UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission file number: 33-23617
Material Technologies, Inc.
(Name of small business issuer in its charter)
|
Delaware |
95-4622822 |
|
11661 San Vicente Boulevard, Suite 707 |
|
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ 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. Yes X No .
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ 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 .
State issuer’s revenues for its most recent fiscal year. The issuer’s revenues for the year ended December 31, 2005 were $139,346.
State the aggregate market value of voting and non‑voting common equity held by non‑affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in rule 12b‑2 of the Exchange Act.) $20,078,226, based on the closing price of $0.13 for our common stock on January 30, 2006.
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. As of January 30, 2006, there were 218,911,233 shares issued, and 176,355,380 shares outstanding, of our Class A common stock. As of January 30, 2006, there were 600,000 shares of our Series B Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them and identify the part of the form 10‑KSB (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to rule 424(b) or (c) of the Securities Act of 1933 (“Securities Act”). The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1990). None.
Transitional Small Business Disclosure Format (check one): Yes _____ No X
Material Technologies, Inc.
TABLE OF CONTENTS
PART I .......................................................................................................................................................3
ITEM 1 - DESCRIPTION OF BUSINESS................................................................................................ 3
ITEM 2 - DESCRIPTION OF PROPERTY............................................................................................... 8
ITEM 3 - LEGAL PROCEEDINGS........................................................................................................... 8
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 9
PART II.................................................................................................................................................... 10
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 10
ITEM 6 - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............ 19
ITEM 7 - FINANCIAL STATEMENTS. 28
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................................................................. 28
ITEM 8A - CONTROLS AND PROCEDURES...................................................................................... 29
ITEM 8B - OTHER INFORMATION..................................................................................................... 30
PART III ................................................................................................................................................. 31
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................................ 31
ITEM 10 - EXECUTIVE COMPENSATION......................................................................................... 35
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS........................................................ 36
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................... 37
ITEM 13 - EXHIBITS............................................................................................................................. 38
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES....................................................... 42
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This Annual Report includes forward‑looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward‑looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.” Forward‑looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.
Forward‑looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Company’s future results and shareholder values may differ materially from those expressed in these forward‑looking statements. Readers are cautioned not to put undue reliance on any forward‑looking statements.
ITEM 1 ‑ DESCRIPTION OF BUSINESS
Introduction
We are engaged in research and development of metal fatigue detection, measurement, and monitoring technologies. As such, we are developing several monitoring devices for metal fatigue detection and measurement. We are a development stage company doing business as Tensiodyne Scientific Corporation.
Our efforts are dedicated to developing devices and systems that indicate the true fatigue status of a metal component. We have developed two products. The first is a small, extremely simple device that continuously integrates the effect of fatigue loading in a structural member, called a Fatigue Fuse. The second is an instrument that detects very small cracks in metals, the Electrochemical Fatigue Sensor. It has demonstrated that it can detect cracks, in the laboratory, as small as 10 microns (0.0004 inches), which is smaller than any other practical crack detection technology, as acknowledged by the United States Air Force and confirmed by Rockwell Scientific Corporation. We hold the patents on the Fatigue Fuse and license the technology on the Electrochemical Fatigue Sensor from the University of Pennsylvania.
We were formed as a Delaware corporation on March 4, 1997. We are the successor to the business of Material Technology, Inc., a Delaware corporation, also doing business as Tensiodyne Scientific, Inc. Material Technology, Inc. was the successor to the business of Tensiodyne Corporation that began developing the Fatigue Fuse in 1983. Our two predecessors, Tensiodyne Corporation and Material Technology, Inc. were engaged in developing and testing the Fatigue Fuse and, beginning in 1993, developing the Electrochemical Fatigue Sensor.
As of December 31, 2005, our investments in our subsidiary companies represented less than 10% of our total assets. We have controlling interests in each of our subsidiary companies and members of our management also serve as officers and directors of each subsidiary.
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The Fatigue Fuse
The Fatigue Fuse is designed to be affixed to a structure to give warnings as pre-selected portions of the fatigue life have been used up (i.e., how far to failure the structure has progressed). It warns against a condition of widespread generalized cracking due to fatigue.
The Fatigue Fuse is a thin piece of metal similar to the material being monitored. It consists of a series of parallel metal strips connected to a common base, much as fingers are attached to a hand. Each “finger” has a different geometric pattern, called “notches,” defining its boundaries. Each finger incorporates an application-specific notch near the base. By applying the laws of physics to determine the geometric contour of each notch, the fatigue life of each finger is finite and predictable. When the fatigue life of a finger (Fuse) is reached, the Fuse breaks.
By implementing different geometry for each finger in the array, different increments of fatigue life are observable. Typically, notches will be designed to facilitate observing increments of fatigue life of 10% to 20%. By mechanically attaching or bonding these devices to different areas of the structural member of concern, the Fuse undergoes the same fatigue history (strain cycles) as the structural member. Therefore, breakage of a Fuse indicates that an increment of fatigue life has been reached for the structural member. The notch and the size and shape of the notch concentrate energy on each finger. The Fuse is intimately attached to the structural member of interest. Therefore, the Fuse experiences the same strain and wear history as the member. Methods are available for remote indication of Fuse fracturing.
In a new structure, we generally assume there is no fatigue and can thus design the Fatigue Fuse for 100% of its life potential. But in an existing structure, one that has experienced loading and wear, we must determine the fatigue status of that structural member so we can design the Fatigue Fuse to monitor the remaining fatigue life potential.
We believe that the Fatigue Fuse is of value in monitoring aircraft, ships, bridges, conveyor systems, mining equipment, cranes, etc. No special training is needed to qualify individuals to report any broken segments of the Fatigue Fuse to the appropriate engineering authority for necessary action. The success of the device is contingent upon our successful marketing of the Fatigue Fuse, and no assurance can be given that we will be able to overcome the obstacles relating to introducing a new product to the market. To implement our ability to produce and market the Fatigue Fuse, we need substantial additional capital and no assurance can be given that this needed capital will be available.
The Electrochemical Fatigue Sensor (“EFS”)
The EFS is a device that employs the principle of electrochemical/mechanical interaction to find cracks. It is an instrument that detects very small cracks and has the potential to determine crack growth rates. The Electrochemical Fatigue Sensor has demonstrated in the laboratory that it can detect cracks as small as 10 microns (0.0004 inches), which is smaller than any other practical technology, as acknowledged by the United States Air Force and Rockwell Scientific Corporation. We believe that nothing comparable to this instrument currently exists in materials technology.
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Currently, our primary focus is on the development and commercialization of the EFS. Due to our limited resources, efforts in the development and testing of the Fatigue Fuse have been delayed.
Status of the Fatigue Fuse
The development and application sequence for the Fatigue Fuse and EFS is (a) basic research, (b) exploratory development, (c) advanced development, (d) prototype evaluation, (e) application demonstration, and (f) commercial sales and service. The Fatigue Fuse came first. The inventor, Professor Maurice Brull, conducted the basic research at the University of Pennsylvania. We conducted the advanced development, including variations of the adhesive bonding process, and fabricating a laboratory-grade remote recorder for finger separation events that constitute proper functioning of the Fatigue Fuse. The next step, prototype evaluation, encompasses empirical tailoring of Fatigue Fuse parameters to fit the actual spectrum loading expected in specific applications, and needs to be done. The tests associated with further development of the Fatigue Fuse include full-scale structural tests with attached Fatigue Fuses. A prototype of the Fatigue Fuse has been designed, fabricated, and successfully demonstrated. The next tasks will be to prepare an analysis for more efficient selection of Fatigue Fuse parameters and to conduct a comprehensive test program to prove the ability of the Fatigue Fuse to accurately indicate fatigue damage when subjected to realistically large variations in measuring stresses and strains in fatiguing metal. The final tasks prior to marketing will be an even larger group of demonstration tests.
The Fatigue Fuse is at its final stages of testing and development. To begin marketing the Fatigue Fuse, it is our belief that it will take from six to 12 months and cost approximately $600,000, including technical and beta testing and final development. If testing, development, and marketing are successful, we estimate we should begin receiving revenue from the sale of the Fatigue Fuse within a year of completing development. However, we cannot estimate the amount of revenue that may be realized from sales of the Fuse, if any.
To date, certain organizations have included our Fatigue Fuse in test programs. We have already completed the tests for welded steel civil bridge members conducted at the University of Rhode Island. In 1996, Westland Helicopter, a British firm, tested the Fatigue Fuse on helicopters. That test was successful with the legs of the Fatigue Fuses failing in sequence as predicted.
The Fatigue Fuse has been at this stage for the past several years as we have not had the necessary financial resources to finalize our development and commence marketing. At the present time we have elected to defer future development of the Fatigue Fuse and apply our resources to pursue the EFS technology.
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The existence of very small cracks can be determined by EFS, and in this regard it appears superior in resolution to other current non-destructive testing techniques. It has succeeded in regularly detecting cracks as small as 40 microns in a titanium alloy, in a laboratory environment, as verified by a scanning electronic microscope, and has proven to be capable of detecting cracks down to ten microns, as acknowledged by the Materials Laboratory at Wright Patterson Air Force on a titanium alloy and confirmed by evaluations at Rockwell Scientific Corporation on bridge grade steel. This is much smaller than the capability of any other practical non-destructive testing method for structural components. There is also a vast body of testing supporting successful use of this technology with selected aluminum alloys. Within the past twelve months, we have successfully evaluated EFS on six highway bridges. These are considered Beta Tests verifying the procedure in the real world. We are now preparing to begin the marketing of the EFS for bridges.
Commercial Markets for our Products and Technologies
No commercial application of our products has been arranged to date, but we believe it can be applied to certain markets. Our technology is applicable to many market sectors such as bridges and aerospace as well as ships, cranes, railways, power plants, nuclear facilities, chemical plants, mining equipment, piping systems, and heavy iron.
Application Of Our Technologies For Bridges
Our EFS and Fatigue Fuse products primarily address the detection of fatigue in structures such as bridges. In the United States alone there are more than 610,000 bridges of which over 260,000 are rated by the Federal Highway Administration as requiring major repair, rehabilitation, or replacement. Our EFS and Fatigue Fuse products can be effectively used as fatigue detection devices for all metal bridges located within the United States. Our detection devices also address maintenance problems associated with bridge structures.
Although there are normal business imperatives, the bridge market is essentially macro-economically and government policy driven. In our opinion, only technology can provide the solution. The need for increased spending accelerates significantly each year as infrastructure ages. The Federal government has recently mandated bridge repair and detection through the passage of the Intermodal Surface Transportation and Efficiency Act in 1991 and again in the $200 billion, 1998 Transportation Equity Act. We do not currently have contracts in place to install our fatigue detection products on bridge structures within the United States.
Our Patent Protections
We are the assignee of four patents originally issued to Tensiodyne Corporation. The first was issued on May 27, 1986, and expired on May 27, 2003. It is titled “Device for Monitoring Fatigue Life” and bears United States Patent Office Number 4,590,804. The second patent, titled “Metal Fatigue Detector” was issued on August 24, 1993 and expires on August 24, 2010, United States Patent Number 5,237,875. The third patent, titled “Device for Monitoring the Fatigue Life of a Structural Member and a Method of Making Same,” was issued on June 14, 1994 and expires on June 14, 2011, United States Patent Number 5,319,982. In addition, we own a fourth patent, titled “Device for Monitoring the Fatigue Life of a Structural Member and a
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The patents described in the preceding section are pledged as collateral to secure the repayment of loans extended to us or indebtedness that we currently owe. On August 30, 1986, we entered into a funding agreement with the Advanced Technology Center, whereby ATC paid $45,000 to us for the purchase of a royalty of 3% of future gross sales and 6% of sublicensing revenue. The royalty is limited to the $45,000 plus an 11% annual rate of return. At December 31, 2005, the future royalty commitment was limited to approximately $344,000. The payment of future royalties is secured by equipment we use in the development of technology as specified in the funding agreement, however, no lien against our equipment or our patents in favor of ATC vests until we generate royalties from product sales.
