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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2004
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
33-23617
- --------
(Commission file number)
Material Technologies, Inc.
- ---------------------------
(Exact name of small business issuer as specified in its charter)
Delaware
- --------
(State or other jurisdiction
of incorporation or organization)
95-4622822
- ----------
(IRS Employer
Identification No.)
11661 San Vicente Boulevard
Suite 707
Los Angeles, California 90049
- -----------------------------
(Address of principal executive offices)
(310) 208-5589
- --------------
(Issuer's telephone number)
- ------------------------------
(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 equity; as
of September 30, 2004
Class A Common Stock - 100, 494,460 shares issued, 70,994,951 shares outstanding
Class B Common Stock - 600,000 shares issued and outstanding
Class A Preferred - 337 shares issued and outstanding
Class B Preferred - 167 shares issued and outstanding
Class C Preferred - 1,350 shares issued and outstanding
Class D Preferred - 4,490,000 shares issued and outstanding
1
INDEX
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Page
------
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Operations -
For the three and nine months ended
September 30, 2004 and 2003and from the
Company's inception (October 21, 1983)
through September 30, 2004 5
Consolidated Statements of Cash Flows
For the nine-months ended September 30,
2004 and 2003 and from the Company's
inception (October 21, 1983) through
September 30, 2004 6 - 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 15
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21
Part 2. Other Information 21
2
Part 1. Financial Information
- -------------------------------
Item 1. - FINANCIAL INFORMATION
- ------------------------------
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
====================================================================================================================
December 31, September 30,
2003 2004
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 47,664 $ 168,686
Receivable due in research contracts 28,004 19,798
Receivable from officer 83,940 94,450
Employee receivable 1,350 2,689
Receivable from tax authorities 161 -
Prepaid expenses 4,179 3,000
---------------- ----------------
TOTAL CURRENT ASSETS 165,298 288,623
---------------- ----------------
FIXED ASSETS
Property and equipment, net
of accumulated depreciation 20,626 16,569
---------------- ----------------
OTHER ASSETS
Intangible assets, net of
accumulated amortization 10,004 8,417
Refundable deposit 2,348 2,348
---------------- ----------------
TOTAL OTHER ASSETS 12,352 10,765
---------------- ----------------
TOTAL ASSETS $ 198,276 $ 315,957
================ ================
See accompanying notes
3
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
====================================================================================================================
December 31, September 30,
2003 2004
---------------- ----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Legal fees payable $ 219,154 $ 148,753
Fees payable to R&D subcontractors 25,000 -
Accounting fees payable 37,984 18,395
Other accounts payable and accrued expenses 96,591 43,133
Accrued officer wages 142,446 196,446
Notes payable - current portion 25,688 25,688
Payable on research and
development sponsorship 638,003 728,068
Loans payable - others 60,438 61,656
---------------- ----------------
TOTAL CURRENT LIABILITIES 1,245,304 1,222,139
SECURED CONVERTIBLE DEBENTURE 345,333 1,193,372
---------------- ----------------
TOTAL LIABILITIES 1,590,637 2,415,511
---------------- ----------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 825 825
---------------- ----------------
STOCKHOLDERS' (DEFICIT)
Class A preferred stock , $.001 par value, authorized 350,000 Shares,
issued and outstanding 337 shares at December 31, 2003 and
and September 30, 2004 - -
Class B preferred stock , $.001 par value, authorized 200,000 Shares,
issued and outstanding 167 shares at December 31, 2003 and
September 30, 2004 - -
Class C preferred stock , $.001 par value, authorized
25,000,000 shares, issued and outstanding 4,050 at December 31, 2003
and 1,350 shares at September 30, 2004 4 1
Class D preferred stock , $.001 par value, authorized 20,000,000 Shares,
issued and outstanding 5,440,000 shares at December 31, 2003 and
4,490,000 shares at September 30, 2004 5,440 4,490
Class A Common Stock, $.001 par value, authorized 1,750,000,000
shares, issued and outstanding 66,488,975 at December
31, 2003 and 70,994,951 shares
outstanding at September 30, 2004 66,488 70,995
Class B Common Stock, $.001 par value, authorized 600,000
Shares, issued and outstanding 600,000 shares at
December 31, 2003,and September 30, 2004 600 600
Additional paid in capital 13,124,573 17,963,237
Less notes receivable - common stock (51,096) (54,088)
Deficit accumulated during the development stage (14,539,195) (20,085,614)
---------------- ----------------
TOTAL STOCKHOLDERS' (DEFICIT) (1,393,186) (2,100,379)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) $ 198,276 $ 315,957
