U.
S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
  FORM
10-K
  (Mark
One)
 x           ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
fiscal year ended December 31, 2008
   ̈           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
transition period from ___________ to _____________
  Commission
File Number 000-30291
  HEMIWEDGE
INDUSTRIES, INC.
 (Name of
small business issuer as specified in its charter)
  Delaware
                03-0453686(State
      or other jurisdiction of
                  incorporation
      or organization)
                (I.R.S.
      Employer
                  Identification
      No.)1011
      Beach Airport Road
                  Conroe,
      Texas 77301
                  (Address of
      principal executive offices, including zip
code)
  Registrant’s
telephone number, including area code:  (936) 539-5770
 Securities
registered pursuant to Section 12(b) of the Act: None
 Securities
registered pursuant to Section 12(g) of the Act:  Common Stock, $.001 par
value
 ___________________
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  ̈Yes Nox
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act:  ̈Yes Nox
  Indicate
by check mark whether the registrant(1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 day. xYes ̈No
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy ir information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 if the Exchange Act.
  Large
      accelerated filter  ̈
                
                Accelerated
      filter  ̈Non-accelerated
      filter    ̈
                (Do
      not check if a smaller reporting company)
                
                Smaller
      reporting company x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.  Yes   ̈  No  x
  As of
April 7, 2009, 24,004,086 shares of our common stock were issued and
outstanding.
 
 Documents
Incorporated by Reference:      None.
  
  PART
I
  Hemiwedge
Industries, Inc., including all its subsidiaries, are collectively referred to
herein as “Hemiwedge Industries,” “Hemiwedge,” “the Company,” “us,” or
“we”.
  Item
1.  DESCRIPTION OF BUSINESS
  Overview
 
 Hemiwedge
Industries, Inc. is a Texas based energy field services
company.  Hemiwedge is a holding company that, through its subsidiary
operates a valve product line. Hemiwedge seeks to leverage its existing
infrastructure, expertise, and customer channels to grow its business and
introduce new product line extensions of the Hemiwedge® technology to the
energy, pipeline, process, mining and power markets.
 
 We
currently employ 28 people. Our executive offices are located at 1011 Beach
Airport Road, Conroe, Texas 77301. Our telephone number is (936) 539-5770 and
our Internet address is www.hemiwedge.com.
 
 Valve
Product Technology – Hemiwedge Valve Corporation
 
 We formed Hemiwedge Valve Corporation
(“HVC”) as a wholly-owned subsidiary to develop and commercialize a new patented
technology addressing what we believe to be a significant opportunity in the
global valve market.
 
 Our product line, known as the
Hemiwedge® Cartridge valve, is a quarter-turn hemispherical wedge valve
engineered to provide what we believe are substantial technological improvements
compared with what is available in the marketplace today, such as traditional
butterfly, ball, and gate valve designs.
 
 We
believe that the patented design of the Hemiwedge® Cartridge valve combines the
benefits of quarter-turn valves with the durability of gate valves. The
Hemiwedge® Cartridge valve has a non-rotating core which guides the fluid flow
through the valve to the Hemiwedge® itself. This is a hollow hemisphere where
the inner and outer walls are slightly offset, having non-concentric centers,
producing a hemispherical wedge shape - the “Hemiwedge®.” Operation of the valve
rotates the Hemiwedge®, a quarter-turn, moving it between the core and valve
seat, thus controlling the flow. We believe that these design features in the
combination of the Hemiwedge® shut off and stationary core make the Hemiwedge®
Cartridge valve unique.
 
 We
believe that the Hemiwedge® Cartridge valve will offer substantial improvements
over currently available valve technologies offered by our competition as well
as a great value proposition to future customers as a result of the following
improvements:
 
 New
cartridge replacement design reduces maintenance downtime and minimizes supply
disruptions
 
 Our new
top-entry cartridge design has all of the internal parts of the valve affixed to
the bonnet. Therefore, once the bonnet is removed with top-entry ease for
in-field maintenance, all the internals are removed as well, including the
seals. A new pre-certified replacement cartridge can be installed without
removing the valve body from its line of service. We believe this represents a
substantial reduction in maintenance and service downtime from a few days to a
few hours, depending on the application, location and size. We also believe this
is a significant cost-reduction benefit to users, especially in severe service
applications such as entrained solids, sour gas gathering, and CO2 flooding
where valves fail frequently and supply disruption from shutting down a line
during service may result in significant costs and loss of
revenues.
  2
  
 
 Reduced
failure frequency rates from superior design
 
 We
believe many times when valves “break,” it is usually due to leaks caused by
leaking seals within a valve. Most ball valves, by example (see “Figure 2”),
have more turbulent flow patterns where the fluid within the valve comes into
direct contact with the seals during modulation, actuation and service. Our
Hemiwedge® Cartridge valve seals (see “Figure 1”) are not placed within the flow
path and therefore we believe our valve is more durable, lasts longer, and will
not encounter seal damage as frequently as currently available valve products as
a result of its protected sealing surfaces. We believe that this product
advantage will be more evident in severe and critical service
applications.
  Figure 1, shows the
      transition between on and off in a Hemiwedge® Cartridge valve. This
      demonstrates how the stationary core and moving Hemiwedge® guides the flow
      past the seal face with a minimum of flow turbulence. This protects the
      sealing surfaces when handling abrasive or corrosive
    fluids.
                
                Figure 2, shows the flow
      through a ball or plug valve. Both the inlet and the outlet flow pass
      across the sealing surfaces, with the ball moving across the main flow
      path. This highly turbulent flow action causes premature failure of the
      seals in most severe
applications.
 
 Fiscal
2008 and Fiscal 2009 Developments
 
 Sale
of Shumate Machine Works’ Assets—Discontinued Operations
 
 On
October 8, 2008, we, and our wholly owned subsidiary Shumate Machine Works, Inc.
(“Machine Works”) consummated the sale of substantially all of Machine Works’
assets to American International Industries, Inc. (“Purchaser”). The sale was
effected pursuant to an asset purchase agreement (the “Purchase Agreement”)
pursuant to which Machine Works transferred substantially all of its assets and
certain enumerated liabilities to Purchaser. The aggregate purchase price was
$6,703,749 consisting of assumption by Purchaser of (i) $5 million of promissory
notes due Stillwater National Bank and Trust Company and (ii) $1,703,749 of
certain other liabilities, including without limitation, accounts payable of
Machine Works. In January 2009 we also issued 1,401,170
shares of our common stock to Purchaser as a purchase price adjustment of
$420,351.
  3
  License
of Certain Hemiwedge Assets
 
 On
October 15, 2008, we, and our wholly owned subsidiary Hemiwedge Valve
Corporation (“HVC”), entered into a Transfer Agreement with Tejas Research &
Engineering, L.P. (“Tejas”) pursuant to which we and HVC transferred certain
assets and granted certain license rights related to our Hemiwedge Valve
Technology to Tejas in exchange for $3.5 million in cash at closing and a 5 year
common stock purchase warrant to purchase 2,443,269 shares of our common stock
at a purchase price of $0.25 per share. The transfer of assets was consummated
pursuant to the Hemiwedge Intellectual Property Agreement between HVC and Tejas,
under which Tejas received (i) a worldwide, perpetual, fully paid up,
irrevocable and sublicensable license for the intellectual property related to
HVC’s hemispherical wedge valves for the markets, or Fields of Use, of Sub-Sea
and Offshore, Drilling and Workover, above 5,000 PSI, Surface Safety valves and
all Downhole applications, all together known as the “Combined Fields of Use;”
(ii) assignment of two pending U.S. patent applications related to specialty
downhole valves and (iii) the use of the Hemiwedge registered trademark in their
Combined Fields of Use subject to our oversight.
 
 HVC still
retains all rights to the original Hemiwedge Cartridge valve product targeted
for the API 6D and ANSI valves in the oil & gas production, pipeline,
refining and power markets.
 
 Amended
Stillwater Credit Facility
 
 On
January 25, 2008, we entered into an Amended and Restated Loan Agreement with
Stillwater National Bank and Trust Company (the “Amended Loan
Agreement”).  On October 19, 2005 we entered into that certain
Agreement (as reported in our Current Report on Form 8-K dated October 19, 2005)
with Stillwater, which Agreement was amended by a certain First Amendment to
Agreement and Guarantors’ Consent dated October 19, 2006, as amended by a
certain Second Amendment to Agreement dated effective January 19, 2007
(collectively, the “Prior Agreement”).
 
 The
Amended Loan Agreement amends and restates the Prior Agreement as
follows:
 
 1.           Term
Loan.  Our prior Term Note dated October 19, 2005 in favor of
Stillwater had an outstanding principal balance of $3,003,998 (as of January 25,
2008) and a maturity date of April 19, 2008.  Stillwater loaned us
(along with our co-borrowers Shumate Machine Works, Inc. and Hemiwedge Valve
Corporation) $3,329,000 pursuant to a new term note dated January 25, 2008,
which funds advanced under the new term note were used to refinance the old term
note and provide working capital.  The new term note requires us to
make 26 equal monthly payments (beginning on February 28, 2008) in an amount
sufficient to fully amortize principal and interest on the amended and restated
note over 64 months.  The new term note is due and payable on April
19, 2010.  The new term note bears interest at a rate equal to the
prime rate plus two percent, and it is secured by a first priority security
interest in all of our existing and future assets as well as a security interest
in certain personal assets of Larry Shumate.
 
 2.           Revolving
Loan.  Our prior revolving promissory note dated October 19,
2005 in favor of Stillwater, had an outstanding principal balance of $893,676
(as of January 25, 2008) and a maturity date of April 19,
2008.  Stillwater loaned us (and the other co-borrowers set forth
above) $1,000,000 pursuant to a new revolving promissory note dated January 25,
2008, which funds advanced under the new revolving promissory were used to
refinance the old revolving promissory note and provide working
capital.  The initial balance on the new line of credit was equal to
the balance of our previous line of credit with Stillwater ($893,676 principal
balance as of January 25, 2008).  The advances available under the new
revolving promissory note are limited to a borrowing base of the sum of (a) 85%
of eligible accounts receivable, and (b) 50% of eligible
inventory.  The new revolving promissory note bears interest at a rate
equal to the prime rate plus two percent, and it is secured by a first priority
security interest in all of our existing and future assets as well as a security
interest in certain personal assets of Larry Shumate. On the 28th day of
each month, beginning January 28, 2008, we will pay all interest accrued on the
new revolving promissory note.  The amount we can borrow on the line
of credit is subject to qualifying accounts receivable and
inventory.  The new revolving promissory note will mature and become
fully due and payable on April 19, 2009.
  4
  On
September 30, 2008, the amounts due under this facility were consolidated under
a Loan and Consolidation Agreement, as discussed below. All amounts due under
the term note and the revolving note for this facility were assumed on October
8, 2008, by the purchaser of substantially all of the assets held by our
subsidiary Shumate Machine Works, Inc.
 
 In March
2008, we borrowed a total of $25,000 from a third party under a promissory note.
This note is due on demand and bears interest at 12% per annum. The principal
plus interest in the amount of $1,500 was paid in full by us in October
2008.
 
 In March
2008, we borrowed $196,118 from several directors of the Company. The loan
principal was due on demand and had an interest rate of 12% per annum. The
principal plus interest in the amount of $1,088 was paid in full by us in May
2008.
 
 On May
23, 2008, we entered into a Loan Agreement with Shumate Machine Works, Inc.,
Hemiwedge Valve Corporation (collectively, the “Borrowers”), Larry Shumate,
Matthew C. Flemming and Russ Clark (collectively, the “Guarantors”) and
Stillwater National Bank and Trust Company pursuant to which Stillwater agreed
to lend us $625,000 for working capital. The promissory note bears interest at a
rate equal to the prime rate plus two percent and has a maturity date of August
31, 2008. The interest rate as of September 30, 2008, was 7%. In addition, the
loan is secured by a security agreement of even date therewith and a limited
guaranty agreement executed by each of the Guarantors. Under the security
agreement, the Borrowers granted Stillwater a security interest in all accounts
and accounts receivable, all capital assets, general intangibles, inventory and
all of the stock of Shumate Machine Works and Hemiwedge Valve Corporation held
by us. Each Guarantor guaranteed payment and performance up to 50% of the
outstanding indebtedness at the time payment becomes due and
payable.
 
 On June
26, 2008, we entered into an Amended and Restated Loan Agreement with Stillwater
National Bank with respect to the May 23, 2008, loan agreement to increase the
size of the loan to $1,140,000 and to extend the maturity date to September 26,
2008. The Borrowers executed an Amended and Restated Note on June 26, 2008, in
the amount of $1,140,000 in connection with such amended loan agreement. This
has been accounted for as a modification of debt. On September 30, 2008, the
amounts due under this facility were consolidated under a Loan and Consolidation
Agreement, as discussed below. All amounts due under the term for this facility
were assumed on October 8, 2008, by the purchaser of substantially all of the
assets held by our subsidiary Shumate Machine Works, Inc.
 
 On
September 30, 2008, we entered into a Loan and Consolidation Agreement with
Stillwater National Bank and Trust Company. This Loan and Consolidation
Agreement consolidated all amounts owed to Stillwater (i) under the January 2008
Amended Loan Agreement; (ii) under the June 2008 Amended and Restated Loan
Agreement and (iii) pursuant to overdrafts by us in certain demand deposit
accounts (the “Overdraft”). The Overdraft and interest owed on the January 2008
term note were consolidated into two promissory notes totaling $1,500,000. There
are no requirements to maintain liquidity and minimum debt coverage ratios (or
other financial covenants) under the Loan and Consolidation
Agreement.  On October 17, 2008, we paid $749,000 in principal and
$2,330 in accrued interest, leaving a principal balance due of
$751,000.  In addition, a reserved cash account was established to
fund the principal and interest on the remaining loan for the initial
year.  The original reserve was $92,775.
 
 We
anticipate that increasing energy commodity prices, including prices of oil and
natural gas, should continue to cause our customers to increase their drilling
and other exploration activities.  As a result, we anticipate seeing
increased oil rig counts as well as a renewal of drilling and production
activity in previously dormant areas.  We believe that such an
increase in activity would result in increased demand for our energy related
field service products during the 2009 fiscal year.  In addition, we
anticipate that our recent commercialization of the Hemiwedge® Cartridge valve
product line will enhance our profitability, although there can be no assurance
thereof.
 
 Transactions
Relating to Beach Road Facility
 
 On May
15, 2008, our wholly owned subsidiary, Shumate Machine Works entered into a
series of simultaneous transactions pursuant to which it purchased the property
located at 1011 Beach Airport Road, Conroe, Texas 77301, underlying its lease
(the “Original Lease”) with Brewer Family Charitable Remainder Annuity Trust
#1.  The terms of the Original Lease included an option to purchase
the underlying property.  Shumate Machine Works purchased the property
for $1,726,949 pursuant to a warranty deed.
  5
  Concurrently
with the purchase of the property, Shumate Machine Works sold this property to
Trader Properties LLC, which Trader Properties immediately leased to Hemiwedge
Valve Corporation.  Shumate Machine Works sold the property to Trader
Properties for an aggregate purchase price of $2,180,000 pursuant to a general
warranty deed with vendor’s lien.  As such, Shumate Machine Works
received net cash of $319,617.   These proceeds were used to pay
back certain indebtedness.
 
 The terms
of the Commercial Lease Agreement between Hemiwedge Valve Corporation and Trader
Properties is for a term of 10 years with a monthly rent of $24,000 per month,
which shall be increased by 2% each year for the term of the
lease.  Hemiwedge Valve Corporation is required to maintain public
liability insurance of not less than $1,000,000 during the term of the
lease.  To secure performance under the commercial lease, Hemiwedge
Valve Corporation granted Trader Properties a lien and security interest against
all of its’ non-exempt personal property that is in the leased
premises.
 
 We
guaranteed payment and performance of the lease pursuant to a Guaranty
Agreement.  In addition, we issued Trader Properties a five year
warrant to purchase 100,000 shares of its common stock at an exercise price of
$0.25 per share prior to June 15, 2008.
 
 Business
Development
 
 Organization
 
 Our
predecessor, Global Realty Management Group, Inc., or GRMG, was incorporated in
the State of Florida in 1997.  In June 2002, GRMG reincorporated under
the laws of the State of Delaware from the State of Florida pursuant to a merger
with a newly formed Delaware corporation.  Under the terms of this
reincorporation merger, GRMG changed its name from “Global Realty Management
Group, Inc.” to “Excalibur Industries, Inc.” in connection with merging with the
Excalibur operations.  In October 2005, we changed our name from
“Excalibur Industries, Inc.” to “Shumate Industries, Inc.”  In
February 2009, we changed our name from “Shumate Industries, Inc.” to “Hemiwedge
Industries, Inc.” to emphasize and focus on our valve product technology after
the recent sale of assets related to our contract machining business discussed
in the paragraph below.
 
 Sale
of Shumate Machine Works’ Assets—Discontinued Operations
 
 On October 8, 2008, we, and our wholly
owned subsidiary Shumate Machine Works, Inc. (“Machine Works”) consummated the
sale of substantially all of Machine Works’ assets to American International
Industries, Inc. (“Purchaser”). The sale was effected pursuant to an asset
purchase agreement (the “Purchase Agreement”) pursuant to which Machine Works
transferred substantially all of its assets and certain enumerated liabilities
to Purchaser. The aggregate purchase price was $6,703,749 consisting of
assumption by Purchaser of (i) $5 million of promissory notes due Stillwater
National Bank and Trust Company and (ii) $1,703,749 of certain other
liabilities, including without limitation, accounts payable of Machine
Works.  We also issued 1,401,170 shares of our common stock to
Purchaser as a purchase price adjustment of $420,351.
 
 Acquisition
of Hemiwedge Assets
 
 On
December 5, 2005, we acquired the intellectual property rights to the Hemiwedge®
line of products, including the Hemiwedge® valve, from Soderberg Research and
Development, Inc. and certain of its affiliates.  The intellectual
property rights acquired consist of all patents, trademarks, and internet
website relating to the Hemiwedge® product line.  For these
intellectual property rights, we paid $138,500 in cash and a two-year, six
percent (6%) promissory note in the principal amount of $100,000, payable in 24
equal installments of principal and interest.  In addition, we agreed
to deposit: (a) $72,000 into an escrow account, the property of Soderberg
Research Inc., to be paid in the form of a monthly advance in the amount of
$3,000 for each month of the 24 month period beginning with the month
immediately following the closing date; and (b) three percent (3%) of the net
sales proceeds collected from customers from: (i) gross revenue from sales of
products to which the acquired intellectual property relates, less (ii) sales
and/or use taxes, import and/or export duties, outbound transportation costs,
and amounts allowed or credited due to returns, which payments shall begin two
years after the closing date and continue until March 29, 2013.  The
$72,000 in monthly advances shall be credited against the three percent (3%) of
the net sales proceeds.
  6
  Reorganization
 
 On
October 19, 2005, we completed a restructuring of our company, resulting in a
significant reduction of our outstanding debt and providing us with a
strengthened balance sheet and reduced debt servicing requirement. The
restructuring was effected through an out-of-court restructuring, or
“recapitalization plan,” which consisted of the following:
 
 ·
              an
      agreement to amend and restate a series of notes issued to Stillwater
      National Bank, or Stillwater, into one term
  note;
 ·
              the
      extension of our current line of credit with
  Stillwater;
 ·
              the
      issuance of a convertible note to
Stillwater;
 ·
              the
      issuance of a note, by Stillwater, to our Chief Financial Officer to
      advance funds to purchase shares of our common stock for
      $250,000;
 ·
              the
      conversion of a portion of our debt to Stillwater into 20% of our
      then-outstanding common stock after giving effect to the
      restructuring;
 ·
              our
      reacquisition of the capital stock of our operating subsidiary, Shumate
      Machine Works;
 ·
              a
      release from Stillwater for any indebtedness not covered
      above;
 ·
              the
      exchange of our outstanding unsecured notes, including principal and
      accrued interest, for our common stock;
and
 ·
              the
      grant of restricted stock awards to our executive officers, in return for
      their personal guarantees on new bank debt, and to our non-employee
      directors.
 
 In
addition, in connection with the recapitalization, we changed our name to
“Shumate Industries, Inc.” and effected a 1-for-7 reverse stock split of our
then outstanding shares of common stock.  The recapitalization plan,
the name change, the reverse stock split, the adoption of our 2005 Stock
Incentive Plan, and the re-election of our directors were all approved at a
special meeting of our stockholders on October 19, 2005.
 
 The
recapitalization plan for achieving our financial goals closed on October 19,
2005 and consisted of the following transactions (the “restructuring
transactions”):
 
 Amended and Restated Term
Note.  Stillwater has amended and restated a series of notes in
the current aggregate principal amounts of approximately $9,413,000 into an
amended and restated note in the principal amount of approximately
$5,600,000.  The amended and restated note requires interest only
payments for the six months following closing, and thereafter, requires us to
make 24 equal monthly payments in an amount sufficient to fully amortize
principal and interest on the amended and restated note over 120
months.  The amended and restated note is due and payable 30 months
after closing, at which time, we will be required to make a balloon payment of
the entire outstanding principal balance and all accrued
interest.  The note bears interest at a rate equal to the prime rate
plus two percent, and it is secured by a first priority security interest in all
of our existing and future assets.  The proceeds of this note were
applied as follows: $303,000 to purchase machines from Larry C. Shumate, our
President and Chief Executive Officer, and from A. Earl Swift, a former
director; $100,000 to purchase the capital stock of Shumate Machine Works; and
the remainder was applied to our existing indebtedness to
Stillwater.
 
 Revised Line of
Credit.  Stillwater has extended our current revolving line of
credit in an amount of up to $1,000,000 for one year.  The initial
balance on the line of credit is the balance of our existing line of credit with
Stillwater, less the excess transferred to the amended and restated
note.  The advances available under the line of credit are limited to
a borrowing base of the sum of (a) 80% of eligible accounts receivable, and (b)
50% of eligible inventory.  The line of credit bears interest at a
rate equal to the prime rate plus two percent, and it is secured by a first
priority security interest in all of our existing and future
assets.  We failed to repay the line of credit on October 19, 2006, as
we were required to do by our agreement with Stillwater.  As of
October 19, 2006 we and Stillwater entered into a First Amendment to Agreement
and Guarantors’ Consent pursuant to which Stillwater agreed to redefine the line
of credit maturity date to January 19, 2007, which was subsequently extended to
April 19, 2008.
  7
  Convertible
Note.  We issued a convertible note to Stillwater in the
principal amount of $2,500,000. The principal and accrued interest on the
convertible note is convertible, at Stillwater’s option, into shares of our
common stock at a conversion rate of $1.00 per share (on a post reverse stock
split basis).  The convertible note matures on the earlier of 60
months from the date of issuance or the date on which it is fully converted into
our common stock.  Interest on the convertible note shall accrue from
the date of closing until the earlier of conversion or 24 months, at which time
the accrued interest was capitalized into principal.  Beginning at the
end of the ninth quarter, we are obligated to make quarterly interest payments
on the convertible note.  The convertible note bears interest at a
rate equal to the prime rate plus two percent, and it is secured by a first
priority security interest in all of our assets.  We have agreed to
include the shares of common stock underlying the convertible note on any
eligible registration statement that we may file with the Securities and
Exchange Commission under the Securities Act of 1933 in the next five
years.
 
 On April
13, 2006, we entered into a letter agreement with Stillwater pursuant to which
Stillwater agreed to accept $500,000 from us in full satisfaction of the secured
convertible promissory note, subject to certain conditions.  On August
9, 2006, the letter agreement was amended to increase the payment by $25,000 to
$525,000 if payment was made between September 2, 2006 and December 1, 2006 and
by $50,000 to $550,000 if payment was made between December 2, 2006 and March 1,
2007.  On December 1, 2006 we repaid the secured convertible
promissory note in full.
 
 CFO
Note.  Stillwater has loaned $350,000 to our Chief Financial
Officer, Matthew C. Flemming, to purchase an aggregate of 250,000 newly issued
shares (post reverse stock split) of our common stock, representing
approximately 2.16% of our outstanding common stock after giving effect to the
restructuring, for a total purchase price of $250,000.  The balance
was applied to the existing personal indebtedness of Mr. Flemming to Stillwater
of approximately $10,000,000 under a personal guarantee of our indebtedness to
Stillwater.  Stillwater has released Mr. Flemming from the remainder
of his personal guarantee.
 
 Conversion of Prior Bank
Debt.  Stillwater has exchanged $2,368,000 of our outstanding
indebtedness to Stillwater for 2,368,000 newly issued shares of our common stock
(on a post reverse-split basis), representing not less than 20% of the
outstanding shares of our common stock after giving effect to the
restructuring.  We have agreed to include these shares of common stock
on any eligible registration statement that we may file with the Securities and
Exchange Commission under the Securities Act of 1933 in the next five
years.
 
 Releases.  Stillwater
has released us and our Chief Financial Officer, Matthew C. Flemming, from our
respective obligations of the prior debt to Stillwater, except to the extent
that such prior debt is amended and restated, issued, or guaranteed as set forth
above.
 
 Unsecured Note Exchange
Offer.  Our unsecured note holders have exchanged all of our
outstanding unsecured notes, with interest rates ranging from 6% to 12% and all
currently due and owing, for approximately 1,691,310 newly issued shares of our
common stock (on a post reverse-split basis), representing approximately 14.61%
of the outstanding shares of our common stock after giving effect to the
restructuring.
 
 Restricted Stock
Awards.  Our board of directors have granted restricted stock
awards of approximately 3,950,000 shares of newly issued common stock (on a post
reverse-split basis) to our executive officers and our non-employee directors,
representing approximately 34.12% of the outstanding shares of our common stock
after giving effect to the restructuring.  These shares vested on the
closing of the restructuring.
 
 As previously reported on a current
report on Form 8-K, on April 28, 2005, Excalibur Holdings, our bankrupt
subsidiary and holder of 100% of the common stock of Shumate Machine Works,
Inc., our sole operating subsidiary, received notice from Stillwater National
Bank that Stillwater intends to dispose of the capital stock of Shumate Machine
Works in a private sale after May 9, 2005 pursuant to the Oklahoma Uniform
Commercial Code.  As part of the restructuring, Stillwater transferred
100% of the capital stock of Shumate Machine Works to us.
 
 A
complete description of the restructuring plan is set forth in our definitive
proxy statement for the October 19, 2005 special meeting of stockholders, which
has been filed with the Securities and Exchange Commission.
  8
  Bankruptcies
 
 On
December 31, 2003, three of our operating subsidiaries, Excalibur Steel,
Excalibur Services, and Excalibur Aerospace, each filed a voluntary petition for
protection under Chapter 7 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court, Southern District of Texas.  On July 26, 2004, the
United States Bankruptcy Court, Southern District of Texas, discharged Excalibur
Steel and Excalibur Aerospace of all of its debts and liabilities pursuant to
Chapter 7 of the U.S. Bankruptcy Code, and on August 3, 2004, the United States
Bankruptcy Court, Southern District of Texas, discharged Excalibur Services of
all of its debts and liabilities pursuant to Chapter 7 of the U.S. Bankruptcy
Code.  As a result of the discharge of these liabilities, we recorded
$5,218,883 in debt forgiveness income in 2004.
 
 On March
9, 2005, Excalibur Holdings, Inc., our wholly-owned subsidiary and the former
parent corporation of Shumate Machine Works, Inc., filed a voluntary petition
for protection under Chapter 7 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court, Southern District of Texas.  On November 30,
2005,the United
States Bankruptcy Court, Southern District of Texas, discharged Excalibur
Holdings of all of its debts and liabilities pursuant to Chapter 7 of the U.S.
Bankruptcy Code. As a result of the discharge of these liabilities, we recorded
$1,837,295 in debt forgiveness income in 2005.
 
 The
Company currently has one wholly-owned operating subsidiary.  Each of
the following former subsidiaries of the Company has been dissolved: Excalibur
Steel, Excalibur Services, Excalibur Aerospace, Excalibur Holdings and Shumate
Machine Works.
 
 Our
Markets
 
 We
believe that the industrial valve market is large and growing. According to a
2008 report from The McIlvaine Company, the dollar value of industrial valve
shipments in 2007 was projected at approximately $8.5 billion in the United
States, up almost 4% from 2006, and $44.8 billion worldwide, up approximately 4%
from 2006.
 