On May 4, 1987, we entered into a funding agreement with ATC whereby ATC provided $63,775 to us for the purchase of a royalty of 3% of future gross sales and 6% of sublicensing revenue. The agreement was amended August 28, 1987, and as amended, the royalty cannot exceed the lesser of (1) the amount of the advance plus a 26% annual rate of return or, (2) total royalties earned for a term of 17 years. As with our first agreement with ATC, no lien or encumbrance against our assets, including our patents, vests in favor of ATC until we generate royalties from product sales. If we were to default on these payments to ATC, our obligations relating to these agreements then become secured by our patents, products and accounts receivable. At December 31, 2005, the total future royalty commitments, including the accumulated 26% annual rate of return, were limited to approximately $6,142,000.
On May 27, 1994, we borrowed $25,000 from Sherman Baker, one of our shareholders. We gave Mr. Baker a promissory note due May 31, 2002 and we pledged our patents as collateral to secure the repayment of this note. As of the date of this prospectus, there is a first priority security interest in our patents as collateral for the repayment of the amounts we owe to Mr. Baker. As additional consideration for this loan, we granted to Mr. Baker a 1% royalty interest in the Fatigue Fuse and a 0.5% royalty interest in the Electrochemical Fatigue Sensor. We are in default of the repayment terms of the note held by Mr. Baker, and at December 31, 2005, we owe Mr. Baker $53,515 in principal and accrued interest. Mr. Baker has not taken any action to foreclose his interest in the collateral and we are in discussions with Mr. Baker, with the expectation that we will cure any default in the note he holds and avoid any foreclosure of his security interest held in our patents. We believe that although we have not yet cured our defaults on the loans to Mr. Baker, our current communications with him suggest that Mr. Baker does not have the present intention of foreclosing on the patents as collateral or the pursuit of legal action against us to collect the balance due under our note.
Distribution of our Products
Subject to available financing, we intend to exhibit the Fatigue Fuse and the Electrochemical Fatigue Sensor at various trade shows and intend to also market our products directly to end users including certain state regulatory agencies charged with overseeing bridge maintenance, companies engaged in manufacturing and maintaining large ships and tankers, and the military. Although we intend to undertake marketing, dependent on the availability of funds, within and without the United States, no assurance can be given that any such marketing activities will be implemented.
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Other technologies exist which measure and indicate fatigue damage. Single cracks larger than a minimum size can be found by nondestructive inspection methods such as dye penetrate, radiography, eddy current, acoustic emission, and ultrasonics. Tracking of load and strain history, to subsequently estimate fatigue damage by computer processing, is possible with recording instruments such as strain gauges and counting accelerometers. These methods have been used for 40 years and also offer the advantage of having been accepted in the market, whereas our products remain largely unproven. Companies marketing these alternate technologies include Magnaflux Corporation, Kraut-Kermer-Branson, Dunegan-Endevco, and Micro Measurements. These companies have more substantial assets, greater experience, and more resources than ours, including, but not limited to, established distribution channels and an established customer base. The familiarity and loyalty to these technologies may be difficult to dislodge. Because we are still in the development stage, we are unable to predict whether our technologies will be successfully developed and commercially attractive in potential markets.
Employees
We have four employees, Robert M. Bernstein, President, Chief Executive Officer and Chief Financial Officer, a Secretary, and two part time engineers. In addition, we retain consultants for specialized work.
ITEM 2 ‑ DESCRIPTION OF PROPERTY
Corporate Office
We lease an office at 11661 San Vicente Blvd., Suite 707, Los Angeles, California, 90049. The space consists of 830 square feet and will be adequate for our current and foreseeable needs. The total rent is payable at $2,348 per month on a month-to-month basis. Either party may cancel the lease on 30 days notice.
ITEM 3 ‑ LEGAL PROCEEDINGS
On June 15, 2005, we filed a Complaint in the Los Angeles Superior Court, State of California, case number BC336689, against Gem Advisors, Inc., GEM Global Emerging Markets, and Global Emerging Markets of North America, Inc., seeking a declaration regarding certain agreements we entered into with the parties. We did not seek monetary damages. On November 16, 2005, Gem Advisors, Inc. filed an Answer and Cross-Complaint, seeking approximately $1.9 million in damages arising out of finders fees for certain transactions. On November 30, 2005, default judgments were entered against the other defendants who failed to respond to our Complaint. No discovery has been taken. We intend to pursue our Complaint and defend the Cross-Complaint vigorously and anticipate that discovery will commence shortly.
In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
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There have been no events that are required to be reported under this Item.
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Market Information
Our common stock is quoted on the OTC Bulletin Board under the symbol “MTNA.” For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
High
Low
Fiscal year ended December 31, 2004:
First Quarter.....................................................
$3.15
$2.70
Second Quarter................................................
$3.55
$3.15
Third Quarter...................................................
$3.45
$3.02
Fourth Quarter..................................................
$3.05
$1.75
Fiscal year ended December 31, 2005:
First Quarter.....................................................
$2.25
$1.25
Second Quarter................................................
$1.65
$1.00
Third Quarter...................................................
$2.46
$0.75
Fourth Quarter..................................................
$2.40
$0.15
Fiscal year ended December 31, 2006:
First Quarter (through January 27, 2006)............
$0.21
$0.08
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
Holders
As of January 30, 2006, we had approximately 1,492 holders of our Class A common stock and 1 holder of our Class B common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.
Dividends
We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and
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Securities Authorized for Issuance under Equity Compensation Plans
We have three stock option plans: The 1998 Stock Plan (“the 1998 Plan”), the 2002 Stock Issuance/Stock Plan (“the 2002 Plan”) and the 2003 Stock Option, SAR and Stock Bonus Consultant Plan (“the 2003 Plan”). There are currently no options outstanding under any of the plans.
In September 1998, we adopted the 1998 Plan and reserved 800,000 shares of our common stock for grant under the plan. Eligible participants include employees, advisors, consultants, and officers who provide services to us. The option price is 100% of the fair market value of a share of common stock at either the date of grant or such other day as the as the Board may determine. During 2005 and 2004, there were no options granted under the 1998 Plan. The 1998 Plan expires upon the earlier of all reserved shares being granted or September 10, 2008.
In February 2002, we adopted the 2002 Plan and reserved 20,000,000 shares of our common stock for grant under the plan. Eligible plan participants include employees, advisors, consultants, and officers who provide services to us. The option price is 100% of the fair market value of a share of common stock at either the date of grant or such other day as the Board may determine. During 2005 and 2004, there were no options granted under the 2002 Plan. The 2002 Plan expires upon the earlier of all reserved shares being awarded or December 31, 2007.
In September 2003, we adopted the 2003 Plan and reserved and 10,000,000 shares of our common stock for grant. Eligible plan participants include independent consultants. The option price shall be no less than 85% of the fair market value of a share of common stock at date of grant. During 2005 and 2004, there were no options granted under the 2003 Plan. The 2003 Plan expires upon the earlier of all reserved shares being granted or September 23, 2006.
As of December 31, 2005, the plan information is as follows:
|
Plan Category |
Number of Securities to
|
Weighted-average
|
Number of securities |
|
Equity compensation |
n/a |
n/a |
n/a |
|
Equity compensation |
30,800,000 |
n/a |
30,800,000 |
|
Total |
30,800,000 |
n/a |
30,800,000 |
Recent Sales of Unregistered Securities
Following is a summary of unregistered securities issued during 2005 and 2004.
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On January 14, 2005, we issued 500,000 shares through the conversion of 500,000 shares of our Series D preferred stock.
On February 7, 2005, we issued 400,000 shares for consulting services. These shares are subject to a thirty-month lock-up agreement and were valued at $555,000.
On March 11, 2005, we issued 2,000 shares of our common stock through an exercise of warrants and received $1,000.
On March 11, 2005, we issued 75,750 shares for consulting services. These shares are subject to a 2-year lock-up agreement and were valued at $90,000.
On March 24, 2005, we issued 500,000 shares for consulting services. These shares are subject to a 2-year lock-up agreement and were valued at $580,000.
On April 4, 2005 we issued 5,000 shares of our common stock to a consultant valued at $4,800. The shares are subject to a two-year lock-up agreement.
On April 13, 2005 we issued 50,000 shares of our common stock to an employee valued at $54,000. The shares are subject to a two-year lock-up agreement.
On April 20, 2005, we issued 10,000 shares of our common stock to a shareholder pursuant to an agreement whereby all company shares held by him are locked up for one year. We valued the 10,000 shares at $11,700, which was charged to operations.
On April 26, 2005, we issued 125,000 shares of our common stock to a consultant in connection with our research projects, which were valued at $130,000. The shares are subject to a two-year lock-up agreement.
On May 17, 2005, we issued 8,190,000 shares of our common stock in exchange for purchasing 8,307,000 shares in Birchington Investments Limited. Of the 8,190,000 shares issued, 5,850,000 were issued to Birchington subject to a one-year lock up agreement, 1,755,000 shares are being held in escrow and 585,000 shares were issued to a consultant in connection with the transaction.
On June 23, 2005, we issued 300,000 shares of our common stock to another consultant in connection with the Birchington transaction. The recipient of the 300,000 shares issued a check for $300 in addition to providing services. We valued the 6,735,000 shares issued in connection with the Birchington purchase (excluding the 1,755,000 shares held in escrow) at $1,661,400.
On June 21, 2005, we returned to treasury 20,832,000 shares of our common stock that were previously held in escrow. These shares were subsequently cancelled.
On June 27, 2005, we issued 40,000,000 shares to be held in escrow in connection with a proposed loan transaction. If the transaction is consummated, the 40,000,000 shares will be pledged as collateral against the loan. The negotiations on the loan are ongoing and there is no assurance that the loan will be consummated.
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On September 7, 2005, we issued a total of 9,539 shares of our Class A common stock to four foreign investors in offshore transactions, for cash totaling $2,246, pursuant to the terms of stock purchase agreements. The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders are sophisticated, foreign investors who are familiar with our operations.
On September 14, 2005, we issued 4,552,000 shares of our Class A common stock, subject to an eighteen-month resale restriction, to the University of Pennsylvania (“Penn”), in exchange for Penn’s waiver, valued at $7,733,848, of potential legal remedies under that certain License Agreement dated August 26, 1993, as amended by Amendment 1 dated December 17, 1997 (collectively, the “License Agreement”) and that certain Sponsored Research Agreement dated August 26, 1993, as amended by the Repayment Agreement dated December 17, 1997 (collectively, the “SRA/Repayment Agreement”), pursuant to the terms of that certain Workout Agreement dated August 31, 2005.
On September 20, 2005, we issued a total of 6,233 shares of our Class A common stock to two foreign investors in offshore transactions, for cash totaling $1,468, pursuant to the terms of stock purchase agreements. The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders are sophisticated, foreign investors who are familiar with our operations.
On September 22, 2005, we issued a total of 149,701 shares of our Class A common stock to sixteen foreign investors in offshore transactions, for cash totaling $26,971, pursuant to the terms of stock purchase agreements. The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholders are sophisticated, foreign investors who are familiar with our operations.