================ ================
See accompanying notes
4
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
===============================================================================================================================
From Inception
For the Three Months Ended For the Nine Months Ended (October 21, 1983)
September 30, September 30, Through
2003 2004 2003 2004 September 30, 2004
-------------- -------------- -------------- -------------- ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Restated) (Restated)
REVENUES
Sale of fatigue fuses $ - $ - $ - $ - $ 64,505
Sale of royalty interests - - - - 198,750
Research and development revenue - 29,186 - 99,522 5,165,883
Test services - - - - 10,870
-------------- -------------- -------------- -------------- ------------------
TOTAL REVENUES - 29,186 - 99,522 5,440,008
-------------- -------------- -------------- -------------- ------------------
COSTS AND EXPENSES
Research and development 16,695 3,966,659 118,410 4,369,901 9,629,981
General and administrative 396,469 173,334 970,947 1,103,609 15,089,488
-------------- -------------- -------------- -------------- ------------------
TOTAL COSTS AND EXPENSES 413,164 4,139,993 1,089,357 5,473,510 24,719,469
-------------- -------------- -------------- -------------- ------------------
INCOME (LOSS) FROM OPERATIONS (413,164) (4,110,807) (1,089,357) (5,373,988) (19,279,461)
-------------- -------------- -------------- -------------- ------------------
OTHER INCOME (EXPENSE)
Interest income 12,101 3,256 38,485 9,502 351,743
Interest expense (42,147) (60,361) (134,670) (181,133) (822,356)
Forgiveness of indebtedness 0 0 0 (289,940)
Loss on abandonment of joint venture 0 0 0 0 (33,000)
-------------- -------------- -------------- -------------- ------------------
TOTAL OTHER INCOME (30,046) (57,105) (96,185) (171,631) (793,553)
-------------- -------------- -------------- -------------- ------------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND PROVISION FOR INCOME TAXES (443,210) (4,167,912) (1,185,542) (5,545,619) (20,073,014)
PROVISION FOR INCOME TAXES 0 0 (800) (800) (12,600)
-------------- -------------- -------------- -------------- ------------------
NET INCOME (LOSS) $ ( 443,210) $ (4,167,912) $ (1,186,34) $ (5,546,419) $ (20,085,614)
============== ============== ============== ============== ==================
PER SHARE DATA
Basic income (loss) before
extraordinary item
BASIC NET (LOSS) PER SHARE $ (0.08) $ (0.06) $ (0.60) $ (0.08)
============== ============== ============== ==============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,497,249 70,149,996 1,991,047 68,374,027
============== ============== ============== ==============
See accompanying notes
5
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================================================================================================
From Inception
For the Nine Months Ended (October 21, 1983)
September 30, Through
2003 2004 September 30, 2004
---------------- ---------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,186,342) $ (5,546,419) $ (20,085,614)
---------------- ---------------- ------------------
Adjustments to reconcile net income
(loss) to net cash provided
(used) in operating activities
Depreciation and amortization 6,854 6,321 201,072
Accrued interest income (36,317) (9,502) (296,671)
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 (4,850) 8,206 (70,126)
(Increase) decrease in employee advances 1,433 (1,511)
(Increase) decrease in prepaid expense (3,000) - (4,338)
Loss on sale of equipment - 12,780
Issuance of common stock for services 522,400 4,596,926 8,569,918
Issuance of stock for agreement modification - - 152
Forgiveness of Indebtedness - - 215,000
Increase (decrease) in accounts - -
payable and accrued expenses 113,848 (49,981) 1,019,856
Increase in legal fees secured by note payable - 1,481,895
Interest accrued on note payables 132,608 179,074 766,777
Increase in research and development -
sponsorship payable - - 218,000
(Increase) in note for litigation settlement - - (25,753)
(Increase) in Deposits - - (2,189)
---------------- ---------------- ------------------
TOTAL ADJUSTMENTS 732,976 4,731,044 15,266,917
---------------- ---------------- ------------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (453,366) (815,375) (4,818,697)
---------------- ---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds From sale of equipment - - 10,250
Purchase of property and equipment - (677) (267,149)
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 - (677) (127,172)
---------------- ---------------- ------------------
See accompanying notes
6
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================================================================================================
From Inception
For the Nine Months Ended (October 21, 1983)
September 30, Through
2003 2004 September 30, 2004
---------------- ---------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
(Restated) (Restated)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock $ 187,140 $ 170,556 $ 3,281,139
Costs incurred in offerings (38,356) (10,314) (464,802)
