IN OUR MANAGEMENT AND DIRECTORS MAY REDUCE THE
CONTROL BY OTHER STOCKHOLDERS OVER THE COMPANY.
Our executive officers and directors own or exercise full or partial control of
approximately 40% of our outstanding common stock.
47
As a result, they may have effective control over the Company and other
investors in our common stock may not have much influence on corporate
decision-making. In addition, the concentration of control over our common stock
in the executive officers and directors could prevent a change in control of the
Company even if the Company registers and sells additional shares.
OUR BOARD OF DIRECTORS COULD BECOME STAGGERED SHOULD WE BECOME LISTED ON CERTAIN
NATIONAL SECURITIES EXCHANGES, AND STOCKHOLDERS DO NOT HAVE THE AUTHORITY TO
CALL A SPECIAL MEETING, BOTH OF WHICH MAKE IT MORE DIFFICULT FOR A STOCKHOLDER
TO ACQUIRE CONTROL OF THE COMPANY.
Our Certificate of Incorporation provides for a staggered board of directors
divided into three classes of directors, with one class elected each year by the
stockholders. However, California law does not allow a quasi-foreign California
corporation, such as the Company, to have a staggered board without a
shareholder vote and listing of the corporation on certain national securities
exchanges. Should we become listed on certain national securities exchanges,
stockholders could vote to stagger our board into three classes as provided in
our certificate of incorporation. Our certificate of incorporation also permits
only our board of directors to call a special meeting of the stockholders,
thereby limiting the ability of stockholders to effect a change in control of
the Company. Both of these provisions generally make it more difficult for
stockholders to replace a majority of directors and obtain control of the board.
ELIMINATION OF MONETARY LIABILITY OF OUR CURRENT AND FORMER DIRECTORS MAY
DISCOURAGE LAWSUITS AGAINST DIRECTORS.
Our certificate of incorporation and bylaws contain provisions that eliminate
the liability of directors for monetary damages to the maximum extent permitted
by law. These provisions may discourage stockholders from bringing a lawsuit
against directors and officers for breaches of fiduciary duty and may also
reduce the likelihood of derivative litigation against directors and officers
even though such action, if successful, might otherwise have benefited the
stockholders.
ITEM 3. CONTROLS AND PROCEDURES
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.
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.
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
48
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.
HiEnergy is currently arbitrating a dispute with former consultant, Yeffet
Security Consultants, Inc. ("YSCI"). HiEnergy entered into a consulting
agreement with YSCI in July of 2002. Under the terms of this agreement, YSCI was
to provide consulting services to HiEnergy to further the company's marketing
and business objectives. On October 29, 2003, HiEnergy notified Yeffet Security
Consultants that it was terminating its contract. YSCI alleges that HiEnergy
breached the consulting agreement and seeks to recover $449,540.91. HiEnergy
denies this allegation and intends to vigorously defend itself in arbitration.
From time to time, we may be subject to other routine litigation incidental to
the ordinary course of business.
In addition, although no activity occurred in the period that is the subject of
this report concerning the following matter, the following is repeated here for
reference:
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 takeover 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.
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.
Other legal proceedings are disclosed in our Form 10-KSB, as amended, for the
previous fiscal year and our Forms 10-QSB, as amended, for previous fiscal
quarters of the current year.
49
ITEM 2. CHANGES IN SECURITIES
LIST OF SALES OF UNREGISTERED SECURITIES DURING THE THREE-MONTH PERIOD ENDED
JANUARY 31, 2004
o In March 2004, we issued 40,000 shares of our common stock and 13,333
warrants to purchase common stock with an exercise price of $1.00 to
Jose Manuel Cabrera Venero in exchange for $30,000 in cash, and we
issued 267 warrants to purchase common stock with an exercise price of
$1.00 to Julian Eguizabal Echeverria as compensation for facilitating
the sale. We believe these issuances of securities were exempt under
Regulation S and/or Section 4(2) under the Securities Act.
o In February 2004, we issued 133,333 shares of our common stock and
56,000 warrants to purchase common stock with an exercise price of
$1.00 to the Robert J. Neborsky M.D. Inc., Combination Retirement Trust
in exchange for $100,000 in cash, and we issued 2,667 shares of our
common stock and 26,667 warrants to purchase common stock with an
exercise price of $0.75 to Brian Corday as compensation as a finder for
initiating the discussions. We believe these issuances of securities
were exempt under Section 4(2) under the Securities Act.