On September 26, 2005, we issued a total of 900,000 shares of our Class A common stock to three officers and directors for services rendered as follows: Bill Berks (500,000), John Goodman (200,000), and Joel Freedman (200,000). These shares are subject to a 2-year lock-up agreement and were valued at $1,080,000.
On September 27, 2005, we issued a total of 7,800,000 shares of our Class A common stock to Birchington, in an offshore transaction, in exchange for 9,606,000 Ordinary Shares of Birchington, pursuant to the terms of that certain Stock Purchase Agreement dated September 27, 2005 (the “Stock Purchase Agreement”). Of the shares of our Class A common stock issued to Birchington, 1,800,000 are held in escrow to be sold or returned to us pursuant to the terms of the Stock Purchase Agreement. The issuance was exempt from registration pursuant to Regulation S of the Securities Act of 1933, and the shareholder is a sophisticated, foreign investor who is familiar with our operations.
On September 27, 2005, we issued a total of 600,000 shares of our Class A common stock to an individual who provided us with consulting services in connection with the Birchington transaction set forth in that certain Stock Purchase Agreement dated September 27, 2005. We valued the 6,600,000 shares issued in connection with the Birchington purchase (excluding the 1,800,000 shares held in escrow) at $1,921,200.
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On October 1, 2005, we cancelled 2,084 outstanding shares for no consideration.
On October 3, 2005, we issued 312,500 shares of our common stock for cash proceeds of $156,250.
On October 4, 2005, we committed to issue 30,135,172 shares to warrant holders in connection with their cashless exercise of 31,000,000 warrants. Such shares were issued in January, 2006.
On October 4, 2005, we issued 50,000 shares of our common stock to a consultant for services rendered valued at $67,500.
On October 5, 2005, we issued 62,467 shares of our common stock pursuant to a Regulation S offering for $11,302.
On October 11, 2005, we issued 4,000 shares of our common stock for cash proceeds of $2,000.
On October 14, 2005, we issued 70,072 shares of our common stock pursuant to a Regulation S offering for $12,565.
On October 27, 2005, we issued 410,000 shares of our common stock to a consultant for media services valued at $123,000.
On October 28, 2005, we issued 86,000 shares of our common stock for legal services valued at $34,400.
On October 31, 2005, we issued 192,938 shares of our common stock to various shareholders of Matech Aerospace (a majority owned subsidiary of the Company) as compensation for the subsidiary’s inactive status, valued at $67,528.
On November 9, 2005, we issued 295,545 shares of our common stock pursuant to a Regulation S offering for $35,207.
On November 15, 2005, we issued 173,577 shares of our common stock pursuant to a Regulation S offering for $14,353.
On November 28, 2005, we issued 90,513 shares of our common stock pursuant to a Regulation S offering for $4,900.
On December 2, 2005, we issued 101,353 shares of our common stock pursuant to a Regulation S offering for $6,196.
On December 8, 2005, we issued 100,000 shares of our common stock for $2,000.
14
On December 15, 2005, we issued an aggregate of 135,747 shares of our common stock to Lynx Consulting as compensation for investor relations services performed on behalf of our company pursuant that certain Investor Relations Services Agreement valued at $32,579.
To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with Golden Gate Investors, Inc. (“Golden Gate”) on December 16, 2005, as amended by that certain Addendum to Convertible Debenture, Warrant to Purchase Common Stock and Securities Purchase Agreement, and that certain Addendum to Convertible Debenture and Warrant to Purchase Common Stock, each dated as of December 16, 2005, for the sale of (i) $40,000 in convertible debentures and (ii) warrants to buy 4,000,000 shares of our common stock. The investors provided us with an aggregate of $40,000 upon the execution of final definitive agreements.
The debentures bear interest at 5¼%, mature three years from the date of issuance, and are convertible into our common stock, at the selling stockholder’s option. The convertible debentures are convertible into the number of our shares of common stock equal to the dollar amount of the debentures being converted multiplied by 110, less the product of the conversion formula multiplied by 100 times the dollar amount of the debenture being converted, which is divided by the conversion formula. The conversion formula for the convertible debentures is the lesser of (i) $0.70, (ii) eighty percent of the average of the thee lowest volume weighted average prices during the twenty (20) trading days prior to the conversion or (iii) eighty percent of the volume weighted average price on the trading day prior to the conversion. Accordingly, there is in fact no limit on the number of shares into which the debenture may be converted. Golden Gate has agreed that, beginning in the first full calendar month after the registration statement is declared effective, it shall convert at least 5%, but no more than 10%, of the debentures per calendar month, provided that the common stock is available, registered and freely tradable; provided that, if, at any time during the applicable month, the volume weighted average price is below $0.10, Golden Gate is not obligated to convert any portion of the debenture during that month. However, in the event that our volume weighted average price is less than $0.20, we will have the option to prepay the debenture at 130% rather than have the debenture converted. If we elect to prepay the debenture, Golden Gate will withdraw its conversion notice. In addition, the selling stockholder is obligated to exercise no less than 5%, and no more than 10%, of the outstanding warrant beginning in the first full month after the Securities and Exchange Commission declares this prospectus effective; provided that, if, at any time during the applicable month, the volume weighted average price is below $0.10, Golden Gate is not obligated to exercise any portion of the warrant during that month. The warrant is exercisable into 4,000,000 shares of common stock at an exercise price of $1.09 per share.
The selling stockholder has contractually agreed to restrict its ability to convert or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 9.9% of the then issued and outstanding shares of common stock.
On December 30, 2005, we issued 250,000 shares of our common stock for consulting services valued at $50,000.
15
On January 7, 2004, we issued 25,000 Class A common shares to our executive secretary. The shares are subject to a three-year lock up agreement and were valued at $48,125.
On February 11, 2004, we issued 250,000 Class A common shares of our common stock through the conversion of 250,000 shares of Class D preferred stock.
On February 12, 2004, we issued 500,000 Class A common shares to a consultant for services rendered in connection with Matech Aerospace and for the overseeing the design, utilization, and marketing of the Videoscope. The shares are subject to a three-year lock up agreement and were valued at $1,032,500.
On February 12, 2004, we issued 50,000 Class A common shares to a consultant for services rendered in connection with Matech Aerospace and the design and utilization of the Videoscope. The shares are subject to a three-year lock up agreement and were valued at $103,250.
On February 12, 2004, we issued 25,000 Class A common shares to a consultant for services rendered in connection with accounting assistance. The shares are subject to a three-year lock up agreement and were valued at $25,000.
On March 8, 2004, we issued 200,000 Class A common shares of our common stock through the conversion of 200,000 shares of Class D preferred stock.
On March 16, 2004, we issued 25,000 shares of our Class A common stock to a consultant for services rendered in connection with the development of the Electrochemical Fatigue Sensor for use on bridges. The shares are subject to a three-year lock up agreement and were valued at $53,550.
On March 26, 2004, we issued to a consultant 25,000 shares of our Class A common stock for services rendered. These shares are subject to a three-year lockup agreement and were valued at $55,125.
On April 1, 2004, certain shareholders exercised 3,300 warrants to purchase 6,200 shares of our Class A common stock for $4,550.
On April 23, 2004, we cancelled 250,000 shares of our Class D preferred stock in exchange for issuing 250,000 shares of our common stock.
On May 12, 2004, we issued 25,000 shares of our common stock to a note holder as additional consideration for our delay in paying off the principal balance owed. These shares are subject to a three-year lockup agreement and were valued at $59,500.
On May 13, 2004, we cancelled 250,000 shares of our Class D preferred stock in exchange for issuing 250,000 shares of our common stock.
On May 25, 2004, we issued to a consultant 10,000 shares of our common stock for services rendered. These shares are subject to a three-year lockup agreement and were valued at $24,150.
On June 1, 2004, we cancelled 2,700 shares of our Class C Preferred in exchange for issuing 2,700 shares of our common stock.
16
On June 8, 2004, we issued 1,900 shares of our Class A common stock for $3,600.
On June 16, 2004, we purchased 260 shares of our Class A common stock from S. Beck for $974, which were subsequently cancelled.
On June 18, 2004, we issued to a consultant 120,000 shares of our Class A common stock for services rendered. These shares are subject to a three-year lockup agreement and were valued at $285,600.
On June 25, 2004, we issued 11,875 shares of our common stock for cash proceeds of $8,906.
On June 30, 2004, we issued an attorney 50,000 shares of our Class A common stock as payment on past due invoices. The shares issued are subject to a three-year lockup agreement and were valued of the indebtedness cancelled totaling $39,467.
On June 30, 2004, we issued to a consultant 3,000 shares of our Class A common stock for services rendered valued at $10,200.
On July 16, 2004, we issued 1,047,000 of our Class A common stock for cash proceeds of $123,500.
On July 27, 2004, we issued 1,000,000 of our Class A common stock to Mr. William Berks, our Vice-President, for services rendered. These shares are subject to a three-year lockup agreement and were valued at $2,380,000.
On July 27, 2004, we issued to a consultant 300 shares of our Class A common stock for services rendered valued at $1,020.
On August 9, 2004, we issued to a consultant 1,800 shares of our Class A common stock for services rendered valued at $6,120.
On August 16, 2004, we issued 1,000 shares of our Class A common in connection with our Regulation S offering valued at $3,400.
On August 16, 2004, we issued three consultants a total of 599,000 shares of our Class A common stock for services rendered. These shares are subject to a three-year lockup agreement and were valued at $1,341,760.
On August 24, 2004, we issued to two consultants a total of 5,600 shares of our Class A common stock for services rendered valued at $18,200.
On September 2, 2004, we issued 7,500 of our Class A common stock to Mr. William Berks, our vice-president, for services rendered valued at $24,000.
On September 13, 2004, we issued 14,760 shares of our Class A common stock for cash proceeds of $14,500.
17
On September 28, 2004, we issued a consultant 1,000 shares of our common stock for services rendered valued at $3,020.
On October 1, 2004, we issued 8,666,666 shares of our common stock in exchange for 7,158,590 shares of Langley Park Investments PLC valued at $12,973,513.
On October 1, 2004, we issued to a consultant 36,923 shares of our Class A common stock for services rendered. These shares are subject to a three-year lockup agreement and were valued at $78,572.
On October 1, 2004, we issued to a consultant 1,000 shares of our Class A common stock for services rendered valued at $2,128.
On October 6, 2004, we issued to a consultant 200,000 shares of our common stock for services rendered. These shares are subject to a three-year lockup agreement and were valued at $425,600.
On October 13, 2004, we cancelled 2,570,000 shares of our Class D Preferred in exchange for issuing 2,570,000 shares of our Class A common stock.
On October 14, 2004, we issued 130,000 shares of our Class A common stock cash proceeds of for $10,000.
On October 15, 2004, we issued Joel Freedman, a Director and Corporate officer, 2,260,000 shares of our Class A common stock for services rendered. These shares are subject to a two-year lockup agreement and were valued at $4,972,000.
On October 15, 2004, we issued John Goodman, a Director and Corporate officer, 1,500,000 shares of our Class A common stock for services rendered. These shares are subject to a three-year lockup agreement and were valued at $2,760,000.
On October 25, 2004, we issued 100,000 shares of our common stock to a consultant for services rendered. These shares are subject to a two-year lockup agreement and were valued at $210,000.
On November 22, 2004, we issued our administrative assistant 25,000 shares of our Class A common stock for services rendered. These shares are subject to a three-year lockup agreement and were valued at $39,375.
On November 29, 2004, we issued an additional 24,800 shares of our Class A common stock to certain shareholders in connection with our Regulation S Offering for no additional consideration than what these shareholders previously paid for the original shares issued.