Purchase of Company's common stock for cancellation (24,332) (4,168) (28,600)
Sale of common stock warrants - - 18,250
Sale of preferred stock 64,500 - 323,005
Sale of redeemable preferred stock - - 150,000
Capital contributions - - 301,068
Payment on proposed reorganization - - (5,000)
Loans to officer - (7,000) 771,805
Repayments from officer - 3,000 (539,379)
Increase in loan payable-others 130,000 785,000 1,307,069
---------------- ---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES: 318,952 937,074 5,114,555
---------------- ---------------- ------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (134,414) 121,022 168,686
BEGINNING BALANCE CASH AND
CASH EQUIVALENTS 251,782 47,664 -
---------------- ---------------- ------------------
ENDING BALANCE CASH AND CASH
EQUIVALENTS $ 117,368 $ 168,686 $ 168,686
================ ================ ==================
See accompanying notes
7
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Financial Statements
Note 1. Nature of Business, Organizational Structure and Principles of
- ------------------------------------------------------------------------
Consolidation
- -------------
Material Technologies, Inc. (the "Company") is engaged in research and
development of metal fatigue detection, measurement, and monitoring
technologies. The Company is developing several monitoring devices for
metal fatigue detection and measurement and is considered a
development stage company doing business as "Tensiodyne Scientific
Corporation".
The accompanying financial statements include the accounts and
transactions of Material Technologies, Inc. and its majority owned
subsidiaries, Matech International, Inc and Matech Aerospace, Inc.
Intercompany transactions and balances have been eliminated in
consolidation.
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 September 30, 2004, and the
results of its operations and cash flows for the three and nine-month
periods ended September 30, 2004 and 2003. The operating results of
the Company on an interim basis may not be indicative of operating
results for the full year. Your attention is directed to footnote
disclosures found in the Company's December 31, 2003 Form 10-K and
particularly to Note 2, which includes a summary of significant
accounting policies.
Certain 2003 amounts have been reclassified in order to conform with
2004 classifications. The Company has restated the results of
operations for the quarter and year to date periods ended September
30, 2003 to properly state Officer Salary for the respective periods.
An increase of $34,500 and $$72,500 was recorded in General and
Administrative Expenses during the quarter and year to date periods
ended September 30, 2003, respectively.
On September 23, 2003, the Company's Board of Directors declared a
1,000 for 1 reverse stock split of its Class A Common Stock and all
classes of its Preferred Stock. The financial statements have been
retroactively restated as if the reverse stock split occurred at the
beginning of each period presented.
8
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred substantial operating and net
losses, as well as negative operating cash flows, in recent fiscal
years. In addition, the Company is in default on approximately
$804,000 of its term notes payable. As a result, the Company has
significant working capital and stockholders' deficits at September
30, 2004. Additionally, the Company has not completed development on
its product and accordingly, has not any income . These factors, among
others, indicate that the Company may be unable to continue as a going
concern. These condensed consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional debt or equity financing as may be
required to make up for any shortfalls in operating cash flows, and
ultimately to attain successful operations.
Note 2. Net Loss Per Share
- ----------------------------
Basic and diluted Earnings (Loss) per share are calculated by dividing
net loss by the weighted average number of shares outstanding during
the period. Diluted earnings per share reflect the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. As of September
30, 2004, the Company has an aggregate of 72.4 million additional
common shares were potentially issuable pursuant to shares held in
escrow (see Note 7), outstanding financial instruments that have fixed
conversion and exercise prices (see Note 6) and warrants (see Note 6).
Based on the net loss incurred for each period presented in the
financial statements, the warrants are considered anti-dilutive and
accordingly are not included in the computation of the net loss per
share.
Note 3. Receivable from Officer
- ---------------------------------
As of September 30, 2004, the Company is owed by its President, Mr.
Robert M. Bernstein, $94,450 for various advances made to him
including accrued interest. Advances are assessed interest at a rate
of 10% per annum, are unsecured, and due on demand. Accrued interest
recognized as income for the three-months ended September 30, 2003 and
2004 was $1,935 and $2,258, respectively. Accrued interest recognized
as income for the nine-months ended September 30, 2003 and 2004 was
$5,767 and $6,510, respectively.