 The
McIlvaine Company report was not prepared for us nor has either company
consented to the use of this information in our report; rather, these reports
are available for public use.
 
 Our
Strategy
 
 Strategies
to achieve our growth objectives include the following:
 
 Commercializing and growing our
proprietary new Hemiwedge® valve technology via the Cartridge valve product line.  In late December
2006 we launched our Hemiwedge® technology with the
Hemiwedge® Cartridge valve product line, a surface-level engineered valve,
targeting oil and gas, process and pipeline applications.  In 2007 we
developed test installs in specific applications and developed a users
list.  In 2008 we received several product certifications and
approvals including API 6D monogram and continue to introduce the product into
new applications appropriate for the technology.
 
 Developing strategic alliances with
other companies to leverage our valve technology into market segmentswhere we have little or
nomarket
infrastructure.We intend to
license and partner our Hemiwedge® technology in market verticals where we have
little or no market infrastructure to maximize the technology’s value. For
example, the Tejas transaction we licensed Hemiwedge® technology for
markets HVC does not target and will allow, via corporate partners, the
potential to accelerate the technology’s adoption.  Also, in early
2009 we signed an agreement with Enertech, the nuclear division within Curtis
Wright Flow Control (NYSE:  CW).
 
 Acquiring other technology-oriented
products to leverage our asset base, manufacturing infrastructure, market
presence and experienced personnel.We have
extensive experience in manufacturing and machining products, and we have a
reputation for providing quality products and services in the energy field
services market.  We have an existing base of customers and existing
distribution channels in this market.  We intend to combine our
experience, reputation, customer base, and distribution channels with our
expertise and knowledge of the industry to market and distribute other
technology-oriented product lines for this customer base and through these
distribution channels.
 
 Sales
and Marketing; Customers
 
 For our
valve division, we intend to target the severe service applications in oil and
gas, process and  pipeline markets where there is a demand for
engineered valves. These target markets seek supply disruption mitigation and
rapid maintenance benefits that our Hemiwedge® Cartridge valve system is
designed to provide.  Although we believe that our valve product line
provides significantly improved functionality for higher-end or engineered
severe service applications, we intend to price our valves competitively
relative to other engineered valve manufacturers to establish market
share.  In addition to leveraging our existing customer base and
distribution channels to market and distribute the valve product line, we have
identified a network of established independent representative companies to
market and distribute the valves on a success fee basis.  We intend to
complement this effort with direct employee salespersons, product catalogs, web
site, direct mail, trade shows and sales support professionals that can travel
to sales locations to consummate sales.
  9
  Raw
Materials
 
 The
principal raw materials that we use are carbon steel, aluminum, stainless steel,
nickel, brass, titanium and various special alloys and other
metals.  The metals industry as a whole is cyclical, and at times
pricing and availability of raw materials in the metals industry can be volatile
due to numerous factors beyond our control, including general, domestic and
international economic conditions, labor costs, production levels, competition,
import duties and tariffs and currency exchange rates.  This
volatility can significantly affect the availability and cost of raw materials,
and may, therefore, adversely affect our net sales, operating margin, and
profitability.  On average, pricing for raw materials has fluctuated
about thirty percent annually on a historical basis. During periods of rising
raw materials pricing, we have been able to pass through the increase in cost to
our customers approximately ninety percent of the time.  The remaining
ten percent reflects down-time between reviewing costs on standardized
repetitive work that is not quoted on a monthly basis.  Accordingly,
the increase in the cost of raw materials has had an immaterial effect on our
operations; however, it is possible that we may not be able to pass any portion
of such increases on to our customers in the future.
 
 Competition
 
 Our
business is fragmented and highly competitive industry segments.  We
estimate that there are more than 4,000 valve product manufacturers and
distributors within the United States alone.  We estimate that our
share of the market, based on 2008 revenues, is less than one percent
(1%).  Competition is based primarily on quality, service, price,
performance timeliness and geographic proximity.  We compete with a
large number of other manufacturers  on a national, regional and local
basis, most of which have greater financial resources than we do, and several of
which are public companies.  We also compete with overseas competitors
whose labor costs may be significantly lower than our costs.  We
anticipate the valve product, as it gains market share, will compete with a
large number of companies with international and national capabilities that will
possess greater financial resources.
 
 We
believe that we are able to compete by defining and understanding customer needs
and by offering a proprietary superior product.
 
 Intellectual
Property
 
 As part
of our ongoing research, development, and manufacturing activities, we intend to
seek patents when appropriate on inventions involving new products and product
improvements.  In December 2005, we acquired the intellectual property
rights to the Hemiwedge® line of products, including the Hemiwedge® Cartridge
valve, from Soderberg Research and Development, Inc. and certain of its
affiliates.  These intellectual property rights consisted of two (2)
unexpired United States patents, one (1) expired United States patent, several
pending United States patent applications, and one (1) registered United States
trademark.  We have developed several new inventions to the technology
which have been propagated within numerous new patent applications during the
last few years. We
have also filed international patent applications for some of the inventions
embodied in the pending United States patent applications.
 
 These
intellectual property rights are of considerable importance to the Hemiwedge®
Cartridge valve product line (including the sub sea high pressure valve licensed
to Tejas), and we consider them, in the aggregate, to be material to our valve
technology commercialization plans.  It is possible that these
intellectual property rights may later be invalidated by a court of competent
jurisdiction, and it is also possible that our products or proposed products may
be found to infringe upon the intellectual property rights of
others.
  10
  We also
rely on trade secret protection for our confidential and proprietary
information.  We seek to enter into confidentiality agreements with
our employees, partners, and suppliers.  It is possible, however, that
others will independently obtain similar information or otherwise gain access to
our trade secrets.
 
 Government
Regulation and Environmental Matters
 
 Our
operations are subject to a number of federal, state and local regulations
relating to the protection of the environment and to workplace health and
safety.  In particular, our operations are subject to extensive
federal, state and local laws and regulations governing waste disposal, air and
water emissions, the handling of hazardous substances, painting product on
premises, environmental protection, remediation and workplace
exposure.  Hazardous materials used in our operations include
lubricants and cleaning solvents.
 
 We
believe that we are in substantial compliance with all such laws and do not
currently anticipate that we will be required to expend any substantial amounts
in the foreseeable future in order to meet current environmental or workplace
health and safety requirements.
 
 Although
no environmental claims have been made against us and we have not been named as
a potentially responsible party by the Environmental Protection Agency or any
other entity, it is possible that we could be identified by the EPA, a state
agency or one or more third parties as a potentially responsible party under
CERCLA or under analogous state laws. If so, we could incur substantial
litigation costs to prove that we were not responsible for the environmental
damage.
 
 Safety
 
 We are
committed to emphasizing and focusing on safety in the workplace.  We
currently have a variety of safety programs in place, which include periodic
safety meetings and training sessions to teach proper safety work
procedures.  We have established “best practices” processes throughout
most of our operations to ensure that our employees comply with safety standards
that we establish and to ensure full compliance with federal, state and local
laws and regulations.  In addition, we intend to continue to emphasize
the need for an accident-free workplace.
 
 Risk
Management and Insurance
 
 The
primary risks in our operations are property damage, workers’ compensation, and
third-party bodily injury.  We maintain insurance above certain
self-insured limits for liability for bodily injury, third-party property
damage, and workers’ compensation, all of which we consider sufficient to insure
against these risks.
 
 Employees
 
 We
currently employ 28 people in Conroe, Texas.  Of the total,
approximately 4 are in administration, 5 are in engineering and drafting, and 4
are in sales, marketing and distribution.  None of our employees are
represented by a labor union, and we have not entered into a collective
bargaining agreement with any union.  We have not experienced any work
stoppages and consider the relations with our employees to be good.
 
 Item
1A.  RISK FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
 
 An
investment in our common stock involves a high degree of risk.  You
should carefully consider the risks described below and the other information in
this annual report, including our financial statements and the notes to those
statements, before you purchase our common stock.  The risks and
uncertainties described below are those that we currently believe may materially
adversely affect our company.  Additional risks and uncertainties may
also impair our business operations.  If the following risks actually
occur, our business, financial condition and results of operations could be
seriously harmed, the trading price of our common stock could decline and you
could lose all or part of your investment.
  11
  Our
business might fail from a lack of capital.,
 
 Although
we completed a restructuring of our debt in October 2005, and although we have
increased revenues in each of the last three years, we have still incurred
operating losses in each of the last three fiscal years.  Our ability
to become profitable will depend upon several factors, including whether our
Hemiwedge® valve products are successful in the marketplace.  We
cannot estimate with any certainty the long-term demand for our products and
services or the degree to which we will meet that demand.  If demand
for our products and services does not increase, or if the market for our
products and services declines, we may not be able to earn enough revenue to
generate profits from operations or positive cash flow.
 
 We
may be unable to continue as a going concern in which case our securities will
have little or no value.
 
 Our
independent auditor has noted in its report concerning our financial statements
as of December 31, 2008 and 2007 that we have incurred recurring losses from
operations and have a working capital deficiency, which raises substantial doubt
about our ability to continue as a going concern.  We have incurred
recurring losses from operations in 2008 and 2007, respectively and, we have
negative working capital as of December 31, 2008.  These conditions
raise substantial doubt as to our ability to continue as a going
concern.  We cannot assure you that we will achieve operating profits
in the future.
 
 We
have substantial indebtedness outstanding, and our operations are significantly
leveraged.  If we are unable to repay our debt obligations in a timely
fashion, it could have a material adverse effect on our business and
prospects.
 
 In order
to finance our operations we have incurred substantial indebtedness, including
the debt with Stillwater National Bank which consists of a term loan, as well as
our 2007 bridge financing.  As of December 31, 2008, we owed total
indebtedness of approximately $751,000 to Stillwater National Bank, our senior
lender.  Additionally, we owe our recent bridge loan investors $3.05
million (not including accrued interest accreted to principal). These notes were
due and payable on July 10, 2008, and are currently in default.  Our
failure to make full payment on such maturity date constituted a default under
these notes.  We also are indebted to other lenders for approximately
$200,000.  Our cash flows from operations are currently not sufficient
to service our debt obligations.  If we fail to pay our debt
obligations in a timely fashion, we will be in default under one or more of our
loan agreements.  If we default on our loan obligations with
Stillwater National Bank, it could exercise its rights and remedies under the
loan agreement, which could include foreclosing on all of our
assets.  Any such action would have a material adverse effect on our
business and prospects.
 
 We
will likely need to finance our operations and a full-scale launch of the
Hemiwedge® products through additional bank borrowings or other capital
financings.  If we are unable to obtain additional capital, we may not
be able to adequately fund our Hemiwedge Valve Corporation subsidiary or
continue our business.
 
 We had a
working capital deficit of $4,647,597 as of December 31, 2007 and we had a
working capital deficit of $3,648,630 as of December 31, 2008.  Since
December 31, 2006, we have completed a private placement of our convertible
notes which resulted in net proceeds to us of approximately $2.74 million,
providing us with working capital for the immediate
future.  Currently, we believe that we will not be able to fund our
operations, working capital requirements, and debt service requirements
throughout the 2009 fiscal year with existing working capital and cash flows
generated from operations.  In addition, we will need additional
capital to be able to fund the further development of the Hemiwedge® technology
and the operations of the Hemiwedge® Cartridge valve products.  In
addition, we do not believe that we will be able to conduct a full-scale
expansion of the Hemiwedge® product, including an inventory buildup or an
expansion of the product line, without obtaining additional
financing.
 
 In the
event we seek to expand the rate of Hemiwedge® Cartridge valve’s growth and
scale up of the product line, or in the event that our cash flows from
operations are insufficient to fund our operations, working capital
requirements, and debt service requirements, we would need to raise additional
capital, either by borrowing more money, if possible, or by selling our
securities or seeking out joint venture opportunities.  Any material
additional borrowing or significant capital expenditures require the written
consent of our lender, Stillwater National Bank.  We may not be
successful in raising additional financing as and when we need it.  If
we are unable to obtain additional financing in sufficient amounts or on
acceptable terms, our operating results and prospects could be adversely
affected.
  12
  Our
Hemiwedge Valve Corporation subsidiary is an early stage company with no
significant operating history.
 
 Our
subsidiary, Hemiwedge Valve Corporation, is an early stage company that has not
had significant historical operations. Its primary business purpose is to
develop, manufacture, and market applications of its new valve technology known
as the Hemiwedge® Cartridge valve. The Hemiwedge® Cartridge valve, our
surface-level valve product line targeting the oil and gas, process and pipeline
markets, was launched in late December 2006.  Other applications of
the Hemiwedge® technology are still in the engineering, design, and development
stage. This subsidiary only began generating product revenue in the late fourth
quarter of 2006, and has incurred losses since its formation. As an early stage
company, the prospects for Hemiwedge Valve Corporation are subject to all of the
risks, uncertainties, expenses, delays, problems, and difficulties typically
encountered in the establishment of a new business.  We expect that
unanticipated expenses, problems, and technical difficulties may occur which
would result in material delays in the development and growth of Hemiwedge. We
may not be able to successfully implement our plans for Hemiwedge Valve
Corporation and achieve a significant level of operations.
 
 If
we do not successfully commercialize the Hemiwedge® Cartridge valve product, we
may never achieve profitability in this subsidiary.
 
 We have
incurred substantial expenses to acquire and fund the development of our
Hemiwedge® Cartridge valve product.  We only began generating product
revenue in the late fourth quarter of 2006 in this subsidiary in connection with
the Hemiwedge® Cartridge valve launch in December 2006. Early stage product
lines are subject to inherent risks of failure.  These risks include
the possibilities that the Hemiwedge® valve may not last as long as the products
of our competitors or may not reduce torque as anticipated. Even if the
Hemiwedge® valve technology operates as anticipated, it may not be commercially
successful.  If we are unable to develop the Hemiwedge® product as
anticipated, or if the product is successfully developed but not accepted in the
marketplace, Hemiwedge Valve Corporation may never be profitable.
 
 Our
ability to achieve any significant revenue in Hemiwedge Valve Corporation may
depend on our ability to establish effective sales and marketing
capabilities.
 
 As a
result of the launch of the Hemiwedge® Cartridge valve in the late fourth
quarter of 2006, we need to build a sales and marketing infrastructure and
customer channels which may include independent sales representative firms,
distributors and/or employees.  If we fail to establish an effective
internal marketing and sales force or to make alternative arrangements to have
these products marketed and sold by others, our ability to commercialize our
valve product line and to enter new or existing markets will be
impaired.
 
 We
may not be able to successfully increase our sales.  If we do not
increase our sales, we may never become profitable.
 
 It is
possible that we may be unable to successfully implement any of our strategies
to increase sales, including expanding the range of processes and services that
we offer, developing long-term partnering relationships with customers and
adding new customers.  Our ability to increase our sales will be
affected by many factors which are beyond our control, such as falling commodity
prices which will decrease demand for our products or the failure of the
marketplace to respond positively to our Hemiwedge® valve
technology.  We cannot assure you that our strategies to increase our
sales will be successful.  If they are not, we may never become
profitable.
 
 We
want to develop additional new energy field services products, but we may not
have the financial ability to do so.
 
 We are
currently seeking opportunities to develop or acquire energy field services
products and technologies through acquisitions or licensing
agreements.  We believe acquiring our own product lines would leverage
our expertise in manufacturing and marketplace knowledge and complement our
current contract machining business and customer
relationships.  However, the energy field services market has numerous
manufacturers that are larger than we are and have greater financial resources
than we do.  Even if we were to acquire or design our own products, it
is possible that we may not have the financial capacity to enter this
market.
  13
  We
face significant competition in our markets.  Our inability to compete
successfully could have a material adverse effect on our business and results of
operations.
 
 The
energy field services industry, including both the machining and manufacturing
industry and the commercial valve industry, is highly
competitive.  Competition in the sale of our products is primarily
based on engineering, product design, process capability, quality, cost,
delivery and responsiveness.  Many of our competitors are entities
that are larger and have greater financial and personnel resources than we
do.  We also compete with foreign manufacturers that have
substantially cheaper labor costs than we do.  We may not be able to
compete successfully.  If we do not compete successfully, our business
and results of operations will be materially adversely affected.
 
 Failure
to protect our proprietary technology could impair our competitive
position.
 
 We have
obtained or are in the process of obtaining U.S. and foreign patents and patent
applications for our Hemiwedge® technology.  Our success will depend
in part on our ability to obtain patent protection for our Hemiwedge®
technology, preserve our trade secrets, and operate without infringing the
proprietary rights of third parties.
 
 Although
we place considerable importance on obtaining patent protection for our
technologies, products and processes, the enforceability of our patents is
uncertain and involves complex legal and factual questions.  The
applicant or inventors of subject matter covered by patent applications or
patents owned by us may not have been the first to invent or the first to file
patent applications for such inventions.
 
 Furthermore,
enforcement of patents and proprietary rights in many other countries may be
problematic or unpredictable.  The issuance of a patent in one country
does not assure the issuance of a similar patent in another
country.  Claim interpretation and infringement laws vary by nation,
so the extent of any patent protection is uncertain and may vary in different
jurisdictions.
 
 Due to
uncertainties regarding patent law and the circumstances surrounding our patent
applications, the pending or future patent applications we own may not result in
the issuance of any patents.  Existing or future patents owned by us
may be challenged, infringed upon, invalidated, found to be unenforceable or
circumvented by others.  Further, any rights we may have under any
issued patents may not provide us with sufficient protection against competitive
products or otherwise cover commercially valuable products or
processes.
 
 Litigation
or other disputes regarding patents and other proprietary rights may be
expensive, cause delays in bringing products to market and harm our ability to
operate.
 
 The
manufacture, use or sale of our Hemiwedge® product candidates may infringe on
the patent rights of others.  If we are unable to avoid infringement
of the patent rights of others, we may be required to seek a license, defend an
infringement action, or challenge the validity of the patents in
court.  Patent litigation is costly and time consuming.  We
may not have sufficient resources to bring these actions to a successful
conclusion.  In addition, if we do not obtain a license, develop or
obtain non-infringing technology, or fail to successfully defend an infringement
action or have the patents we are alleged to infringe declared invalid, we may
incur substantial money damages, encounter significant delays in bringing our
Hemiwedge® products to market, be precluded from participating in the
manufacture, use, or sale of our Hemiwedge® products without first obtaining
licenses to do so, or not be able to obtain any required license on favorable
terms, if at all.  In addition, if another party claims the same
subject matter (or subject matter overlapping with the subject matter) that we
have claimed in a U.S. patent application or patent, we may decide or be
required to participate in interference proceedings in the United States Patent
and Trademark Office in order to determine the priority of
invention.  Loss of such an interference proceeding would deprive us
of patent protection sought or previously obtained and could prevent us from
commercializing our products.  Participation in such proceedings could
result in substantial costs, whether or not the eventual outcome is
favorable.  These additional costs could adversely affect our
financial results.
 
 Confidentiality
agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information.
 
 In order
to protect our proprietary technology and processes, we rely in part on
confidentiality agreements with our employees, consultants, outside
collaborators, and other advisors.  These agreements may not
effectively prevent disclosure of confidential information and may not provide
an adequate remedy in the event of unauthorized disclosure of confidential
information.  Costly and time-consuming litigation could be necessary
to enforce and determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could adversely affect our
competitive business position.
  14
  We
purchase metals in the open market, and our profitability may vary if prices of
metals fluctuate.
 
 The
principal raw materials that we use are carbon steel, aluminum, stainless steel,
nickel, brass, titanium and various special alloys and other
metals.  The metals industry as a whole is cyclical and at times
pricing and availability of raw materials in the metals industry can be volatile
due to numerous factors beyond our control, including general, domestic and
international economic conditions, labor costs, production levels, competition,
import duties and tariffs and currency exchange rates.  This
volatility can significantly affect the availability and cost of raw materials,
and may, therefore, adversely affect our net sales, operating margin and net
income.  During periods of rising raw materials pricing, there can be
no assurance that we will be able to pass any portion of such increases on to
our customers.  When raw material prices decline, customer demands for
lower prices could result in lower sale prices and, as we use existing
inventory, result in lower margins.  Changing metal prices could
adversely affect our ability to attain profitably.
 
 The oil & gas industry is subject
to fluctuations in demand, which results in fluctuations in our results of
operations.
 
 Many of
our valve products are sold to oil and gas E&P and services companies that
experience significant fluctuations in demand based on economic conditions,
energy prices, domestic and international drilling rig counts, consumer demand,
and other factors beyond our control.  In 2007 and early 2008, we
experienced increased activity levels driven by increases in energy commodity
prices and increased demand for oil field drilling products.  However,
in late 2008 and now we see reduction from lower commodity prices and slowing
activity levels for our company.  These changes can happen very
quickly and without forecast or notice, and may have a material adverse effect
on our results of operations.
 
 We
may need to recruit additional personnel for Hemiwedge Valve
Corporation.  If we are unable to attract qualified personnel, we may
be unable to operate the business as planned.
 
 Our
ability to implement our business plan and develop Hemiwedge Valve Corporation
may depend on our ability to attract and retain other qualified management,
engineering, machinists, project development, and sales and marketing
personnel.  We compete for such persons with other companies, some of
which have substantially greater capital resources and facilities than we
have.  Further, demand for such personnel during periods of increased
demand for energy products is very strong.  We may not be able to
recruit or retain personnel of the requisite caliber or in adequate numbers to
enable us to conduct the Hemiwedge® business as planned.
 
 Our
operations are subject to a number of federal, state and local regulations
relating to the protection of the environment and to workplace health and
safety.  If we were found to be responsible for significant damages
related to such regulation, it could have a material adverse effect on our
business and results of operation.
 
 Our
operations are subject to extensive federal, state and local laws and
regulations governing waste disposal, air and water emissions, the handling of
hazardous substances, environmental protection, remediation, workplace exposure,
and other matters.  Hazardous materials that we use in our operations
primarily include lubricants and cleaning solvents.  Our leased
facility is located in an industrial area close to properties with histories of
heavy industrial use.  Although no environmental claims have been made
against us and we have not been named as a potentially responsible party by the
EPA or any other party, it is possible that we could be identified by the EPA, a
state agency or one or more third parties as a potentially responsible party
under CERCLA or under analogous state laws.  If so, we could incur
substantial litigation costs to prove we are not responsible for the
environmental damage, or, if we were found to be a responsible party, we could
be liable for significant damages.  This could have a material adverse
effect on our business and results of operations.
 
 INVESTMENT
RISKS
 
 There
is a limited trading market for our shares.  You may not be able to
sell your shares if you need money.
 
 Our
common stock is traded on the Over-The-Counter Bulletin Board, an inter-dealer
automated quotation system for equity securities.  During the 30
trading days ended March 31, 2009, the average daily trading volume of our
common stock was approximately 21,700 shares.  As of March 31, 2009,
we had approximately 366 record holders of our common stock (not including an
indeterminate number of stockholders whose shares are held by brokers in “street
name”).  There has been limited trading activity in our stock, and
when it has traded, the price has fluctuated widely.  We consider our
common stock to be “thinly traded” and any last reported sale prices may not be
a true market-based valuation of the common stock.  Stockholders may
experience difficulty selling their shares if they choose to do so because of
the illiquid market and limited public float for our common stock.
  15
  We
are subject to the penny stock rules and these rules may adversely affect
trading in our common stock.
 
 Our
common stock is a “low-priced” security under rules promulgated under the
Securities Exchange Act of 1934.  In accordance with these rules,
broker-dealers participating in transactions in low-priced securities must first
deliver a risk disclosure document which describes the risks associated with
such stocks, the broker-dealer’s duties in selling the stock, the customer’s
rights and remedies and certain market and other
information.  Furthermore, the broker-dealer must make a suitability
determination approving the customer for low-priced stock transactions based on
the customer’s financial situation, investment experience and
objectives.  Broker-dealers must also disclose these restrictions in
writing to the customer, obtain specific written consent from the customer, and
provide monthly account statements to the customer.  The effect of
these restrictions probably decreases the willingness of broker-dealers to make
a market in our common stock, decreases liquidity of our common stock and
increases transaction costs for sales and purchases of our common stock as
compared to other securities.
 
 Transfers
of our securities may be restricted by virtue of state securities “blue sky”
laws which prohibit trading absent compliance with individual state laws. These
restrictions may make it difficult or impossible to sell shares in those
states.
 
 Transfers
of our common stock may be restricted under the securities or securities
regulations laws promulgated by various states and foreign jurisdictions,
commonly referred to as “blue sky” laws. Absent compliance with such individual
state laws, our common stock may not be traded in such jurisdictions. Because
the securities registered hereunder have not been registered for resale under
the blue sky laws of any state, the holders of such shares and persons who
desire to purchase them should be aware that there may be significant state blue
sky law restrictions upon the ability of investors to sell the securities and of
purchasers to purchase the securities. These restrictions may prohibit the
secondary trading of our common stock. Investors should consider the secondary
market for our securities to be a limited one.
 
 There
are options and warrants to purchase shares of our common stock currently
outstanding.
 
 As of
December 31, 2008, we have granted options and warrants to purchase an aggregate
of 1,687,000 and 5,893,579 shares respectfully of our common stock to various
persons and entities, of which options and warrants to purchase up to 1,330,333
and 5,893,579 shares respectfully of our common stock are currently
exercisable.  The exercise prices on these options and warrants range
from $0.25 per share to $1.25 per share.  If issued, the shares
underlying options and warrants would increase the number of shares of our
common stock currently outstanding and will dilute the holdings and voting
rights of our then-existing shareholders.
 
 We
have no immediate plans to pay dividends.
 
 We have
not paid any cash dividends to date and do not expect to pay dividends for the
foreseeable future.  In addition, the terms of our line of credit and
term loan from Stillwater National Bank prohibit us from declaring or paying
dividends or purchasing or redeeming any of our capital stock without the
approval of Stillwater National Bank.  We intend to retain earnings,
if any, as necessary to finance the operation and expansion of our
business.
 
 Our
officers and directors collectively own a substantial portion of our outstanding
common stock, and as long as they do, they may be able to control the outcome of
stockholder voting.
 
 Our
officers and directors are collectively the beneficial owners of approximately
18.8% of the outstanding shares of our common stock as of the date of this
report.  As long as our officers and directors collectively own a
significant percentage of our common stock, our other shareholders may generally
be unable to affect or change the management or the direction of our company
without the support of our officers and directors.  As a result, some
investors may be unwilling to purchase our common stock.  If the
demand for our common stock is reduced because our officers and directors have
significant influence over our company, the price of our common stock could be
materially depressed.  The officers and directors will be able to
exert significant influence over the outcome of all corporate actions requiring
stockholder approval, including the election of directors, amendments to our
certificate of incorporation and approval of significant corporate
transactions.
  16
  We
have the ability to issue additional shares of our common stock and shares of
preferred stock without asking for stockholder approval, which could cause your
investment to be diluted.
 
 Our
Certificate of Incorporation authorizes the Board of Directors to issue up to
50,000,000 shares of common stock and up to 10,000,000 shares of preferred
stock.  The power of the Board of Directors to issue shares of common
stock, preferred stock or warrants or options to purchase shares of common stock
or preferred stock is generally not subject to stockholder
approval.  Accordingly, any additional issuance of our common stock,
or preferred stock that may be convertible into common stock, may have the
effect of diluting your investment.
 
 By
issuing preferred stock, we may be able to delay, defer or prevent a change of
control.
 
 Our
Certificate of Incorporation permits us to issue, without approval from our
shareholders, a total of 10,000,000 shares of preferred stock.  Our
Board of Directors can determine the rights, preferences, privileges and
restrictions granted to, or imposed upon, the shares of preferred stock and to
fix the number of shares constituting any series and the designation of such
series.  It is possible that our Board of Directors, in determining
the rights, preferences and privileges to be granted when the preferred stock is
issued, may include provisions that have the effect of delaying, deferring or
preventing a change in control, discouraging bids for our common stock at a
premium over the market price, or that adversely affect the market price of and
the voting and other rights of the holders of our common stock.
 
 Our
stock price is volatile.
 
 The
trading price of our common stock has been and continues to be subject to
fluctuations.  The stock price may fluctuate in response to a number
of events and factors, such as quarterly variations in operating results, the
operating and stock performance of other companies that investors may deem as
comparable and news reports relating to trends in the marketplace, among other
factors.  Significant volatility in the market price of our common
stock may arise due to factors such as:
 
 ·
              our
      developing business;
 
 ·
              a
      continued negative cash flow;
 
 ·
              relatively
      low price per share;
 
 ·
              relatively
      low public float;
 
 ·
              variations
      in quarterly operating results;
 
 ·
              general
      trends in the industries in which we do
  business;
 
 ·
              the
      number of holders of our common stock;
and
 
 ·
              the
      interest of securities dealers in maintaining a market for our common
      stock.
 