On December 17, 2004, we issued to two of our advisory board members a total of 175,000 shares of our Class A common stock for services rendered. These shares are subject to a two-year lockup agreement and were valued at $315,000.
Unless otherwise noted, all of the above offerings and sales were deemed to be exempt under
18
Disclaimer Regarding Forward Looking Statements
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Overview
We research and develop technologies that detect and measure metal fatigue. We have developed two products, and we have a third product that is very close to final development. Our two products are the Fatigue Fuse and Electrochemical Fatigue Sensor. We do not generate any revenue from the sale of our products, and thus we are a development stage company. We do generate revenue from research and development services provided to third parties, primarily one defense contractor, however our revenues are minimal.
Our biggest challenge is funding the continued research and development of our products, and then the marketing of our products, until they generate sufficient revenue to support our operations. We try to keep our overhead low and utilize outside consultants as much as
19
Results of Operations for the Three Months Ended December 30, 2005 and 2004
Introduction
Our revenues for the fourth quarter of 2005 were substantially similar to the fourth quarter of 2004 and the third quarter of 2005, and were limited exclusively to our research contracts with Northrop Grumman. Most of our research and development costs in both years are related to the recorded cost of stock issued to third party consultants.
Revenues and Loss from Operations
Our revenue, research and development costs, general and administrative expenses, and loss from operations for the three months ended December 31, 2005, as compared to the three months ended December 31, 2004 and September 30, 2005, are as follows:
|
3 Months |
3 Months |
Percentage |
3 Months Ended |
||||||
|
|
|
|
|
||||||
|
|
|||||||||
|
Revenue |
$ |
82,284 |
$ |
47,410 |
|
74 |
% |
$ |
22,963 |
|
Research and development |
|
78,253 |
|
3,198,861 |
|
(98) |
|
|
890,607 |
|
General and administrative |
|
722,918 |
|
6,122,205 |
|
(88) |
|
|
495,410 |
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
$ |
(718,887) |
$ |
(9,273,656) |
|
(91) |
% |
$ |
(1,363,054) |
| =========== | =========== | ============ |
General and administrative expenses were $722,918 and $495,410, respectively, for the three month periods ended December 31, 2005 and September 30, 2005. The major expenses incurred during the three months ended December 31, 2005 and 2004 and September 30, 2005 were:
20
|
3 Months Ended |
3 Months Ended |
3 Months Ended |
||||
|
|
|
|
||||
|
(Restated) |
||||||
|
|
|
|
|
|
|
|
|
Consulting services |
$ |
505,533 |
$ |
343,792 |
$ |
364,878 |
|
Officer’s salary |
|
48,000 |
|
48,000 |
|
45,000 |
|
Secretarial salary |
|
10,202 |
|
28,283 |
|
10,336 |
|
Professional fees |
|
98,800 |
|
270,610 |
|
22,916 |
|
Office expense |
|
13,050 |
|
10,808 |
|
9,658 |
|
Travel expenses |
|
13,106 |
|
13,304 |
|
7,795 |
|
Rent |
|
7,044 |
|
7,044 |
|
7,044 |
|
Franchise and other taxes |
|
- |
|
5,808 |
|
2,040 |
|
Payroll taxes |
|
4,671 |
|
2,134 |
|
3,853 |
|
Telephone |
|
4,340 |
|
6,392 |
|
6,988 |
Other Income and Expenses and Net Loss
Our other income and expenses and net loss for the three months ended December 31, 2005 and 2004, as compared to the three months ended September 30, 2005 are as follows:
|
3 Months |
3 Months |
Percentage |
3 Months |
||||||
|
|
|
|
|
||||||
|
|
|||||||||
|
Modification of research and |
$ |
- |
$ |
- |
|
0 |
% |
$ |
(7,738,400) |
|
Interest expense |
|
(6,062,376) |
|
(180,779) |
|
3,253 |
|
|
(97,635) |
|
Realized/unrealized loss on |
|
(1,918,636) |
|
(9,476,920) |
|
(79) |
|
|
- |
|
Change in fair value of |
|
(585,735) |
|
- |
|
100 |
|
|
- |
|
Interest income |
|
3,298 |
|
2,995 |
|
10 |
|
|
3,649 |
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
$ |
(9,282,336) |
$ |
(18,883,210) |
|
(51) |
% |
$ |
(9,195,440) |
|
===========
|
===========
|
|
============
|
21
Results of Operations for the Years ended December 31, 2005 and 2004
Introduction
In 2005, our revenues were limited exclusively to our research contracts with Northrop Grumman, and totaled $139,346. In 2004 we generated only $46,932 from our contracts with Northrop Grumman, but also generated $100,000 of our income for the year from research contract with URS Corporation. We continued to fund the majority of our operations through the issuance of our stock, resulting in large expenses in the areas of research and development and consulting. The amount of cash used our operations was relatively consistent at approximately $1.05 million in 2005 and $1.32 million in 2004. We anticipate that we will continue to fund a substantial portion of our operations through the issuance of stock until such time as we can begin to generate revenue from the sale of our products, and we do not have an estimate of when such revenues will begin.
Revenues and Loss from Operations
Our revenue, research and development costs, general and administrative expenses, and loss from operations for the year ended December 31, 2005 as compared to the year ended December 31, 2004 are as follows:
Year Ended
December 31,
2005Year Ended
December 31,
2004Percentage
Change
Revenue
$
139,346
$
146,932
(5) %
Research and development costs
2,364,059
7,605,747
(69) %
General and administrative expenses
1,801,928
8,010,423
(78) %
Loss from Operations
$
(4,026,641)
$
(15,469,238)
(74) %
All of our revenues in 2005 came from our research contracts with Northrop Grumman. Of the $146,932 in revenues in 2004, $46,932 came from research contracts with Northrop Grumman, while the balance came from a research contract with URS Corporation.
22
Year Ended
December 31,
2005Year Ended
December 31,
2004
Consulting services
$
1,093,606
$
7,149,240
Officer’s salary
192,000
192,000
Secretarial salary
41,782
61,750
Professional fees
245,153
398,492
Office expense
39,991
35,608
Travel expenses
47,364
49,456
Rent
28,176
28,171
Franchise and other taxes
12,021
9,317
Payroll taxes
22,624
10,670
Telephone
21,274
20,295
Of the $1,093,606 in consulting expense for 2005, $948,159 was related to the issuance of 1,618,685 shares of our common stock. Included in the 1,618,685 shares were 250,000 shares issued for services to be rendered through July 2006 which was valued at $525,000, of which $218,750 was expensed and included in consulting expense. The remaining $306,250 is considered prepaid for services to be rendered in 2006 and is included in current assets on our balance sheet. Also included in the 1,618,685 shares were 200,000 shares issued to Joel Freedman, our corporate secretary, valued at $240,000 and 50,000 shares to an employee valued at $54,000.
Of the $7,149,240 in consulting expense for 2004, $6,842,477 was related to the issuance of 3,159,923 shares of our common stock. Included in the 3,159,923 shares was 2,260,000 shares issued to Joel Freedman, valued at $4,972,000.
Other Income and Expenses and Net Loss
Our license modification expense, write-down of marketable securities, realized loss on the sale of marketable securities, unrealized loss on decrease in value of marketable securities, interest expense, interest income, and net loss for the year ended December 31, 2005 as compared to the year ended December 31, 2004 are as follows:
23
Year Ended
December 31,
2005Year Ended
December 31,
2004Percentage
Change
Modification of research and
development agreement$
(7,738,400)
$
-
100 %
Realized/unrealized loss on securities
(1,922,176)
(9,476,920)
(80)%
Change in fair value of
investmentderivative liability(585,735)
-
Interest expense
(6,493,345)
(605,980)
972 %
Interest income
17,837
12,497
43 %
Net loss
$
(20,749,260)
$
(25,495,291)
(19)%
=========== ===========
In 2005, we charged $7,738,400 to operations relating to the issuance of 4,552,000 shares of our common stock to the University of Pennsylvania pursuant to the terms of a workout agreement with them. There was no such workout agreement in 2004.
The realized/unrealized loss on securities relates to the Langley investment. In 2004, the shares experienced a sharp decline, which leveled off in 2005. As a result, the loss recognized to operations was much larger in 2004..
The change in fair value of investments derivative liability relates to our investment in Birchington. This value represents the value of the downside price protection shares that we would be required to sell to Birchington based on the value of our shares as of December 31, 2005. The Birchington transaction was new in 2005.
Of the $6,493,345 in interest expense incurred in 2005, $5,917,188 was related to the fair values of derivative and warrant liabilities related to the GGI Notes and $399,420 pertained to the amortization of the debt discount related to the beneficial conversion feature of the Palisades Debentures. In addition, $45,354 was accrued on the note due the University of Pennsylvania, $127,010 was accrued on the actual outstanding principal balance of the Palisades Debentures, and $4,373 was accrued on our other interest-bearing obligations.
Of the $605,980 in interest expense incurred in 2004, $122,827 was accrued on the note due to the University of Pennsylvania, $93,119 was accrued on the actual outstanding principal balance of the convertible debenture, $326,161 pertains to the amortized portion of the discount attributed to the conversion feature of the debenture, and $59,500 was paid to the holder of a past due note as additional consideration. The $59,500 was paid through the issuance of 25,000 shares of our common stock.
Liquidity and Capital Resources
Introduction
During the year ended December 31, 2005, we did not generate positive cash flow. As a result, we funded our operations through the sale of marketable securities that we obtained in a
24
Our cash, investments in marketable securities held for trading, investments in marketable securities available for sale, prepaid services, prepaid expenses and other current assets, total current assets, total assets, total current liabilities, and total liabilities as of December 31, 2005, as compared to December 31, 2004 and September 30, 2005, were as follows:
December 31,
December 31,
September 30,
2005
2004
2005
Cash
$
47,345
$
100,800
$
461,898
Marketable securities - trading
302,841
988,990
10,919
Marketable securities – available-for-sale
162,193
-
-
Prepaid services
306,250
-
437,500
Prepaid expenses and other
2,153
1,950
2,100
Total current assets
891,607
1,107,635
929,524
Total assets
4,493,227
2,167,089
5,217,769
Total current liabilities
1,930,182
1,192,425
390,024
Total liabilities
9,768,555
1,617,037
1,953,156
Cash Requirements
For the year ended December 31, 2005, our net cash used in operations was $(1,053,380), compared to $(1,321,389) for the year ended December 31, 2004. Negative operating cash flows during the year ended December 31, 2005, were primarily created by a net loss from operations of $20,749,260, offset by non-cash stock related expenses of $10,837,657, an adjustment for the fair value of derivative and warrant liabilities arising out of a financing transaction of $5,917,188, an other-than temporary impairment of marketable securities held for sale of $1,918,587, an increase in the fair value of the investment derivative liability of $585,735, accrued interest expense added to principal of $173,987, and amortization of discount on convertible debenture of $399,420. Because of our need for cash to fund our continuing research and development, we do not have an opinion as to how indicative these results will be of future results.
Negative operating cash flows during the year ended December 31, 2004, were primarily created by a net loss from operations of $25,495,291, offset by non-cash stock related expenses of $14,252,195, net realized and unrealized loss on marketable securities held for trading of $5,192,160, an other-than temporary impairment of marketable securities held for sale of $4,284,760, accrued interest expense added to principal of $216,713, and amortization of discount on convertible debenture of $326,161.