9
Note 4. Intangibles
- ---------------------
Intangible assets consist of the following at September 30, 2004:
Period of
Amortization
------------
Patent Costs 17 Years $ 28,494
License Agreement 17 Years 6,250
(See Note 5)
Website 5 Years 5,200
---------
39,944
Less Accumulated Amortization (31,527)
$ 8,417
=========
Amortization charged to operations for the three-months ended
September 30, 2003 and 2004 was $529, respectively. Amortization
charged to operations for the nine-months ended September 30, 2003 and
2004 was $1,587, respectively.
Estimated amortization expense for the next five years is as follows:
2005 $2,116
2006 $1,596
2007 $1,076
2008 $1,076
2009 $1,076
Note 5. Notes and Loans Payable
- ---------------------------------
a. In October 1996, the Company borrowed $25,000 from an unrelated third
party. The loan balance as of September 30, 2004 was $25,688. This
loan is in default.
b. On May 27, 1994, the Company borrowed $25,000 from Mr. Sherman Baker,
a current shareholder. The loan is evidenced by a promissory note that
is assessed interest at major bank prime rate. The note matured on May
31, 2002, when principal and accrued interest became fully due and
payable. The Company has pledged its patents as collateral against
this loan. This loan is in default.
As additional consideration for the loan, the Company granted to Mr.
Baker, a 1% royalty interest in the Fatigue Fuse and a 0.5% royalty
interest in the Electrochemical Fatigue Sensor. The Company has not
placed a value on the royalty interest granted. The balance due on
this loan as of September 30, 2004, was $51,487.
c. On April 28, 2003, the Company borrowed $10,169 from third parties.
These loans are unsecured, non-interest bearing, and due on demand.
10
d. The Company is indebted to the University of Pennsylvania pursuant to
a Sponsorship Agreement. The balance due as of September 30, 2004 is
$728,068. This loan is in default.
Note 6. Convertible Debentures
- --------------------------------
On September 23, 2003, the Company entered into a Class A Senior
Secured Convertible Debenture (the "Debenture") with Palisades
Capital, LLC or its registered assignee ("Palisades"), pursuant to
which Palisades has agreed to loan to the Company up to $1,500,000, of
which a total of $1,125,000 has been funded through September 30,
2004.
Under the Debenture, Palisades has the option, after March 30, 2004,
to convert the principal amount of all moneys loaned under the
Debenture, together with accrued interest, into Common Stock of the
Company at the lesser of (i) 50% of the average ten closing prices for
the Company's Common Stock for the ten (10) trading days immediately
preceding the Conversion Date or (ii) $0.10 (the lesser of the two
being referred to as the "Conversion Price"). In the event Palisades
loans the full $1,500,000 face amount of the Debenture to the Company
and subsequently elects to exercise its right to convert the Debenture
into the Company's Common Stock at a time when the Conversion Price is
less than four cents per share Palisades would receive at least fifty
million (50,000,000) shares of Common Stock resulting in a change in
control of the Common Stock of the Company. However, Mr. Bernstein,
the Company's President and Chief Financial Officer would still retain
voting control as a result of his holding of one hundred percent
(100%) of the Class B Common Stock.
In connection with the financing, the Company's President entered into
a voting agreement and irrevocable proxy, which provides that until
September 23, 2006, if an Event of Default, as defined in the
Debenture in favor of Palisades and continues for a period of not less
than 30 days, all Class B Common Stock which Mr. Bernstein owns of
record, or becomes the owner of record in the future will be voted in
accordance with the directions of Mr. Monty Freedman, an affiliate of
Palisades, or his designated successor. This loss of voting rights
would create a change in the voting control of the Company.
The debenture bears interest at an annual rate of 10% and matures on
December 31, 2006 when the principal and accrued interest becomes
fully due. During the three-month period ended September 30, 2004, the
Company was advanced $100,000 from Palisades. The balance of the
debenture at September 30, 2004 was $1,193,372 including accrued
interest. Interest charged to operations for the three-months ended
September 30, 2003 and 2004 pertaining to this obligation were $99 and
$27, 915 respectively. Interest charged to operations for the
nine-months ended September 30, 2003 and 2004 pertaining to this
obligation were $99 and $63,039, respectively.
