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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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33-23617
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(Commission file number)
Material Technologies, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
95-4622822
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(IRS Employer Identification No.)
11661 San Vicente Boulevard
Suite 707
Los Angeles, California 90049
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(Address of principal executive offices)
(310) 208-5589
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
[X] Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of common
equity;
as of March 31, 2003
Class A Common Stock - 67,588,975 shares outstanding, 842 shares held in reserve
Class B Common Stock - 600,000 shares outstanding
Class A Preferred - 337 shares outstanding
Class B Preferred - 167 shares outstanding
Class C Preferred - 4,050 shares outstanding
Class D Preferred - 4,990,000 shares outstanding
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INDEX
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Page
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Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Operations -
First Quarter Ended March 31, 2003 and 2004
and from the Company's inception (October 21,
1983) through March 31, 2004 5
Consolidated Statements of Cash Flows
First Quarter Ended March 31, 2003 and 2004
and from the Company's inception (October 21,
1983) through March 31, 2004 6 - 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 12
Part 2. Other Information 12
2
Part 1. Financial Information
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Item 1. Financial Statements
- ------------------------------
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
==========================================================================================================================
December 31, March 31,
2003 2004
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 47,664 $ 28,133
Receivable due in research contracts 28,004 34,307
Receivable from officer 83,940 86,033
Employee receivable 1,350 1,350
Receivable from tax authorities 161 152
Prepaid expenses 4,179 3,000
---------------- ----------------
TOTAL CURRENT ASSETS 165,298 152,975
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FIXED ASSETS
Property and equipment, net
of accumulated depreciation 20,626 19,048
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OTHER ASSETS
Intangible assets, net of
accumulated amortization 10,004 9,475
Refundable deposit 2,348 2,348
---------------- ----------------
TOTAL OTHER ASSETS 12,352 11,823
---------------- ----------------
TOTAL ASSETS $ 198,276 $ 183,846
================ ================
See accompanying notes
3
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
==========================================================================================================================
December 31, March 31,
2003 2004
---------------- ----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Legal fees payable $ 219,154 $ 204,270
Fees payable to R&D subcontractors 25,000 -
Accounting fees payable 37,984 23,336
Other accounts payable 78,671 26,525
Accrued expenses 17,920 17,095
Accrued officer wages 142,446 160,446
Notes payable - current portion 25,688 25,688
Payable on research and
development sponsorship 638,003 666,713
Loans payable - others 60,438 60,844
---------------- ----------------
TOTAL CURRENT LIABILITIES 1,245,304 1,184,917
LONG-TERM DEBT 345,333 736,183
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TOTAL LIABILITIES 1,590,637 1,921,100
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MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 38,422 38,422
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STOCKHOLDERS' (DEFICIT)
Class A preferred stock, $.001 par value, authorized 350,000 Shares,
issued and outstanding 337 shares at December 31, 2003 and
March 31, 2004 - -
Class B preferred stock, $.001 par value, authorized 200,000 Shares,
issued and outstanding 167 shares at December 31, 2003 and
March 31, 2004 - -
Class C preferred stock, $.001 par value, authorized
25,000,000 shares, issued and outstanding 4,050 at December 31, 2003
and March 31, 2004 4 4
Class D preferred stock, $.001 par value, authorized 20,000,000 Shares,
issued and outstanding 5,440,000 shares at December 31, 2003 and
4,990,000 shares at March 31, 2004 5,440 4,990
Class A Common Stock, $.001 par value, authorized 549,400,000
shares, issued and outstanding 66,488,975 at December 31, 2003 and
67,588,975 shares at March 31, 2004, Shares held
in reserve 843 shares at December 31, 2003 and March 31, 2004 66,488 67,588
Class B Common Stock, $.001 par value, authorized 600,000
Shares, issued and outstanding 600,000 shares at
December 31, 2003, and March 31, 2004 600 600
Additional paid in capital 13,086,976 13,664,528
Less notes receivable - common stock (51,096) (52,093)
Deficit accumulated during the development stage (14,539,195) (15,461,293)
---------------- ----------------
TOTAL STOCKHOLDERS' (DEFICIT) (1,430,783) (1,775,676)
================ ================
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) $ 198,276 $ 183,846
================ ================
See accompanying notes
4
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
============================================================================================================
From Inception
For the Three Months Ended (October 21, 1983)
March 31, Through
2003 2004 March 31, 2004
---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
REVENUES