Sources and Uses of Cash
Net cash provided by investing activities for the years ended December 31, 2005 and 2004, were $679,962 and $395,379, respectively. For the years ended December 31, 2005 and 2004, the net cash came primarily from the sale of marketable securities in the amount of
25
Net cash provided by financing activities for the years ended December 31, 2005 and 2004, were $319,963 and $979,146, respectively. For the year ended December 31, 2005, the net cash came primarily from the sale of common stock and warrants in the amount of $325,239. For the year ended December 31, 2004, the net cash came primarily from the sale of common stock in the amount of $212,025, and proceeds from convertible debentures and other notes of $785,000.
We are not generating sufficient cash flow from operations to fund growth. We cannot predict when we will begin to generate revenue from the sale of our products, and until that time, we will need to raise additional capital through the sale of our equity securities. If we are unsuccessful in raising the required capital, we may have to curtail operations.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with its Board of Directors, the Company has identified the following accounting policies that it believes are key to an understanding of its financial statements. These are important accounting policies that require management’s most difficult, subjective judgments.
The first critical accounting policy relates to revenue recognition. Income from the Company’s research is recognized at the time services are rendered and billed for.
The second critical accounting policy relates to research and development expense. Costs incurred in the development of the Company’s products are expensed as incurred.
The third critical accounting policy relates to the valuation of non-monetary consideration issued for services rendered. The Company values all services rendered in exchange for its common stock at the quoted price of the shares issued at date of issuance or at the fair value of the services rendered, which ever is more readily determinable. All other services provided in exchange for other non-monetary consideration is valued at either the fair value of the services received or the fair value of the consideration relinquished, whichever is more readily determinable.
The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees.” The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance to EITF 00-18, an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified as
26
The fourth critical accounting policy is the Company’s accounting for conventional convertible debt. When the convertible feature of the conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to EITF Issue No. 98-5 (“EITF 98-05”), “Accounting for Convertible Securities with Beneficial Conversion Features or Contingency Adjustable Conversion Ratio,” and EITF Issue No. 00-27, “Application of EITF Issue No. 98-5 to Certain Convertible Instruments.” In those circumstances, the convertible debt will be record net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
The fifth critical account policy relates to the accounting for non-conventional convertible debt and the related stock purchase warrants. In the case of non-conventional convertible debt, the Company bifurcates its embedded derivative instruments and records them under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” These embedded derivatives include the conversion feature, liquidated damages related to registration rights and default provisions. The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. In addition, under the provisions of EITF Issue No. 00-19, as a result of entering into the non-conventional convertible debenture, the Company is required to value and classify all other non-employee stock options and warrants as derivative liabilities at that date and mark them to market at each reporting date thereafter. Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income. The Company values its derivatives primarily using the Black-Scholes Option Pricing Model. The derivatives are classified as long-term liabilities.
The sixth critical accounting policy relates to the recording of marketable securities held for trading and available-for-sale. Marketable securities purchased with the intent of selling them in the near term are classified as trading securities. Trading securities are initially recorded at cost and are adjusted to their fair value, with the change in fair value during the period included in earnings as unrealized gains or losses. Realized gains or losses on dispositions are based upon the net proceeds and the adjusted book value of the securities sold, using the specific identification method, and are recorded as realized gains or losses in the consolidated statements of operations. Marketable securities that are not classified as trading securities are classified as available-for-sale securities. Available-for-sale securities are initially recorded at cost. Available-for-sale securities with quoted market prices are adjusted to their fair value, subject to an impairment analysis (see below). Any change in fair value during the period is excluded from earnings and recorded, net of tax, as a component of accumulated other comprehensive income (loss). Any decline in value of available-for-sale securities below cost that is considered to be “other than temporary” is recorded as a reduction of the cost basis of the security and is included in the statement of operations as a write down of the market value (see below).
27
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheet
F-2
Consolidated Statements of Operations
F-4
Consolidated Statements of Comprehensive Loss
F-5
Consolidated Statements of Stockholders (Deficit)
F-6
Consolidated Statements of Cash Flows
F-11
Notes to Consolidated Financial Statements
F-13
ITEM 8 ‑ CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Gumbiner, Savett, Finkel, Fingleson & Rose, Inc., Certified Public Accountants (hereinafter “Gumbiner”) was dismissed by us as our principal independent accountant, effective June 3, 2004. Gumbiner’s report on the financial statements for the year ended December 31, 2003, contained a modification as to the uncertainty of us continuing as a going concern.
We engaged Farber & Hass, LLP as the principal accountant to audit our financial statements effective as of June 3, 2004. Farber & Hass, LLP (hereinafter “Farber”) was dismissed by us as our principal independent accountant, effective January 20, 2005. Farber did not issue a report in either of the last two years, as they were engaged only to perform reviews of our interim financial statements for each of the three quarters in the period ended September 30, 2004. The decision to change accountants was recommended and approved by the Board of Directors. There were no disagreements with Farber on any matter of accounting principles or practices,
28
We engaged Corbin & Company, LLP (hereinafter “Corbin”) as the principal accountants to audit our financial statements effective as of January 21, 2005. We, during our most recent fiscal year and any subsequent interim period to the date hereof, did not have discussions nor has we consulted with Corbin regarding the following: (i) the application of accounting principles to a specified transaction, either completed or proposed or the type of audit opinion to be rendered on the our financial statements, and neither a written report was provided to us nor oral advice was provided that Corbin concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matters that were the subject of a “disagreement”, as that term is defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of Regulation S-B, or a reportable event.
ITEM 8A – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 31, 2005, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2005, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following three material weaknesses which have caused management to conclude that, as of December 31, 2005, our disclosure controls and procedures were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act and will be applicable to us for the year ending December 31, 2006. Management evaluated the impact of our failure to have written
29
3. We had a significant number of audit adjustments last fiscal year. Audit adjustments are the result of a failure of the internal controls to prevent or detect misstatements of accounting information. The failure could be due to inadequate design of the internal controls or to a misapplication or override of controls. Management evaluated the impact of our significant number of audit adjustments last year and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Remediation of Material Weaknesses
To remediate the material weaknesses in our disclosure controls and procedures identified above, subsequent to December 31, 2005, in addition to working with our independent auditors, we have refined our internal procedures to begin to implement segregation of duties and to reduce the number of audit adjustments.
Changes in Internal Control over Financial Reporting
Except as noted above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 8B – OTHER INFORMATION
There have been no events that are required to be reported under this Item.
30
ITEM 9 ‑ DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth the names and ages of the current directors and executive officers of the Company, the director nominees, and the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. The executive officers of the Company are appointed by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve until their death, resignation or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers, and none of our officers or directors serves as a director of another reporting issuer.
|
Name
|
Age
|
|
Position(s) | |
|
|
|
|
||
| Robert M. Bernstein |
71
|
President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board |
||
|
|
||||
| Joel R. Freedman |
45
|
Secretary and Director | ||
|
|
||||
| Dr. John W. Goodman |
71
|
Chief Engineer and Director | ||
|
|
||||
| Dr. William Berks |
75
|
Vice President and Director |
JOEL R. FREEDMAN, SECRETARY/DIRECTOR.
Joel R. Freedman is 45 years of age. From October 1989 until the present, Mr. Freedmen holds the position of Secretary and a Director of the company. Mr. Freedman attends board meetings and provides advice to the Company as needed. From 1983 through 1999, he was president of Genesis Advisors, Inc., an investment advisory firm in Bala Cynwyd, Pennsylvania. From January 1, 2000 through December 2002, he was a Senior Vice President of PMG Capital
31
DR. JOHN W. GOODMAN, CHIEF ENGINEER/DIRECTOR.
Dr. John W. Goodman is 71 years of age. He is retired from TRW Space and Electronics and was formerly Chairman of the Aerospace Division of the American Society of Mechanical Engineers. He holds a Doctorate of Philosophy in Materials Science that was awarded with distinction by the University of California at Los Angeles in 1970. In 1957, he received a Masters of Science degree in Engineering Mechanics from Penn State University and in 1955 he received a Bachelor of Science degree in Mechanical Engineering from Rutgers University. From 1972 to 1987, Dr. Goodman was with the U. S. Air Force as lead Structural Engineer for the B-1 aircraft; Chief of the Fracture and Durability Branch, and Materials Group Leader, Structures Department, Aeronautical Systems Center, Wright-Patterson Air Force Base. From 1987 to December 1993, he was on the Senior Staff, Materials Engineering Department of TRW Space and Electronics. He has been Chief Engineer for Development of Material Technologies’ products since May 1993. Over the last four years he has consulted part time for the Company.
DR. WILLIAM BERKS, VICE-PRESIDENT/DIRECTOR
William Berks- Vice-President/Director, age 75. He managed the previous Material Technologies contracts for the development of EFS at the University of Pennsylvania, Southwest Research Institute, and Optim, Inc. Mr. Berks has a B. Aero. E and MS in Applied Mechanics from Polytechnic Institute of New York and MS in Industrial Eng., Stevens Institute of Technology. With Matech since 1997 he has over 30 years’ experience in spacecraft mechanical systems engineering. He retired from TRW in November 1992 where he was employed for 26 years in a variety of management positions: Manager of the Mechanical Design Laboratory, the engineering design skill center for the design and development of spacecraft mechanical systems, which had as many as 350 individuals: Manager of the Advanced Systems Design Department, which was responsible for mechanical systems design for all spacecraft project: Assistant Project Manager for Mechanical Subsystems for a major spacecraft program, which included preparation of plans, specifications and drawings, supervision of two major subcontracts, and responsibility for flight hardware fabrication and testing. He holds six patents.
Board Committees
We presently do not have an audit committee, compensation committee, nominating committee, an executive committee of our board of directors, stock plan committee or any other committee of our board of directors.
Since 1987, we and our predecessors have had an Advisory Board consisting of very senior experienced businessmen and technologists, most of whom are nationally prominent. These individuals consult with us on an as needed basis. Members of the Advisory Board serve at will. The Advisory Board advises our management on technical, financial, and business matters and may in the future be additionally compensated for these services. A brief biographical description of the members of the advisory board is as follows:
32
We issued the following shares of common stock to Ms. Miceli as compensation for services performed on our behalf:
- 75,000 shares on December 17, 2004 valued at $135,000;
- 75,000 shares on March 11, 2005 valued at $90,000;
- 125,000 shares on April 26, 2005 valued at $130,000; and
- 475,000 shares on January 9, 2006 valued at $76,000.
BRENT M. PHARES. Dr. Phares has over 15 years of management, inspection, research, and testing experience related to bridge structures. He currently is the Associate Director for Bridges and Structures at Iowa State University. In this position, Dr. Phares is responsible for the development and deployment of innovative bridge evaluation and techniques and for the development of applications for innovative materials in bridge engineering. In the past, Dr. Phares has served as a consulting Research Engineer at the Federal Highway Administration’s Nondestructive Evaluation Validation Center where he lead the execution of several validation and developmental studies. More recently, Dr. Phares served as president and CEO of a small engineering firm specializing in the evaluation of civil infrastructure based on innovative sensors and monitoring strategies. He is a registered professional engineer and serves as a voting member of many national and international technical committees.
On January 9, 2006, we issued Dr. Phares 1,000,000 shares of our common stock as compensation for services performed on our behalf valued at $160,000.
CAMPBELL LAIRD. Campbell Laird, age 64, received his Ph.D. in 1963 from the University of Cambridge. His Ph.D. thesis title was “Studies of High Strain Fatigue.” He is presently professor and graduate group Chairman in the Department of Materials, Science & Engineering at the University of Pennsylvania. His research has focused on the strength, structure, and fatigue of materials, in which areas he published in excess of 250 papers. He is co-inventor of the EFS.
On December 17, 2004, we issued Dr. Laird 100,000 shares of our common stock subject to a two-year lockup agreement and valued at $180,000.