 As long
as there is only a limited public market for our common stock, the sale of a
significant number of shares of our common stock at any particular time could be
difficult to achieve at the market prices prevailing immediately before such
shares are offered, and could cause a severe decline in the price of our common
stock.
  17
  There
are limitations in connection with the availability of quotes and order
information on the OTCBB.
 
 Trades
and quotations on the OTCBB involve a manual process and the market information
for such securities cannot be guaranteed. In addition, quote information, or
even firm quotes, may not be available.  The manual execution process
may delay order processing and intervening price fluctuations may result in the
failure of a limit order to execute or the execution of a market order at a
significantly different price.  Execution of trades, execution
reporting and the delivery of legal trade confirmation may be delayed
significantly.  Consequently, one may not be able to sell shares of
our Common Stock at the optimum trading prices.
 
 There
are delays in order communication on the OTCBB.
 
 Electronic
processing of orders is not available for securities traded on the OTCBB and
high order volume and communication risks may prevent or delay the execution of
one's OTCBB trading orders.  This lack of automated order processing
may affect the timeliness of order execution reporting and the availability of
firm quotes for shares of our Common Stock.  Heavy market volume may
lead to a delay in the processing of OTCBB security orders for shares of our
Common Stock, due to the manual nature of the market.  Consequently,
one may not able to sell shares of our Common Stock at the optimum trading
prices.
 
 There
is a risk of market fraud on the OTCBB.
 
 OTCBB
securities are frequent targets of fraud or market manipulation. Not only
because of their generally low price, but also because the OTCBB reporting
requirements for these securities are less stringent than for listed or NASDAQ
traded securities, and no exchange requirements are imposed.  Dealers
may dominate the market and set prices that are not based on competitive forces.
Individuals or groups may create fraudulent markets and control the sudden,
sharp increase of price and trading volume and the equally sudden collapse of
the market price for shares of our Common Stock.
 
 There
is a limitation in connection with the editing and canceling of orders on the
OTCBB.
 
 Orders
for OTCBB securities may be canceled or edited like orders for other securities.
All requests to change or cancel an order must be submitted to, received and
processed by the OTCBB.  Due to the manual order processing involved
in handling OTCBB trades, order processing and reporting may be delayed, and one
may not be able to cancel or edit one's order. Consequently, one may not able to
sell its shares of our Common Stock at the optimum trading prices.
 
 Increased
dealer compensation could adversely affect our stock price.
 
 The
dealer's spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of shares of our Common Stock on
the OTCBB if the stock must be sold immediately.  Further, purchasers
of shares of our Common Stock may incur an immediate "paper" loss due to the
price spread.  Moreover, dealers trading on the OTCBB may not have a
bid price for shares of our Common Stock on the OTCBB.  Due to the
foregoing, demand for shares of our Common Stock on the OTCBB may be decreased
or eliminated.
 
 Cautionary
Statement Concerning
 Forward-Looking
Information
 
 This
annual report and the documents to which we refer you and incorporate into this
annual report by reference contain forward-looking statements.  In
addition, from time to time, we, or our representatives, may make
forward-looking statements orally or in writing.  These are statements
that relate to future periods and include statements regarding our future
strategic, operational and financial plans, potential acquisitions, anticipated
or projected revenues, expenses and operational growth, markets and potential
customers for our products and services, plans related to sales strategies and
efforts, the anticipated benefits of our relationships with strategic partners,
growth of our competition, our ability to compete, the adequacy of our current
facilities and our ability to obtain additional space, use of future earnings,
and the feature, benefits and performance of our current and future products and
services.
 
 You can identify forward-looking
statements by those that are not historical in nature, particularly those that
use terminology such as “may,” “should,” “expects,” “anticipates,”
“contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,”
“potential,” “seek” or “continue” or the negative of these or similar
terms.  In evaluating these forward-looking statements, you should
consider various factors, including those described in this annual report under
the heading “Risk Factors.”  These and other factors may cause our
actual results to differ materially from any forward-looking
statement.  We caution you not to place undue reliance on these
forward-looking statements.
  18
  We base
these forward-looking statements on our expectations and projections about
future events, which we derive from the information currently available to
us.  Such forward-looking statements relate to future events or our
future performance.  Forward-looking statements are only
predictions.  The forward-looking events discussed in this annual
report, the documents to which we refer you and other statements made from time
to time by us or our representatives, may not occur, and actual events and
results may differ materially and are subject to risks, uncertainties and
assumptions about us.  For these statements, we claim the protection
of the “bespeaks caution” doctrine.  The forward-looking statements
speak only as of the date hereof, and we expressly disclaim any obligation to
publicly release the results of any revisions to these forward-looking
statements to reflect events or circumstances after the date of this
filing.
  Item 1B.  UNRESOLVED STAFF
COMMENTS
  None.
  Item
2.  PROPERTIES
  In
December 2005, Shumate Machine Works entered into a lease agreement for a
manufacturing facility of approximately 60,000 square feet to be used by
Hemiwedge Valve Corporation.  The term of the lease is three years and
the rent is approximately $14,000 per month.  The lease agreement
grants to Shumate Machine Works an option to purchase the premises covered under
the lease for a purchase price of approximately $1,825,000 before
lease.  Shumate Machine Works will be entitled to a credit against the
purchase price in an amount equal to the amount necessary to amortize the
purchase price at 7% over a period of 240 months.  The option to
purchase expires on September 1, 2009.  On May 15, 2008, Shumate
Machine Works exercised the aforementioned option and purchased the property for
$1,726,949 pursuant to a warranty deed.  Concurrently with the
purchase, the property was sold to Trader Properties LLC and immediately leased
to Hemiwedge Valve Corporation. The Commercial Lease Agreement between Hemiwedge
Valve Corporation and Trader Properties is for a term of 10 years with a monthly
rent of $24,000 per month, which rent is increased by 2% each year for the term
of the lease.  Hemiwedge Valve Corporation is required to maintain
public liability insurance of not less than $1,000,000 during the term of the
lease.  To secure performance under this lease, Hemiwedge Valve
Corporation granted Trader Properties a lien and security interest against all
of its’ non-exempt personal property that is in the leased
premises  Hemiwedge Industries guaranteed payment and performance of
the lease pursuant to a Guaranty Agreement.  In addition, Hemiwedge
Industries agreed to issue Trader Properties a warrant to purchase 100,000
shares of its common stock at an exercise price of $0.25 per share prior to June
15, 2008.
 
 The
existing facilities are adequate for our current operations.  We
anticipate that additional facilities may be leased or purchased as needed and
that facilities that are adequate for our needs are readily
available.
 
 Item
3.   LEGAL PROCEEDINGS
 
 On June
23, 2008, we received notice from Sunbelt Machine Works Corporation of its
intention to seek arbitration in Houston, Harris County Texas relating to the
$150,000 termination payment due under (and in connection with the termination
of) that certain Stock Purchase Agreement dated August 17, 2007.  We
failed to make the first 3 installment payments of $37,500 to Sunbelt on each of
October 25, 2007, February 20, 2008, and June 20, 2008, as required under the
Stock Purchase Agreement. Sunbelt had threatened litigation regarding this
matter in April 2008, and we were unable to come to terms on a settlement.
Sunbelt is seeking an award of $150,000 and reasonable attorney’s fees, expenses
and costs incurred to enforce their contractual rights. . We have recorded
$178,995 in accrued expenses in our financial statements to reflect this
contingency.
 
 On July 14, 2008, we entered into a
letter agreement with Sunbelt pursuant to which Sunbelt agreed to withdraw the
notice of arbitration until November 1, 2008, in exchange for an immediate
payment of $1,000 and installment payments of $500 on the 1st and
15th
of each month until November 1, 2008.   On October 8, 2008, we
entered into a letter agreement with Sunbelt under which Hemiwedge agreed to pay
Sunbelt $75,000 in full satisfaction of this matter; provided, however, that
payment must be received by Sunbelt within 90 days of the date of the letter for
such settlement to be effective.  Due to cash constraints, we were
unable to make the payment within the required 90 days.  As of the
date of this report, Sunbelt has not informed us of any indication to
re-institute arbitration proceedings.
  19
  Item
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
 
 None.
 
 PART
II
  Item
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  Our common stock has traded on the OTC
Bulletin Board under the symbol “HWEG.OB” since February 19,
2009.  Before that date our common stock traded on the OTC Bulletin
Board under the symbol “SHMT.OB” October 20, 2005.  Before that date,
our common stock traded on the OTC Bulletin Board under the symbol “EXCB.OB”
since June 10, 2002.  Before that date, our common stock traded on the
OTC Bulletin Board under the symbol “GRMA.OB,” and before that, it traded on the
OTC Bulletin Board under the symbol “GRMG.OB.”  The following table
shows the high and low bid prices for our common stock for each quarter since
January 1, 2007 as reported by the OTC Bulletin Board.
 
 We
consider our stock to be “thinly traded” and any reported sale prices may not be
a true market-based valuation of our stock.  Some of the bid
quotations from the OTC Bulletin Board set forth below may reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
 
 2008 (OTC Bulletin Board)
                                  
                                  High Bid
                                  
                                  
                                  Low BidFirst
      quarter
                                  
                                  $
                                  0.60
                                  
                                  
                                  $
                                  0.21Second
      quarter
                                  
                                  
                                  0.60
                                  
                                  
                                  
                                  0.18Third
      quarter
                                  
                                  
                                  0.35
                                  
                                  
                                  
                                  0.11Fourth
      quarter
                                  
                                  
                                  0.22
                                  
                                  
                                  
                                  0.062007
      (OTC Bulletin Board)
                                  
                                  High Bid
                                  
                                  
                                  Low BidFirst
      quarter
                                  
                                  $
                                  2.30
                                  
                                  
                                  $
                                  1.17Second
      quarter
                                  
                                  
                                  2.14
                                  
                                  
                                  
                                  1.30Third quarter
                                  
                                  
                                  2.03
                                  
                                  
                                  
                                  1.37Fourth
      quarter
                                  
                                  
                                  1.64
                                  
                                  
                                  
                                  0.60
 
 As of
April 7, 2009 there were 366 record holders of our common stock. This does not
include an indeterminate number of shareholders whose shares are held by brokers
in street name.
 
 We have
not paid cash dividends since our inception and we do not contemplate paying
dividends in the foreseeable future.  Furthermore, the terms of our
line of credit and term loan with Stillwater National Bank prohibit us from
declaring or paying dividends or purchasing or redeeming any of our capital
stock without the approval of Stillwater National Bank.  We anticipate
that earnings, if any, will be retained to retire debt and for the operation of
our business.
 
 Shares
eligible for future sale could depress the price of our common stock and lower
the value of your investment.  Sales of substantial amounts of our
common stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for shares of our common stock.
 
 20
  Securities Authorized for Issuance
Under Equity Compensation Plans.The following provides
information concerning compensation plans under which our equity securities are
authorized for issuance as of December 31, 2008:
 
 (a)
                    
                    
                    (b)
                    
                    
                    (c)PlanCategory
                    
                    Numberof
                      securitiestobe
                      issuedupon
                      exerciseof
                      outstanding
                      options,warrants
                      andrights
                    
                    
                    Weighted-average
                      exercisepriceof
                      outstanding
                      options,warrants
                      andrights
                    
                    
                    Numberofsecurities
                      remainingavailable
                      forfutureissuance
                      underequity
                      compensationplans
                      (excludingsecurities
                      reflectedincolumn
                      (a))Equity
      compensation plans approved by security holders (1)(2)
                    
                    
                    1,687,000
                    
                    
                    $
                    0.45
                    
                    
                    
                    1,937,840Equity
      compensation plans not approved by security holders
      (3)(4)(5)(6)
                    
                    
                    120,000
                    
                    
                    $
                    1.50
                    
                    
                    
                    —Total
                    
                    
                    1,807,000
                    
                    
                    $
                    1.43
                    
                    
                    
                    1,937,840
 
 (1)
              2005 Stock Incentive
      Plan.  On April 29, 2005, our board of directors adopted,
      and on October 19, 2005, our stockholders approved, our 2005 Stock
      Incentive Plan.  The purpose of the plan is to further align the
      interests of employees, directors and non-employee consultants with those
      of the stockholders by providing incentive compensation opportunities tied
      to the performance of the common stock and by promoting increased
      ownership of the common stock by such individuals.  The plan is
      also intended to advance the interests of the company and its shareholders
      by attracting, retaining and motivating key personnel upon whose judgment,
      initiative and effort the successful conduct of the company’s business is
      largely dependent.  We are permitted to grant awards of stock
      options, stock awards, and restricted stock awards under the
      plan.  The maximum aggregate number of shares of common stock
      that may be issued and sold under all awards granted under the plan is
      10,000,000 shares, and as of December 31, 2008, we have issued 8,062,140
      shares under the plan, and there are options to purchase 1,687,000 shares
      outstanding under this plan.
  (2)
              2001 Stock Option
      Plan.  On April 8, 2002, we assumed the 2001 Excalibur
      Holdings, Inc. Stock Option Plan, which was approved by the securities
      holders of Excalibur Holdings prior to our assumption of the
      plan.  We are authorized to issue options to purchase up to
      285,714 shares under this plan.  As of December 31, 2008, there
      were zero options to purchase shares outstanding under this
      plan.
  (3)
              Individual Option and Warrant
      Grants.  We have granted warrants on an individual
      basis.  We have granted no options on an individual
      basis.  Of the warrants we have granted on an individual basis
      for compensatory services, there are currently warrants to purchase in the
      aggregate up to 120,000 shares of our common stock at a weighted average
      price of $1.50 per share.
  (4)
              Stock Grant
      Plan.Our board of directors adopted our 2003 Stock
      Grant Plan on June 25, 2003.  The purpose of this plan was to
      encourage and enable our officers, employees, directors, consultants,
      advisors, and other key persons upon whose judgment, initiative and
      efforts we largely depends for the successful conduct of our business to
      acquire a proprietary interest in us.  We were permitted to
      issue up to 428,157 shares of common stock under this plan, and to date,
      we had issued 232,063 shares.  On April 20, 2006, our board of
      directors terminated this plan.
  (5)
              Employee Stock Incentive
      Plan.  Our board of directors adopted our 2003 Employee
      Stock Incentive Plan on July 17, 2003.  The purpose of this plan
      was to allow designated officers and employees of us and our subsidiaries
      to receive options to purchase our common stock and to receive grants of
      common stock subject to certain restrictions.  We were permitted
      to issue up to 1,071,429 shares of common stock under this plan, and to
      date, we issued no shares or options to purchase shares under this
      plan.  On April 20, 2006, our board of directors terminated this
      plan.
  21
  (6)
              Non-Employee Directors and
      Consultants Retainer Stock Plan.  Our board of directors
      adopted our 2003 Non-Employee Directors and Consultants Retainer Stock
      Plan on July 17, 2003.  The purposes of this plan was to enable
      us to promote the interests of us and our stockholders by attracting and
      retaining non-employee directors and consultants capable of furthering our
      future success and by aligning their economic interests more closely with
      those of our stockholders, by paying their retainer or fees in the form of
      shares of our common stock.  We were permitted to issue up to
      357,143 shares of common stock under this plan, and to date, we issued no
      shares under this plan.  On April 20, 2006, our board of
      directors terminated this plan.
  Recent
Sales of Unregistered Securities
  On August
6, 2008, we issued 76,338 shares of our common stock to a single accredited
investor in consideration of accrued and unpaid interest of $32,235 due under a
convertible promissory note.  We relied on the exemption from
registration provided by Section 462) of the Securities Act of 1933, as amended,
for the issuance of these shares.
 On
December 11, 2008, we issued 40,812 shares of our common stock to a single
accredited investor in consideration of accrued and unpaid interest of $11,250
due under a convertible promissory note.  We relied on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, for the issuance of these shares
  Item
6.  SELECTED FINANCIAL DATA
  We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.
 
 Item
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
 
 The
following discussion and analysis should be read in conjunction with our audited
consolidated financial statements and related notes included in this
report.  This report contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995.  The
statements contained in this report that are not historic in nature,
particularly those that utilize terminology such as “may,” “will,” “should,”
“expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable
terminology are forward-looking statements based on current expectations and
assumptions.
 
 Various
risks and uncertainties could cause actual results to differ materially from
those expressed in forward-looking statements.  Factors that could
cause actual results to differ from expectations include, but are not limited
to, those set forth under the section “Risk Factors” set forth in this
report.
 
 The
forward-looking events discussed in this annual report, the documents to which
we refer you and other statements made from time to time by us or our
representatives, may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about
us.  For these statements, we claim the protection of the “bespeaks
caution” doctrine.  All forward-looking statements in this document
are based on information currently available to us as of the date of this
report, and we assume no obligation to update any forward-looking
statements.  Forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements.
 
 General
 
 Hemiwedge
Industries, Inc. is a Texas based energy field services
company.  Hemiwedge is a holding company that, through its subsidiary
operates a valve product line. Hemiwedge seeks to leverage its existing
infrastructure, expertise, and customer channels to grow its business and
introduce new product line extensions of the Hemiwedge® technology to the
energy, pipeline, process, mining and power markets.
 
 We
currently employ 28 people at one plant totaling approximately 60,000 square
feet in Conroe, Texas, north of Houston.  Our executive offices are
located at 1011 Beach Airport Road, Conroe, Texas 77301.  Our
telephone number is (936) 539-5770 and our Internet address is www.hemiwedgeinc.com.
   22
  Valve
Product Technology – Hemiwedge Valve Corporation
 
 We formed Hemiwedge Valve Corporation
as a wholly-owned subsidiary to develop and commercialize a new patented
technology addressing what we believe to be a significant opportunity in the
global valve market.
 Our first
product line, known as the Hemiwedge® Cartridge valve, is a quarter-turn
hemispherical wedge valve engineered to provide what we believe are substantial
technological improvements compared with what is available in the marketplace
today, such as traditional butterfly, ball, and gate valve designs.
 
 We
believe that the patented design of the Hemiwedge® Cartridge valve combines the
benefits of quarter-turn valves with the durability of gate valves. The
Hemiwedge® Cartridge valve has a non-rotating core which guides the fluid flow
through the valve to the Hemiwedge® itself. This is a hollow hemisphere where
the inner and outer walls are slightly offset, having non-concentric centers,
producing a hemispherical wedge shape - the “Hemiwedge®.” Operation of the valve
rotates the Hemiwedge®, a quarter-turn, moving it between the core and valve
seat, thus controlling the flow. We believe that these design features in the
combination of the Hemiwedge® shut off and stationary core make the Hemiwedge®
Cartridge valve unique.
 
 Sale
of Shumate Machine Works’ Assets—Discontinued Operations
 
 On
October 8, 2008, we, and our wholly owned subsidiary Shumate Machine Works, Inc.
(“Machine Works”) consummated the sale of substantially all of Machine Works’
assets to American International Industries, Inc. (“Purchaser”). The sale was
effected pursuant to an asset purchase agreement (the “Purchase Agreement”)
pursuant to which Machine Works transferred substantially all of its assets and
certain enumerated liabilities to Purchaser. The aggregate purchase price was
$6,703,749 consisting of assumption by Purchaser of (i) $5 million of promissory
notes due Stillwater National Bank and Trust Company and (ii) $1,703,749 of
certain other liabilities, including without limitation, accounts payable of
Machine Works. In January 2009 we also issued 1,401,170 shares of our common
stock to Purchaser as a purchase price adjustment of $420,351.
 
 License
of Certain Hemiwedge Assets
 
 On
October 15, 2008, we, and our wholly owned subsidiary Hemiwedge Valve
Corporation (“HVC”), entered into a Transfer Agreement with Tejas Research &
Engineering, L.P. (“Tejas”) pursuant to which we and HVC transferred certain
assets and granted certain license rights related to our Hemiwedge Valve
Technology to Tejas in exchange for $3.5 million in cash at closing and a 5 year
common stock purchase warrant to purchase 2,443,269 shares of our common stock
at a purchase price of $0.25 per share. The transfer of assets was consummated
pursuant to the Hemiwedge Intellectual Property Agreement between HVC and Tejas,
under which Tejas received (i) a worldwide, perpetual, fully paid up,
irrevocable and sub-licensable license for the intellectual property related to
HVC’s hemispherical wedge valves for the markets, or Fields of Use, of Sub-Sea
and Offshore, Drilling and Workover, above 5,000 PSI, Surface Safety valves and
all Downhole applications, all together known as the “Combined Fields of Use;”
(ii) assignment of two pending U.S. patent applications related to specialty
downhole valves and (iii) the use of the Hemiwedge registered trademark in their
Combined Fields of Use subject to our oversight.
 
 HVC still
retains all rights to the original Hemiwedge Cartridge valve product targeted
for the API 6D and ANSI valves in the oil & gas production, pipeline,
refining and power markets.
 
 Reorganization/Debt
Forgiveness
 
 On
October 19, 2005, we completed a restructuring of our company, resulting in a
significant reduction of our outstanding debt and providing us with a
strengthened balance sheet and reduced debt servicing
requirement.  The restructuring was effected through an out-of-court
restructuring, or “recapitalization plan,” which consisted of, among other
things, a restructuring of debt we owed to Stillwater National Bank, or
Stillwater, the issuance of stock in exchange for the cancellation and
conversion of debt, the issuance of restricted stock awards, the change of our
name to “Shumate Industries, Inc.”, and a 1-for-7 reverse stock
split.  A detailed description of the restructuring plan is set forth
in the Description of Business in our Annual Report on Form 10-KSB as filed with
the Securities and Exchange Commission for the year ended December 31,
2005.
 
 As a
result of the reorganization, in 2005, we recognized $4,222,743 in debt
forgiveness income from Stillwater and $204,414 in debt forgiveness income
related to the exchange of the unsecured notes for common stock.
  23
  On March
31, 2006, we entered into a First Amendment to Loan Agreement and Guarantor’s
Consent with Stillwater National Bank, or Stillwater, pursuant to which
Stillwater agreed to forgive $2,000,000 of indebtedness under an amended and
restated term promissory note which we had previously delivered to Stillwater in
connection with our October 19, 2005 reorganization.  In connection
with this first amendment, we executed and delivered a new amended and restated
term promissory note in the principal face amount of $3,633,053.
 
 The new
amended and restated note requires one interest only payment on March 31, 2006,
and thereafter, requires us to make 24 equal monthly payments in an amount
sufficient to fully amortize principal and interest on the amended and restated
note over 84 months.  The amended and restated note is due and payable
on April 19, 2008, at which time we will be required to make a balloon payment
of the entire outstanding principal balance and all accrued
interest.  The note bears interest at a rate equal to the prime rate
plus two percent, and it is secured by a first priority security interest in all
of our existing and future assets.
 
 As a
result of this amendment, we recorded paid in capital in the amount of
$2,000,000 in the first quarter of 2006 as Stillwater National Bank was
considered a related party.
 
 On April
13, 2006, we entered into a letter agreement with Stillwater National Bank, or
Stillwater, pursuant to which Stillwater agreed to accept $500,000 from us in
full satisfaction of a secured convertible promissory note in the principal
amount of $2,500,000 that we had previously issued to Stillwater in connection
with our October 19, 2005 reorganization.  Stillwater’s agreement to
accept this reduced amount was subject to the following conditions: (i) the
$500,000 payment must come from new equity funds and cannot be borrowed or in
any way become our obligation or an obligation of our related concerns, (ii)
Stillwater will not assign the rights in the note to another party and the terms
of the new equity investment must contain no terms which allow the investor(s)
of the new equity funds to gain any special benefit resulting from the spread
between the $500,000 and the face amount of the note, (iii) the new equity funds
must be raised upon terms to the investors no better than those recently
approved by Stillwater for dilution of its equity interest, (iv) a breach of
(i)-(iii) above will constitute a breach of the reorganization agreement dated
October 19, 2005 between us, Stillwater, and other parties, and (iv) payment of
the full $500,000 must be made on or before September 1, 2006. On August 9,
2006, the letter agreement was amended to increase the payment by $25,000 to
$525,000 if payment is made between September 2, 2006 and December 1, 2006 and
by $50,000 to $550,000 if payment is made between December 2, 2006 and March 1,
2007. All other conditions as set forth above remain the same. On December 1,
2006, we delivered $525,000 to Stillwater as full payment of the $2.5 million
debenture. In connection with this payment, Stillwater agreed to the
cancellation of the entire remaining outstanding principal and approximately
$272,000 of accrued interest due and owing under the terms of the debenture at
December 1, 2006.
 
 Critical
Accounting Policies
 
 Our
discussion and analysis of our financial conditions and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United
States.  The preparation of financial statements requires managers to
make estimates and disclosures on the date of the financial
statements.  On an on-going basis, we evaluate our estimates,
including, but not limited to, those related to revenue
recognition.  We use authoritative pronouncements, historical
experience, and other assumptions as the basis for making
judgments.  Actual results could differ from those
estimates.  We believe the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
consolidated financial statements.
 
 Revenue
Recognition
 
 Revenues
of Hemiwedge Valve Corporation are derived from Hemiwedge® Cartridge valve
product sales and an agreement to perform contractual research and development
services.  The research and development services revenue is recognized
as the services are performed and related costs are incurred and
recorded.  The valve product sales revenue is recognized when
persuasive evidence of an arrangement exists, the sale is complete, the price is
fixed or determinable, and collectability is reasonably assured.  This
typically occurs when the order is shipped.   Shipping terms are
FOB shipping and title passes to the customer at the time the product is
shipped.  Customers have the right to inspection and acceptance for
generally up to five days after taking delivery.
  24
  Accounts
Receivable
  Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.  The allowance for doubtful accounts represents our estimate
of the amount of possible credit losses existing in our accounts
receivable.  We determine the allowance based on management’s
estimate of likely losses based on a review of current open receivables and
our historical write-off experience.  We review the adequacy of our
allowance for doubtful accounts quarterly.  Significant individual
accounts receivable balances and balances which have been outstanding greater
than 90 days are reviewed individually for collectability.  Account
balances, when determined to be uncollectible, are charged against the
allowance.
 
 Inventory
 
 Inventory
is stated at the lower of cost (first-in, first-out for raw materials and
specific job cost for work-in-process and finished goods) or
market.  Slow-moving inventories are periodically reviewed for
impairment in value.  Work-in-process and finished goods include
labor, materials and production overhead.
 
 Discontinued
Operations
 
 On August
29, 2008, we entered into an Asset Purchase Agreement with American
International Industries, Inc. pursuant to which we agreed to sell the assets of
Shumate Machine Works, subject to certain closing conditions.  This
transaction closed on October 8, 2008.
 
 The
depreciable assets of Shumate Machine Works were depreciated through the date of
shareholder approval and then the cost and accumulated depreciation was moved to
a long term asset account identified as "Assets held for sale."
 
 Prior
year financial statements have been restated to present the operations of
Shumate Machine Works as discontinued operations.
 
 The
assets and liabilities of the discontinued operations are presented separately
under the captions "Current assets from discontinued operations," “Assets held
for sale,” "Non-Current assets from discontinued operations," "Current
liabilities from discontinued operations," and “Long-term liabilities from
discontinued operations”  respectively, in the accompanying Balance
Sheets at December 31, 2007.  The results of operations are presented
under the caption “Income (loss) from discontinued operations” in the
accompanying Consolidated Statement of Operations for the years ended December
31, 2008 and 2007.
 
 Results
of Continuing Operations
 
 Basis
of Presentation
 
 The
results of operations set forth below for the years ended December 31, 2008 and
2007 are those of the continuing operations of Hemiwedge Industries and the
operations of Hemiwedge Valve Corporation on a consolidated basis.
 