Sale of fatigue fuses $ - $ - $ 64,505
Sale of royalty interests - - 198,750
Research and development revenue - 67,270 5,133,631
Test services - - 10,870
---------------- ---------------- ----------------
TOTAL REVENUES - 67,270 5,407,756
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COSTS AND EXPENSES
Research and development 31,236 161,586 5,421,666
General and administrative 338,438 784,419 14,770,298
---------------- ---------------- ----------------
TOTAL COSTS AND EXPENSES 369,674 946,005 20,191,964
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(LOSS) FROM OPERATIONS (369,674) (878,735) (14,784,208)
---------------- ---------------- ----------------
OTHER INCOME (EXPENSE)
Interest income 13,186 3,090 345,331
Interest expense (46,261) (45,653) (686,876)
Forgiveness of indebtedness (289,940)
Loss on abandonment of joint venture - - (33,000)
---------------- ---------------- ----------------
TOTAL OTHER INCOME (EXPENSE) (33,075) (42,563) (664,485)
---------------- ---------------- ----------------
NET (LOSS) BEFORE EXTRAORDINARY ITEMS
AND PROVISION FOR INCOME TAXES (402,749) (921,298) (15,448,693)
PROVISION FOR INCOME TAXES (800) (800) (12,600)
---------------- ---------------- ----------------
NET (LOSS) $ (403,549) $ (922,098) $ (15,461,293)
================ ================ ================
PER SHARE DATA
Basic income (loss) before extraordinary item
BASIC NET (LOSS) PER SHARE $ (3.49) $ (0.01)
================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 115,637 67,006,008
================ ================
See accompanying notes
5
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================================
From Inception
For the Three Months Ended (October 21, 1983)
March 31, Through
2003 2004 March 31, 2004
---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (403,549) $ (922,098) $ (15,461,293)
---------------- ---------------- ----------------
Adjustments to reconcile net income
(loss) to net cash provided
(used) in operating activities
Depreciation and amortization 2,285 2,107 196,858
Accrued interest income (12,007) (3,090) (290,259)
Gain on sale of securities - - (196,596)
Charge off of investment in joint venture - - 33,000
Officers' and directors compensation on stock
subscription modification - - 1,500,000
Issuance of common stock to officer for past services - - 1,727,617
Charge off of deferred offering costs - - 36,480
Charge off of long-lived assets due to impairment - - 92,919
Modification of royalty agreement - - 7,332
Gain on foreclosure - - (18,697)
(Increase) decrease in accounts receivable - (6,303) (84,635)
(Increase) decrease in employee advances 1,433 - (1,511)
(Increase) decrease in prepaid expense - 1,188 (3,150)
Loss on sale of equipment - - 12,780
Issuance of common stock for services 132,250 553,200 4,526,192
Issuance of stock for agreement modification - - 152
Forgiveness of Indebtedness - - 215,000
Increase (decrease) in accounts -
payable and accrued expenses 10,098 (64,501) 1,005,336
Increase in legal fees secured by note payable 22,725 - 1,481,895
Interest accrued on note payables 22,849 44,966 632,669
Increase in research and development
sponsorship payable - - 218,000
(Increase) in note for litigation settlement - - (25,753)
(Increase) in Deposits - - (2,189)
---------------- ---------------- ----------------
TOTAL ADJUSTMENTS 179,633 527,567 11,063,440
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NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (223,916) (394,531) (4,397,853)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From sale of equipment - - 10,250
Purchase of property and equipment - - (266,472)
Proceeds from sale of securities - - 283,596
Purchase of securities - - (90,000)
Proceeds from foreclosure - - 44,450
Investment in joint ventures - - (102,069)
Payment for license agreement - - (6,250)
---------------- ---------------- ----------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES - - (126,495)
---------------- ---------------- ----------------
See accompanying notes
6
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================================
From Inception
For the Three Months Ended (October 21, 1983)
March 31, Through
2003 2004 March 31, 2004
---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 112,853 $ - $ 3,110,583
Costs incurred in offerings (19,045) - (454,488)
Purchase of Company's common stock for cancellation (15,720) - (24,432)
Sale of common stock warrants - - 18,250
Sale of preferred stock 24,100 - 323,005
Sale of redeemable preferred stock - - 150,000
Capital contributions - - 301,068
Payment on proposed reorganization - - (5,000)
Loans From officer - - 778,805
Repayments to officer - - (542,379)
Increase in loan payable-others - 375,000 897,069
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES: 102,188 375,000 4,552,481
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (121,728) (19,531) 28,133
BEGINNING BALANCE CASH AND
CASH EQUIVALENTS 251,782 47,664 -
---------------- ---------------- ----------------
ENDING BALANCE CASH AND CASH
EQUIVALENTS $ 130,054 $ 28,133 $ 28,133
================ ================ ================
See acompanying notes
7
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements
-----------------------------
Note 1. In the opinion of the Company's management, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of normal recurring accruals) necessary to present fairly
the financial position of the Company as of March 31, 2004, and the
results of its operations and cash flows for the three-month periods
ended March 31, 2004 and 2003. The operating results of the Company on
a quarterly basis may not be indicative of operating results for the
full year.