o In February 2004, we issued 333,333 shares of our common stock and
686,450 warrants to purchase common stock with at various exercise
prices to Bullbear Capital Partners, LLC in exchange for $150,000 in
cash. We also issued 3,333 shares of our common stock and 15,000
warrants to purchase common stock with an exercise price of $0.45 to
Brian Corday as compensation for facilitating the sale. We believe
these issuances of securities were exempt under Section 4(2) under the
Securities Act.
o In February 2004 we issued 99,332 shares of our common stock to various
purchasers of our common stock as penalty shares for late registration
of their common stock. We believe these issuances of securities were
exempt under Section 3(a)(9) of the Securities Act.
o In February 2004, we issued 25,049 shares of our common stock to
Richard Melnick in a cashless exercise of warrants. We believe the
issuance of securities was exempt under Section 3(a)(9) of the
Securities Act.
o In January 2004, we issued 55,000 shares of our common stock to Stern
Consulting for consulting services. We believe the issuance of
securities was exempt under Section 4(2) of the Securities Act.
o In January 2004, we issued 102,053 shares of our common stock to
Richard Melnick in a cashless exercise of warrants. We believe the
issuance of securities was exempt under Section 3(a)(9) of the
Securities Act.
o In January 2004, we issued a convertible promissory note for $50,000
which is convertible into common stock at $0.45 per share, plus 362,222
warrants to purchase our common stock at various exercise prices to
Richard Melnick, with an option to purchase an addional $300,000
convertible notes and 1,506,667 warrants on the same terms. 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 January 2004, we issued a convertible promissory note for $150,000
which is convertible into common stock at $0.45 per share, plus 520,000
warrants to purchase our common stock at various exercise prices to
Platinum Partners Arbitrage Value Fund LP, with an option to purchase
an additional $850,000 convertible notes and 6,548,148 warrants on the
same terms. 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 January 2004, we issued a convertible promissory note for $185,000
which is convertible into common stock at $0.45 per share, plus 929,111
warrants to purchase our common stock at various exercise prices to
Nicholas J. Yocca, with an option to purchase an additional $400,000
convertible notes and 1,120,000 warrants on the same terms. 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 January 2004, we issued 78,259 shares of our common stock to various
purchasers of our common stock as penalty shares for late registration
of their common stock. 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 January 2004, we issued warrants to purchase 30,000 shares of common
stock with an exercise price of $1.25 per share to Vintage Filings,
LLC. We believe these issuances of securities were exempt under Rule
506 of Regulation D and/or Section 4(2) under the Securities Act.
50
o In December 2003, we issued 42,254 shares of our common stock to E.
Narbaiza in exchange for $30,000 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 December 2003, we issued 33,334 shares of our common stock and 8,334
warrants to purchase common stock with an exercise price of $1.00 per
share to James Hertzog 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 December 2003, we issued 61,242 shares of our common stock to
various purchasers of our common stock as penalty shares for late
registration of their common stock. 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 and
40,000 warrants to purchase common stock with an exercise price of
$1.00 per share to Robert J. Neborsky in exchange for $150,000 in cash,
and we issued 2,000 shares of our common stock at a price of $0.75 per
share and 10,000 warrants to purchase common stock with an exercise
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 44,187 shares of our common stock to
various purchasers of our common stock as penalty shares for late
registration of their common stock. 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 and 8,803
warrants to purchase common stock with an exercise price of $1.00 per
share to each of Keith Moore and Ryan Patch in exchange for $25,000 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.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITYHOLDERS
At the Annual Meeting of Stockholders, all five (5) of the nominees for director
identified in the Company's proxy statement were elected and the Company's 2003
Stock Incentive Plan was approved. The voting was as follows:
FOR AGAINST ABSTAIN
Bogdan C. Maglich 21,640,207 73,880 0
Harb Al Zuhair 21,662,887 51,200 0
David Baker 21,672,887 41,200 0
Robert Drysdale 21,672,887 41,200 0
Whitney Stanbury 21,662,587 51,200 300
Stock Incentive Plan 15,209,728 273,855 98,882
51
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
10.1.2 (13) Addendum No. 2 to Original Lease Agreement dated August 15,
2002, between the Registrant and Del Mar Avionics dated
January 1, 2004.
10.1.3 (13) Addendum No. 3 to Original Lease Agreement dated August 15,
2002, between the Registrant and Del Mar Avionics dated
January 20, 2004.
10.40.3 (12) Amendment of the Promissory Note issued to Yocca, Patch &
Yocca, LLP
10.53.1 Form of Amendment of Warrant dated December 15, 2003 between
HiEnergy Technologies, Inc. and the purchasers of common
stock and warrants
10.58 (12) Form of Stock Purchase Agreement dated October 15 -
December 2, 2003 between HiEnergy Technologies, Inc. and the
purchasers of common stock and warrants.