 The
following table sets forth, for the periods indicated, certain selected
financial data expressed as a percentage of net sales from continuing
operations:
  25
  Year
      EndedDecember
      312008
                                              
                                              
                                              2007Net
      sales
                                              
                                              
                                              100.0
                                              %
                                              
                                              
                                              100.0
                                              %Cost
      of sales
                                              
                                              
                                              (65.0
                                              )
                                              
                                              
                                              (51.2
                                              )Gross
      profit (loss)
                                              
                                              
                                              35.0
                                              
                                              
                                              
                                              48.8Selling,
      general and administrative
                                              
                                              
                                              (131.0
                                              )
                                              
                                              
                                              (497.4
                                              )Depreciation
                                              
                                              
                                              (5.5
                                              )
                                              
                                              
                                              (17.4
                                              )Bad
      debt recovery (expense)
                                              
                                              
                                              (6.5
                                              )
                                              
                                              
                                              -Research
      and development
                                              
                                              
                                              (7.9
                                              )
                                              
                                              
                                              (157.6
                                              )Operating
      loss
                                              
                                              
                                              (115.9
                                              )%
                                              
                                              
                                              (623.6
                                              )%
 
 Comparison
of the Years ended December 31, 2008 and 2007
 
 Net sales. Net sales for
Hemiwedge Valve Corporation increased by $1,725,144 or an increase of 156% to
$2,829,996 for the year ended December 31, 2008, from $1,104,852 for the year
ended December 31, 2007. The revenues recorded for the year ended December 31,
2007, reflect $1,084,629 in income for amounts earned for services completed
under the development agreement with a former corporate partner. The
revenues recorded for the year ended December 31, 2008, include $2,613,985 from
the transfer of certain assets and granting of certain license rights related to
our Hemiwedge® Valve Technology to Tejas along with Hemiwedge® Cartridge valve
sales.   Management currently believes that sales of the
Hemiwedge® Cartridge valve will increase significantly going forward resulting
from new distribution channels, independent representation agreements signed
during 2008 and test ‘beta’ installations of the product concluding with larger
customer purchases.  Additionally, the company has received several
product approvals during 2008 including API and ISO certification for the
Hemiwedge® Cartridge valve which is required in many applications.  We
believe the industrial valve market in the United States and worldwide will
continue to grow in 2009 based on peer company announcements and publicly
available industry forecasts.
 
 Cost of Sales.  Cost
of sales for Hemiwedge Valve Corporation increased by $1,275,211 or 226%, to
$1,840,427, for the year ended December 31, 2008, from $565,216 for the year
ended December 31, 2007.  As a percentage of net sales, cost of sales
increased to 65.0% of net sales for the year ended December 31, 2008, versus
51.2% of sales for the year ended December 31, 2007.  Cost of sales
includes direct labor and related payroll tax and benefits as well as various
allocated overhead items such as facility lease, utilities, and indirect labor
costs with related payroll tax and their employee benefits expenses. The
increase includes an inventory adjustment of $228,833 for scrap and recording an
additional inventory allowance based on the lower of cost or market
method.  The increase in the cost of sales as a percentage of sales
resulted from a decrease in efficiencies from lower volumes and higher fixed
costs relative to volumes and the inventory adjustment.  We generated
a gross profit of $989,569, with a gross profit margin of approximately 35.0%,
for the year ended December 31, 2008, as compared to a 48.8% gross profit margin
in the same period 2007.  We are focused on increasing revenues and
seeking to improve gross margins by generating more sales and generating better
costs of goods sold from economies received from higher volumes.  We
believe that continued growth in the industrial valve market driven by activity
levels in the process, mining and power markets along with global infrastructure
investment trends and anticipated future higher volumes of sales of the
Hemiwedge® Cartridge valve will continue to lead to better cost economies,
pricing, volumes and gross margins for our products.
 
 Selling, general, and
administrative.  Selling, general and administrative expenses
decreased by $1,786,953 to $3,708,636 for the year ended December 31, 2008, from
$5,495,589 for the year ended December 31, 2007.  This decrease
resulted primarily from the elimination of indemnification, acquisition and
investor relations expenses incurred in 2007 as further discussed
below.  As a percentage of net sales, selling, general and
administrative expenses were 131.0% for the year ended December 31, 2008, as
compared to 497.4% for the comparable period in 2007.  For the year
ended December 31, 2007, the Board agreed to indemnify an officer of the
Company, and record an accrued expense of approximately $580,000 in connection
with a judgment personally assessed on our officer from a previously discharged
corporate liability.  Additionally, we recorded an expense of $333,575 in
the year ended December 31, 2007 for acquisition related costs associated with
the failed acquisition of Sunbelt Machine Works, Inc. Our firm also expensed
approximately $374,000 in the year ended December 31, 2007, from the cost of our
shares issued in connection with the hiring of our investment relations firm.
These expenses were partially offset by the amortization of the beneficial
conversion feature discount in the year ended December 31, 2008. We also
incurred approximately $144,720 in non-cash stock and option awards associated
with FASB 123R for the year ended December 31, 2008, compared to 662,872 for the
year ended December 31, 2007.
  26
  Depreciation.Depreciation
expense increased by $11,810 to $228,551 for the year ended December 31, 2008,
from $216,741 for the year ended December 31, 2007.
 
 Bad debt
expense.  During the year
ended December 31, 2008, we recorded a bad debt allowance of
$183,429.  A receivable was formally charged off in September against
the allowance thus no additional expense was recorded.
 
 Research and development.Research and
development expense decreased by $1,517,178 to $224,256 for the year ended
December 31, 2008, from $1,741,434 for the year ended December 31,
2007.  The reduction in research and development expenses resulted
from the conclusion of some of activities associated with the development of our
sub sea and down hole Hemiwedge® valve products. However, we currently expect to
incur research and development expenses as we continue the development of
Hemiwedge® valve technology projects as well as the anticipated additional
implementation of more product sizes, forms and applications of the Hemiwedge®
Cartridge valve line.   We expect that these expenses will
include consulting fees, engineering fees, design fees and costs, development
fees and costs, third party testing costs, patent and other intellectual
property filing costs, legal fees, prototyping costs, costs of new materials,
and other research and development costs.
 
 Operating
loss.  We incurred an
operating loss of $3,282,135 for the year ended December 31, 2008, a decrease of
$3,607,164 as compared to an operating loss of $6,889,299 for the year ended
December 31, 2007.
 
 Hemiwedge
Valve Corporation recorded an operating loss of $1,464,042 for the year ended
December 31, 2008, as compared to an operating loss of $3,525,693 for the same
period in 2007.  The decreased operating loss is primarily due to the
decrease in research and development of $1,517,178.
 
 Also included in our
operating loss were general corporate overhead expenses of $1,818,093 for the
year ended December 31, 2008, resulting from the
costs of operating a publicly reporting company including $324,627 for
accounting, legal and professional fees, Sarbanes-Oxley consulting costs, filing
costs, and $225,840 for investor relations and shareholder meeting
costs.
 
 We
have not
reduced our fixed costs significantly enough as compared to the revenues we
generated in the period to generate an operating profit.   In the event
that we successfully commercialize our Hemiwedge® products with revenues
exceeding costs we anticipate that increased revenues from the sales of our
Hemiwedge® products will greatly improve our results of
operations.
 
 Interest
expense.  Interest expense increased
by $474,160 to $819,064 for the year ended December 31, 2008, from $344,904 for
the year ended December 31, 2007.  This includes the amortization of
the beneficial conversion feature discount related to the 2007 convertible loans
for $364,290 in amortization expense.
 
 Provision for income
taxes.  We generated a net loss of $806,594 for the year ended
December 31, 2008 compared to a net loss of $7,210,784 for the year ended
December 31, 2007. We have made no provision for income taxes due to our tax
loss carry-forward from previous years.
 
 Liquidity
and Capital Resources
 
 We have
financed our operations, acquisitions, debt service, and capital requirements
through cash flows generated from operations, debt financing, capital leases,
and issuance of equity securities.  We had a working capital deficit
of $3,648,630 at December 31, 2008.  We had unrestricted and
restricted cash of $388,958 and $79,842 respectively, as of December 31, 2008,
compared to having cash of $83,591 at December 31, 2007.
  27
  We used
$2,223,086 of net cash in operating activities for the year ended December 31,
2008, compared to using $4,475,529 in the year ended December 31,
2007.  Cash used in operating activities is primarily due to an
operating loss of $806,594 and an increase in inventory of $190,091 and $135,729
in accounts receivable.  This was offset by non-cash charges of
$228,551 for amortization and depreciation and $754,406 for issuances of stock,
stock options and warrants.
 
 Net cash
flows provided by investing activities was $254,683 for the year ended December
31, 2008, compared to net cash flows used by investing activities of $450,849 in
the year ended December 31, 2007.  Cash of $319,617 was used provided
by the sale leaseback transaction.
 
 Net cash
flows provided by financing activities were $2,353,612 for the year ended
December 31, 2008, compared to net cash provided by financing activities of
$3,462,643 in the year ended December 31, 2007.  Cash provided by
financing activities is primarily due to proceeds from notes payable of
$2,740,000, offset by payments on notes payable of $949,385.
 
 Bank
Credit Facility
 
 A primary source of
our financing has been our senior credit facility with Stillwater National Bank.
Our credit facility with Stillwater National Bank was restructured on October
19, 2005, and further amended as set forth below.
 
 On
February 8, 2007,
and effective January 19, 2007, we renewed our $1,000,000 secured revolving line
of credit facility with Stillwater. The amount we can borrow on the line
of credit subject to qualifying accounts receivable and inventory. The advances
available under the line of credit are limited to a borrowing base of the sum of
(a) 85% of eligible accounts receivable, and (b) 50% of eligible inventory. The
line of credit bears interest at a rate equal to the prime rate plus two
percent, and it is secured by a first priority security interest in all of our
existing and future assets. The line of credit expired on April 19,
2008.
  On
January 25, 2008, we entered into an Amended and Restated Loan Agreement with
Stillwater National Bank and Trust Company (the “Amended Loan
Agreement”). On October 19, 2005 we entered into that certain Agreement (as
reported in our Current Report on Form 8-K dated October 19, 2005) with
Stillwater, which Agreement was amended by a certain First Amendment to
Agreement and Guarantors’ Consent dated October 19, 2006, as amended by a
certain Second Amendment to Agreement dated effective January 19, 2007
(collectively, the “Prior Agreement”).
 
 The
Amended Loan Agreement amends and restates the Prior Agreement as
follows:
  1.             Term
Loan. Our prior Term Note dated October 19, 2005, in favor of Stillwater
had an outstanding principal balance of $3,003,998 (as of January 25, 2008)
and a maturity date of April 19, 2008. Stillwater loaned us (along with our
co-borrowers Shumate Machine Works, Inc. and Hemiwedge Valve Corporation)
$3,329,000 pursuant to a new term note dated January 25, 2008, which funds
advanced under the new term note were used to refinance the old term note and
provide working capital. The new term note requires us to make 26 equal monthly
payments (beginning on February 28, 2008) in an amount sufficient to fully
amortize principal and interest on the amended and restated note over 64 months.
The new term note is due and payable on April 19, 2010. The new term note bears
interest at a rate equal to the prime rate plus two percent, and it is secured
by a first priority security interest in all of our existing and future assets
as well as a security interest in certain personal assets of Larry
Shumate.
 
 2.             Revolving
Loan. Our prior revolving promissory note dated October 19, 2005, in
favor of Stillwater, had an outstanding principal balance of $893,676 (as
of January 25, 2008) and a maturity date of April 19, 2008. Stillwater loaned us
(and the other co-borrowers set forth above) $1,000,000 pursuant to a new
revolving promissory note dated January 25, 2008, which funds advanced under the
new revolving promissory were used to refinance the old revolving promissory
note and provide working capital. The initial balance on the line of credit was
equal to the balance of our prior line of credit with Stillwater ($893,676
principal balance as of January 25, 2008). The advances available under the new
revolving promissory note are limited to a borrowing base of the sum of (a) 85%
of eligible accounts receivable, and (b) 50% of eligible inventory. The new
revolving promissory note bears interest at a rate equal to the prime rate plus
two percent, and it is secured by a first priority security interest in all of
our existing and future assets as well as a security interest in certain
personal assets of Larry Shumate. On the 28th day of
each month, beginning January 28, 2008, we will pay all interest accrued on the
new revolving promissory note. The amount we can borrow on the line of credit is
subject to qualifying accounts receivable and inventory. The new revolving
promissory note will mature and become fully due and payable on April 19,
2009.
  28
  The loan
documents for the Stillwater line of credit and term loan require us to keep all
other credit facilities in good standing.  Our failure to pay the
convertible promissory notes discussed below on July 10, 2008, constitutes a
default.  Accordingly,  Stillwater had the right to declare all
indebtedness under the loan agreement due and payable.  As of
September 30, 2008, Stillwater had not accelerated the $3,850,278 outstanding
under the January 2008 loan agreement.  Should Stillwater decide to declare
a default and request acceleration of the related debt, it could result in
Stillwater foreclosing on our assets.  On September 30, 2008, the
amounts due under this facility were consolidated under a Loan and Consolidation
Agreement, as discussed below.  All amounts due under the term note
and the revolving note for this facility were assumed on October 8, 2008, by the
purchaser of substantially all of the assets held by our subsidiary Shumate
Machine Works, Inc.
 
 On May
23, 2008, Hemiwedge entered into a Loan Agreement with Shumate Machine Works,
Inc., Hemiwedge Valve Corporation (collectively, the “Borrowers”), Larry
Shumate, Matthew C. Flemming and Russ Clark (collectively, the “Guarantors”) and
Stillwater National Bank and Trust Company pursuant to which Stillwater agreed
to lend us $625,000 for working capital. The promissory note bears interest at a
rate equal to the prime rate plus two percent and has a maturity date of August
31, 2008. In addition, the loan is secured by a security agreement of even date
therewith and a limited guaranty agreement executed by each of the Guarantors.
Under the security agreement, the Borrowers granted Stillwater a security
interest in all accounts and accounts receivable, all FFE, general intangibles,
inventory and all of the stock of Shumate Machine Works and Hemiwedge Valve
Corporation held by us. Each Guarantor guaranteed payment and performance up to
50% of the outstanding indebtedness, at the time payment becomes due and
payable.
 
 On June
26, 2008, Hemiwedge entered into an Amended and Restated Loan Agreement with
Stillwater National Bank with respect to the May 23, 2008, loan agreement to
increase the size of the loan to $1,140,000 and to extend the maturity date to
September 26, 2008.  The Borrowers executed an Amended and Restated
Note on June 26, 2008, in the amount of $1,140,000 in connection with such
amended loan agreement.  The loan agreement for this loan provides
that failure to pay when due any substantial liability shall constitute an event
of default thereunder.  Our failure to pay the convertible promissory
notes
discussed below on July 10, 2008, constitutes a default.  Accordingly,
Stillwater has the right to declare all indebtedness under the loan agreement
due and payable.  As of September 30, 2008, Stillwater has not
accelerated the $1,140,000 outstanding under the June 2008 loan
agreement.  On September 30, 2008, the amounts due under this facility
were consolidated under a Loan and Consolidation Agreement, as discussed
below.  All amounts due under the term for this facility were assumed
on October 8, 2008, by the purchaser of substantially all of the assets held by
our subsidiary Shumate Machine Works, Inc.
 
 On
September 30, 2008, Hemiwedge entered into a Loan and Consolidation Agreement
with Stillwater National Bank and Trust Company.  This Loan and
Consolidation Agreement consolidated all amounts owed to Stillwater (i) under
the January 2008 Amended Loan Agreement; (ii) under the June 2008 Amended and
Restated Loan Agreement and (iii) pursuant to overdrafts by
Hemiwedge in certain demand deposit accounts (the “Overdraft”).  The
Overdraft and interest owed on the January 2008 term note were consolidated into
two promissory notes totaling $1,500,000.  There are no requirements
to maintain liquidity and minimum debt coverage ratios (or other financial
covenants) under the Loan and Consolidation Agreement.  On October 17,
2008, we paid $749,000 in principal and $2,330 in accrued interest, leaving a
principal balance due of $751,000.  In addition, a reserved cash
account was established to fund the principal and interest on the remaining loan
for the initial year.  The original reserve was $92,775.
 
 Convertible
Promissory Notes
  Since
July 1, 2007, we have sold $3,050,000 of principal amount of convertible
promissory notes with warrants to purchase 610,000 shares of its common stock to
accredited investors. The notes have a 1 year term and bear interest at ten
percent (10%); provided, however, that we are required to prepay the note if we
consummate a subsequent equity financing (as defined) within the next 12 months.
Interest is payable monthly in arrears; however, we have the right to defer any
interest payment and accrue
same to principal. The notes are convertible into our common stock at a fixed
conversion price of $1.89. In addition, if we close a subsequent equity
financing while the notes are outstanding, the note holders have the option to
convert the outstanding balance of such note into such financing on the same
terms as the other investors in such financing.
  29
  Under the
terms of the notes and the related warrants, the notes and the warrants are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of our then
outstanding common stock as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended.
  The notes
were issued with warrants to purchase up to 610,000 shares of our common stock
at an exercise price of $1.89 per share, subject to adjustment. The warrant
holders may designate a “cashless exercise option.” This option entitles the
warrant holders to elect to receive fewer shares of common stock without paying
the cash exercise price. The number of shares to be determined by a formula
based on the total number of shares to which the warrant holder is entitled, the
current market value of the common stock and the applicable exercise price of
the warrant.
  Hemiwedge determined
that the conversion feature of the note and the warrants issued were not
derivative instruments pursuant to SFAS No. 133, Accounting for Derivatives, as
amended. Under the provisions of EITF Issue 98-5, Hemiwedge estimated that
fair value of
the beneficial conversion feature and warrants at the issuances of the notes
using Black-Scholes option pricing model to exceed the principal vale of the
note. The resulting discount of $552,495 is being amortized over the life of the
notes using the effective interest method. The amortized amount as of December
31, 2008, is $552,495.
  We
granted the investors in the offering registration rights for the resale of the
shares issuable upon conversion of the note and upon exercise of the warrant. To
the extent that all such shares are not registered pursuant to the granted
piggyback registration rights, Hemiwedge agreed to register the remaining
underlying shares, if any, by January 6, 2008.  We accrued
approximately $26,200 at December 31, 2008, for estimated liquidated damages
penalties expected to be due such investors for failure to timely register their
shares as required under the registration rights agreement.
  We used
the net proceeds from the financing for working capital and general corporate
purposes. An NASD member firm acted as primary placement agent in connection
with the offering and received $210,000 in commissions while another NASD member
firm received $5,000 in placement agent fees. In addition, another $10,000
in legal fees was incurred. The net proceeds of this offering after the payment
of commissions, fees and other expenses of the offering were approximately
$2,825,000.
 
 These notes were due and payable on
July 10, 2008, and are currently in default.  Our failure to make full
payment on such maturity date constituted a default under these notes. These
notes continue to bear interest until payment. As of December 31, 2008, the
total amount due under these notes, including accrued interest was
$3,496,229.  The company’s intention is to restructure these
notes.
 
 Sale-Leaseback
 
 On May
15, 2008, our wholly owned subsidiary, Shumate Machine Works entered into a
series of simultaneous transactions pursuant to which it purchased the property
underlying its lease (the “Original Lease”) with Brewer Family Charitable
Remainder Annuity Trust #1 located at 1011 Beach Airport Road, Conroe, Texas
77301.  The operations of Hemiwedge Valve are conducted at this
location. The terms of the Original Lease included an option to purchase the
underlying property.  Shumate Machine Works purchased the property for
$1,726,949 pursuant to a warranty deed.
 
 Concurrently
with the purchase of the property, Shumate Machine Works entered into a sale and
simultaneous lease transaction with Trader Properties LLC.  Shumate
Machine Works sold the property to Trader Properties for an aggregate purchase
price of $2,180,000 pursuant to a general warranty deed with vendor’s
lien.  As such, Shumate Machine Works received net cash of $319,617
and the gain realized on the sale of the property was $304,031.  The
gain was deferred and is being amortized over the life of the lease as a
reduction to rent expense.
  30
  The terms
of the Commercial Lease Agreement dated May 15, 2008, between Hemiwedge Valve
Corporation and Trader Properties is for a term of 10 years with a monthly rent
of $24,000 per month, which shall be increased by 2% each year for the term of
the lease.  Hemiwedge Valve
Corporation is required to maintain public liability insurance of not less than
$1,000,000 during the term of the lease.  To secure performance under
the commercial lease, Hemiwedge Valve Corporation granted Trader Properties a
lien and security interest against all of Hemiwedge Valve Corporation’s
non-exempt personal property that is in the leased premises.
 
 We
guaranteed payment and performance of the lease pursuant to a Guaranty Agreement
with Trader Properties.  In addition, we issued Trader Properties a
warrant to purchase 100,000 shares of its common stock at an exercise price of
$0.25 per share, with a five year term in connection with the
lease.
  Liquidity
and Capital Requirements
 
 In 2005,
we successfully restructured our outstanding indebtedness with Stillwater
National Bank and our unsecured creditors.  In addition, we have seen an
increase in demand and pricing for manufacturing of our customer’s oil and gas
drilling products and components, which allowed us to
generate gross profits since the third quarter of 2005 at Shumate Machine
Works.  Since late 2006, we have commercialized the first valve
product line known as the Hemiwedge® Cartridge valve and developed other
corporate strategic relationships which have subsidized a portion of our
technology development expenses.  Even with the increased demand for
oilfield manufacturing and the commercialization of part of our valve
technology, we are still operating on a net loss basis, and we will need to
continue to service our debt obligations from our continuing operations.
 
 As of the
date of this report, we do not believe that we will be able to fund our
operations, working capital requirements, and debt service
requirements.  We have sought recapitalization with debt and equity
during 2008, however, there can be no assurance that it will successfully
recapitalize. In addition, management is trying to continue to increase
Hemiwedge’s revenues and improve its results of operations to a level of
profitability including increasing revenues and cash flow from its Hemiwedge
Valve Corporation subsidiary.  New sales representative agreements
have been executed at Hemiwedge Valve Corporation during 2008 to assist in the
sales and marketing efforts to improve our results of
operations.
 
 The
closing of our sale of Shumate Machine Works’ assets on October 8, 2008, allowed
us to substantially reduce our outstanding debt as $5 million of promissory
notes due to our senior lender, Stillwater National Bank and Trust Company, were
assumed by the purchaser at closing.
 
 We have
funded the initial launch of the Hemiwedge® valve products through existing
working capital, cash flows generated from operations, the equity raises completed in
2006, the proceeds from the exercise of warrants in March 2007, and the
convertible debt raise referenced above. In addition, on October 15, 2008, we
transferred certain assets and granted certain license rights related to our
Hemiwedge Valve Technology in exchange for, among other things, a $3.5 million
cash payment.  While this debt reduction and cash influx improved our
working capital profile, our existing working capital and cash flows generated
from operations will not be sufficient to conduct full implementation of the
Hemiwedge® Cartridge valve product line.
 
 Accordingly,
we will need to finance our operations through other capital financings. We
intend to seek additional debt or equity financing, in the form of a bank line,
private placement or a public offering, a strategic alliance, or a joint
venture. Such additional financing, alliances, or joint venture opportunities
might not be available to us, when and if needed, on acceptable terms or at all.
If we are unable to obtain additional financing in sufficient amounts or on
acceptable terms under such circumstances, our operating results and prospects
could be adversely affected. In addition, any debt financings or significant
capital expenditures require the written consent of our lender, Stillwater
National Bank.
 
 We may
continue to incur operating losses if the industrial valve market deteriorates
or softens. Additionally, if we restructure our convertible loans, they may
include future negative covenants.  Our ability to comply with these
covenants in the future will depend on whether we can obtain additional capital
financing or increase our cash flows from operations.
  31
  In
addition to the 2005 recapitalization and fiscal 2006 and 2007 equity and
convertible debt financings, we anticipate that, due in part to increasing
energy
prices, demand for our energy related field service products will continue to
increase in the coming fiscal year. The fiscal 2005 reorganization, debt
restructuring during 2005 and 2006, equity and convertible debt financings
during 2006 and 2007, operating expense reductions, and our intent to capitalize
on anticipated increase in demand are the steps that we have
been taking to try to return to profitability.  However, it is possible
that none of these steps will be completed and that we may never return to
profitability.
 
 We intend
to retain any future earnings to retire debt, finance the expansion of our
business and any necessary capital expenditures, and for general corporate purposes.
All of our bank debt contains restrictions as to the payment of
dividends.
 
 Off-Balance
Sheet Arrangements
 
 None.
  32
  Item
8.  FINANCIAL STATEMENTS
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors
 Hemiwedge
Industries, Inc.
 Conroe,
Texas
  We have
audited the accompanying consolidated balance sheets of Hemiwedge Industries,
Inc., as of December 31, 2008 and 2007 and the related statements of
operations, changes in stockholders’ deficits and cash flows for the years ended
December 31, 2008 and 2007. These financial statements are the responsibility of
Hemiwedge Industries, Inc.’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
  We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatements. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hemiwedge Industries,
Inc. as of December 31, 2008 and 2007 and the results of its operations and
its cash flows for the years ended December 31, 2008 and 2007 in conformity
with accounting principles generally accepted in the United States of
America.
  As
discussed in Note 2 to the financial statements, the accompanying financial
statements have been prepared assuming that Hemiwedge Industries, Inc.will
continue as a going concern. Hemiwedge Industries, Inc. requires significant
amount of cash in its operations and does not have sufficient cash to fund its
operations for the next twelve months, which raises substantial doubt about its
ability to continue as a going concern. Management’s plans regarding those
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
  /s/
MALONE & BAILEY, PC
 www.malone-bailey.com
 Houston,
Texas
  April 15,
2009
  33
  HEMIWEDGE
INDUSTRIES, INC.
 CONSOLIDATED
BALANCE SHEETS
 
 December 31,
                                                          
                                                          
                                                          December 31,2008
                                                          
                                                          
                                                          2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                          
                                                          $
                                                          388,958
                                                          
                                                          
                                                          $
                                                          83,591Restricted
      cash for note payable
                                                          
                                                          
                                                          79,842
                                                          
                                                          
                                                          $
                                                          -Accounts
      receivable, net of allowance for doubtful accounts of $0 and
      $40,000
                                                          
                                                          
                                                          157,948
                                                          
                                                          
                                                          
                                                          502,383Inventory,
      net of allowance of $281,233 and $0
                                                          
                                                          
                                                          1,135,381
                                                          
                                                          
                                                          
                                                          1,259,166Prepaid
      expense and other current assets
                                                          
                                                          
                                                          219,243
                                                          
                                                          
                                                          
                                                          472,345Current
      assets from discontinued operations
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          24,900Total
      current assets
                                                          
                                                          
                                                          1,981,372
                                                          
                                                          
                                                          
                                                          2,342,385Fixed
      assets, net of accumulated depreciation of $502,750  and
      $303,239
                                                          
                                                          
                                                          348,650
                                                          
                                                          
                                                          
                                                          537,847Assets
      held for sale
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          1,838,214Patents,
      net of accumulated amortization of $87,118 and $58,078
                                                          
                                                          
                                                          344,938
                                                          
                                                          
                                                          
                                                          340,366Deposits
                                                          
                                                          
                                                          17,740
                                                          
                                                          
                                                          
                                                          25,000Non-current
      assets from discontinued operations
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          59,320Total
      assets
                                                          
                                                          $
                                                          2,692,700
                                                          
                                                          
                                                          $
                                                          5,143,132LIABILITIES
      AND STOCKHOLDERS' (DEFICIT)Current
      liabilities:Accounts
      payable
                                                          
                                                          $
                                                          364,230
                                                          
                                                          
                                                          $
                                                          485,498Accounts
      payable - related party
                                                          
                                                          
                                                          18,368
                                                          
                                                          
                                                          
                                                          55,000Accrued
      expenses
                                                          
                                                          
                                                          1,457,744
                                                          
                                                          
                                                          
                                                          929,833Deferred
      Gain on Sale/Leaseback
                                                          
                                                          
                                                          30,408
                                                          
                                                          
                                                          
                                                          -Current
      portion of notes payable - other
                                                          
                                                          
                                                          206,244
                                                          
                                                          
                                                          
                                                          258,798Current
      portion of capital lease obligation
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          51,586Current
      portion of equipment notes payable
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          5,578Current
      portion of convertible notes payable, net of discount of $0 and
      $364,290
                                                          
                                                          
                                                          3,496,229
                                                          
                                                          
                                                          
                                                          2,800,535Current
      portion of term note payable - Stillwater National Bank
                                                          
                                                          
                                                          56,779
                                                          
                                                          
                                                          