11
Note 7. Stock Activity
- ------------------------
On April 23, 2004, the Company amended its Certificate of
Incorporation increasing the number of authorized common shares to
1,750,000,000 and number of authorized preferred shares to 50,000,000.
During the three-months ended September 30, 2004, the Company had the
following stock activity::
a) Common Stock issued and outstanding
Shares issued for $152,000 1,061,760
Shares issued for consulting services,
valued at $3,897,851 1,615,200 (1)
Shares issued in connection with private
offerings, valued at $3,400 1,000
Shares purchased in the open market for
cancellation (1,000)
-----------
2,676,960
Add: shares issued and outstanding as of
June 30, 2004 68,317,991
-----------
Common shares issued and outstanding as
of September 30, 2004 70,994,951
============
b) Common share activity issued during the
three-months ended September 30, 2004,
but held in escrow and considered not
outstanding 23,198,666 (2)
Add: Shares held in escrow as of June
30, 2004 and considered not outstanding 6,300,843
------------
Common shares held in escrow as of
September 30, 2004 29,499,509
============
Total shares issued as of September 30,
2004 100,494,460
============
1) Of the 1,615,200 ahares, 1,599,000 were issued pursuant to a
three-year lock up agreement. Under this agreement, these shares
cannot be sold or transferred for a three-year period, with
certain limited exceptions. Due to the restrictions placed on
these shares marketability, the shares were valued at 70% of
their market price on date of issuance.
12
2) A description of the shares held in escrow are as follows
a), 4,200,000 shares were issued as part of the on going
negotiations on a $7,000,000 loan.
b) 8,666,666 shares were issued to escrow pursuant to a July
23, 2004 Stock Purchase Agreement ("Langley Agreement") with
Langley Park Investments PLC, a corporation organized under
the laws of England and Wales ("Langley"). The Agreement was
subject to a number of material conditions precedents before
the obligations of any of the parties under the Agreement
matured. The last of the conditions precedent was satisfied
on October 1, 2004, at which time the Agreement became a
binding and enforceable obligation of the parties thereto.
There is no material relationship between the registrant and
Langley other then the obligations created by the Agreement.
The Agreement obligates the Company to issue and sell
8,666,666 shares of its Common Stock par value $.001 (the
"Shares") to Langley for a purchase price of $1.50 per share
(the "Purchase Price"). The Purchase Price for the Shares is
represented by the issuance to the Company of 6,621,696
shares of Langley (the "Langley Shares"), which is net of
the 7.5% finder's fee. The Agreement provides that 3,579,295
shares will be held in an escrow account and the balance of
3,042,445 shares is saleable on the London Exchange. The
Shares of the Company are restricted stock for a period of 2
years from date of issuance. If the Shares of the Company do
not have a market price of at least $1.50 per share at the
end of the 2 year period, the Company is required to return
the shares of Langley held in escrow based on a formula, as
defined.
c) 10,332,000 shares of common stock were issued to escrow as
part of the negotiations on potential financing with Seaside
Partners Fund LP ("Seaside"). The Agreement is subject to a
number of material conditions precedents before the
obligations of any of the parties under the Agreement
matures.
The Agreement obligates the Company to issue and sell
10,332,000 shares of its Common Stock par value $.001 (the
"Shares") to Seaside for a purchase price of $0.55 per share
(the "Purchase Price"). The Purchase Price for the Shares is
represented by the issuance to the Company of 4,920,000
shares of Seaside which is net of the 9.1% finder's fee. The
Agreement provides that 1,623,600 shares will be held in an
escrow account and the balance of 3,296,400 shares is
saleable on the London Exchange. The Shares of the Company
are restricted stock for a period of 1 year from date of
issuance. If the Shares of the Company do not have a market
price of at least $0.55 per share, the Company is required
13
to return the shares of Langley held in escrow based on a
formula, as defined.
Note 8. Subsequent Events
- ---------------------------
The Company consummated its transaction with Langley, and on October
15, 2004, the Company sold 1,000,000 shares in Langley on the London
Stock Exchange through a registered broker dealer licensed in the
United Kingdom for $466,000.
In addition, on November 8, 2004, the Company sold 500,000 shares of
Langley on the London Stock Exchange through a registered broker
dealer licensed in the United Kingdom for $220,283.
The Company is expects to consummate the transaction with Seaside in
November 2004.