On September 23, 2003, the Company's Board of Directors affected a
1,000 for 1 reverse stock split of its Class A Common Stock and all
classes of its Preferred Stock. The financial statements presented
herein have been restated as if the reverse stock split occurred at
the beginning of each period presented.
Note 2. Summary of Significant Accounting Policies
a. Principles of consolidation
The accompanying financial statements include the accounts and
transactions of Material Technologies, Inc.and its wholly owned
subsidiaries, Matech International, Inc and Matech Aerospace, Inc.
Intercompany transactions and balances have been eliminated in
consolidation.
b. Accounts Receivable
Accounts receivable are reported at the customers' outstanding
balances less any allowance for doubtful accounts. Interest is not
accrued on overdue accounts receivable.
c. Allowance for Doubtful Accounts
The allowance for doubtful accounts on accounts receivable is charged
to income in amounts sufficient to maintain the allowance for
uncollectible accounts at a level management believes is adequate to
cover any probable losses. Management determines the adequacy of the
allowance based on historical write-off percentages and information
collected from individual customers.
d. Property and Equipment
Property and equipment are stated at cost. Major renewals and
improvements are charged to the asset accounts while replacements,
maintenance and repairs, which do not improve or extend the lives of
the respective assets, are expensed. At the time property and
equipment are retired or otherwise disposed of, the asset and related
accumulated depreciation accounts are relieved of the applicable
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amounts. Gains or losses from retirements or sales are credited or
charged to income.
Material Technologies, Inc. depreciates its property and equipment as
follows:
Financial statement reporting - straight line method as follows:
Machinery 5 years
Computer equipment 3-5 years
Office equipment 5 years
Long-Lived Assets
As of January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances
indicate that the historical cost-carrying value of an asset may no
longer be appropriate. The Company assesses recoverability of the
carrying value of an 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 or disposable value.
e. Net Loss Per Share
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS")
that established standards for the computation, presentation and
disclosure of earnings per share, replacing the presentation of
Primary EPS with a presentation of Basic and diluted EPS. Basic and
diluted EPS is calculated by dividing net loss by the weighted average
shares number of shares outstanding during the year.
f. Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
g. Fair Value of Financial Instruments
The Company estimates the fair value of its financial instruments at
their current carrying amounts since the assets and liabilities
approximate their respective fair values.
h. Stock Based Compensation
For 1998 and subsequent years, the Company has adopted FASB Statement
123 which establishes a fair value method of accounting for its
stock-based compensation plans. Prior to 1998, the Company used APB
Opinion 25.
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i. Revenue Recognition
Significantly all of the Company's revenue is derived from the
Company's contracts relating to the further development of the
Electrochemical Fatigue Sensor (EFS). Revenue on the contracts is
recognized at the time services are rendered.
All other revenue is reported in the period that the income was
earned.
j. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers
cash and cash equivalents to include all stable, highly liquid
investments with maturities of three months or less.
k. Income Taxes
The Company accounts for its income taxes under the provisions of
Statement of Financial Accounting Standards 109 ("SFAS 109"). The
method of accounting for income taxes under SFAS 109 is an asset and
liability method. The asset and liability method requires the
recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between tax bases and
financial reporting bases of other assets and liabilities.
Note 4. Stock Activity
During the quarter ended March 31, 2004,.the Company issued 1,100,000
shares of its common of which 450,000 shares were issued through the
conversion of 450,000 shares of the Company's Class D Preferred,
25,000 shares were issued to the Company's accountant for $25,000 for
past amounts due, and 625,000 shares were issued for consulting
services valued at $553,200. The 25,000 shares issued to the Company's
accountant and the 625,000 issued to the five consultants are subject
to three-year lockup agreements whereby these shares cannot be
transferred or sold for three years.
During the quarter ended March 31, 2003, the Company received $93,808
net of offering costs in exchange for the issuance of 10,799 shares of
its Class A common stock. The Company also received $24,100 in
exchange for the issuance of 24 shares of its preferred stock. The
preferred stock is convertible into 48 shares of Class A common. In
addition, during the quarter the Company issued 6,000 shares of its
Class A common stock for legal services valued at $105,000, 1,362
shares of Class A common were issued for consulting services valued at
$27,250, and 2,550 shares of Class A common were issued in connection
with its Regulation S offering valued at $25,496. The shares issued
for non-cash consideration were valued at their respective quoted
market price at date of issuance.
Also during the quarter ended March 31, 2003, the Company purchased
812 shares of its common stock from various shareholders on the open
market for $15,720. These shares are held in the Company's treasury
waiting for cancellation.