                                                          -Line
      of credit from discontinued operations
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          764,606Current
      portion of notes payable from discontinued operations
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          389,719Current
      liabilities from discontinued operations
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          1,248,829Total
      current liabilities
                                                          
                                                          
                                                          5,630,002
                                                          
                                                          
                                                          
                                                          6,989,982Long
      term liabilities:Deferred
      Gain on Sale/Leaseback
                                                          
                                                          
                                                          255,885
                                                          
                                                          
                                                          
                                                          -Term
      note payable - Stillwater National Bank
                                                          
                                                          
                                                          694,221
                                                          
                                                          
                                                          
                                                          -Long-term
      liabilities from discontinued operations
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          2,638,758Total
      long term liabilities
                                                          
                                                          
                                                          950,106
                                                          
                                                          
                                                          
                                                          2,638,758Total
      liabilities
                                                          
                                                          
                                                          6,580,108
                                                          
                                                          
                                                          
                                                          9,628,740Commitments
      and contingencies
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Stockholders'
      (deficit)Preferred
      stock, $.001 par value, 10,000,000 shares authorized,no
      shares issued or outstanding
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Common
      stock, $.001 par value, 50,000,000 shares authorized,22,054,691 and
      20,578,071 shares issued and outstanding
                                                          
                                                          
                                                          22,054
                                                          
                                                          
                                                          
                                                          20,578Additional
      paid-in-capital
                                                          
                                                          
                                                          23,984,913
                                                          
                                                          
                                                          
                                                          22,581,595Accumulated
      deficit
                                                          
                                                          
                                                          (27,894,375
                                                          )
                                                          
                                                          
                                                          (27,087,781
                                                          )Total
      stockholders' (deficit)
                                                          
                                                          
                                                          (3,887,408
                                                          )
                                                          
                                                          
                                                          (4,485,608
                                                          )Total
      liabilities and stockholders' (deficit)
                                                          
                                                          $
                                                          2,692,700
                                                          
                                                          
                                                          $
                                                          5,143,132
 
 See
accompanying notes to consolidated financial statements
  34
  HEMIWEDGE
INDUSTRIES, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 For the years endedDecember 31,2008
                                                  
                                                  
                                                  2007REVENUES
                                                  
                                                  $
                                                  2,829,996
                                                  
                                                  
                                                  $
                                                  1,104,852COST
      OF REVENUESCost
      of revenues
                                                  
                                                  
                                                  1,767,259
                                                  
                                                  
                                                  
                                                  540,387Depreciation
      expense
                                                  
                                                  
                                                  73,168
                                                  
                                                  
                                                  
                                                  24,829Total
      cost of revenues
                                                  
                                                  
                                                  1,840,427
                                                  
                                                  
                                                  
                                                  565,216GROSS
      PROFIT (LOSS)
                                                  
                                                  
                                                  989,569
                                                  
                                                  
                                                  
                                                  539,636OPERATING
      EXPENSES:Selling,
      general and administrative
                                                  
                                                  
                                                  3,708,636
                                                  
                                                  
                                                  
                                                  5,495,589Depreciation
      expense
                                                  
                                                  
                                                  155,383
                                                  
                                                  
                                                  
                                                  191,912Bad
      debt expense (recovery)
                                                  
                                                  
                                                  183,429
                                                  
                                                  
                                                  
                                                  -Research
      and development
                                                  
                                                  
                                                  224,256
                                                  
                                                  
                                                  
                                                  1,741,434Total
      operating expenses
                                                  
                                                  
                                                  4,271,704
                                                  
                                                  
                                                  
                                                  7,428,935LOSS
      FROM OPERATIONS
                                                  
                                                  
                                                  (3,282,135
                                                  )
                                                  
                                                  
                                                  (6,889,299
                                                  )OTHER
      INCOME (EXPENSE)Interest
      expense
                                                  
                                                  
                                                  (819,064
                                                  )
                                                  
                                                  
                                                  (344,904
                                                  )LOSS
      BEFORE DISCONTINUED OPERATIONS
                                                  
                                                  
                                                  (4,101,199
                                                  )
                                                  
                                                  
                                                  (7,234,203
                                                  )INCOME
      (LOSS) FROM DISCONTINUED OPERATIONS(including
      gain on disposal of $3,558,508 in 2008)
                                                  
                                                  
                                                  3,294,605
                                                  
                                                  
                                                  
                                                  23,419NET
      LOSS
                                                  
                                                  $
                                                  (806,594
                                                  )
                                                  
                                                  $
                                                  (7,210,784
                                                  )Basic
      and diluted net income (loss) per share from continuing
      operations
                                                  
                                                  $
                                                  (0.19
                                                  )
                                                  
                                                  $
                                                  (0.36
                                                  )Basic
      and diluted net income (loss) per share from discontinued
      operations
                                                  
                                                  
                                                  0.15
                                                  
                                                  
                                                  
                                                  -Basic
      and diluted net income (loss) per share
                                                  
                                                  
                                                  (0.04
                                                  )
                                                  
                                                  
                                                  (0.36
                                                  )Weighted
      average shares outstanding-Basic
                                                  
                                                  
                                                  21,357,689
                                                  
                                                  
                                                  
                                                  20,061,282Weighted
      average shares outstanding-Diluted
                                                  
                                                  
                                                  21,357,689
                                                  
                                                  
                                                  
                                                  20,061,282
 
 See
accompanying notes to consolidated financial statements
  35
  HEMIWEDGE
INDUSTRIES, INC.
 CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS'  (DEFICIT)
 For
the years ended December 31, 2008 and 2007
 
 AdditionalCommon Stock
                                        
                                        
                                        Paid-In
                                        
                                        
                                        AccumulatedShares
                                        
                                        
                                        Par
                                        
                                        
                                        Capital
                                        
                                        
                                        Deficit
                                        
                                        
                                        TotalBalances
      at December 31, 2006
                                        
                                        
                                        19,322,277
                                        
                                        
                                        
                                        19,322
                                        
                                        
                                        
                                        20,015,762
                                        
                                        
                                        $
                                        (19,876,997
                                        )
                                        
                                        
                                        118,487Common
      stock issued for cash
                                        
                                        
                                        680,520
                                        
                                        
                                        
                                        681
                                        
                                        
                                        
                                        769,079
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        769,760Common
      stock issued for services
                                        
                                        
                                        480,050
                                        
                                        
                                        
                                        480
                                        
                                        
                                        
                                        643,377
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        643,857Costs
      of raising capital
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (132,333
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (132,333
                                        )Cashless
      exercise of warrants
                                        
                                        
                                        95,224
                                        
                                        
                                        
                                        95
                                        
                                        
                                        
                                        (95
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        -Options
      and warrants issued
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        733,310
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        733,310Discount
      on beneficial conversion feature related to convertible notes
      payable
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        552,495
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        552,495Deferred
      compensation
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        39,600Net
      loss
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (7,210,784
                                        )
                                        
                                        
                                        (7,210,784
                                        )Balances
      at December 31, 2007
                                        
                                        
                                        20,578,071
                                        
                                        
                                        $
                                        20,578
                                        
                                        
                                        $
                                        22,581,595
                                        
                                        
                                        $
                                        (27,087,781
                                        )
                                        
                                        $
                                        (4,485,608
                                        )Common
      stock issued for services
                                        
                                        
                                        1,359,470
                                        
                                        
                                        
                                        1,359
                                        
                                        
                                        
                                        429,922
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        431,281Common
      stock issued for interest
                                        
                                        
                                        117,150
                                        
                                        
                                        
                                        117
                                        
                                        
                                        
                                        43,368
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        43,485Vesting
      of restricted shares
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        14,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        14,000Options
      and warrants expense
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        280,238
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        280,238Warrant
      issued for cash
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        635,790
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        635,790Net
      loss
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (806,594
                                        )
                                        
                                        
                                        (806,594
                                        )Balances
      at December 31, 2008
                                        
                                        
                                        21,903,879
                                        
                                        
                                        $
                                        22,054
                                        
                                        
                                        $
                                        23,984,913
                                        
                                        
                                        $
                                        (27,894,375
                                        )
                                        
                                        $
                                        (3,887,408
                                        )
 
 See
accompanying notes to consolidated financial statements
  36
  HEMIWEDGE
INDUSTRIES, INC
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the years ended Dectember 31, 2008 and 2007
 
 2008
                                                                      
                                                                      
                                                                      2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                                                      
                                                                      $
                                                                      (542,691
                                                                      )
                                                                      
                                                                      $
                                                                      (7,234,203
                                                                      )Net
      income (loss) from discontinued operations
                                                                      
                                                                      
                                                                      (263,903
                                                                      )
                                                                      
                                                                      
                                                                      23,419Net
      loss from continuing operations
                                                                      
                                                                      
                                                                      (806,594
                                                                      )
                                                                      
                                                                      
                                                                      (7,210,784
                                                                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization expense
                                                                      
                                                                      
                                                                      228,551
                                                                      
                                                                      
                                                                      
                                                                      216,740Bad
      debt expense
                                                                      
                                                                      
                                                                      183,429
                                                                      
                                                                      
                                                                      
                                                                      -Amortization
      of beneficial conversion feature discount
                                                                      
                                                                      
                                                                      364,292
                                                                      
                                                                      
                                                                      
                                                                      187,589Stock-based
      compensation
                                                                      
                                                                      
                                                                      754,406
                                                                      
                                                                      
                                                                      
                                                                      1,346,332Non-cash
      gain on sale of assets
                                                                      
                                                                      
                                                                      (3,558,508
                                                                      )
                                                                      
                                                                      
                                                                      -Changes
      in:Accounts
      receivable
                                                                      
                                                                      
                                                                      (135,729
                                                                      )
                                                                      
                                                                      
                                                                      1,361Inventory
                                                                      
                                                                      
                                                                      (190,901
                                                                      )
                                                                      
                                                                      
                                                                      (568,432
                                                                      )Other
      assets
                                                                      
                                                                      
                                                                      84,672
                                                                      
                                                                      
                                                                      
                                                                      (216,183
                                                                      )Accounts
      payable
                                                                      
                                                                      
                                                                      72,383
                                                                      
                                                                      
                                                                      
                                                                      260,830Accounts
      payable - related party
                                                                      
                                                                      
                                                                      (46,632
                                                                      )
                                                                      
                                                                      
                                                                      55,000Accrued
      expenses
                                                                      
                                                                      
                                                                      462,321
                                                                      
                                                                      
                                                                      
                                                                      928,535Deferred
      revenue
                                                                      
                                                                      
                                                                      (18,730
                                                                      )
                                                                      
                                                                      
                                                                      (400,000
                                                                      )Net
      cash used in continuing operations
                                                                      
                                                                      
                                                                      (2,607,040
                                                                      )
                                                                      
                                                                      
                                                                      (5,399,012
                                                                      )Net
      cash provided in discontinued operations
                                                                      
                                                                      
                                                                      383,954
                                                                      
                                                                      
                                                                      
                                                                      923,483Net
      cash used in operating activities
                                                                      
                                                                      
                                                                      (2,223,086
                                                                      )
                                                                      
                                                                      
                                                                      (4,475,529
                                                                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Net
      proceeds received in purchase and sale of facilities
                                                                      
                                                                      
                                                                      319,617
                                                                      
                                                                      
                                                                      
                                                                      -Purchase
      of fixed assets
                                                                      
                                                                      
                                                                      (10,314
                                                                      )
                                                                      
                                                                      
                                                                      (162,268
                                                                      )Purchase
      of patents
                                                                      
                                                                      
                                                                      (33,612
                                                                      )
                                                                      
                                                                      
                                                                      (62,076
                                                                      )Net
      cash provided by (used in) continuing operations
                                                                      
                                                                      
                                                                      275,691
                                                                      
                                                                      
                                                                      
                                                                      (224,344
                                                                      )Net
      cash provided by (used in) discontinued operations
                                                                      
                                                                      
                                                                      (21,008
                                                                      )
                                                                      
                                                                      
                                                                      (226,505
                                                                      )Net
      cash provided by (used in) investing activities
                                                                      
                                                                      
                                                                      254,683
                                                                      
                                                                      
                                                                      
                                                                      (450,849
                                                                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable
                                                                      
                                                                      
                                                                      (949,385
                                                                      )
                                                                      
                                                                      
                                                                      (98,747
                                                                      )Payments
      on notes payable - related party
                                                                      
                                                                      
                                                                      (196,118
                                                                      )
                                                                      
                                                                      
                                                                      -Proceeds
      from notes payable - related party
                                                                      
                                                                      
                                                                      196,118
                                                                      
                                                                      
                                                                      
                                                                      -Proceeds
      from notes payable
                                                                      
                                                                      
                                                                      2,740,000
                                                                      
                                                                      
                                                                      
                                                                      3,300,000Proceeds
      from sales of warrants
                                                                      
                                                                      
                                                                      635,790
                                                                      
                                                                      
                                                                      
                                                                      —Proceeds
      from sales of common stock, net of offering cost
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      637,426Net
      cash provided by continuing operations
                                                                      
                                                                      
                                                                      2,426,405
                                                                      
                                                                      
                                                                      
                                                                      3,838,679Net
      cash provided by (used in) discontinued operations
                                                                      
                                                                      
                                                                      (72,793
                                                                      )
                                                                      
                                                                      
                                                                      (376,036
                                                                      )Net
      cash provided by financing activities
                                                                      
                                                                      
                                                                      2,353,612
                                                                      
                                                                      
                                                                      
                                                                      3,462,643NET
      INCREASE (DECREASE) IN CASH AND
      CASHEQUIVALENTS
                                                                      
                                                                      
                                                                      385,209
                                                                      
                                                                      
                                                                      
                                                                      (1,463,735
                                                                      )CASH
      AND CASH EQUIVALENTS, beginning of period
                                                                      
                                                                      
                                                                      83,591
                                                                      
                                                                      
                                                                      
                                                                      1,547,326CASH
      AND CASH EQUIVALENTS, end of period
                                                                      
                                                                      $
                                                                      468,800
                                                                      
                                                                      
                                                                      $
                                                                      83,591Supplemental
      disclosures:Cash
      paid for income taxes
                                                                      
                                                                      $
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      -Cash
      paid for interest
                                                                      
                                                                      
                                                                      158,124
                                                                      
                                                                      
                                                                      
                                                                      422,712Non-cash
      investing and financing transactions:Purchase
      and sale leaseback of facilities
                                                                      
                                                                      
                                                                      1,719,978
                                                                      
                                                                      
                                                                      
                                                                      -
 
 See
accompanying notes to consolidated financial statements
  37


HEMIWEDGE
INDUSTRIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 – DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES





Description of
Business.  Hemiwedge Industries, Inc. (“Hemiwedge”) is a Texas
based energy field services company. Hemiwedge is a holding company that,
through its subsidiary Hemiwedge Valve Corporation (“HVC”), operates in the
proprietary valve product line business. Hemiwedge seeks to leverage its
existing infrastructure, expertise, and customer channels to grow its business
and introduce new technologies to the energy markets.





On
February 11, 2009, the Company filed an amendment to its certificate of
incorporation with the Delaware Secretary of State to change its name from
“Shumate Industires, Inc.” to "Hemiwedge Industries, Inc." This amendment was
unanimously approved by the Company’s board of directors and by a majority of
the Company’s stockholders at the August 6, 2008 special meeting of
stockholders.





Basis of Presentation.The
consolidated financial statements include the accounts of Hemiwedge and its
wholly-owned subsidiary HVC. Significant inter-company accounts and transactions
have been eliminated.





Reclassifications.Certain amounts in the
consolidated financial statements of the prior year have been reclassified to
conform to the presentation of the current year for comparative
purposes.





Use of Estimates in Financial
Statement Preparation.  The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.





Revenue
Recognition.Revenues of
HVC are derived from Hemiwedge® Cartridge valve product sales and an agreement
to perform contractual research and development services.  The
research and development services revenue is recognized as the services are
performed and related costs are incurred and recorded.  The valve
product sales revenue is recognized when persuasive evidence of an arrangement
exists, the sale is complete, the price is fixed or determinable, and
collectability is reasonably assured.  This typically occurs when the
order is shipped.  Shipping terms are FOB shipping and title passes to
the customer at the time the product is shipped.  Customers have the
right to inspection and acceptance for generally up to five days after taking
delivery.





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





Allowance for Doubtful
Accounts.  Bad debt expense is recognized based on management’s
estimate of likely losses per year, based on past experience and an estimate of
current year uncollectible amounts.  The allowance was $0 and $40,000
as of December 31, 2008 and December 31, 2007, respectively.





Inventory.  Inventory
is stated at the lower of cost (first-in, first-out for raw materials and
specific job cost for work-in-process and finished goods) or
market.  Slow-moving inventories are periodically reviewed for
impairment in value.  Work-in-process and finished goods include
labor, materials and production overhead.





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





Patents.  Patents
are initially measured based on their fair values.  Patents are being
amortized on a straight-line basis over a period of 8 to 10 years and are stated
net of accumulated amortization of $87,118 and $58,078 at December 31, 2008
and 2007, respectively.  Amortization expense of $29,040 and $29,040
was charged to operations during 2008 and 2007, respectively.


38


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





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





Stock-Based
Compensation.  Effective January 1, 2006, Hemiwedge began
recording compensation expense associated with stock options and other forms of
equity compensation in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 123R,Share-Based Payment, as
interpreted by SEC Staff Accounting Bulletin No. 107.  Prior to
January 1, 2006, Hemiwedge had accounted for stock options according
to the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to
Employees, and related interpretations, and therefore no related
compensation expense was recorded for awards granted with no intrinsic
value.  Hemiwedge adopted the modified prospective transition method
provided for under SFAS No. 123R, and, consequently, have not retroactively
adjusted results from prior periods.





There
were 345,000 and 991,000 options issued to employees and non-employee
directors during the year ending December 31, 2008 and 2007,
respectively.





Accounting for Derivative
Instruments. Hemiwedge does not use derivative instruments to hedge
exposures to cash flow, market, or foreign currency risks. Hemiwedge evaluates
all of it financial instruments under the application of SFAS 133 and EITF 00-19
to determine if such the financial instruments are derivatives or contain
features that qualify as embedded derivatives. There are no derivative
instruments outstanding as of December 31, 2008 and 2007.





Basic and Diluted Net Income per
Share.  Basic loss per share is computed using the weighted
average number of shares of common stock outstanding during each period. Diluted
loss per share includes the dilutive effects of common stock equivalents on an
“as if converted” basis. For the years ended 2008 and 2007, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.





Research and
Development.  All costs for research and development activities
are expensed as incurred.





Recently Issued Accounting
Pronouncements.  In September 2006, the FASB issued FASB
Statement No. 157, which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, and is
effective for fiscal years beginning after November 15, 2007.





In June
2008, the FASB ratified EITF Issue 07-5, "Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity's Own Stock" ("EITF 07-5"). Paragraph
11(a) of Statement of Financial Accounting Standard No 133, “Accounting for
Derivatives and Hedging Activities” ("SFAS 133") specifies that a contract that
would otherwise meet the definition of a derivative, but is both (a) indexed to
its own stock and (b) classified in stockholders' equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer's own stock,
including evaluating the instrument's contingent exercise and settlement
provisions, and thus able to qualify for the SFAS 133 paragraph 11(a) scope
exception. It also clarifies the impact of foreign-currency-denominated strike
prices and market-based employee stock option valuation instruments on the
evaluation. EITF 07-5 will be effective for the first annual reporting period
beginning after December 15, 2008, and early adoption is
prohibited.





Hemiwedge
does not expect the adoption of this or any other recently issued accounting
pronouncements to have a significant impact on their consolidated financial
position, results of operations, or cash flows.


39


NOTE
2 – GOING CONCERN





As shown
in the accompanying consolidated financial statements, Hemiwedge incurred
recurring losses from operations for the year ended December 31, 2008, and
has an accumulated deficit and negative working capital as of December 31, 2008.
These conditions raise substantial doubt as to Hemiwedge’s ability to continue
as a going concern.  Hemiwedge has sought recapitalization with debt
and equity during 2008; however, there can be no assurance that it will
successfully recapitalize. In addition, management is trying to continue to
increase Hemiwedge’s’ revenues and improve its results of operations to a level
of profitability including revenues and cash flow from its HVC
subsidiary.  New sales representative agreements have been executed
during 2008 to assist in the sales and marketing efforts to improve our results
of operations.  As of the date of this report, Hemiwedge believes that
it will not be able to fund its operations, working capital requirements, and
debt service requirements through cash flows generated by operations alone.
Management will seek to raise additional capital in fiscal 2009, and possibly
beyond 2009 if Hemiwedge’s’ results of operations do not continue to improve or
if the need otherwise arises.  The financial statements do not include
any adjustments that might be necessary if Hemiwedge is unable to continue as a
going concern.





NOTE
3 – DISCONTINUED OPERATIONS





On
October 8, 2008, the Company’s wholly owned subsidiary Shumate Machine Works,
Inc. (“Machine Works”) consummated the sale of substantially all of Machine
Works’ assets to American International Industries, Inc. (“Purchaser”). The sale
was effected pursuant to an asset purchase agreement (the “Purchase Agreement”)
pursuant to which Machine Works transferred substantially all of its assets and
certain enumerated liabilities to Purchaser. The aggregate purchase price was
$6,703,749 consisting of assumption by Purchaser of (i) $5 million of promissory
notes due Stillwater National Bank and Trust Company and (ii) $1,703,749 of
certain other liabilities, including without limitation, accounts payable of
Machine Works.





The
assets and liabilities of Machine Works sold and transferred are comprised of
the following at October 8, 2008 and December 31, 2007:





October
      8, 2008
                        
                        
                        December
      31, 2007Accounts
      receivable
                        
                        
                        294,888
                        
                        
                        
                        480,164Inventories
                        
                        
                        760,373
                        
                        
                        
                        314,686Property
      and equipment, net
                        
                        
                        1,566,894
                        
                        
                        
                        1,838,214Other
      assets
                        
                        
                        11,603
                        
                        
                        
                        11,469Total
      assets
                        
                        
                        2,633,758
                        
                        
                        
                        2,644,533Accounts
      payable
                        
                        
                        1,100,489
                        
                        
                        
                        580,158Accrued
      liabilities
                        
                        
                        386,726
                        
                        
                        
                        501,111Notes
      payables
                        
                        
                        4,167,256
                        
                        
                        
                        3,829,460Total
      liabilities
                        
                        
                        5,654,471
                        
                        
                        
                        4,910,729Net
      liabilities of discontined operations
                        
                        
                        (3,020,713
                        )
                        
                        
                        (2,266,196
                        )





As shown
in the table below, the gain recognized on this transaction was
$3,558,508.


40





Aggregate
      purchase price:Assumption
      of Stillwater National Bank debt
                    
                    $
                    5,000,000Assumption
      of certain liabilities
                    
                    
                    1,703,7496,703,749Less:Accounts
      receivable
                    
                    
                    294,888Inventory
                    
                    
                    760,373Property
      and equipment, net
                    
                    
                    1,620,231Other
      assets
                    
                    
                    49,398Negative
      working capital adjustment
                    
                    
                    420,3513,145,241Gain
      on sale
                    
                    
                    3,558,508





The
Purchase Agreement also contained a purchase price adjustment whereby if the
Assumed Liabilities (as defined in the Purchase Agreement) exceeded the
accounts receivable, inventory, cash and pre-paid assets (otherwise known as
“Negative Working Capital”), then Shumate will issue Purchaser that number of
shares of our common stock equal to the Negative Working Capital up to a maximum
of $700,000. The actual number of shares to be issued is based upon the closing
price for Shumate's common stock on the closing date.  The negative
working capital on the day of the sale was $420,351





Prior
year financial statements have been restated to present the operations of
Shumate Machine Works as discontinued operations.





The
assets and liabilities of the discontinued operations are presented separately
under the captions "Current assets from discontinued operations," “Assets held
for sale,” "Non-Current assets from discontinued operations," "Current
liabilities from discontinued operations," and “Long-term liabilities from
discontinued operations” respectively, in the accompanying Balance Sheets at
December 31, 2007.  The results of operations are presented under the
caption “Income (loss) from discontinued operations” in the accompanying
Consolidated Statement of Operations for the years ended December 31, 2008 and
2007.





NOTE
4 – RESEARCH AND DEVELOPMENT CONTRACT





In July
2006, HVC entered into an agreement with At Balance Americas, LLC, a
Houston-based Managed Pressure Drilling, or MPD, services company. At Balance
Americas, LLC (“At Balance”) is an affiliate of Shell Technology Ventures, a
leading energy-focused venture capital firm with offices in Houston, Texas. At
Balance is not a related party and the development agreement was negotiated on
an arm’s length basis. The agreement provided HVC with funding of approximately
$895,000 during the contract period to develop a down-hole isolation valve, or
DIV, using our Hemiwedge® valve technology. The two year contract ended on July
13, 2008.  The contract included three major phases with partial
funding in advance of each phase, and progress payments throughout each phase.
The three major phases (including estimated funding for each phase)
were:  Phase I –Engineering and Design ($292,500); Phase
II—Procurement and Manufacturing ($805,000) and Phase III—Testing and Validation
($287,300).  To the extent that actual costs vary from the estimates
provided, Hemiwedge utilized a change order to request additional monies from At
Balance during an uncompleted phase when needed.  At Balance had the
sole discretion to approve any such request for additional money.





The table
below includes revenue and expenses recognized by HVC during the years ended
December 31, 2008, and 2007:


41





2008
                  
                  
                  2007Contractual
      Research and Development Revenue
                  
                  
                  -
                  
                  
                  
                  1,084,629Contractual
      Research and Development Expense
                  
                  
                  -
                  
                  
                  
                  437,022Payments
      Received
                  
                  
                  -
                  
                  
                  
                  495,219





NOTE
5 – PROPERTY AND EQUIPMENT





Property
and equipment consisted of the following at December 31, 2008 and
2007:





Description
                        
                        Life
                        
                        2008
                        
                        
                        2007Shop
      equipment
                        
                        5-12
      years
                        
                        $
                        373,991
                        
                        
                        $
                        363,677Other
      equipment and furniture
                        
                        3
      years
                        
                        
                        233,499
                        
                        
                        
                        233,499Leasehold
      improvements
                        
                        5
      years
                        
                        
                        243,910
                        
                        
                        
                        243,910851,400
                        
                        
                        
                        841,086Less:
      accumulated depreciation
                        
                        
                        
                        
                        (502,750
                        )
                        
                        
                        (303,239
                        )Property
      and equipment, net
                        
                        
                        
                        $
                        348,650
                        
                        
                        $
                        537,847





Depreciation
expense in continuing operations totaled $199,509 and $187,699 in 2008 and 2007,
respectively.





NOTE
6 – INTELLECTUAL PROPERTY





On
December 5, 2005, Hemiwedge acquired for $238,500 the intellectual property
rights to the HemiwedgeÒ line of products,
including the HemiwedgeÒ valve, from Soderberg
Research and Development, Inc. and certain of its
affiliates.  Hemiwedge contributed these intellectual property rights
to HVC as a capital contribution.  The intellectual property rights
acquired consist of all patents, trademarks, and the internet website relating
to the HemiwedgeÒ
product line.  The aggregate consideration paid for the intellectual
property rights consisted of $138,500 in cash and a two-year six percent
promissory note in the principal amount of $100,000, payable in 24 equal
installments of principal and interest.  In addition, Hemiwedge agreed
to deposit (a) $72,000 into an escrow account, the property of Soderberg
Research Inc., to be paid in the form of a monthly advance in the amount of
$3,000 for each month of the 24 month period beginning in January 2006 as an
advance against future potential royalties.  Royalties will be earned
beginning January 1, 2008, based on (a) three percent of the net sales proceeds
collected from customers from (b) gross revenue from sales of products to which
the acquired intellectual property relates, less (c) sales and/or use taxes,
import and/or export duties, outbound transportation costs, and amounts allowed
or credited due to returns, which payments shall continue until March 29,
2013.  The $72,000 in monthly advances shall be credited against the
three percent of the net sales proceeds.  As of December 31, 2008,
royalties of $2,232 had been earned leaving a remaining advance of $69,768 on
the balance sheet.  Amortization expense in continuing operations
totaled $29,040 and $29,040 in 2008 and 2007, respectively.