During the period from October 1, 2004 through November 8, 2004, the
Company had the following stock activity: (i) issued 1,000 shares of
common stock for services rendered in its research and development
project valued at $3,040; (ii) issued 200,000 shares of common stock
for consulting services subject to a two year lock up agreement valued
at $422,800; (iii) issued 2,570,000 shares of common stock through the
conversion of 2,570,000 shares of convertible Class D Preferred; (iv)
sold130,000 shares of common stock , subject to a two year lock up
agreement for $10,000; (v) issued 2,260,000 shares of its common stock
to its Corporate Secretary, subject to a two year lock up agreement,
which were valued at $3,970,820; (vi) issued 36,923 shares of its
common stock to a consultant who is assisting the Company in finding
licensing technologies relevant to the Company's business valued at
$78,055; (vii) issued 100,000 shares to its outside accounting
consultant, subject to a three-year lock up agreement, valued at
$251,000; and (viii) issued 1,500,000 shares to John Goodman, an
employee and director in connection with engineering services, subject
to a three-year lock up agreement, valued at $2,520,000.
14
Item 2. Management's discussion and analysis of financial conditions and
- --------------------------------------------------------------------------------
results of operations
- ---------------------
Results of Operations for the Nine Months Ended September 30, 2004 and 2003
- ---------------------------------------------------------------------------
A summary of the Company's operating activities for the nine-months ended
September 30, 2004 as compared to the Company's operating activities for the
nine-months ended September 30, 2003 is as follows:
For the Nine Months
Ended
September 30 Increase
2004 2003 (Decrease)
---------------- ---------------- ----------------
(Unaudited) (Unaudited) 2004 v 2003
================
Research and development revenue $ 99,522 $ - $ 99,522
================ ================ ================
Research and development costs
Stock issued for services $ 4,019,715 $ 45,000 $ 3,974,715
Cash and accrued expenses
Salaries 88,725 66,381 22,344
Consultants and other expenses 261,461 7,029 254,432
---------------- ---------------- ----------------
$ 4,369,901 $ 118,410 $ 4,251,491
================ ================ ================
General and administrative expenses
Stock issued for services $ 577,210 $ 477,400 $ 99,810
Cash and accrued expenses
Officer's salary 144,000 103,500 40,500
Salaries - other 33,467 34,288 (821)
Consulting fees 69,007 102,963 (33,956)
Professional fees 89,767 124,851 (35,084)
Rent 21,127 21,132 (5)
Office expense 24,800 20,287 4,513
Telephone 13,903 13,385 518
Travel expense 34,060 17,257 16,803
Other expenses 96,268 55,884 40,384
---------------- ---------------- ----------------
$ 1,103,609 $ 970,947 $ 132,662
================ ================ ================
Interest Expense $ 181,133 134,670 $ 46,463
================ ================ ================
Interest income $ 9,502 $ 38,485 $ (28,983)
================ ================ ================
15
During the nine months ended September 30, 2004, the Company issued 127,700
shares of its common stock (free trading) to various consultants for services
rendered in the Company's research and development projects. These shares were
valued at $150,980. The Company also issued during the nine-month period ending
September 30, 2004, 599,000 to various consultants for services rendered in
connection with the Company's research and development efforts. These shares are
subject to a three-year lock up and were valued at $1,394,172 (70% of the
respective shares' market value on date of issuance). In addition, the Company
issued 1,007,500 shares (restricted) to Mr. William Berks, a director and
vice-president of the Company for services rendered. These shares are subject to
three-year lock up agreement and were valued at $2,474,563 (70% of the shares'
market value on date of issuance).
During the nine months ended September 30, 2003, the Company issued 4,250
(post-split) shares of its common stock for services rendered in connection with
its research and development endeavors that were valued at $45,000. Of the 4,250
shares issued, 1,000 shares were issued to Mr. John Goodman, a director and
officer of the Company and 3,000 shares were issued to Mr. Williams Berks.
During the nine months ended September 30, 2004, the Company issued 1,000 shares
(free trading) to its outside accounting consultant, which was valued at $3,235.
Other shares of its common stock totaling 638,000 were issued to various
consultants for marketing and other services and were valued at $573,975.
During the nine months ended September 30, 2003, the Company issued 7,765
(post-split) shares of its common stock for consulting services valued at
$98,701. Also during this nine-month period, it issued 8,650 (post-split) shares
of its common stock for professional services valued at $131,500, and issued
30,000 (post-split) shares of its common stock to its president as compensation
valued at $247,199.