SAMUEL I. SCHWARTZ. Samuel I. Schwartz, age 50, is presently president of Sam Schwartz Co., consulting engineers, primarily in the bridge industry. Mr. Schwartz received his BS in Physics from Brooklyn College in 1969, and his Masters in Civil Engineering from the University of Pennsylvania in 1970. From February 1986 to March 1990, he was the Chief
33
NICK SIMIONESCU. Mr. Simionescu joined HNTB in 1974, one of the largest consulting engineering companies in the world, and is currently vice president, Director of Business Development in the New York City Office. He has over 37 years of management, construction, design, inspection and detailing experience. Mr. Simionescu is very familiar with the New York City infrastructure. For nearly 28 years he has been working in New York City, primarily on projects with the New York City Department of Transportation and New York State Department of Transportation Regions 10 and 11. His projects have included management of the inspections of the Williamsburg, Brooklyn, Triborough, Manhattan, and Queensboro bridges. Additionally, he has been the Project Manager of Bridge Inspection for many other arterial and local bridges throughout New York. Mr. Simionescu’s responsibilities with HNTB have involved a variety of National and International projects. He has been the Senior Structural Designer and Manager of bridges in South Carolina (800 ft. span), Rhode Island (366 ft. span), Malaysia (740 ft. span), and Florida (1300 ft. span).
HENRYKA MANES. Ms. Manes is the Founder and President of H. Manes & Associates, a consulting firm that enables environmental and high technology companies to export their products worldwide. She has a wide-range of experience with projects in more than 20 countries in Asia, Africa, Eastern Europe and South America. Prior to founding HMA, Ms. Manes was Director of Operations for the American Jewish Joint Distribution Committee’s International Development Program and has worked with the World Bank, United States Agency for International Development, and the United Nations Development Program. Ms. Manes received her B.A. from Macalester College in St. Paul, MN, and did her graduate work at the University of Minnesota, Minneapolis, MN.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the registrant under Rule 16a-3(d) during fiscal 2005, and certain written representations from executive officers and directors, we are unaware of any required reports that have not been timely filed.
Code of Ethics
We have not adopted a written code of ethics, primarily because we believe and understand that our officers and directors adhere to and follow ethical standards without the necessity of a written policy.
34
|
|
|
Annual Compensation |
|
Long Term Compensation |
||||||
|
|
|
|
|
|
|
Awards |
|
Payouts |
||
|
Name and |
Year |
Salary |
Bonus |
Other Annual |
|
Restricted |
Securities |
|
LTIP |
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Robert M. Bernstein |
2005 |
192,000 (2) |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
||
|
Director and CEO |
2004 |
192,000 (1) |
-0- |
-0- |
-0- |
-0- |
-0- |
-0- |
||
|
2003 |
138,000 |
19,617 (9) |
320,000 |
-0- |
-0- |
-0- |
||||
|
|
|
|||||||||
|
John W. Goodman |
2005 |
41,700 |
-0- |
-0- |
240,000 (4) |
-0- |
-0- |
-0- |
||
|
Director and |
2004 |
35,250 |
-0- |
-0- |
2,760,000 (3) |
-0- |
-0- |
-0- |
||
|
2003 |
18,943 |
-0- |
-0- |
10,000 (10) |
-0- |
-0- |
-0- |
|||
|
|
|
|||||||||
|
William Berks |
2005 |
85,350 |
-0- |
-0- |
600,000 (6) |
-0- |
-0- |
-0- |
||
|
Director and VP of |
2004 |
79,500 |
-0- |
-0- |
2,404,000 (5) |
-0- |
-0- |
-0- |
||
|
2003 |
71,374 |
-0- |
-0- |
30,000 (11) |
-0- |
-0- |
-0- |
|||
|
|
|
|||||||||
|
Joel Freedman |
2005 |
-0- |
-0- |
-0- |
240,000 (8) |
-0- |
-0- |
-0- |
||
|
Director and |
2004 |
-0- |
-0- |
-0- |
4,972,000 (7) |
-0- |
-0- |
-0- |
||
(1) Cash compensation actually paid to Mr. Bernstein in 2004 amounted to $316,000 of which $120,000 relates to 2004 with the remaining amount of $196,000 pertained to the payment of prior years accrued compensation. Mr. Bernstein used the net pay received from the cashing of the accrued compensation to reduce the loan balance he owed us by $97,450.
(2) Cash compensation actually paid to Mr. Bernstein in 2005 amounted to $210,446 of which $192,000 relates to 2005 with the remaining amount of $18,446 pertained to the payment of prior years' accrued compensation.
(3) In 2004, we issued Mr. Goodman 1,500,000 shares of our common stock subject to a two-year lockup agreement. The shares were valued at $2,760,000, which represents 80% of the market price on date of issuance.
(4) In 2005, we issued Mr. Goodman 200,000 shares our common stock subject to a two-year lockup agreement. The shares were valued at $240,000, which represents 80% of the market price on date of issuance.
(5) In 2004, we issued Mr. Berks 1,000,000 shares its common stock subject to a three-year lockup agreement. The shares were valued at $2,380,000, which represents 70% of the market price on date of issuance. In addition, in 2004, we issued Mr. Berks an additional 7,500 shares of our common stock which was valued at $24,000, the fair value of the shares on date of issuance.
(6) In 2005, we issued Mr. Berks 500,000 shares our common stock subject to a two-year lockup agreement. The shares were valued at $600,000, which represents 80% of the market price on date of issuance.
35
(7) During 2004, we issued 2,260,000 shares of our common stock to Mr. Freedman a member of the Board and Company Secretary, which were valued at $4,972,000, which represents 80% of the market price on the date of issuance. The shares are subject to a two-year lockup agreement.
(8) In 2005, we issued Mr. Freedman 200,000 shares our common stock subject to a two-year lockup agreement. The shares were valued at $240,000, which represents 80% of the market price on date of issuance.
(9) In 2003, Mr. Bernstein’s 1,962 shares of common stock held in escrow were vested, and he recognized $19,617 in additional compensation as a result.
(10) In 2003, we issued 1,000 shares of common stock to Mr. Goodman. The shares were valued at $10,000, the fair value of the shares on date of issuance.
(11) In 2003, we issued 3,000 shares of common stock to Mr. Berks. The shares were valued at $30,000, the fair value of the shares on date of issuance.
Directors’ Compensation
Directors of our company who are also employees do not receive cash compensation for their services as directors or members of the committees of the board of directors. All directors may be reimbursed for their reasonable expenses incurred in connection with attending meetings of the board of directors or management committees.
Employment Contract
On September 24, 2003, we entered into an Employment Agreement with Robert M. Bernstein, our President, Chief Executive Officer, and Chief Financial Officer. Pursuant to the Employment Agreement, we will employ Mr. Bernstein for a period of 3 years commencing September 24, 2003. Mr. Bernstein will be paid an annual base salary of $16,000 per month (“Base Salary”), of which $6,000 per month shall be deferred until the later of (i) 18 months from September 24, 2003, or (ii) when we report at least $250,000 of earnings before depreciation and amortization in one fiscal quarter. During the term of his employment and for a period thereafter, Mr. Bernstein will be subject to non-disclosure, non-competition and non-solicitation provisions, subject to standard exceptions.
Upon the execution of the employment agreement, Mr. Bernstein was issued an aggregate 300,000 shares of our common stock.
Other Compensation
There are no annuity, pension or retirement benefits proposed to be paid to officers, directors, or employees of our company in the event of retirement at normal retirement date as there was no existing plan as of December 31, 2005 provided for or contributed to by our company.
ITEM 11 ‑ SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of January 30, 2006, certain information with respect to the Company’s equity securities owned of record or beneficially by (i) each Officer and Director of the Company; (ii) each person who owns beneficially more than 5% of each class of the
36
|
Common Stock |
||||||
|
Title of Class |
Name and Address of |
Amount and Nature of Beneficial Ownership |
Percent |
|||
|
|
|
|
|
|||
|
|
||||||
|
Class A |
Robert M. Bernstein |
21,987,850 |
12.5% |
|||
|
|
||||||
|
Class A |
Joel R. Freedman |
2,603,000 |
1.5% |
|||
|
|
||||||
|
Class A |
John Goodman |
2,630,000 |
1.5% |
|||
|
|
||||||
|
Class A |
William Berks |
2,512,500 |
1.4% |
|||
|
|
||||||
|
Class A |
Birchington Investments Ltd. |
15,405,000 |
8.7% |
|||
|
|
||||||
|
Class B |
Robert M. Bernstein |
600,000 (3) |
100% |
|||
|
|
|
|||||
|
|
||||||
|
All Officers and Directors |
29,733,350 |
16.9% |
||||
(1) Unless otherwise indicated, the address of each director is c/o Material Technologies, Inc., 11661 San Vicente Boulevard, Suite 707, Los Angeles, CA 90049.
(2) Unless otherwise indicated, based on 176,355,380 shares of common stock outstanding. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.
(3) Each share of Class B common stock has 2,000 votes on any matter on which the common shareholders vote. As a result, Mr. Bernstein holds 1.2 billion votes represented by the Class B common stock, and 85.5% of the overall votes.
(4) The directors of Langley Park Investments, PLC are Harry George Pearl (Chairman), Rufus Pearl (Administrative Director), and Robin Bolton (Non-Executive Director).
ITEM 12 ‑ CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as set forth below, during the last two fiscal years there have not been any relationships,
37
During 2005, we paid our president $210,446, of which $192,000 pertains to salary accruing in 2005 and $18,446 pertained to salary accrued in a previous year.
During 2005, we accrued $203 of interest on loans due us from our president. The balance of the loans owed by our president including accrued interest as of December 31, 2005 totaled $2,153.
During 2005, we accrued $3,989 of interest due us from our president on a stock subscription. The balance owed us on this subscription as of December 31, 2005 totaled $59,085.
During 2005, we issued Mr. John Goodman, a member of the board and our employee, 200,000 shares of our common stock subject to a two year lockup agreement. The shares were valued at $240,000.
During 2005, we issued Mr. William Berks, Vice-President, Director, and our employee, 500,000 shares of our common stock subject to a two year lockup agreement. The shares were valued at $600,000.
During 2005, we issued Mr. Joel Freedman, Director, and Corporate Secretary, 200,000 shares of our common stock subject to a two year lockup agreement. The shares were valued at $240,000.
During 2004, we paid our president $196,000 of the accrued compensation we owed him. Mr. Bernstein paid down the net loan balance he owed us by $90,450. The remaining balance due from him at December 31, 2004 was $1,950. Interest credited to operations on this loan for 2004 amounted to $8,460.
The balance on the stock subscription due from our president at December 31, 2004 totaled $55,096. Interest credited to operations on this receivable for 2004 amounted to $4,000.
During 2004, we issued 1,500,000 shares of our common stock to Mr. Goodman, a member of the board and our employee that were valued at $2,760,000. The shares are subject to a two-year lockup agreement.
During 2004, we issued 2,260,000 shares of our common stock to Mr. Freedman, a member of the Board and our Secretary, that were valued at $4,972,000. The shares are subject to a two-year lockup agreement.
During 2004, we issued 1,000,000 shares of our common stock to Mr. Berks, Vice-President and Director, that were valued at $2,380,000. The shares are subject to a three-year lockup agreement. In addition, we in 2004 issued Mr. Berks 7,500 shares of our common stock that were valued at $24,000.
ITEM 13 ‑ EXHIBITS
(a) Exhibits
38
3.2 Certificate of Amendment to Certificate of Incorporation of Material
Technologies, Inc. dated as of February 16, 2000 (Previously Filed in connection
with our Annual Report on Form 10-K that was filed on March 30, 2001).