NOTE
7 – ACCRUED EXPENSES





Accrued
expenses as of December 31, 2008 and 2007 included the
following:


42





2008
                    
                    
                    2007Payroll
      taxes and estimated penalties
                    
                    $
                    17,525
                    
                    
                    $
                    21,050Property
      tax
                    
                    
                    -
                    
                    
                    
                    39,354Accrued
      salaries and commissions
                    
                    
                    -
                    
                    
                    
                    32,745Investor
      relation payable
                    
                    
                    90,500
                    
                    
                    
                    -Failed
      Acquisition Contingency
                    
                    
                    253,995
                    
                    
                    
                    178,995Officer
      Indemnification
                    
                    
                    560,000
                    
                    
                    
                    580,000Payable
      to AMIN
                    
                    
                    450,128
                    
                    
                    
                    -Other
                    
                    
                    85,596
                    
                    
                    
                    77,689$
                    1,457,744
                    
                    
                    $
                    929,833





On
November 5, 2007, Sunbelt Machine Works Corporation terminated that certain
Stock Purchase Agreement dated as of August 17, 2007 by and among Hemiwedge
Industries, Inc., Sunbelt Machine Works Corporation and each of the stockholders
of Sunbelt.  In connection therewith, Hemiwedge was required to pay
Sunbelt a termination fee of $150,000 for which we have recorded an accrued
expense of $178,995 for such contingency as of December 31,
2007.  During the year ended December 31, 2008, Hemiwedge accrued an
additional $75,000 for additional contingent liabilities related to the
terminated agreement.





During
the year ended December 31, 2007, Hemiwedge agreed to indemnify one of its
officers in connection with a judgment assessed against him personally resulting
from a previously discharged corporate tax liability.  This resulted
in an accrued expense of $580,000 in the 4th quarter
of 2007 which was reduced by $20,000 in 2008.





In
addition, Hemiwedge accrued a payable  of $420,351 to American
International Industries, Inc., related to the negative working capital
adjustment discussed in Note 3 above.  There were additional items due
to American totaling $29,777.





NOTE
8 – NOTES PAYABLE AND CAPITAL LEASE





During
the year ended December 31, 2007, Hemiwedge sold $3,050,000 of principal amount
of convertible promissory notes with warrants to purchase 610,000 shares of its
common stock to two accredited investors.   The notes have a 1
year term and bear interest at ten percent (10%); provided, however, that
Hemiwedge is required to prepay the note if Hemiwedge consummates a subsequent
equity financing (as defined) within the next 12 months. Interest is payable
monthly in arrears, however Hemiwedge has the right to defer any interest
payment and accrue same to principal. The notes are convertible into Hemiwedge
common stock at a fixed conversion price of $1.89. In addition, if Hemiwedge
closes a subsequent equity financing within the next 12 months, the note holders
have the option to convert the outstanding balance of such note into such
financing on the same terms as the other investors in such
financing.


Under the
terms of the notes and the related warrants, the notes and the warrants are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of Hemiwedge’s
then outstanding common stock as determined in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended.





The notes
were issued with a warrant to purchase up to 610,000 shares of Hemiwedge’s
common stock at an exercise price of $1.89 per share, subject to adjustment. The
warrant holders may designate a “cashless exercise option.” This option entitles
the warrant holders to elect to receive fewer shares of common stock without
paying the cash exercise price. The number of shares to be determined by a
formula based on the total number of shares to which the warrant holder is
entitled, the current market value of the common stock and the applicable
exercise price of the warrant.


Hemiwedge determined
that the conversion feature of the note and the warrants issued were not
derivative instruments pursuant to SFAS No. 133, Accounting for Derivatives, as
amended.  Under the provisions of EITF Issue 98-5 and
00-27, Hemiwedge discounted the fair value of warrants attached to the
notes and calculated the intrinsic value of the beneficial conversion feature
using the Black-Scholes Option Pricing Model to exceed the principal value of
the note. The resulting discount of $552,495 is being amortized over the life of
the notes using the effective interest method.  The amortized amount
for the year ended December 31, 2007 is $187,589. A summary of these convertible
notes is as follows:


43





Carrying
      amount of notes as of December 31, 2007
                    
                    $
                    2,800,535Add:  amortization
      of discounts
                    
                    
                    364,290Add:  accrued
      interest
                    
                    
                    331,404Carrying
      amount of notes as of December 31, 2008
                    
                    $
                    3,496,229





Hemiwedge
granted the investors in the offering registration rights for the resale of the
shares issuable upon conversion of the note and upon exercise of the warrant. To
the extent that all such shares are not registered pursuant to the granted
piggyback registration rights, Hemiwedge agreed to register the remaining
underlying shares, if any, by January 6, 2008.





In
connection with the offering, the placement agents received $215,000 in fees. In
addition, another $10,000 in legal fees were incurred.  The net
proceeds of this offering after the payment of commissions, fees and other
expenses of the offering were approximately $2,825,000.





On January 25, 2008, Hemiwedge entered
into an Amended and Restated Loan Agreement with Stillwater National Bank and
Trust Company (“Stillwater”) (the "Amended Loan Agreement").





The Amended Loan Agreement amends and
restates the Prior Agreement as follows:





1.  Term Loan. Hemiwedge’s
current Term Note dated October 19, 2005, in favor of Stillwater had an
outstanding principal balance of $3,003,998 as of January 25, 2008, and a
maturity date of April 19, 2008. Stillwater loaned Hemiwedge (along with its
co-borrowers Shumate Machine Works, Inc. and Hemiwedge Valve Corporation)
$3,329,000 pursuant to a new term note dated January 25, 2008, which funds
advanced under the new term note were used to refinance the old term note and
provide working capital. The new term note requires Hemiwedge to make 26 equal
monthly payments (beginning on February 28, 2008) in an amount sufficient to
fully amortize principal and interest on the amended and restated note over 64
months. The new term note is due and payable on April 19, 2010. The new term
note bears interest at a rate equal to the prime rate plus two percent, and it
is secured by a first priority security interest in all of Hemiwedge’s existing
and future assets as well as a security interest in certain personal assets of
the President of Hemiwedge.  The interest rate as of September 30,
2008, was 7%.  This has been accounted for as a modification of
debt.





2.  Revolving Loan.
Hemiwedge’s current revolving promissory note dated October 19, 2005 in favor of
Stillwater had an outstanding principal balance of $893,676 as of January 25,
2008, and a maturity date of April 19, 2008. Stillwater loaned Hemiwedge (along
with its co-borrowers Shumate Machine Works, Inc. and Hemiwedge Valve
Corporation) $1,000,000 pursuant to a new revolving promissory note dated
January 25, 2008, which funds advanced under the new revolving promissory will
be used to refinance the old revolving promissory note and provide working
capital. The initial balance on the line of credit was the balance of
Hemiwedge’s existing line of credit with Stillwater ($893,676 principal balance
as of January 25, 2008). The advances available under the new revolving
promissory note are limited to a borrowing base of the sum of (a) 85% of
eligible accounts receivable, and (b) 50% of eligible inventory. The new
revolving promissory note bears interest at a rate equal to the prime rate plus
two percent, and it is secured by a first priority security interest in all of
Hemiwedge’s existing and future assets as well as a security interest in certain
personal assets of the President of Hemiwedge. The interest rate as of September
30, 2008, was 7%.  On the 28th day of each month, beginning January
28, 2008, Hemiwedge will pay all interest accrued on the new revolving
promissory note. The amount Hemiwedge can borrow on the line of credit is
subject to qualifying accounts receivable and inventory. The new revolving
promissory note will mature and become fully due and payable on April 19,
2009.  This has been accounted for as a modification of
debt.





On
September 30, 2008, the amounts due under this facility were consolidated under
a Loan and Consolidation Agreement, as discussed below.  All amounts
due under the term note and the revolving note for this facility were assumed on
October 8, 2008, by the purchaser of substantially all of the assets held by our
subsidiary Shumate Machine Works, Inc.


44


In
October 2007, Hemiwedge sold $250,000 of principal amount of a promissory
note.  The note was due and payable as of December 31, 2007, and bears
interest at twelve percent (12%).  The note has been extended as a
demand loan.





In June
2006, Hemiwedge entered into a financing agreement with an independent third
party to sell and leaseback certain machinery and equipment, which is accounted
for as a capital lease.  This lease agreement contains a residual
value guarantee at the end of the lease term.  The cost of equipment
under the capital lease is included in the balance sheet as shop equipment of
approximately $100,000 at December 31, 2008. Amortization of the assets under
the capital lease were included in the depreciation expense. The purchase option
on the lease was executed in December 2008.





On
December 5, 2005, Hemiwedge executed a promissory note to Soderberg Research and
Development, Inc. and certain of its affiliates in the amount of $100,000 in
connection with the purchase of intellectual property (See Note 6). The note
bears interest at the rate of six percent and is payable in twenty-four equal
installments of principal and interest beginning January 1, 2006 and ending
December 1, 2007.





NOTE
9 – SALE LEASEBACK





On May
15, 2008, Hemiwedge’s wholly owned subsidiary, Shumate Machine Works entered
into a series of simultaneous transactions pursuant to which it purchased the
property underlying its lease (the “Original Lease”) with Brewer Family
Charitable Remainder Annuity Trust #1 located at 1011 Beach Airport Road,
Conroe, Texas 77301.  The operations of HVC are conducted at this
location. The terms of the Original Lease included an option to purchase the
underlying property.  Shumate Machine Works purchased the property for
$1,726,949 pursuant to a warranty deed.





Concurrently
with the purchase of the property, Shumate Machine Works entered into a sale and
simultaneous lease transaction with Trader Properties LLC.  Shumate
Machine Works sold the property to Trader Properties for an aggregate purchase
price of $2,180,000 pursuant to a general warranty deed with vendor’s
lien.  As such, Shumate Machine Works received net cash of $319,617,
as more particularly set forth below





Sales
      Price
                    
                    $
                    2,180,000Less:Settle
      amount owed on the purchase of the Asset
                    
                    
                    -
      1,719,978Sales
      commission paid on the sale of the Asset
                    
                    
                    -
      100,280Loan
      Origination Fees
                    
                    
                    -
      17,800Title
      Insurance
                    
                    
                    -
      10,829Prorated
      County Taxes
                    
                    
                    -
      9,247Other
      Closing Costs
                    
                    
                    - 2,249Net
      Cash Received
                    
                    $
                    319,617





As shown
in the table below, the gain realized on the sale of the property was
$304,031.


45





Sales
      Price
                      
                      $
                      2,180,000Less:Basis
      in Asset
                      
                      
                      -
      1,726,949Sales
      commission paid on the sale of the Asset
                      
                      
                      -
      100,280Loan
      Origination Fees
                      
                      
                      -
      17,800Title
      Insurance
                      
                      
                      -
      10,829Other
      Closing Costs
                      
                      
                      - 20,111Gain
      on Sale
                      
                      $
                      304,031





Pursuant
to the guidelines in SFAS 13, the gain is accounted for as a deferred gain on
the balance sheet and amortized straight-line over the life of the lease, at the
rate of $2,533 per month as a reduction to rent expense.





The terms
of the Commercial Lease Agreement dated May 15, 2008, between Shumate Machine
Works and Trader Properties is for a term of 10 years with a monthly rent of
$24,000 per month, which shall be increased by 2% each year for the term of the
lease.  The lessor is required to maintain public liability insurance
of not less than $1,000,000 during the term of the lease.  To secure
performance under the commercial lease, we granted Trader Properties a lien and
security interest against all of our non-exempt personal property that is in the
leased premises.  This lease is being accounted for as an operating
lease.





In May
15, 2008, Hemiwedge guaranteed payment and performance of the lease pursuant to
a Guaranty Agreement dated May 15, 2008, with Trader Properties.  In
addition, Hemiwedge agreed to issue Trader Properties a warrant to purchase
100,000 shares of its common stock at an exercise price of $0.25 per share, with
a five year term in connection with the lease.





NOTE
10 – LICENSE OF CERTAIN HEMIWEDGE ASSETS





On
October 15, 2008, we, and our wholly owned subsidiary Hemiwedge Valve
Corporation (“HVC”), entered into a Transfer Agreement with Tejas Research &
Engineering, L.P. (“Tejas”) pursuant to which we and HVC transferred certain
assets and granted certain license rights related to our Hemiwedge Valve
Technology to Tejas in exchange for $3.5 million in cash at closing and a 5 year
common stock purchase warrant to purchase 2,443,269 shares of our common stock
at a purchase price of $0.25 per share. The transfer of assets was consummated
pursuant to the Hemiwedge Intellectual Property Agreement between HVC and Tejas,
under which Tejas received (i) a worldwide, perpetual, fully paid up,
irrevocable and sub-licensable license for the intellectual property related to
HVC’s hemispherical wedge valves for the markets, or Fields of Use, of Sub-Sea
and Offshore, Drilling and Workover, above 5,000 PSI, Surface Safety valves and
all Downhole applications, all together known as the “Combined Fields of Use;”
(ii) assignment of two pending U.S. patent applications related to specialty
downhole valves and (iii) the use of the Hemiwedge registered trademark in their
Combined Fields of Use subject to our oversight.





HVC still
retains all rights to the original Hemiwedge Cartridge valve product targeted
for the API 6D and ANSI valves in the oil & gas production, pipeline,
refining and power markets.





As shown
in the table below, the net revenue recognized on this transaction was
$2,613,985.





Sales
      Price
                        
                        $
                        3,500,000Less:Fair
      market value of warrants issued
                        
                        
                        - 635,790Finder's
      Fee
                        
                        
                        - 215,000Legal
      Fees associated with the transaction
                        
                        
                        - 35,225Net
      revenue on the Sale of license
                        
                        $
                        2,613,985


46





NOTE
11 – INCOME TAXES





Hemiwedge
uses the liability method, where deferred tax assets and liabilities are
determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for financial
and income tax reporting purposes.  Hemiwedge has incurred significant
net losses in past years and, therefore, has no tax liability.  The
net deferred tax asset generated by the loss carry-forward has been fully
reserved.  The cumulative net operating loss carry-forward is
approximately $27,000,000 at December 31, 2008, and will expire in the years
2022 through 2027.





At
December 31, 2008 and 2007, deferred tax assets consisted of the
following:




2008
                
                
                2007Deferred
      tax asset
                
                $
                9,615,000
                
                
                $
                9,445,000Valuation
      allowance
                
                
                (9,615,000
                )
                
                
                (9,445,000
                )Net
      deferred tax asset
                
                $
                -
                
                
                $
                -







Internal
Revenue Section 382 restricts the ability to use these carryforwards whenever an
ownership change as defined occurs.  Hemiwedge incurred such an
ownership change both 2006 and 2005.  As the result of the ownership
change, Hemiwedge’ use of net operating losses through the date of change is
restricted.  Losses subsequent to the date of change are not
restricted.





NOTE
12 – COMMON STOCK





Between
March 1, 2007 and March 31, 2007, Hemiwedge issued an aggregate of 666,768
shares of common stock for the exercise of outstanding warrants. The net
proceeds of these warrant exercises to Hemiwedge after the payment of
commissions, fees, and other expenses of the offering were $735,560. Of the
666,768 warrants exercised, 536,300 were Class A Warrants. The Class A Warrants
were exercised at a price of $1.25 per share and resulted in approximately
$653,366 in net proceeds to Hemiwedge after the payment of commissions, fees,
and other expenses. All of the holders of the Class A Warrants that were
exercised received one share of Hemiwedge's common stock and one Class B Warrant
as a result of such exercise. The Class B Warrants have a term of five years and
an exercise price of $2.00 per share. The Class B Warrants include piggy-back
registration rights, subject to customary underwriter cutbacks. If the common
stock underlying the Class B Warrants is not registered by March 31, 2008, the
holders will be entitled to exercise the Class B Warrants on a cashless basis at
any time that there is not an effective registration statement covering the
resale of the common stock underlying the Class B Warrants. During the nine
months ended September 30, 2007, Hemiwedge incurred $81,019 costs of raising
capital that were related to the offering.





Hemiwedge
evaluated the Class B Warrants to determine if they were within the scope of
SFAS 133 and EITF 00-19. Hemiwedge concluded the Class B Warrants should not be
classified as a liability and therefore are not subject to SFAS
133.





Between
April 1, 2007 and December 31, 2007, Hemiwedge issued an aggregate of 420,050
shares of common stock valued at $660,912 for consulting services, professional
fees, and hiring incentives.





Between
July 1, 2007 and September 30, 2007, Hemiwedge issued an aggregate of 13,752
shares of common stock for the exercise of outstanding Class A Warrants at an
exercise price of $1.25 per share, resulting in net proceeds of
$17,190.





Between
July 1, 2007 and September 30, 2007, Hemiwedge issued an aggregate of 150,000
shares of common stock for the exercise of non-qualified stock options at an
exercise price of $0.65 per share.  The stock options were exercised
by payment by the option holder of 54,776 shares of outstanding common stock
valued at $97,500 on the date of exercise.





Between
July 1, 2007 and September 30, 2007, Hemiwedge incurred $24,454 in offering
costs.


47


In
December, 2007, the company issued 60,000 shares of restricted stock as a hiring
incentive.  5,000 shares vest each quarter beginning in the first
quarter of 2008, for a three year vesting schedule.




During
the quarter ended June 30, 2008, Hemiwedge issued 350,000 shares of common stock
to several individuals for their services. These shares were valued and recorded
at their fair value $157,500.  This amount was recorded as a prepaid
expense and as the provider applies the stock to invoices, the prepaid value is
reduced against accounts payable. In addition, Hemiwedge issued 132,000 shares
to Stillwater National Bank in connection with making the loan referenced in
Note 4 above.  The shares were valued and recorded at their fair value
of $55,400.  This cost was recorded as debt discount and was amortized
over the life of the loan using the effective interest method.  In
December, 2007, Hemiwedge issued 60,000 shares of restricted stock as a hiring
incentive. 5,000 shares vest each quarter beginning in the first quarter of
2008, for a three year vesting schedule.  During the year ended
December 31, 2008, 20,000 shares vested and were valued and expensed at
$14,000.




During
the quarter ended March 31, 2008, Hemiwedge issued 369,000 shares of common
stock to several individuals for their services. These shares were valued and
recorded at their fair value $155,640.  This amount was recorded as a
prepaid expense and as the provider applies the stock to invoices, the prepaid
value is reduced against accounts payable.




In
connection with the lease transaction of the Hemiwedge Valve Corporation
facility, Hemiwedge Industries agreed to issue the landlord, Trader Properties
LLC, a warrant to purchase 100,000 shares of its common stock at an exercise
price of $0.25 per share with a five year term.  The warrants were
valued and recorded at their fair value of $14,595 using the Black-Scholes
pricing model and expensed during the quarter ended June 30, 2008.




On July
25, 2008, Hemiwedge issued a total of 348,470 shares of common stock to various
individuals for services provided from January to June 2008.  196,679
shares were issued to employees who had entered into an agreement to receive a
portion of their net compensation in shares in place of cash.  These
shares represent $73,992 in net pay.  120,145 shares were issued to an
officer as reimbursement for company expenses that had been paid by the
officer.  These shares represent $31,238 in
expenses.  31,646 shares were issued to a consultant for engineering
services related to certain tests of the Hemiwedge® valve.  These
shares represent $9,750 in consulting fees.




On August
6, 2008, Hemiwedge issued a total of 50,000 shares of common stock to various
individuals for services.  These shares were valued and recorded at
their fair value $12,500.  This amount was recorded as a prepaid
expense and as the provider applies the stock to invoices, the prepaid value is
reduced against accounts payable.  In addition we issued 76,338 shares
of our common stock to a single accredited investor in consideration of accrued
and unpaid interest of $32,235 due under a convertible promissory
note.


On
October 6, 2008, Hemiwedge issued a total of 50,000 shares of common stock to
various individuals for services.  These shares were valued and
recorded at their fair value $17,000.  This amount was recorded as a
prepaid expense and as the provider applies the stock to invoices, the prepaid
value is reduced against accounts payable.  60,000 shares were issued
to an employee as a hiring incentive valued at $20,400.  On December
11, 2008, we issued 40,812 shares of our common stock to a single accredited
investor in consideration of accrued and unpaid interest of $11,250 due under a
convertible promissory note.




Hemiwedge
incurred approximately $279,643 in non-cash stock and option awards associated
with FASB 123R for the year ended December 31, 2008, from prior period
grants.  In addition, Hemiwedge incurred approximately $89,928 in
non-cash options awards associated with FASB 123R due to the modification of
existing option agreements to reduce the exercise price from various amounts
down to $0.50.




Variables
used in the Black-Scholes option-pricing model during the year ended December
31, 2008, include (1)  risk-free interest rate from 0.92% to 2.26%,
(2) option life is the expected remaining life of the options, (3) expected
volatility from 160% to 187%, and (4) zero expected dividends.





NOTE
13 – STOCK OPTIONS AND WARRANTS





Hemiwedge
currently has two stock option plans: (a) the 2001 Stock Option Plan reserved
285,714 common shares and 300,571 stock options have been granted through
December 31, 2007 of which 296,429 options have expired unexercised, and (b) the
2005 Stock Incentive Plan reserved 10,000,000 shares, of which 4,783,690 shares
have been issued to date and 1,796,000 options have been granted through
December 31, 2007.  In addition, there were 48,571 non-plan options
outstanding as of December 31, 2006.


48


During
the year ended December 31, 2007, Hemiwedge granted 991,000 options to its
employees and non-employee directors at exercise prices ranging from $1.00 to
$2.25 per share for services rendered and valued at the options' fair value
totaling $728,170. Of this amount, $516,645 was recorded as compensation expense
during the year ended December 31, 2007 and $211,525 was deferred to recognize
over the future periods in which the options vest and the services will be
performed.  The weighted average term in which the unrecognized
expense will be amortized is 2.4 years.





During
the first quarter of 2007, Hemiwedge determined that additional working capital
was needed to fund its continuing operations. Hemiwedge decided to initiate a
capital raising effort via a private offering to a limited number of accredited
investors during a limited period of time. In exchange for the exercise of any
or all of the investors' Class A warrants, the investors would receive the
applicable shares of common stock and Class B warrants. In connection therewith,
Hemiwedge granted 536,300 warrants at an exercise prices of $2.00 per share to
investors associated with the exercise of Class A Warrants. These warrants
vested immediately and have a life of five years. These warrants have a fair
value of $890,571.





Variables
used in the Black-Scholes option-pricing model during the year ended December
31, 2007, include (1) 2.85% - 5.00% risk-free interest rate, (2) 2.5 to 3.5 year
option life is the expected remaining life of the options, (3) expected
volatility of 81% - 182%, and (4) zero expected dividends.





During
the year ended December 31, 2007, Hemiwedge also recognized $146,227 option
expense for options granted in the prior year that vested in the current
year.





During
2007, 150,000 options were exercised and 163,047 expired
unexercised.  In the same period 680,520 warrants were exercised and
891,045 expired unexercised.





Shumate
Machine Works sold the 1011 Beach Airport Road property to Trader Properties
LLC, which Trader Properties immediately leased to Hemiwedge Valve
Corporation.  The terms of the Commercial Lease Agreement between
Hemiwedge Valve Corporation and Trader Properties is for a term of 10 years with
a monthly rent of $24,000 per month, which shall be increased by 2% each year
for the term of the lease.  We guaranteed payment and performance of
the lease pursuant to a Guaranty Agreement.  In addition, on May 15,
2008, we issued Trader Properties a five year warrant to purchase 100,000 shares
of its common stock at an exercise price of $0.25 per share.  These
warrants vested immediately and have a life of 5 years.  These
warrants have a fair value of $14,595.





On
October 15, 2008, we, and our wholly owned subsidiary Hemiwedge Valve
Corporation (“HVC”), entered into a Transfer Agreement with Tejas Research &
Engineering, L.P. (“Tejas”) pursuant to which we and HVC transferred certain
assets and granted certain license rights related to our Hemiwedge Valve
Technology to Tejas in exchange for $3.5 million in cash at closing and a 5 year
common stock purchase warrant to purchase 2,443,269 shares of our common stock
at a purchase price of $0.25 per share.  These warrants vested
immediately and have a life of 5 years.  These warrants have a fair
value of $578,186.





On
October 27, 2008, we issued a 5-year warrant to a single accredited investor to
purchase 250,000 shares of our common stock at an exercise price of $0.30 as
consideration for certain services rendered.  These warrants vested
immediately and have a life of 5 years.  These warrants have a fair
value of $57,604.





During
the year ended December 31, 2008, Hemiwedge granted 345,000 options to its
employees at exercise prices ranging from $0.25 to $0.30 per share for services
rendered and valued at the options' fair value totaling $56,946. Of this amount,
$39,118 was recorded as compensation expense during the year ended December 31,
2008.





Variables
used in the Black-Scholes option-pricing model during the year ended December
31, 2008, include (1) risk-free interest rate from 0.92% to 2.26%, (2) option
life is the expected remaining life of the options, (3) expected volatility from
101% to 187%, and (4) zero expected dividends.





During
the year ended December 31, 2008, Hemiwedge also recognized $240,525 option
expense for options granted in the prior year that vested in the current
year.





During
2008, no options were exercised and 193,810 expired unexercised.  In
the same period no warrants were exercised and none expired
unexercised.