16
During the nine-months ended September 30, 2004, the Company incurred $261,461
in cash and accrued expenses relating to its research and development endeavors
as compared to $7,029 for the same period in 2003. The main reason for the
difference in amounts incurred for the two periods relates to the Company's
funding during the two periods and the amount it had available to pay for its
research and development projects. The net funding from financing activities
during the nine-months ended September 30, 2004 amounted to $937,074 as compared
to $318,952. As it did not have sufficient resources to fund its programs in
2003, the Company suspended its research and development projects during the
2003.
During the nine-months ended September 30, 2004, the Company incurred $144,000
in Officer's compensation, which consisted of $90,000 paid in cash, and $54,000
that was accrued pursuant to the President's employment agreement. During the
nine months ended September 30, 2003, Officer's accrued compensation totaled
$103,500. The increase in 2004 as compared to 2003 for Officer's compensation
pertains directly to the new employment agreement in October 2003.
Consulting fees paid in cash and accrued during the nine-months ended September
30, 2004 was $33,956 less than amounts paid and accrued during the same period
in 2003. The reduction pertains to increased fees incurred in 2003 for
consultants involved in seeking financing for the Company.
Professional fees paid in cash and accrued during the nine-months ended
September 30, 2004 was $35,084 less than amounts paid and accrued during the
same period in 2003. The reduction pertains to the fees incurred in 2003
relating to the Company's filing of an SB-2 Registration Statement that was
subsequently withdrawn.
17
Results of Operations for the Three Months Ended September 30, 2004 and 2003
- ----------------------------------------------------------------------------
For the Three Months Ended
September 30, Increase
2004 2003 (Decrease)
-------------------------------------------------------
(Unaudited) (Unaudited) 2004 v 2003
Research and development revenue $ 29,186 $ - $ 29,186
================ ================ ================
Research and development costs
Stock based compensation $ 3,894,615 $ - $ 3,894,615
Cash and accrued expenses
Salaries 27,598 15,667 11,931
Consultants and other expenses 44,446 1,028 43,418
---------------- ---------------- ----------------
$ 3,966,659 $ 16,695 $ 3,949,964
================ ================ ================
General and administrative expenses
Stock based compensation $ 3,235 $ 258,939 $ (255,704)
Cash and accrued expenses
Officer's salary 48,000 34,500 13,500
Salaries - other 12,022 9,715 2,307
Consulting fees 17,352 35,643 (18,291)
Professional fees 34,881 29,235 5,646
Rent 9,392 7,044 2,348
Office expense 5,916 7,827 (1,911)
Telephone 5,536 4,943 593
Travel expense 17,239 4,871 12,368
Other expenses 19,761 3,752 16,009
---------------- ---------------- ----------------
$ 173,334 $ 396,469 $ (177.135)
================ ================ ================
Interest Expense $ 60,361 $ 42,147 $ 18,214
================ ================ ================
Interest income $ 3,256 $ 12,101 $ ( 8,845)
================ ================ ================
During the three months ended September 30, 2004, the Company issued 7,700
shares of its common stock (free trading) to various consultants for services
rendered in the Company's research and development projects. These shares were
valued at $25,880. The Company also issued 599,000 shares to three of its
advisors for engineering and consulting services relating to its research and
development projects.. These shares are subject to a three-year lock up and were
valued at $1,394,172 (70% of the shares' market value on date of issuance). In
addition, the Company issued 1,007,500 shares (restricted) to Mr. William Berks,
a director and vice-president of the Company for services rendered. These shares
are subject to three-year lock up agreement and were valued at $2,474,563 (70%
of the shares' market value on date of issuance).
18
During the three months ended September 30, 2004, the Company issued 1,000
shares (free trading) to its outside accounting consultant, which was valued at
$3,235. The Company also issued 599,000 shares to three of its advisors. These
shares are subject to a three-year lock up and were valued at $1,394,173 (70% of
the shares' market value on date of issuance).
During the three months ended September 30, 2003, the Company issued 7,760
(post-split) shares of its common stock for consulting services valued at
$76,383. Also during this nine-month period, it issued 8,650 (post-split) shares
of its common stock for professional services valued at $131,500, and issued
30,000 (post-split) shares of its common stock to its president as compensation
valued at $247,199.