3.3 Certificate of Amendment to Certificate of Incorporation of Material Technologies,
Inc. dated as of July 12, 2000 (Previously Filed in connection with
our Annual Report on Form 10-K that was filed on March 30, 2001).
3.4 Certificate of Amendment to Certificate of Incorporation of Material Technologies,
Inc. dated as of July 31, 2000 (Previously Filed in connection with our
Annual Report on Form 10-K that was filed on March 30, 2001).
3.5 Amended and Restated Certificate of Incorporation of Material Technologies,
Inc. dated as of September 12, 2003 (Previously Filed in connection with our
Annual Report on Form 10-K that was filed on April 9, 2004).
3.6 Bylaws of Material Technologies, Inc. (Previously Filed in connection our S-1
Registration Statement that was filed on April 30, 1997).
4.1 Class A Convertible Preferred Stock Certificate of Designations (Previously
Filed in connection with our S-1 Registration Statement that was filed on April 30, 1997).
4.2 Class B Convertible Preferred Stock Certificate of Designations (Previously
Filed in connection our S-1 Registration Statement that was filed on April 30, 1997).
4.3 Material Technologies, Inc. Stock Escrow/Grant (Previously Filed in connection
with our Annual Report on Form 10-K that was filed on March 30, 2001).
10.1 License Agreement between Tensiodyne Scientific Corporation and the Trustees
of the University of Pennsylvania (Previously Filed in connection with S-1
Registration Statement that was filed on April 30, 1997).
10.2 Sponsored Research Agreement between Tensiodyne Scientific Corporation and
the Trustees of the University of Pennsylvania (Previously Filed in connection
with S-1 Registration Statement that was filed on April 30, 1997).
10.3 Amendment No. 1 to the License Agreement between Tensiodyne Scientific
Corporation and the Trustees of the University of Pennsylvania (Previously Filed
in connection with S-1 Registration Statement that was filed on April 30, 1997).
10.4 Repayment Agreement between Tensiodyne Scientific Corporation and the
Trustees of the University of Pennsylvania (Previously Filed in connection with
S-1 Registration Statement that was filed on April 30, 1997).
39
10.6 Letter Agreement between Tensiodyne Scientific Corporation, Robert M.
Bernstein, and Stephen Forrest Beck and Handwritten modification (Previously
Filed in connection with S-1 Registration Statement that was filed on April 30, 1997).
10.7 Agreement between Tensiodyne Corporation and Tensiodyne 1985-1 R&D
Partnership, is incorporated by reference from Exhibit 10.3 of Material
Technology, Inc.’s S-1 Registration Statement, File No. 33-83526, which became
effective on January 19, 1996).
10.8 Amendment to Agreement between Material Technologies, Inc. and Tensiodyne
1985-1 R&D Partnership, is incorporated by reference from Exhibit 10.6 of Material
Technologies, Inc.’s S-1 Registration Statement, File No. 33-83526, which became
effective on January 19, 1996).
10.9 Agreement between Advanced Technology Center of Southeastern Pennsylvania
and Material Technologies, Inc. is incorporated by reference from Exhibit 10.4 of
Material Technologies, Inc.’s S-1 Registration Statement, File No. 33-8352,
which became effective on January 19, 1996).
10.10 Addendum to Agreement between Advanced Technology Center of Southeastern
Pennsylvania and Material Technologies, Inc. is incorporated by reference from
Exhibit 10.5 of Material Technologies, Inc.’s S-1 Registration Statement, File
No. 33-83526, which became effective on January 19, 1996).
10.11 Class A senior preferred convertible debenture of Material Technologies, Inc.
issued to Palisades Capital, LLC (Previously Filed in connection with our Annual
Report on Form 10-K that was filed on April 9, 2004).
10.12 Stock Purchase Agreement dated as of April 7, 2005 by and between Material
Technologies, Inc. and Birchington Investments Ltd. is incorporated by reference
from Exhibit 10.1 of Material Technologies, Inc.’s Quarterly Report on Form 10-Q
which was filed on November 14, 2005.
10.13 Escrow Agreement by and between Material Technologies, Inc. and Birchington
Investments Ltd dated as of September 27, 2005 is incorporated by reference
from Exhibit 10.2 of Material Technologies, Inc.’s Quarterly Report on Form 10-Q
which was filed on November 14, 2005.
10.14 Master Agreement with Barclay Asset Management, LLC dated as of June 28,
2005 is incorporated by reference from Exhibit 10.3 of Material Technologies,
Inc.’s Quarterly Report on Form 10-Q which was filed on November 14, 2005.
10.15 Stock Purchase Agreement of Material Technologies, Inc. dated as of June 29,
2005 is incorporated by reference from Exhibit 10.4 of Material Technologies,
Inc.’s Quarterly Report on Form 10-Q which was filed on November 14, 2005.
40
10.17 Workout Agreement the with the Trustees of the University of Pennsylvania
dated as of August 15, 2005 is incorporated by reference from Exhibit 10.6 of
Material Technologies, Inc.’s Quarterly Report on Form 10-Q which was filed on
November 14, 2005.
10.18 Securities Purchase Agreement by and between Material Technologies, Inc. and
Golden Gate Investors, Inc. is incorporated by reference from Exhibit 10.1 of
Material Technologies, Inc.’s Current Report on Form 8-K/A which was filed on
January 5, 2006.
10.19 Convertible Debenture of Material Technologies, Inc. issued to Golden Gate
Investors, Inc. is incorporated by reference from Exhibit 10.2 of Material
Technologies, Inc.’s Current Report on Form 8-K/A which was filed on January
5, 2006.
10.20 Common Stock Purchase Warrant of Material Technologies, Inc. issued to
Golden Gate Investors, Inc. is incorporated by reference from Exhibit 10.3 of
Material Technologies, Inc.’s Current Report on Form 8-K/A which was filed on
January 5, 2006.
10.21 Registration Rights Agreement by and between Material Technologies, Inc. and
Golden Gate Investors, Inc. is incorporated by reference from Exhibit 10.4 of
Material Technologies, Inc.’s Current Report on Form 8-K/A which was filed on
January 5, 2006.
10.22 Letter Agreement by and between Material Technologies, Inc. and Golden Gate
Investors, Inc. is incorporated by reference from Exhibit 10.5 of Material
Technologies, Inc.’s Current Report on Form 8-K/A which was filed on January
5, 2006.
10.23 Letter Agreement by and between Material Technologies, Inc. and Golden Gate
Investors, Inc. is incorporated by reference from Exhibit 10.6 of Material
Technologies, Inc.’s Current Report on Form 8-K/A which was filed on January
5, 2006.
10.24 Addendum to Convertible Debenture, Warrant to Purchase Common Stock and
Securities Purchase Agreement by and between Material Technologies, Inc. and
Golden Gate Investors, Inc. is incorporated by reference from Exhibit 10.7 of
Material Technologies, Inc.’s Current Report on Form 8-K/A which was filed on
January 5, 2006.
10.25 Addendum to Convertible Debenture and Warrant to Purchase Common Stock by
and between Material Technologies, Inc. and Golden Gate Investors, Inc. is
incorporated by reference from Exhibit 10.8 of Material Technologies, Inc.’s
Current Report on Form 8-K/A which was filed on January 5, 2006.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
41
32.1 Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed in each of the fiscal years ended December 31, 2005 and 2004 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-KSB or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $73,270 and $42,740, respectively.
Audit – Related Fees
There were no fees billed for services reasonably related to the performance of the audit or review of the financial statements outside of those fees disclosed above under “Audit Fees” for fiscal years 2005 and 2004.
Tax Fees
For the fiscal years ended December 31, 2005 and December 31, 2004, our principal accountants did not render any services for tax compliance, tax advice, and tax planning work.
All Other Fees
None.
42
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Material Technologies, Inc. |
|
|
|
|
|
|
|
|
Dated: February 8, 2006 |
/s/ Robert M. Bernstein |
|
By: Robert M. Bernstein, President, |
|
|
|
|
|
|
|
|
|
|
|
Dated: February 8, 2006 |
/s/ Joel R. Freedman |
|
By: Joel R. Freedman, Secretary and |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
/s/ Robert M. Bernstein |
Dated: February 8, 2006 |
|
By: Robert M. Bernstein, President, Chief |
|
|
|
|
|
|
|
|
/s/ Joel R. Freedman |
Dated: February 8, 2006 |
|
By: Joel R. Freedman, Secretary and |
|
|
|
|
|
|
|
|
/s/ Dr. John W. Goodman |
Dated: February 8, 2006 |
|
By: Dr. John W. Goodman, Chief Engineer |
|
|
|
|
|
|
|
|
/s/ Dr. William Berks |
Dated: February 8, 2006 |
|
By: Dr. William Berks, Vice President and |
43
MATERIAL TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm..............................................F-1
Financial Statements
Consolidated Balance Sheet...............................................................................................F-2
Consolidated Statements of Operations..............................................................................F-4
Consolidated Statements of Comprehensive Loss...............................................................F-5
Consolidated Statements of Stockholders’ Deficit...............................................................F-6
Consolidated Statements of Cash Flows...........................................................................F-11
Notes to Consolidated Financial Statements.....................................................................F-13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Material Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Material Technologies, Inc. (a development stage company) (the “Company”) as of December 31, 2005, and the related consolidated statements of operations, comprehensive loss, stockholders’ deficit and cash flows for each of the years in the two-year period then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the cumulative data from October 21, 1983 (inception) to December 31, 2003 in the consolidated statements of operations, comprehensive loss, stockholders’ deficit and cash flows, which were audited by other auditors whose reports dated March 7, 2003 and March 16, 2004, which expressed unqualified opinions (the March 16, 2004 report was modified related to the uncertainty of the Company’s ability to continue as a going concern) have been furnished to us. Our opinion, insofar as it relates to the amounts included for the cumulative period from October 21, 1983 (inception) to December 31, 2003 is based solely on the reports of the other auditors.
We conducted our audits in accordance with the 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 financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, audits 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 opinions. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Material Technologies, Inc. (a development stage company) as of December 31, 2005 and the results of its operations and its cash flows for each of the years in the two-year period then ended and for the period from October 21, 1983 (inception) through December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses and has yet to be successful in establishing profitable operations. These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
CORBIN & COMPANY, LLP
Irvine, California
January 31, 2006
|
(A Development Stage Company)
|
|||
|
CONSOLIDATED BALANCE SHEET
|
|||
|
|
|
|
|
|
December 31,
|
|||
|
2005
|
|||
| ASSETS | |||
| Current assets: | |||
| Cash and cash equivalents |
$
|
47,345
|
|
| Investments in marketable securities held for trading |
302,841
|
||
| Investments in marketable securities available for sale |
162,193
|
||
| Receivable due on research contracts |
70,825
|
||
| Prepaid services |
306,250
|
||
| Prepaid expenses and other current assets |
2,153
|
||
|
|
|||
| Total current assets |
891,607
|
||
| Investments in non-marketable securities |
3,582,600
|
||
| Property and equipment, net |
10,900
|
||
| Intangible assets, net |
5,772
|
||
| Deposit |
2,348
|
||
|
|
|||
|
$
|
4,493,227
|
||
|
=============
|
|||
Continued . . .