The following purchasers have executed this form of agreement:
Purchaser Agreement Date No. of Shares Total Purchase Price
- --------- -------------- ------------- --------------------
Luis Lopez Echeto 10/15/2003 31,500 $30,000.60
Carlos S. De La Cuesta Nazabal 10/15/2003 31,500 $30,000.60
Keith & Roberta Moore 11/5/2003 35,212 $25,000.50
Ryan M. & Nancy Wright Patch 11/5/2003 35,212 $25,000.50
Robert J. Neborsky 11/21/2003 200,000 $150,000
James Hertzog 12/2/2003 26,667 $20,000
Barbara Tawil 12/2/2003 6,667 $5,000
10.59 (12) Form of Warrant Agreement dated October 28 - December 2, 2003
between HiEnergy Technologies, Inc. and the purchasers of
common stock and warrants.
The following warrants have been issued in this form:
Holder Issue Date No. of Shares Price Termination
- ------ ---------- ------------- ----- ------------
Julian E. Echeverria 10/28/2003 7,875 $1.25 31/2years
Julian E. Echeverria 10/28/2003 7,875 $1.25 31/2years
Keith & Roberta Moore 11/5/2003 8,803 $1.00 31/2years
Ryan M. & Nancy Wright Patch 11/5/2003 8,803 $1.00 31/2years
Robert J. Neborsky 11/21/2003 40,000 $1.00 31/2years
Brian D. Corday 11/21/2003 10,000 $0.75 31/2years
James Hertzog 12/2/2003 6,667 $1.00 31/2years
Barbara Tawil 12/2/2003 1,667 $1.00 31/2years
10.60 (12) Letter Agreement between SBI - USA LLC and HiEnergy
Technologies, Inc. dated August 1, 2003
10.61 (13) Promissory Note issued to Bogdan Maglich by HiEnergy
Technologies, Inc.
10.62 (13) Note Purchase Agreement dated January 16, 2004 between
HiEnergy Technologies, Inc. and Platinum Partners Value Fund
LP, with attached Form of Convertible Note and Warrant
10.63 (13) Note Purchase Agreement dated January 31, 2004 between
HiEnergy Technologies, Inc. and Richard Melnick with attached
Form of Convertible Note and Warrant
10.64 (13) Stock Purchase Agreement dated February 9, 2004 between
HiEnergy Technologies, Inc. and Bullbear Capital Partners, LLC
with attached Form of Warrant
52
10.65 (13) Letter Agreement between KCSA Public Relations Worldwide and
HiEnergy Technologies, Inc. dated January 6, 2003
10.66 (13) Assignment of Patent Rights by Dr. Bogdan C. Maglich to
HiEnergy Microdevices, Inc. dated March 26, 2002.
10.66.1 (13) Assignment of Patent Rights from HiEnergy Microdevices, Inc.
to HiEnergy Technologies, Inc. dated November 17, 2003.
10.67 (13) Assignment of Patent Rights by Dr. Bogdan C. Maglich to
HiEnergy Technologies, Inc. dated November 17, 2003
10.68 (13) Employment Agreement between HiEnergy Technologies, Inc. and
Ioana C. Nicodin dated February 3, 2004
10.69 (13) Note Purchase Agreement dated January 28, 2004 between
HiEnergy Technologies, Inc. and Nicholas J. Yocca with
attached Form of Convertible Note and Warrant
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.
(12) Filed on December 16, 2003 as an exhibit to HiEnergy Technologies'
quarterly report on Form 10-QSB for the fiscal quarter ended October 31, 2003,
and incorporated herein by reference.
(13) Filed on February 25, 2004 as a like numbered exhibit to HiEnergy
Technologies' current report on Form 8-K.
(B) REPORTS ON FORM 8-K
On November 6, 2003, we filed a report on Form 8-K dated October 30, 2003. The
report disclosed that HiEnergy Technologies, Inc. was featured on Fox News
Channel's national investigative report on new cutting-edge technologies
currently in development for airport security.
On November 12, 2003, we filed a report on Form 8-K dated November 7, 2003. The
report disclosed that HiEnergy Technologies, Inc. held its Annual Meeting of
Stockholders on Friday, November 7, 2003, and that the entire report on the
meeting can be viewed on HiEnergy's website.
53
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HIENERGY TECHNOLOGIES, INC.
Date: March 16, 2004 By: /s/ B. C. Maglich
-------------------- ------------------------
Name: Bogdan C. Maglich
Title: Chief Executive
Officer and
President
54