During the three-months ended September 30, 2004, the Company incurred $44,446
in cash and accrued expenses relating to its research and development endeavors
as compared to $1,028 for the same period in 2003. As indicated above, the main
reason for the difference in amounts incurred for the two periods relates to the
Company's lack of funds in 2003 as compared to 2004, and the suspension of its
research and development projects during 2003.
During the three-months ended September 30, 2004, the Company incurred $48,000
in Officer's compensation, which consisted of $30,000 paid in cash, and $18,000,
which was accrued pursuant to the President's employment agreement. The accrued
compensation for the three months ended September 30, 2003 amounted $34,500. The
increase is attributable to the new employment contract in October 2003.
Consulting fees paid in cash and accrued during the three-months ended September
30, 2004 was $18,291 less than amounts paid and accrued during the same period
in 2003. The reduction pertains to increased fees incurred in 2003 for
consultants involved in seeking financing for the Company.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents as of September 30, 2004 and 2003 were $168,686 and
$117,368, respectively. During the nine-months ended September 30, 2004, the
Company received a total of $1,066,284, which consisted of $107,728 from its two
research and development contracts, $170,556 through the sale of 1,080,336
shares of its common stock, $785,000 in advances on the Company's convertible
debenture, and a $3,000 repayment from the Company's President. During the same
nine-months, the Company used $923,103 in its operations, purchased office
equipment for $677, used $10,314 for expenses in its Regulation S offering, made
a $7,000 advance to its President and used $4,168 to purchase its 1,260 shares
of common stock from a shareholder.
During 2003, the Company received $6,880 from the prior year's development
contract, $184,951 through the issuance of 33,117 shares (post split) of Class A
common stock, $24,100 through the issuance of 24 (post split) shares of the
19
Company's Class A Preferred Shares, $40,400 through the issuance of the 4,050
(post split) shares of the Company's Class C Convertible shares, and $2,189
through the issuance of 43,750 shares of common stock of Matech Aerospace, Inc.,
an inactive corporation that was wholly owned by the Company prior to the
issuance of the 43,750 shares. The Company holds 4,000,000 shares of the
subsidiary's common stock. Of the $258,520 received, $460,246 was used in
operations, $38,356 was used to pay offering expenses, and $24,332 was used to
repurchase 997 (post split) shares of its common stock from investors.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
n/a.
Item 4. Controls and Procedures
- ---------------------------------
The Company's management has evaluated, with the participation of the Company's
Chief Executive Officer and Principal Financial Officer and its Corporate
Controller and Treasurer, the effectiveness of the design and operation of the
Company's disclosure controls and procedures, and have concluded that, as of the
end of the period covered by this Quarterly Report, the Company's disclosure
controls and procedures as defined in Rule 13a-14(e) under the Securities
Exchange Act of 1934, as amended, are effective for gathering, analyzing and
disclosing information the Company is required to disclose in its periodic
reports filed under such Act. During the most recent fiscal quarter, there has
been no change in the Company's internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II. Other Information
- ---------------------------
Item 2. Changes in Securities
During the three-months ended September 30, 2004, the Company had the following
stock activity::
a) Common Stock issued and outstanding
Shares issued for $152,000 1,061,760
Shares issued for consulting services,
valued at $3,897,851 1,615,200 (1)
Shares issued in connection with private
offerings, valued at $3,400 1,000
Shares purchased in the open market for
cancellation (1,000)
------------
2,676,960
b) Common share activity issued during the
three-months ended September 30, 2004,
but held in escrow and considered not
outstanding 23,198,666 (1)
------------
Common shares issue during the three
months ended September 30, 2004 25,875,626
============
1) See Note 6 to the accompanying financial statements.
21
During the period from October 1, 2004 through November 8, 2004, the Company
issued the following shares of its common stock:
For services rendered in connection with finding
New technologies 36,923
For services rendered in research development
projects 1,000
Shares issued for consulting services subject to a
three-year lock up agreement 200,000
Conversion of 2,570,000 shares of Class D
Preferred 2,570,000
Sale of 130,000 shares for $10,000 subject to a
two-year lock up agreement 130,000
Shares issued to the Company's Secretary, And
Board member subject to a two-year lock up
agreement 2,260,000
Shares issued to the Company's Outside accountant,
subject to a three year lock up agreement 100,000
Shares issued to Mr. John Goodman for engineering
services, subject to a three-year lock up
agreement 1,500,000
------------
Total 6,797,923
============
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
22