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Item 2. Management's discussion and analysis of financial conditions and
- --------------------------------------------------------------------------------
results of operations
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Results of Operations for the Three Months Ended March 31, 2004 and 2003
- ------------------------------------------------------------------------
Revenue generated by the Company during the quarter ended March 31, 2004 came
from its research contracts with Northrop Gruman amounting to $25,715 and URS
Corporation amounting to $41,555. In addition, the Company accrued interest
income during the same quarter on amounts due it from its President in the
amount of $3,090.
During the three-month period ended March 31, 2003, the Company did not generate
any revenue from its research and development contracts and earned $13,186 in
interest income, the majority of which was accrued on officer loans and notes
due the Company.
During the three-month periods ended March 31, 2004 and 2003, the Company
incurred development costs of approximately $161,586 and $31,236, respectively.
Of the $31,236 incurred in 2003, $5,000 was paid through the issuance of 250
shares of the Company's common stock.
General and administration costs were $784,419 and $338,438, respectively, for
the three-month periods ended March 31, 2004 and 2003.
The major expenses incurred during 2004 consisted of consulting in the amount of
$591,419, officer's salary of $48,000, secretarial salary of $11,658,
professional fees of $81,863, travel expenses of $9,913, and telephone expense
of $3,736. Of the $591,419 incurred for consulting expense, $553,200 was paid
through the issuance of 675,000 shares of the Company's common stock. Included
in the 675,000 shares is 550,000 shares issued to two consultants for services
rendered in connection with Matech Aerospace and for the overseeing the design,
utilization, and marketing of the Company's Videoscope. The shares are subject
to a three-year lock up agreement and were valued at $486,750, which is based on
30% of the quoted market value of the shares on the date of issuance.
The major expenses incurred during 2003 consisted of consulting in the amount of
$67,155, officer's salary of $31,000, secretarial salary of $13,015,
professional fees of $161,772, travel expenses of $6,575, and telephone expense
of $4,317. Of the $67,155 incurred for consulting expense, $22,250 was through
the issuance of 1,112 shares of the Company's common stock. Of the $161,155
incurred for professional fees, $105,000 was through the issuance of 6,000
shares of the Company's common stock.
Interest charged to operations for the quarters ended March 31, 2004 and 2003,
primarily relate to accrued interest due on the Company's various obligations.
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Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents as of March 31, 2004 and 2003 were $28,133 and
$130,054, respectively.
During the quarter ended March 31, 2004, the Company received a total of
$435,967, $60,967 was received on services rendered on its two research
contracts and $375,000 was advanced on its Class A Senior Convertible Debenture.
During the quarter, the Company spent $455,498 in its operations.
During the first quarter of 2003, the Company received a total of $138,133,
which consisted of $112,853 through the sale of 10,799 shares of its common
stock, $24,100 through the sale of 24 of its convertible preferred shares, and
$1,180 in interest income. During the quarter, the Company used $225,096 in its
operations, $19,045 was incurred in the offering of the shares of common stock,
and $15,720 was used to purchase 812 shares of its common stock from various
shareholders.
For the quarter ended March 31, 2004, operating expenses exceeded operating
revenue by $394,531 ($60,967 less $455,498) leaving a cash balance at March 31,
2004 of only $28,133. The Company is currently financing its operations from its
two research contracts, and its Senior Class A Debenture. The two research
contracts do not generate enough revenues to cover the costs of Company's
current research projects and the remaining expected funds from its debenture
agreement is only $785,000. Based upon the Company's current level of spending,
the remaining amounts expected from the debenture and the remaining amounts
expected from the research contracts should allow the Company to fund its
operations through May 2004. Although Management has continued to lower the
Company's overhead, there is no assurance that the Company can continue
operating without additional funding. Management continues in its attempt to
raise capital, but there is no assurance that additional capital will be found,
and if found, the amounts raised will be sufficient to fund continued operations
until such time as the Company's products are brought to market. Even if the
necessary funds are obtained, there is no assurance that Company's products will
be fully developed and go to market, or that that the Company will generate
enough sales to ever be profitable.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
n/a.
Part II. Other Information
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Item 2. Changes in Securities
- -------------------------------
During the quarter ended March 31, 2004, the Company issued 1,100,000 shares of
its common of which 450,000 shares were issued through the conversion of 450,000
shares of the Company's Class D Preferred, 25,000 shares were issued to the
Company's accountant for $25,000 for past amounts
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due, and 625,000 shares were issued for consulting services valued at $553,200.
The 25,000 shares issued to the Company's accountant and the 625,000 issued to
the five consultants are subject to three-year lockup agreements whereby these
shares cannot be transferred or sold three years.
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Material Technologies, Inc.
---------------------------
Registrant
/s/ Robert M. Bernstein
--------------------------------------------
Robert M. Bernstein, President and Chief
Financial Officer
13