49


Summary
information regarding options and warrants is as follows:





Weighted
                                                        
                                                        
                                                        Aggregate
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Weighted
                                                        
                                                        
                                                        AggregateAverage
                                                        
                                                        
                                                        Intrinsic
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Average
                                                        
                                                        
                                                        IntrinsicShare Price
                                                        
                                                        Options
                                                        
                                                        
                                                        Exercise Price
                                                        
                                                        
                                                        Value
                                                        
                                                        
                                                        Warrants
                                                        
                                                        
                                                        Exercise Price
                                                        
                                                        
                                                        ValueOutstanding
      at December 31, 2006
                                                        
                                                        
                                                        857,857
                                                        
                                                        
                                                        
                                                        1.55
                                                        
                                                        
                                                        $
                                                        222,900
                                                        
                                                        
                                                        
                                                        2,648,385
                                                        
                                                        
                                                        
                                                        1.51
                                                        
                                                        
                                                        $
                                                        356,802Year
      ended December 31, 2007:Granted
                                                        
                                                        
                                                        991,000
                                                        
                                                        
                                                        
                                                        1.57
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        2,023,490
                                                        
                                                        
                                                        
                                                        1.69Exercised
                                                        
                                                        
                                                        (150,000
                                                        )
                                                        
                                                        
                                                        0.65
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (680,520
                                                        )
                                                        
                                                        
                                                        1.13Forfeited
                                                        
                                                        
                                                        (163,047
                                                        )
                                                        
                                                        
                                                        3.66
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (891,045
                                                        )
                                                        
                                                        
                                                        2.29Outstanding
      at December 31, 2007
                                                        
                                                        
                                                        1,535,810
                                                        
                                                        
                                                        $
                                                        1.42
                                                        
                                                        
                                                        $
                                                        5,000
                                                        
                                                        
                                                        
                                                        3,100,310
                                                        
                                                        
                                                        $
                                                        1.49
                                                        
                                                        
                                                        $
                                                        20,320Year
      ended December 31, 2008:Granted
                                                        
                                                        
                                                        345,000
                                                        
                                                        
                                                        
                                                        0.26
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        2,793,269
                                                        
                                                        
                                                        
                                                        0.25Exercised
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Forfeited
                                                        
                                                        
                                                        (193,810
                                                        )
                                                        
                                                        
                                                        1.27
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Outstanding
      at December 31, 2008
                                                        
                                                        
                                                        1,687,000
                                                        
                                                        
                                                        $
                                                        0.45
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        
                                                        5,893,579
                                                        
                                                        
                                                        $
                                                        0.78
                                                        
                                                        
                                                        $
                                                        -





Options
outstanding and exercisable as of December 31, 2008:





Outstanding
                                  
                                  
                                  ExercisableExercise
                                  
                                  
                                  Number
                                  
                                  
                                  Remaining
                                  
                                  
                                  NumberPrice
                                  
                                  
                                  of Shares
                                  
                                  
                                  Life (years)
                                  
                                  
                                  of Shares$
                                  0.50
                                  
                                  
                                  
                                  100,000
                                  
                                  
                                  
                                  2.03
                                  
                                  
                                  
                                  66,6670.50
                                  
                                  
                                  
                                  100,000
                                  
                                  
                                  
                                  2.22
                                  
                                  
                                  
                                  100,0000.50
                                  
                                  
                                  
                                  100,000
                                  
                                  
                                  
                                  0.02
                                  
                                  
                                  
                                  66,6670.50
                                  
                                  
                                  
                                  75,000
                                  
                                  
                                  
                                  2.62
                                  
                                  
                                  
                                  50,0000.50
                                  
                                  
                                  
                                  50,000
                                  
                                  
                                  
                                  2.70
                                  
                                  
                                  
                                  50,0000.50
                                  
                                  
                                  
                                  10,000
                                  
                                  
                                  
                                  2.79
                                  
                                  
                                  
                                  6,6670.50
                                  
                                  
                                  
                                  20,000
                                  
                                  
                                  
                                  2.95
                                  
                                  
                                  
                                  13,3330.50
                                  
                                  
                                  
                                  75,000
                                  
                                  
                                  
                                  3.01
                                  
                                  
                                  
                                  75,0000.50
                                  
                                  
                                  
                                  32,000
                                  
                                  
                                  
                                  3.02
                                  
                                  
                                  
                                  10,3330.50
                                  
                                  
                                  
                                  60,000
                                  
                                  
                                  
                                  3.36
                                  
                                  
                                  
                                  60,0000.50
                                  
                                  
                                  
                                  440,000
                                  
                                  
                                  
                                  3.61
                                  
                                  
                                  
                                  306,6660.50
                                  
                                  
                                  
                                  65,000
                                  
                                  
                                  
                                  0.02
                                  
                                  
                                  
                                  25,0000.50
                                  
                                  
                                  
                                  215,000
                                  
                                  
                                  
                                  3.97
                                  
                                  
                                  
                                  215,0000.30
                                  
                                  
                                  
                                  60,000
                                  
                                  
                                  
                                  0.20
                                  
                                  
                                  
                                  -0.25
                                  
                                  
                                  
                                  285,000
                                  
                                  
                                  
                                  4.97
                                  
                                  
                                  
                                  285,0001,687,000
                                  
                                  
                                  
                                  3.11
                                  
                                  
                                  
                                  1,330,333


50


Warrants
outstanding and exercisable as of December 31, 2008:





Outstanding
                                      
                                      
                                      ExercisableExercise
                                      
                                      
                                      Number
                                      
                                      
                                      Remaining
                                      
                                      
                                      NumberPrice
                                      
                                      
                                      of Shares
                                      
                                      
                                      Life (years)
                                      
                                      
                                      of Shares$
                                      0.63
                                      
                                      
                                      
                                      119,532
                                      
                                      
                                      
                                      2.15
                                      
                                      
                                      
                                      119,5321.50
                                      
                                      
                                      
                                      12,000
                                      
                                      
                                      
                                      2.59
                                      
                                      
                                      
                                      12,0001.25
                                      
                                      
                                      
                                      1,398,936
                                      
                                      
                                      
                                      2.95
                                      
                                      
                                      
                                      1,398,9362.00
                                      
                                      
                                      
                                      536,300
                                      
                                      
                                      
                                      3.25
                                      
                                      
                                      
                                      536,3001.25
                                      
                                      
                                      
                                      263,542
                                      
                                      
                                      
                                      3.41
                                      
                                      
                                      
                                      263,5421.89
                                      
                                      
                                      
                                      410,000
                                      
                                      
                                      
                                      3.28
                                      
                                      
                                      
                                      410,0001.25
                                      
                                      
                                      
                                      60,000
                                      
                                      
                                      
                                      3.62
                                      
                                      
                                      
                                      60,0001.89
                                      
                                      
                                      
                                      200,000
                                      
                                      
                                      
                                      3.84
                                      
                                      
                                      
                                      200,0001.50
                                      
                                      
                                      
                                      100,000
                                      
                                      
                                      
                                      3.93
                                      
                                      
                                      
                                      100,0000.25
                                      
                                      
                                      
                                      100,000
                                      
                                      
                                      
                                      4.37
                                      
                                      
                                      
                                      100,0000.25
                                      
                                      
                                      
                                      2,443,269
                                      
                                      
                                      
                                      4.79
                                      
                                      
                                      
                                      2,443,2690.30
                                      
                                      
                                      
                                      250,000
                                      
                                      
                                      
                                      4.82
                                      
                                      
                                      
                                      250,0005,893,579
                                      
                                      
                                      
                                      1.66
                                      
                                      
                                      
                                      5,893,579





NOTE
14 – TERMINATION OF SUNBELT STOCK PURCHASE AGREEMENT





On
November 5, 2007, Sunbelt Machine Works Corporation terminated that certain
Stock Purchase Agreement dated as of August 17, 2007 by and among Hemiwedge
Industries, Inc., Sunbelt Machine Works Corporation and each of the stockholders
of Sunbelt.  In connection therewith, Hemiwedge was required to pay
Sunbelt a termination fee of $150,000 for which the Company has recorded an
expense of $333,575 for the year ended December 31, 2007 for the write-off of
prepaid acquisition costs accrued in connection with the stock purchase
agreement.





On June
23, 2008, Hemiwedge received notice from Sunbelt Machine Works Corporation of
its intention to seek arbitration in Houston, Harris County, Texas, relating to
the $150,000 termination payment due under (and in connection with the
termination of) that certain Stock Purchase Agreement dated August 17,
2007.  Hemiwedge has failed to make the first 3 installment payments of
$37,500 to Sunbelt on each of October 25, 2007, February 20, 2008, and June 20,
2008, as required under the Stock Purchase Agreement. Sunbelt had threatened
litigation regarding this matter in April 2008 and Hemiwedge was unable to come
to terms on a settlement. Sunbelt is seeking an award of $150,000 and reasonable
attorney’s fees, expenses and costs incurred to enforce their contractual
rights. Hemiwedge has recorded $178,995 in accrued expenses in our financial
statements to reflect this contingency.





On July
14, 2008, Hemiwedge entered into a letter agreement with Sunbelt pursuant to
which Sunbelt agreed to withdraw the notice of arbitration until November 1,
2008, in exchange for an immediate payment of $1,000 and installment payments of
$500 on the 1st and
15th
of each month until November 1, 2008. Hemiwedge agreed to continue to negotiate
in good faith to resolve this matter.





On
October 8, 2008, Hemiwedge entered into a letter agreement with Sunbelt under
which Hemiwedge agreed to pay Sunbelt $75,000 in full satisfaction of this
matter; provided, however, that payment must be received by Sunbelt within 90
days of the date of the letter for such settlement to be
effective.  Due to cash constraints, we were unable to make the
payment within the required 90 days.  As of the date of this report,
Sunbelt has not informed us of any indication to re-institute arbitration
proceedings.


51


NOTE
15 – RELATED PARTY TRANSACTIONS





In
connection with the election and appointment of Mr. Jungers to our board of
directors in January, 2007, The Company granted Mr. Jungers an option to
purchase up to 75,000 shares of the Company’s common stock at an exercise price
of $1.75 per share pursuant to our 2005 Stock Incentive Plan. These options were
fully vested and became exercisable immediately upon their grant. These options
expire on the date that is five years from the date of grant.





On March
26, 2007, the Francis Jungers Trust exercised 55,000 Class A Warrants and in
connection therewith the Company issued 55,000 shares of its common stock and
55,000 Class B Warrants to the Francis Jungers Trust.





On March
28, 2007, the Marshik Family Trust exercised 12,000 Class A Warrants and in
connection therewith the Company issued 12,000 shares of its common stock and
12,000 Class B Warrants to the Marshik Family Trust.





On May 9,
2007, the Company granted Frank X. Marshik, one of the Company’s independent
directors, a non-qualified stock option to purchase 60,000 shares of common
stock at an exercise price of $1.90 per share under our 2005 Stock Incentive
Plan. The term of the option is five years.





On May 9,
2007, the board of directors adopted a compensation policy for outside,
independent directors, pursuant to which we will pay each independent director
who serves on a committee of the board of directors, other than the chairman of
such committee, $500 for each committee meeting attended by such independent
director, either in person or telephonically; provided, however, that such
payment shall only be made for committee meetings where written minutes are
maintained.  In addition, we will pay each independent director who
serves as chairman of a committee of the board of directors $750 for each such
committee meeting attended by such independent director, either in person or
telephonically; provided, however, that such payment shall only be made for
committee meetings where written minutes are maintained.





On August
9, 2007, the board of directors approved grants of non-qualified stock options
to purchase 60,000 shares of common stock at an exercise price of $1.80 per
share to each of our outside directors, Leo Womack, Steve Erikson, Francis
Jungers and Frank Marshik under our 2005 Stock Incentive Plan.  The
term of each option is five years.





On August
9, 2007, the board of directors approved the issuance of 13,450 shares of common
stock under our 2005 Stock Incentive Plan to Kenton Chickering III as
compensation under a September 12, 2006 consulting agreement.





In
December 2007, the board of directors agreed to indemnify our Chief Financial
Officer, Matthew C. Flemming, for a judgment assessed against him resulting from
a previously discharged corporate tax liability.  The Company accrued
an expense of $580,000 to reflect this contingency. As of December 31, 2008, the
remaining accrual was $560,000.





Indeglia
& Carney, P.C. provides legal services to us. One of the partners at
Indeglia & Carney, P.C. is the son-in-law of Frank Marshik, one of our
directors and stockholders. Indeglia & Carney, P.C. billed the Company
$204,992 in fees in 2007 and $205,450 in fees in 2008.





On
January 25, 2008, the Company’s formal President, Larry Shumate, entered into a
security agreement with Stillwater National Bank & Trust Company to secure
the loans under the January 2008 Amended Loan Agreement with
Stillwater.  Mr. Shumate granted Stillwater a security interest in
certain of his personal property with an aggregate value of $179,000 as
collateral for payment.





In March
2008, Hemiwedge borrowed $50,000 each from directors Frank Jungers, Kenton
Chickering III and Steven B. Erikson, through Red Rock Interests, Ltd., for a
total of $150,000. The loan was made pursuant to 12% demand promissory
notes.  The principal plus interest in the amount of $1,088 per loan
($51,088 each and $153,264 in the aggregate) was paid in full by Hemiwedge in
May 2008.





NOTE
16 – COMMITMENTS AND CONTINGENCIES





On June
23, 2008, we received notice from Sunbelt Machine Works Corporation of its
intention to seek arbitration in Houston, Harris County Texas relating to the
$150,000 termination payment due under (and in connection with the termination
of) that certain Stock Purchase Agreement dated August 17, 2007.  We
failed to make the first 3 installment payments of $37,500 to Sunbelt on each of
October 25, 2007, February 20, 2008, and June 20, 2008, as required under the
Stock Purchase Agreement. Sunbelt had threatened litigation regarding this
matter in April 2008, and we were unable to come to terms on a settlement.
Sunbelt is seeking an award of $150,000 and reasonable attorney’s fees, expenses
and costs incurred to enforce their contractual rights. . We have recorded
$178,995 in accrued expenses in our financial statements to reflect this
contingency.


52


On July
14, 2008, we entered into a letter agreement with Sunbelt pursuant to which
Sunbelt agreed to withdraw the notice of arbitration until November 1, 2008, in
exchange for an immediate payment of $1,000 and installment payments of $500 on
the 1st and 15th of each month until November 1, 2008.   On
October 8, 2008, we entered into a letter agreement with Sunbelt under which
Hemiwedge agreed to pay Sunbelt $75,000 in full satisfaction of this matter;
provided, however, that payment must be received by Sunbelt within 90 days of
the date of the letter for such settlement to be effective.  Due to
cash constraints, we were unable to make the payment within the required 90
days.  As of the date of this report, Sunbelt has not informed us of
any indication to re-institute arbitration proceedings.





NOTE
17 – SUBSEQUENT EVENTS





On January 14, 2009,
Hemiwedgeissued additional 1,401,170 shares of its common stock to American International
Industries, Inc.as a purchase price adjustment of $420,351 related to
the sale of Machine
Works. This amount was fully accrued by the Company as of December 31,
2008.













53





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





None.





Item
9A. CONTROLS AND PROCEDURES.




Evaluation of
Disclosure Controls and Procedures




Our
management has established and maintains a system of disclosure controls and
procedures to provide reasonable assurances that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.




We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures pursuant
to Rule 13a-15 under the Exchange Act as of December 31, 2008. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of December 31, 2008 were
effective in ensuring that the information required to be disclosed by us in
reports filed under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
SEC.




Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over our financial reporting as that term is defined in Rule 13a-15(f)
of the Exchange Act. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements for external
purposes in accordance with U.S. generally accepted accounting principles. Our
control environment is the foundation for our system of internal control over
financial reporting and is an integral part of our Code of Business Conduct and
Ethics and our Code of Ethics for the Chief Executive Officer, Chief Financial
Officer and Chief Accounting Officer. Our internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
our transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit timely
preparation of our financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.




In order
to evaluate the effectiveness of our internal control over financial reporting
as of December 31, 2008, as required by Section 404 of the Sarbanes-Oxley Act of
2002, our management conducted an assessment, including testing, based on the
criteria set forth in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting and, based on
that evaluation, concluded that, as of December 31, 2008, our internal control
over financial reporting was effective.




This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.


54


Item 9B. OTHER
INFORMATION.





None.





PART
III





Item
10.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT





Set forth
below is certain information concerning our directors and executive
officers:




Name
              
              Age
              
              PositionKenton
      Chickering III
              
              74
              
              President,
      Chief Executive Officer and ChairmanMatthew
      C. Flemming
              
              40
              
              Chief
      Financial Officers and directorRussell
      T. Clark
              
              43
              
              Vice
      President, Chief Operating Officer and directorFrancis
      X. Marshik
              
              82
              
              DirectorSteven
      B. Erikson
              
              41
              
              DirectorLeo
      B. Womack
              
              66
              
              DirectorFrancis
      Jungers
              
              82
              
              Director





Kenton “Ken” Chickering III is
a director and President and Chief Executive Officer.  Mr. Chickering
was appointed to President and Chief Executive Officer on October 8, 2008 and
became a director of our company on September 12, 2006.  From 1976 to
1999, Mr. Chickering held various positions with Daniel Industries and Daniel
Valve Co., including Executive Vice President, Vice President of Sales and
Marketing 1984-1988, and President of Daniel Valve Company from 1988-2003. In
1999, Emerson Electric Co. (NYSE:EMR) purchased Daniel Valve Company. Later it
was sold to SPX Corporation (NYSE: SPW) in 2002.  From 2003 to 2005,
Mr. Chickering was Vice President of Development for SPX Valves & Controls,
a division of SPX.  Daniel Valve Company is a global manufacturer and
marketer of valves for applications such as pipelines, loading and unloading
terminals.  From 1962 to 1976, Mr. Chickering was the Regional Manager
for the eastern U.S. and Saudi Arabia for General Valve Co., a company that
manufactured and marketed an expanding plug valve for pipeline service, which
now is a part of Cameron International.  Prior thereto, Mr. Chickering
served three years as a petroleum officer in the U.S. Air Force and was a
petroleum engineer with Humble Oil, a company that was subsequently acquired by
Exxon.  Mr. Chickering received his B.S. in Petroleum Engineering from
the University of Oklahoma in 1957.  Mr. Chickering was the Chairman
of the Valve Manufacturing Association in 1998.  Mr. Chickering was
also the Pipeline Committee Chairman of the ASME Petroleum Division in 1990 and
the Chairman of the Petroleum Division Executive Committee in 1996.





Matthew C. Flemming is a
director and our Chief Financial Officer, Treasurer, Secretary, and Executive
Vice-President.  From June 1999 to March 2001, he served as Chief
Executive Officer of WorldByNet, Inc. a Houston, Texas based privately held
Internet start-up company. From January 1994 to May 1999, Mr. Flemming served as
Chief Executive Officer of FARO Pharmaceuticals, Inc., a privately held
specialty products company.  From May 1991 to December 1993, he was a
Series 7 licensed financial advisor with Eppler, Guerin and Turner, a regional
investment banking firm in the Southwest at that time.  Mr. Flemming
received a Bachelor of Arts in Finance from the University of
Houston.  Mr. Flemming is a former officer of Excalibur Holdings,
Inc., Excalibur Aerospace, Excalibur Steel, and Excalibur Services, all former
direct or indirect subsidiaries of our company, prior to their respective
filings for bankruptcy protection.  Mr. Flemming has served as a
director and as Chief Financial Officer since April 2002.





Russell T. Clark is a director
and our Vice President and Chief Operating Officer.  Mr. Clark has
served as the Chief Operating Officer of Shumate Machine Works since 1998,
developing operating procedures, production systems and controls and managing
manufacturing personnel for growth.  From 1988 to 1998, Mr. Clark
worked at Baker Hughes in a variety of positions.  From 1996 to 1998
he was Quality Assurance Manager for the western hemisphere for the Navitrak
product line, and from 1988 to 1996, Mr. Clark served as Senior Quality Manager
of Baker Hughes Develco and Senior Quality Engineer of Baker Hughes
MWD.  Mr. Clark has served as a director and Chief Operating Officer
since April 2004.


55


Francis X. Marshik is a
director.  Mr. Marshik retired in 1986 from M.W. Kellogg, an
engineering, construction and fabrication company, where he served as its Senior
Vice President of Global Business Development since 1980.  From 1974
to 1980, Mr. Marshik was Commercial Vice President of M.W. Kellogg in London,
and from 1968 to 1972, he was the head of the Far East as General Manager of
Japan.  From 1950 to 1966, Mr. Marshik held various positions at C.F.
Braun, an engineering company.  He received a Bachelor of Science from
Oregon State University.  Mr. Marshik has served as a director since
April 2002.





Steven B. Erikson is a
director.  Mr. Erikson is a co-founder of Flowchem, Ltd., a specialty
chemical provider to the pipeline industry, and has been its president since
2001.  From 1998 to 2000, Mr. Erikson was the president of Red Rock
Interests, Ltd., a financial advisory and investment company.  From
1995 to 1998, he was an associate with Jeffries & Co. in the Corporate
Finance – Energy Group.  From 1990 to 1993, Mr. Erikson was a senior
consultant with PriceWaterhouseCoopers in the Bankruptcy and Turnaround
Group.  Mr. Erikson received a Bachelor of Arts in Economics from
Colorado College and a Masters of Business Administration from Rice
University.





Leo B. Womack is a
director.  Mr. Womack has been the President and a director of Gulf
Equities Realty Advisors, Inc., a diversified real estate portfolio management
company, since 1986.  He has also been the Chairman and Chief
Financial Officer of Fairway Medical Technologies, Inc., a medical device
company and a portfolio company of the Baylor College of Medicine Venture Fund,
since 1996.  He has been a director of Valves Incorporated of Texas, a
specialty lubricants manufacturer for pipelines, since 1975.  From
1969 to 1978, Mr. Womack was a managing partner of Womack, Gilman, Ritzwaller,
& Co., which later merged with Fox & Company, a national accounting
firm.  From 1965 to 1969, he was a senior accountant at Arthur
Andersen & Co.  Mr. Womack has been nominated to be a director of
O.I. Corporation, a publicly traded company.  Mr. Womack is licensed
as a certified public accountant and a real estate broker.  He
received a bachelor of arts from Texas A&M University.





Francis “Frank”
Jungersis a
director.  Mr. Jungers also serves as a director of Horizon Lines, Inc., a
publicly traded company, Horizon Lines Holding and H-Lines Finance, and Esco
Corporation, a private metals company. He also is a former Chairman of the Board
and Chief Executive Officer of Arabian American Oil Company (Aramco), a
petroleum producer.  During his career, Mr. Jungers has served as a
director of AES Corporationand
Georgia Pacific Corporation. Mr. Jungers has served as a director since January
2007.





Director
Independence





Our Board of Directors has determined
that Messrs. Marshik, Womack, Erikson, and Jungers are “independent” as defined
under the standards set forth in Section 121A of the American Stock Exchange
Company Guide.  In making this determination, the Board of Directors
considered all transactions set forth under “Certain Relationships and Related
Transactions” below.  All members of each of our Audit, Compensation,
and Nomination and Governance Committees are independent directors, except that
Mr. Flemming, who is the Chairperson of the Nomination and Governance Committee,
is not independent.





Involvement
in Certain Legal Proceedings





None of
our directors or executive officers has, during the past five
years:





·
            been
      convicted in a criminal proceeding or been subject to a pending criminal
      proceeding (excluding traffic violations and other minor
      offences);





·
            been
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities, futures, commodities or
      banking activities; or





·
            been
      found by a court of competent jurisdiction (in a civil action), the
      Securities and Exchange Commission or the Commodity Futures Trading
      Commission to have violated a federal or state securities or commodities
      law, and the judgment has not been reversed, suspended, or
      vacated.


56


During
2004, Excalibur Steel, Excalibur Services, and Excalibur Aerospace, and during
2005 Excalibur Holdings, Inc., had their debts and liabilities discharged in
bankruptcy.  Mr. Flemming and Mr. Marshik, who are currently members
of our Board of Directors and, in Mr. Flemming’s case, an officer, were also
directors and, in Mr. Flemming’s case, an officer, of our company during these
periods. Excalibur Steel, Excalibur Services, Excalibur Aerospace, and Excalibur
Holdings, Inc. are all former direct or indirect subsidiaries of our
company.





None of
our remaining officers or directors has had any bankruptcy petition filed by or
against any business of which he was a general partner or executive officer,
either at the time of the bankruptcy or within two years prior to that
time.





Information
about our Board and its Committees.





Our Board
of Directors held 1 formal meeting during fiscal 2008, and the Board of
Directors acted by unanimous written consent on 15 occasions during fiscal
2008.





Audit
Committee.  Our Board of Directors established an Audit
Committee which became active in April 2002.  Since 2004 until August
2, 2006, our entire Board of Directors has served to act as the Audit
Committee.  On August 2, 2006, our Board of Directors appointed Leo B.
Womack, Steven B. Erikson, and Frank X. Marshik to the Audit Committee and
appointed Mr. Womack as the Chairman of the Audit Committee.  Each of
these directors continues to serve on the Audit Committee in the same
capacity.  All members of our Audit Committee are “independent” under
American Stock Exchange standards.  We have determined that Mr. Womack
is an “audit committee financial expert” as such term is defined under the rules
and regulations of the Securities Exchange Act of 1934, as amended.





The Audit
Committee provides assistance to our board in satisfying its fiduciary
responsibilities relating to our financial statements, financial reporting
process, systems of internal accounting and financial controls and the annual
independent audit of our financial statements.  The Audit Committee is
responsible for appointing or replacing the independent auditors, and approves
all audit engagement fees and terms and all non-audit engagements with the
independent auditors.  The Audit Committee operates under a written
charter adopted by our Board of Directors.  Our Audit Committee held 1
meeting, all in conjunction with formal board meetings, in fiscal
2008.





Compensation
Committee.  On August 2, 2006, our Board of Directors
established a Compensation Committee, appointed Steven B. Erikson, Leo B.
Womack, and Frank X. Marshik to the Compensation Committee, and appointed Mr.
Erikson as the Chairman of the Compensation Committee.  Each of these
directors continues to serve on the Compensation Committee in the same
capacity.  All members of our Compensation Committee are “independent”
under American Stock Exchange standards.





The
Compensation Committee’s basic responsibility is to review the performance and
development of our management in achieving corporate goals and objectives and to
assure that our senior executives are compensated effectively in a manner
consistent with our strategy, competitive practice, and the requirements of the
appropriate regulatory bodies. Toward that end, this committee oversees,
reviews, and administers all of our compensation, equity, and employee benefit
plans and programs. In addition, The Compensation Committee has the authority
and responsibility to determine all aspects of executive compensation packages
for executive officers and makes recommendations to the Board of Directors
regarding the compensation of non-employee directors.  This committee
held acted by unanimous written consent on 3 occasions during fiscal
2008.





Nomination and
Governance Committee.





On August
2, 2006, our Board of Directors established a Nominating and Governance
Committee, appointed Matthew C. Flemming, Leo B. Womack, and Steven B. Erikson
to the Nominating and Governance Committee, and appointed Mr. Flemming as the
Chairman of the Nominating and Governance Committee.  Each of these
directors continues to serve on the Nominating and Governance Committee in the
same capacity.  All members of our Nomination and Governance Committee
are “independent” under American Stock Exchange standards, except that Mr.
Flemming, who is the Chairperson of the Nomination and Governance Committee, is
not independent.





The
Nomination and Governance Committee is responsible for overseeing, reviewing and
making periodic recommendations concerning our corporate governance policies,
and for recommending to the full Board of Directors candidates for election to
the Board of Directors. This committee held one meeting during the last fiscal
year in conjunction with a formal board meeting.


57





Nominees for the Board of Directors
should be committed to enhancing long-term stockholder value and must possess a
high level of personal and professional ethics, sound business judgment, and
integrity. The Board of Directors’ policy is to encourage selection of directors
who will contribute to our overall corporate goals.  The Nomination
and Governance Committee may from time to time review the appropriate skills and
characteristics required of board members, including such factors as business
experience, diversity, and personal skills in oil & gas, technology,
engineering, finance, marketing, sales, international business, financial
reporting and other areas that are expected to contribute to an effective Board
of Directors.  In evaluating potential candidates for the Board of
Directors, the Nomination and Governance Committee considers these factors in
the light of the specific needs of the Board of Directors at that
time.





In
recommending candidates for election to the Board of Directors, the Nomination
and Governance Committee considers nominees recommended by directors, officers,
employees, stockholders and others, using the same criteria to evaluate all
candidates. The Nomination and Governance Committee reviews each candidate’s
qualifications, including whether a candidate possesses any of the specific
qualities and skills desirable in certain members of the Board of
Directors.  Evaluations of candidates generally involve a review of
background materials, internal discussions, and interviews with selected
candidates as appropriate.  Upon selection of a qualified candidate,
the Nomination and Governance Committee would recommend the candidate for
consideration by the full Board of Directors.  The Nomination and
Governance Committee may engage consultants or third-party search firms to
assist in identifying and evaluating potential nominees.  To recommend
a prospective nominee for the Nomination and Governance Committee’s
consideration, submit the candidate’s name and qualifications to our Secretary
in writing to the following address: Hemiwedge Industries, Inc., Attn:
Secretary, 12060 FM 3083, Conroe, Texas 77031.  When submitting
candidates for nomination to be elected at the Company’s annual meeting of
stockholders, stockholders must also follow the notice procedures and provide
the information required by our bylaws.





In
particular, for the Nomination and Governance Committee to consider a candidate
recommended by a stockholder for nomination at the 2009 Annual Meeting of
Stockholders, the recommendation must be delivered or mailed to and received by
our Secretary between December 1, 2008 and December 31, 2008 (or, if the 2009
annual meeting is not held within 30 days of the anniversary of the date of the
2007 annual meeting, within 10 days after our public announcement of the date of
the 2009 annual meeting).  The recommendation must include the
following information to be considered at an annual meeting:





·
            The
      stockholder’s name and address and the beneficial owner, if any, on whose
      behalf the nomination is proposed;





·
            The
      stockholder’s reason for making the nomination at the annual meeting, and
      the signed consent of the nominee to serve if
  elected;





·
            The
      number of shares owned by, and any material interest of, the record owner
      and the beneficial owner, if any, on whose behalf the record owner is
      proposing the nominee;





·
            A
      description of any arrangements or understandings between the stockholder,
      the nominee and any other person regarding the nomination;
    and





·
            Information
      regarding the nominee that would be required to be included in our proxy
      statement by the rules of the Securities and Exchange Commission,
      including the nominee’s age, business experience for the past five years
      and any other directorships held by the
nominee.


58


Report of the Audit
Committee





Our Audit Committee has issued the
following report:





Management
is responsible for our internal controls, financial reporting process, and
compliance with laws and regulations and ethical business
standards.  The independent auditor is responsible for performing an
independent audit of our consolidated financial statements in accordance with
generally accepted auditing standards and issuing a report
thereon.  The Audit Committee’s responsibility is to monitor and
oversee these processes on behalf of the Board of Directors.  In this
context, the Audit Committee has reviewed and discussed with management and the
independent auditors our audited financial statements.  The Audit
Committee has discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61 (Communication with
Audit Committees).  In addition, the Audit Committee has received from
the independent auditors the written disclosures required by Independence
Standards Board Standard No. 1 (Independence Discussions with Audit
Committees) and discussed with them their independence from us and our
management.  Moreover, the Audit Committee has considered whether the
independent auditor’s provision of other non-audit services to us is compatible
with the auditor’s independence.  In reliance on the reviews and
discussions referred to above, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in our annual report
on Form 10-K for the year ended December 31, 2008 for filing with the
Securities and Exchange Commission.  By recommending to the Board of
Directors that the audited financial statements be so included, the Audit
Committee is not opining on the accuracy, completeness, or fairness of the
audited financial statements.





Leo B.
Womack, Chairman


Steven B.
Erikson


Frank X.
Marshik





AUDIT
COMMITTEE





Communications
with the Board of Directors





Stockholders
can send communications to the Board of Directors by sending a certified or
registered letter to the Chairman of the Board, care of the Secretary, at our
main business address set forth above.  Communications that are
threatening, illegal, or similarly inappropriate, and advertisements,
solicitations for periodical or other subscriptions, and other similar
communications will generally not be forwarded to the Chairman.





Item
11. EXECUTIVE COMPENSATION





The
following table sets forth the compensation paid to the Chief Executive Officer
and our other executive officers for services rendered during the fiscal years
ended December 31, 2008, 2007 and 2006.





Summary
      Compensation TableStock
                                                  
                                                  
                                                  Option
                                                  
                                                  
                                                  All
      OtherName
      and Position
                                                  
                                                  Year
                                                  
                                                  Salary
                                                  
                                                  
                                                  Bonus
                                                  
                                                  
                                                  Awards
      ($)
                                                  
                                                  
                                                  Awards
      ($)
                                                  
                                                  
                                                  Compensation
                                                  
                                                  
                                                  Total
      ($)Kenton
      Chickering
                                                  
                                                  2008
                                                  
                                                  $
                                                  116,870
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  5,490
                                                  (1)
                                                  
                                                  $
                                                  16,335
                                                  (2)
                                                  
                                                  $
                                                  138,695Chairman,
      President
                                                  
                                                  2007
                                                  
                                                  
                                                  129,116
                                                  (3)
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  20,800
                                                  (4)
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  10,000
                                                  (5)
                                                  
                                                  
                                                  159,916and
      Chief Executive
                                                  
                                                  2006
                                                  
                                                  
                                                  N/A
                                                  
                                                  
                                                  
                                                  N/A
                                                  
                                                  
                                                  
                                                  N/A
                                                  
                                                  
                                                  
                                                  N/A
                                                  
                                                  
                                                  
                                                  N/A
                                                  
                                                  
                                                  
                                                  N/AOfficer
      (since October2008)President
      – HemiwedgeValve
      Corporation(since
      January 2007)Larry
      C. Shumate
                                                  
                                                  2008
                                                  
                                                  $
                                                  151,558
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  11,752
                                                  (6)
                                                  
                                                  $
                                                  163,310Chairman,
      President and
                                                  
                                                  2007
                                                  
                                                  
                                                  172,885
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  8,100
                                                  (7)
                                                  
                                                  
                                                  180,985Chief
      Executive Officer
                                                  
                                                  2006
                                                  
                                                  
                                                  150,000
                                                  
                                                  
                                                  
                                                  70,000
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  11,770
                                                  (8)
                                                  
                                                  
                                                  231,770(until
      October 2008)Matthew
      C. Flemming
                                                  
                                                  2008
                                                  
                                                  $
                                                  180,000
                                                  
                                                  
                                                  $
                                                  7,775
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  5,490
                                                  (1)
                                                  
                                                  $
                                                  38,056
                                                  (9)
                                                  
                                                  $
                                                  231,321Executive
      Vice President
                                                  
                                                  2007
                                                  
                                                  
                                                  166,154
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  23,666
                                                  (10)
                                                  
                                                  
                                                  189,820Chief
      Financial Officer, Secretary and Treasurer
                                                  
                                                  2006
                                                  
                                                  
                                                  140,000
                                                  
                                                  
                                                  
                                                  67,500
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  26,950
                                                  (11)
                                                  
                                                  
                                                  234,450Chief
      Financial Officer, Secretary and TreasurerRussell
      T. Clark
                                                  
                                                  2008
                                                  
                                                  $
                                                  155,000
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  $
                                                  4,118
                                                  (12)
                                                  
                                                  $
                                                  8,838
                                                  (13)
                                                  
                                                  $
                                                  167,956Vice
      President and
                                                  
                                                  2007
                                                  
                                                  
                                                  142,885
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  8,059
                                                  (14)
                                                  
                                                  
                                                  150,944Chief
      Operating Officer
                                                  
                                                  2006
                                                  
                                                  
                                                  120,000
                                                  
                                                  
                                                  
                                                  40,000
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  17,770
                                                  (15)
                                                  
                                                  
                                                  177,770


59


(1)
            Represents
      the December 18, 2008 grant date fair value of an option to purchase
      40,000 shares of common stock calculated in accordance with FAS
      123R.





(2)
            Includes
      $8,168 car allowance and $8,167 for country club dues.  $7,425
      of the $16,335 was accrued but not paid in
2008.





(3)
            Includes
      $21,640 earned by Mr. Chickering for consulting services rendered to us in
      2006 but paid in 2007.





(4)
            Mr.
      Chickering received a stock award of 13,450 shares of our common stock as
      compensation for consulting services rendered in 2006 but paid in
      2007.  The value of the stock was determined at the time of
      grant and represents the compensation costs of the stock award for
      financial reporting purposes for the year under FAS
  123R.





(5)
            Includes
      $5,000 for a car allowance and $5,000 for country club
    dues.





(6)
            Includes
      $11,752 for car allowance.





(7)
            Includes
      $8,100 for car allowance.





(8)
            Includes
      $6,000 for car allowance and $5,770 as payment of cash for unused accrued
      vacation.





(9)
            Includes
      $11,041 for car allowance, $8,412 for gas allowance, $6,834 for cell phone
      allowance and $11,769 as payment of cash for unused vacation
      time.





(10)
            Includes
      $7,800 for car allowance, $4,400 for gas allowance, $3,850 for call phone
      allowance and $7,616 as payment of cash for unused vacation
      time.





(11)
            Includes
      $6,000 for car allowance, $4,800 for gas allowance, $4,200 for cell phone
      allowance, and $10,770 as payment of cash for unused accrued
      vacation.





(12)
            Represents
      the December 18, 2008 grant date fair value of an option to purchase
      30,000 shares of common stock calculated in accordance with FAS
      123R.





(13)
            Includes
      $8,048 for car allowance and $790 as payment of cash for unused vacation
      time.





(14)
            Includes$6,000 for car allowance and $2,059 as payment of cash for unused
      vacation time.





(15)
            Includes
      $6,000 for car allowance and $11,770 as payment of cash for unused accrued
      vacation.


60


Outstanding
Equity Awards





There
were no outstanding equity awards, unexercised options, unvested stock, or
equity incentive plan awards as of December 31, 2008 for any of the executive
officers named in the Summary Compensation Table above.





Employment
Agreements





On May
10, 2007, we entered into employment agreements with each of Larry C. Shumate,
Matthew C. Flemming and Russell T. Clark.  Mr. Shumate’s agreement was
terminated in accordance with his resignation in October 2008.  Mr.
Shumate provided a release of any and all amounts and claims due him under such
employment agreement.  A description of the material terms of each
remaining agreement is set forth below.





Matthew C.
Flemming.We entered into an employment agre0ement with
Matthew C. Flemming pursuant to which we employ Mr. Flemming as our Executive
Vice President and Chief Financial Officer. The agreement is for an initial term
of three years and provides for an annual base salary during the term of the
agreement of $180,000, subject to potential upwards adjustments at the
discretion of the Compensation Committee of the Board of Directors. Mr. Flemming
may also receive bonuses at the discretion of the Compensation Committee payable
in cash, options or common stock.





The
agreement also contains the following material provisions: (i) reimbursement for
all reasonable travel and other out-of-pocket expenses incurred in connection
with his employment; (ii) four (4) weeks paid vacation leave, which shall
entitle Mr. Flemming to a cash payment for any unused vacation time at the end
of each fiscal year; (iii) medical, dental and life insurance benefits; (iv) an
$800 per month automobile allowance; (v) a severance payment of six (6) month’s
salary at the then-applicable base salary rate in the event that we terminate
Mr. Flemming’s employment without cause or if Mr. Flemming’s employment is
terminated due to death or disability; and (vi) 24 month non-compete/non
solicitation terms.





Russell T. Clark.We entered
into an employment agreement with Russell T. Clark pursuant to which we employ
Mr. Clark as our Vice President and Chief Operating Officer. The agreement is
for an initial term of three years and provides for an annual base salary during
the term of the agreement of $155,000, subject to potential upwards adjustments
at the discretion of the Compensation Committee of the Board of Directors. Mr.
Clark may also receive bonuses at the discretion of the Compensation Committee
payable in cash, options or common stock.





The
agreement also contains the following material provisions: (i) reimbursement for
all reasonable travel and other out-of-pocket expenses incurred in connection
with his employment; (ii) four (4) weeks paid vacation leave, which shall
entitle Mr. Clark to a cash payment for any unused vacation time at the end of
each fiscal year; (iii) medical, dental and life insurance benefits; (iv) an
$500 per month automobile allowance; (v) a severance payment of six (6) month’s
salary at the then-applicable base salary rate in the event that we terminate
Mr. Clark’s employment without cause or if Mr. Clark’s employment is terminated
due to death or disability; and (vi) 24 month non-compete/non solicitation
terms.





Potential
Payments upon Termination




Messrs.
Flemming and Clark have employment agreements with us.  Under the
terms of their respective employment agreements, each of Messrs. Flemming and
Clark are entitled to a severance payment of six (6) month’s salary at the
then-applicable base salary rate in the event that Hemiwedge terminates their
employment without cause or in the event that their employment is terminated due
to death or disability.




The
following table sets forth quantitative information with respect to potential
payments to be made to Messrs. Flemming and Clark upon termination in various
circumstances. The potential payments are based on the terms of each of the
Employment Agreement discussed above. For a more detailed description of the
Employment Agreement, see the “Employment Agreements” section
above.




Name
                
                Potential
      Payment upon Termination (1)Matthew
      C. Flemming
                
                
                90,000
                (2)Russell
      T. Clark
                
                
                77,500
                (3)


61


(1)
            Employee
      entitled to six months severance at the then applicable base salary
      rate.





(2)
            Based
      on Mr. Flemming’s current annual base salary of
  $180,000.





(3)
            Based
      on Mr. Clark’s current annual base salary of
  $155,000.





Compensation
of Directors





The
following table sets forth the compensation paid to each director (other than
compensation set forth under Executive Compensation) for services rendered
during the fiscal year ended December 31, 2008.







Fees
      Earned orPaid
      in
                
                
                Stock
                
                
                Option
                
                
                All
      OtherName
                
                Cash
                
                
                Awards
      ($)
                
                
                Awards
      ($)
                
                
                Compensation
                
                
                Total
      ($)Frank
      Marshik
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Leo
      B. Womack
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Steven
      B. Erikson
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Francis
      Jungers
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —





All
directors receive reimbursement for reasonable out-of-pocket expenses in
attending Board of Directors meetings and for promoting our
business.





From time
to time we may engage certain members of the Board of Directors to perform
services on our behalf.  In such cases, we compensate the members for
their services at rates no more favorable than could be obtained from
unaffiliated parties.  Other than as set forth above, we did not
engage any members of the Board of Directors to perform services our behalf in
2008.





Section
16(a) Beneficial Ownership Reporting Compliance





Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors,
executive officers, and stockholders holding more than 10% of our outstanding
common stock, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in beneficial ownership of our
common stock.  Executive officers, directors and greater-than-10%
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) reports they file.  To our knowledge, based solely
on review of the copies of such reports furnished to us for the period ended
December 31, 2008, all Section 16(a) reports required to be filed by
our executive officers, directors, and greater-than-10% stockholders were filed
on a timely basis, except that Mr. Chickering was late in
filing his Form 4 (such transactions were reported on a Form 5) in connection
with his acquisition of shares for services rendered and his gift of shares to
family members under State Uniform Gift to Minors Act.





Code
of Ethics





We have
adopted a code of ethics that applies to the principal executive officer and
principal financial and accounting officer.  We will provide to any
person without charge, upon request, a copy of our code of
ethics.  Requests may be directed to our principal executive offices
at 1011 Beach Airport Road, Conroe, Texas 77301.





Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The
following table sets forth information as of April 7, 2009 as to each person or
group who is known to us to be the beneficial owner of more than 5% of our
outstanding voting securities and as to the security and percentage ownership of
each of our executive officers and directors and of all of our officers and
directors as a group.  As of April 7, 2009 we had 24,004,086 shares of
common stock outstanding.





Beneficial
ownership is determined under the rules of the Securities and Exchange
Commission and generally includes voting or investment power over
securities.  Except in cases where community property laws apply or as
indicated in the footnotes to this table, we believe that each stockholder
identified in the table possesses sole voting and investment power over all
shares of common stock shown as beneficially owned by the
stockholder.


62





Shares of
common stock subject to options or warrants that are currently exercisable or
exercisable within 60 days of the date of this Memorandum are considered
outstanding and beneficially owned by the person holding the options for the
purpose of computing the percentage ownership of that person but are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person.





Name
      And Address(1)
                
                Number
      Of
                  Shares
                  Beneficially
                  Owned
                
                
                Percentage
                  OwnedKenton
      Chickering III
                
                
                500,053
                (2)
                
                
                2.08
                %Matthew
      C. Flemming
                
                
                1,156,350
                (3)
                
                
                4.81Russell
      T. Clark
                
                
                1,478,400
                (4)
                
                
                6.15Frank
      X. Marshik
                
                
                540,339
                (5)
                
                
                2.24Steven
      B. Erikson
                
                
                205,000
                (6)
                
                
                *Leo
      B. Womack
                
                
                226,292
                (7)
                
                
                *Francis
      Jungers
                
                
                527,000
                (8)
                
                
                2.18All
      directors and officers as a group (7 persons)
                
                
                4,633,434
                
                
                
                18.8
                %


*Less
than 1%.


(1)
            Unless
      otherwise noted, the address is c/o Hemiwedge Industries, Inc., 1011 Beach
      Airport Road, Conroe, Texas 77301.





(2)
            Includes
      140,000 shares underlying presently exercisable options; 12,700 shares of
      common stock held by Mr. Chickering’s wife, and 50,000 held in an account
      for Mr. Chickering’s grandchildren, under which account Mr. Chickering is
      the custodian.




(3)
            Includes
      40,000 shares subject to presently exercisable options.  Mr.
      Flemming’s 1,116,350 shares of common stock have been pledged to
      Stillwater National Bank and Trust to secure payment for a loan
      collateralized by the shares.(4)
            Includes 30,000
      shares underlying presently exercisable
options.




(5)
            Includes
      270,910 shares held by the Marshik Family Trust, of which Mr. Marshik is a
      grantor and a trustee, 137,429 shares held by Mr. Marshik’s IRA, 12,000
      shares underlying presently exercisable warrants, 120,000 shares
      underlying presently exercisable options. Mr. Marshik’s address is 8515
      Costa Verde Boulevard, #907, San Diego, CA
  92112.




(6)
            Includes
      95,000 shares held by Red Rock Interests, Ltd., of which Mr. Erikson is
      President and shareholder, 110,000 shares underlying presently exercisable
      options.




(7)
            Includes
      110,792 shares held by a trust of which Mr. Womack is a trustee, 110,000
      shares underlying presently exercisable options, 5,500 shares underlying
      presently exercisable warrants. Mr. Womack’s address is 710 North Post Oak
      Road, Suite 400, Houston, Texas
77024.




(8)
            Includes
      357,000 shares held by the Francis Jungers Trust, of which Mr. Jungers is
      a grantor and a trustee, 8,000 shares held by Mr. Jungers’ IRA, 9,000
      shares held by the Julie Jungers Trust, of which Mr. Jungers’ spouse is a
      grantor and a trustee, 135,000 shares underlying presently exercisable
      options.





Item
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





Indeglia
& Carney, P.C., provides legal services to us.  One of the
partners at Indeglia & Carney, P.C., is the son-in-law of Frank Marshik, one
of our directors and stockholders.  Indeglia & Carney, P.C.,
billed us $204,992 in fees in 2007 and $205,450 in fees in
2008.


63


On May 9,
2007, the board of directors adopted a compensation policy for outside,
independent directors, pursuant to which we will pay each independent director
who serves on a committee of the board of directors, other than the chairman of
such committee, $500 for each committee meeting attended by such independent
director, either in person or telephonically; provided, however, that such
payment shall only be made for committee meetings where written minutes are
maintained.  In addition, we will pay each independent director who
serves as chairman of a committee of the board of directors $750 for each such
committee meeting attended by such independent director, either in person or
telephonically; provided, however, that such payment shall only be made for
committee meetings where written minutes are maintained.





On
January 25, 2008, our then President, Larry Shumate, entered into that certain
security agreement with Stillwater National Bank & Trust Company to secure
the loans under the January 2008 Amended Loan Agreement with
Stillwater.  Mr. Shumate granted Stillwater a security interest in
certain of his personal property with an aggregate value of $179,000 as
collateral for payment.





In March
2008, Hemiwedge borrowed $50,000 each from directors Frank Jungers, Kenton
Chickering III and Steven B. Erikson, through Red Rock Interests, Ltd., for a
total of $150,000. The loan was made pursuant to 12% on demand
notes.  The principal plus interest in the amount of $1,088 per loan
($51,088 each and $153,264 in the aggregate) was paid in full by us in May
2008.





On
September 30, 2008, Matthew C. Flemming Russ Clark, our Chief Financial Officer
and Chief Operating Officer, respectively, executed guaranty agreements in favor
of Stillwater National Bank and Trust Company in connection with that certain
Loan and Security Agreement with Stillwater National Bank dated September 30,
2008.  As of March 31, 2009, our total outstanding indebtedness to
Stillwater was $751,000.





We
believe that the foregoing transactions were in our best interests. Consistent
with Section 144 of the Delaware General Corporation Law, it is our current
policy that all transactions between us and our officers, directors and their
affiliates will be entered into only if such transactions are approved by a
majority of the disinterested directors, are approved by vote of the
stockholders, or are fair to us as a corporation as of the time it is us at is
authorized, approved or ratified by the board. We will conduct an appropriate
review of all related party transactions on an ongoing basis, and, where
appropriate, we will utilize our audit committee for the review of potential
conflicts of interest.





Item
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.





Audit Fees





Malone
& Bailey, PC billed us $45,000 in fees for our 2008 annual
audit and $70,000 in fees for our 2007 annual audit, $38,027 in fees for the
review of our quarterly financial statements in 2008 and $67,685 in fees for
the review of our quarterly financial statements
for 2007.





Audit-Related
Fees





We did
not pay any fees to Malone & Bailey, PC for assurance and related
services that are not reported under Audit Fees above in 2008 or
2007.


64


Tax Fees





We did
not pay any fees to Malone & Bailey, PC for tax compliance, tax
advice or tax planning in 2008 or 2007.





All Other Fees





For 2008,
Malone & Bailey, PC, billed us $14,175 for work in connection with the sale
of a subsidiary’s assets and for support related to SEC matters.  For
2007, Malone & Bailey, PC, billed us $47,124 for work in connection with the
evaluation of a potential acquisition and $10,890 for support related to SEC
matters.





Pre-Approval
Policies and Procedures





We have
implemented pre-approval policies and procedures related to the provision of
audit and non-audit services.  Under these procedures, our audit
committee pre-approves all services to be provided by Malone & Bailey, PC
and the estimated fees related to these services.





All
audit, audit related, and tax services were pre-approved by the audit committee,
which concluded that the provision of such services by Malone & Bailey, PC
was compatible with the maintenance of that firm’s independence in the conduct
of its auditing functions.  Our pre-approval policies and procedures
provide for the audit committee’s pre-approval of specifically described audit,
audit-related, and tax services on an annual basis, but individual engagements
anticipated to exceed pre-established thresholds must be separately
approved.  The policies and procedures also require specific approval
by the audit committee if total fees for audit-related and tax services would
exceed total fees for audit services in any fiscal year.  The policies
and procedures authorize the audit committee to delegate to one or more of its
members pre-approval authority with respect to permitted services.





Item
15. EXHIBITS.





(a)           Exhibits





Exhibit No.
              
              Description2.1
              
              Agreement
      and Plan of Merger by and among Global Realty Management Group, Inc., GRMG
      Acquisition Corporation, Excalibur Holdings, Inc., and Michael D. Farkas,
      incorporated by reference to Amendment No. 1 to Hemiwedge’s Registration
      Statement on Form SB-2 filed on September 5, 2002 (File No.
      333-88974).2.2
              
              Agreement
      and Plan of Merger by and among Shumate Machine Works, Inc., Larry C.
      Shumate, Russ Clark, Excalibur Holdings, Inc., and Excalmergeco, Inc.,
      incorporated by reference to Amendment No. 1 to Hemiwedge’s Registration
      Statement on Form SB-2 filed on September 5, 2002 (File No.
      333-88974).2.3
              
              Asset
      Purchase Agreement by and among Hemiwedge Valve Corporation, Soderberg
      Research and Development, Inc., Inprop, Inc., and Jeanette Soderberg,
      incorporated by reference to Hemiwedge’s Current Report on Form 8-K filed
      on December 6, 2005.2.4
              
              Asset
      Purchase Agreement dated August 29, 2008, by and among Hemiwedge
      Industries, Inc., American International Industries, Inc. and Shumate
      Machine Works, Inc., incorporated by reference to our Current Report on
      Form 8-K filed on September 5, 2008.3.1
              
              Certificate
      of Incorporation of Excalibur Industries, Inc. (now known as Hemiwedge
      Industries, Inc.), incorporated by reference to Amendment No. 1 to
      Hemiwedge’s Registration Statement on Form SB-2 filed on September 5, 2002
      (File No. 333-88974).3.2
              
              Certificate
      of Amendment to Certificate of Incorporation of Excalibur Industries, Inc.
      (now known as Hemiwedge Industries, Inc.), incorporated by reference to
      our Current Report on Form 8-K filed on October 26,
  2005.


65





3.3
                                              
                                              Bylaws
      of Excalibur Industries, Inc. (now known as Hemiwedge Industries, Inc.),
      incorporated by reference to Amendment No. 1 to our Registration Statement
      on Form SB-2 filed on September 5, 2002 (File No.
    333-88974).3.4
                                              
                                              Certificate
      of Amendment to Certificate of Incorporation, incorporated by reference to
      our Current Report on Form 8-K filed on February 18,
  2009.4.1
                                              
                                              Specimen
      Certificate of common stock, incorporated by reference to our Annual
      Report on Form 10-KSB for the year ended December 31,
  2005.4.2
                                              
                                              Form
      of common stock purchase warrant, incorporated by reference to Amendment
      No. 1 to our Registration Statement on Form SB-2 filed on September 5,
      2002 (File No. 333-88974).4.3
                                              
                                              Convertible
      promissory note (Stillwater National Bank), incorporated by reference to
      our Annual Report on Form 10-KSB for the year ended December 31,
      2005.4.4
                                              
                                              Amended
      and restated promissory note (Term Note – Stillwater National Bank),
      incorporated by reference to our Amendment No. 1 to Current Report on Form
      8-K, filed on November 7, 2005.4.5
                                              
                                              Stock
      Purchase Agreement by and between Hemiwedge Industries, Inc. and A. Earl
      Swift, incorporated by reference to our Annual Report on Form 10-KSB for
      the year ended December 31, 2005.4.6
                                              
                                              Form
      of Securities Purchase Agreement among Hemiwedge Industries, Inc., and
      various purchasers, incorporated by reference to our Current Report on
      Form 8-K filed on February 23, 2006.4.7
                                              
                                              Form
      of Registration Rights Agreement among Hemiwedge Industries, Inc., and
      various purchasers, incorporated by reference to our Current Report on
      Form 8-K filed on February 23, 2006.4.8
                                              
                                              Common
      stock purchase warrant (First Montauk Securities Corp.), incorporated by
      reference to our Current Report on Form 8-K filed on February 23,
      2006.4.9
                                              
                                              Registration
      Rights Agreement dated July 10, 2007 between Hemiwedge Industries, Inc.
      and Whitebox Shumate, Limited, incorporated by reference to our Current
      Report on Form 8-K filed on July 10, 2007.4.10
                                              
                                              Form
      of Warrant, incorporated by reference to our Current Report on Form 8-K
      filed on July 10, 2007.4.11
                                              
                                              Form
      of Warrant, incorporated by reference to our Current Report on Form 8-K
      filed on October 21, 2008.10.1
                                              
                                              Restructuring
      Agreement between Hemiwedge Industries, Inc., Shumate Machine Works, Inc.,
      Matthew Flemming, Larry Shumate, Russ Clark, and Stillwater National Bank
      and Trust Company, incorporated by reference to our Amendment No 1. to
      Current Report on Form 8-K, filed on November 7, 2005.10.2
                                              
                                              2001
      Stock Option Plan of Excalibur Holdings, Inc., incorporated by reference
      to Amendment No. 1 to our Registration Statement on Form SB-2 filed on
      September 5, 2002 (File No. 333-88974).10.3
                                              
                                              2003
      Stock Grant Plan, incorporated by reference to our Registration Statement
      on Form S-8, filed on June 26, 2003 (File No.
  333-106521).10.4
                                              
                                              2003
      Employee Stock Incentive Plan, incorporated by reference to our
      Registration Statement on Form S-8, filed on August 1, 2003 (File No.
      333-107548).


66





10.5
                                      
                                      2003
      Non-Employee Directors and Consultants Retainer Stock Plan, incorporated
      by reference to our Registration Statement on Form S-8, filed on August 1,
      2003 (File No. 333-107548).10.6
                                      
                                      2005
      Stock Incentive Plan, incorporated by reference to our Registration
      Statement on Form S-8, filed on May 3, 2005 (File No.
      333-124568).10.7
                                      
                                      Employment
      Agreement dated May 10, 2007 between Matthew C. Flemming and Hemiwedge
      Industries, Inc., incorporated by reference to our Quarterly Report on
      Form 10-QSB for the period ended March 31, 2007.10.8
                                      
                                      Employment
      Agreement dated May 10, 2007 between Russell T. Clark and Hemiwedge
      Industries, Inc., incorporated by reference to our Quarterly Report on
      Form 10-QSB for the period ended March 31, 2007.10.9
                                      
                                      Note
      Purchase Agreement dated July 10, 2007 between Hemiwedge Industries, Inc.
      and the purchasers set forth therein.10.11
                                      
                                      Transfer
      Agreement dated October 14, 2008 by and among Hemiwedge Industries, Inc.,
      Hemiwedge Valve Corporation and Tejas Research and Engineering, L.P.,
      incorporated by reference to our Current Report on Form 8-K filed on
      October 21, 2008.10.12
                                      
                                      Hemiwedge
      Intellectual Property Agreement dated October 14, 2008 between Tejas
      Research & Engineering LP and Hemiwedge Valve Corporation,
      incorporated by reference to our Current Report on Form 8-K filed on
      October 21, 2008.21.1
                                      
                                      Subsidiaries
      incorporated by reference to our Annual Report on Form 10-KSB for the year
      ended December 31, 2005.23.1
                                      
                                      Consent
      of Independent Public Accountants, Malone & Bailey,
  PC.31.1
                                      
                                      Certificationof Kenton Chickering pursuant to Rule 13a-14(a).31.2
                                      
                                      Certificationof Matthew C. Flemming pursuant to Rule 13a-14(a).32.1
                                      
                                      Certification
      of Kenton Chickering pursuant to 18 U.S.C Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
                                      
                                      Certification
      of Matthew C. Flemming pursuant to 18 U.S.C Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


67


SIGNATURES




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




HEMIWEDGE
      INDUSTRIES, INC.By:
              /s/ Kenton Chickering
      IIIKenton Chickering III, Chairman, President
                and Chief Executive
Officer





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





Signatures
              
              Title
              
              Date/s/ Kenton Chickering III
              
              Chairman
      of the Board, President,
              
              April
      15, 2009Kenton
      Chickering III
              
              Chief
      Executive Officer/s/ Matthew C. Flemming
              
              Executive
      Vice President, Chief
              
              April
      15, 2009Matthew
      C. Flemming
              
              Financial
      Officer, Treasurer,Secretary,
      and Director/s/ Russell T. Clark
              
              Vice
      President, Chief Operating OfficerRussell
      T. Clark
              
              and
      Director
              
              April
      15, 2009/s/ Leo B. Womack
              
              Director
              
              April
      15, 2009Leo
      B. Womack


68