F-2
|
(A Development Stage Company)
|
||
|
CONSOLIDATED BALANCE SHEET
|
||
|
|
|
|
|
December 31,
|
||
|
2005
|
||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||
| Current liabilities: | ||
| Accounts payable and accrued expenses |
$
|
279,889
|
| Current portion of research and development sponsorship payable |
25,000
|
|
| Notes payable |
88,515
|
|
| Investments deriviative liability |
585,735
|
|
| Convertible debentures and accrued interest payable, net of discount | ||
| of $399,420 |
951,043
|
|
|
|
||
| Total current liabilities |
1,930,182
|
|
| Research and development sponsorship payable, net of current portion |
756,185
|
|
| Convertible debentures and accrued interest payable, net of discount | ||
| of $40,000 |
-
|
|
| Derivative and warrant liabilities |
7,082,188
|
|
|
|
||
| Total liabilities |
9,768,555
|
|
|
|
||
| Minority interest in consolidated subsidiary |
825
|
|
|
|
||
| Commitments and contingencies | ||
| Stockholders' deficit: | ||
| Class A preferred stock , $0.001 par value, liquidation preference | ||
| of $720 per share; 350,000 shares authorized; 337 shares issued | ||
| and outstanding |
-
|
|
| Class B preferred stock , $0.001 par value, liquidation preference of | ||
| $10,000 per share; 15 shares authorized; none issued and | ||
| outstanding |
-
|
|
| Class C preferred stock , $0.001 par value, liquidation preference of | ||
| $0.001 per share; 25,000,000 shares authorized; 1,517 shares issued | ||
| and outstanding |
1
|
|
| Class D preferred stock , $0.001 par value, liquidation preference of | ||
| $0.001 per share; 20,000,000 shares authorized; 1,420,000 shares | ||
| issued and outstanding |
1,420
|
|
| Class A common stock, $0.001 par value, 1,699,400,000 shares | ||
| authorized; 184,199,770 shares issued; 140,643,927 shares outstanding | ||
| (including 30,135,172 shares committed but not issued) |
140,644
|
|
| Class B common stock, $0.001 par value, 600,000 shares authorized, | ||
| issued and outstanding |
600
|
|
| Warrants subscribed |
10,000
|
|
| Additional paid-in-capital |
55,561,366
|
|
| Deficit accumulated during the development stage |
(60,783,746)
|
|
| Note receivable - common stock |
(59,085)
|
|
| Treasury stock (76,800 shares at cost) |
(26,136)
|
|
| Accumulated other comprehensive loss |
(121,217)
|
|
|
|
||
| Total stockholders' deficit |
(5,276,153)
|
|
|
|
||
|
$
|
4,493,227
|
|
|
=============
|
||
See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-3
|
From October 21, 1983
|
|||||||
|
For the Year Ended
|
(Inception)
|
||||||
|
December 31,
|
through
|
||||||
|
2005
|
2004
|
December 31, 2005
|
|||||
| Revenues: | |||||||
| Research and development revenue |
$
|
139,346
|
$
|
146,932
|
$
|
5,352,639
|
|
| Other |
-
|
-
|
274,125
|
||||
|
|
|
|
|||||
| Total revenues |
139,346
|
146,932
|
5,626,764
|
||||
|
|
|
|
|||||
| Costs and expenses: | |||||||
| Research and development |
2,364,059
|
7,605,747
|
15,229,886
|
||||
| General and administrative |
1,801,928
|
8,010,423
|
23,798,230
|
||||
|
|
|
|
|||||
| Total costs and expenses |
4,165,987
|
15,616,170
|
39,028,116
|
||||
|
|
|
|
|||||
| Loss from operations |
(4,026,641)
|
(15,469,238)
|
(33,401,352)
|
||||
|
|
|
|
|||||
| Other income (expense): | |||||||
| Modification of research and development sponsorship agreement |
(7,738,400)
|
-
|
(7,738,400)
|
||||
| Interest expense |
(6,493,345)
|
(605,980)
|
(7,740,548)
|
||||
| Other-than-temporary impairment of marketable | |||||||
| securities available for sale |
(1,918,587)
|
(4,284,760)
|
(6,203,347)
|
||||
| Realized loss on sale of marketable securities |
(3,589)
|
(3,668,850)
|
(3,672,439)
|
||||
| Unrealized loss on decrease in market value of | |||||||
| securities held for trading |
-
|
(1,523,310)
|
(1,523,310)
|
||||
| Change in fair value of investments derivative liability |
(585,735)
|
-
|
(585,735)
|
||||
| Interest income |
17,837
|
12,497
|
372,575
|
||||
| Gain (loss) on settlement of indebtedness |
-
|
45,150
|
(244,790)
|
||||
| Other |
-
|
-
|
(33,000)
|
||||
|
|
|
|
|||||
| Other expense, net |
(16,721,819)
|
(10,025,253)
|
(27,368,994)
|
||||
|
|
|
|
|||||
| Loss before provision for income taxes |
(20,748,460)
|
(25,494,491)
|
(60,770,346)
|
||||
| Provision for income taxes |
(800)
|
(800)
|
(13,400)
|
||||
|
|
|
|
|||||
| Net loss |
$
|
(20,749,260)
|
$
|
(25,495,291)
|
$
|
(60,783,746)
|
|
| ============ | ============ | ================= | |||||
| Per share data: | |||||||
| Basic and diluted net loss per share |
$
|
(0.20)
|
$
|
(0.35)
|
|||
| ============ | ============ | ||||||
| Weighted average Class A common shares | |||||||
| outstanding - basic and diluted |
103,528,817
|
72,472,662
|
|||||
|
============
|
============
|
||||||
See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-4
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
From October 21, 1983
|
|||||||
|
For the Year Ended
|
(Inception)
|
||||||
|
December 31,
|
Through
|
||||||
|
|
2005
|
2004
|
December 31, 2005
|
||||
| Net loss |
$
|
(20,749,260)
|
$
|
(25,495,291)
|
$
|
(60,783,746)
|
|
|
|
|
|
|||||
| Other comprehensive loss: | |||||||
| Temporary decrease in market value of | |||||||
| securities available for sale |
(872,188)
|
(5,452,376)
|
(6,324,564)
|
||||
| Reclassification to other-than-temporary | |||||||
| impairment of marketable securities | |||||||
| available for sale |
1,918,587
|
4,284,760
|
6,203,347
|
||||
|
|
|
|
|||||
|
1,046,399
|
(1,167,616)
|
(121,217)
|
|||||
|
|
|
|
|||||
|
|
|
|
|||||
| Net comprehensive loss |
$
|
(19,702,861)
|
$
|
(26,662,907)
|
$
|
(60,904,963)
|
|
|
===========
|
===========
|
=================
|
|||||
See report of independent registered public accounting firm
and accompanying notes to the consolidated financial statements
F-5
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
|
Class A
Preferred Stock |
Class B
Preferred Stock |
Class C
Preferred Stock |
Class D
Preferred Stock |
Class A
Common Stock |
Class B
Common Stock |
Warrants Subscribed
|
Additional
Paid-in Capital |
Deficit
Accumulated During the Development Stage |
Notes
Receivable- Common Stock |
Treasury Stock
|
Accumulated
Other Comprehensive Loss |
Total
Stockholders' Equity (Deficit) |
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||||||||
| Initial issuance of common stock | |||||||||||||||||||||||||||||||||||||||
| October 21, 1983 |
-
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
-
|
2
|
$
|
-
|
-
|
$
|
-
|
$
|
-
|
$
|
2,500
|
$
|
-
|
$
|
-
|
-
|
$
|
-
|
$
|
-
|
$
|
2,500
|
||||||
| Adjustment to give effect to | |||||||||||||||||||||||||||||||||||||||
| recapitailization on December 15, | |||||||||||||||||||||||||||||||||||||||
| 1986 - cancellation of shares |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2)
|
-
|
-
|
-
|
-
|
(4)
|
-
|
-
|
-
|
-
|
-
|
(4)
|
|||||||||||||||||||
| Balance, October 21, 1983 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,496
|
-
|
-
|
-
|
-
|
-
|
2,496
|
|||||||||||||||||||
| Shares issued by Tensiodyne | |||||||||||||||||||||||||||||||||||||||
| Corporation in connection with | |||||||||||||||||||||||||||||||||||||||
| pooling of interests |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
42
|
-
|
-
|
-
|
-
|
4,342
|
-
|
-
|
-
|
-
|
-
|
4,342
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,317)
|
-
|
-
|
-
|
-
|
(4,317)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Balance, December 31, 1983 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
42
|
-
|
-
|
-
|
-
|
6,838
|
(4,317)
|
-
|
-
|
-
|
-
|
2,521
|
|||||||||||||||||||
| Capital contribution |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
21,755
|
-
|
-
|
-
|
-
|
-
|
21,755
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5
|
-
|
-
|
-
|
-
|
10,700
|
-
|
-
|
-
|
-
|
-
|
10,700
|
|||||||||||||||||||
| Offering costs |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,849)
|
-
|
-
|
-
|
-
|
-
|
(2,849)
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(21,797)
|
-
|
-
|
-
|
-
|
(21,797)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Balance, December 31, 1984 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
47
|
-
|
-
|
-
|
-
|
36,444
|
(26,114)
|
-
|
-
|
-
|
-
|
10,330
|
|||||||||||||||||||
| Capital contribution |
-
|
-
|
|||||||||||||||||||||||||||||||||||||
| Sale of 12,166 warrants at $1.50 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
200,555
|
-
|
-
|
-
|
-
|
-
|
200,555
|
|||||||||||||||||||||
| per warrant |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
18,250
|
-
|
-
|
-
|
-
|
-
|
18,250
|
|||||||||||||||||||
| Cancellation of shares |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(9)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(252,070)
|
-
|
-
|
-
|
-
|
(252,070)
|
|||||||||||||||||||
| Balance, December 31, 1985 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
38
|
-
|
-
|
-
|
-
|
255,249
|
(278,184)
|
-
|
-
|
-
|
-
|
(22,935)
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(10,365)
|
-
|
-
|
-
|
-
|
(10,365)
|
|||||||||||||||||||
| Balance, December 31, 1986 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
38
|
-
|
-
|
-
|
-
|
255,249
|
(288,549)
|
-
|
-
|
-
|
-
|
(33,300)
|
|||||||||||||||||||
| Issuance of common stock upon | |||||||||||||||||||||||||||||||||||||||
| exercise of warrants |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
27,082
|
-
|
-
|
-
|
-
|
-
|
27,082
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(45,389)
|
-
|
-
|
-
|
-
|
(45,389)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Balance, December 31, 1987 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
38
|
-
|
-
|
-
|
-
|
282,331
|
(333,938)
|
-
|
-
|
-
|
-
|
(51,607)
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3
|
-
|
-
|
-
|
-
|
101,752
|
-
|
-
|
-
|
-
|
-
|
101,752
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3
|
-
|
-
|
-
|
-
|
70,600
|
-
|
-
|
-
|
-
|
-
|
70,600
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(142,335)
|
-
|
-
|
-
|
-
|
(142,335)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Balance, December 31, 1988 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
44
|
-
|
-
|
-
|
-
|
454,683
|
(476,273)
|
-
|
-
|
-
|
-
|
(21,590)
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4
|
-
|
-
|
-
|
-
|
2,000
|
-
|
-
|
-
|
-
|
-
|
2,000
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
36
|
-
|
-
|
-
|
-
|
18,000
|
-
|
-
|
-
|
-
|
-
|
18,000
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(31,945)
|
-
|
-
|
-
|
-
|
(31,945)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Balance, December 31, 1989 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
84
|
-
|
-
|
-
|
-
|
474,683
|
(508,218)
|
-
|
-
|
-
|
-
|
(33,535)
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2
|
-
|
-
|
-
|
-
|
59,250
|
-
|
-
|
-
|
-
|
-
|
59,250
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
6
|
-
|
-
|
-
|
-
|
32,400
|
-
|
-
|
-
|
-
|
-
|
32,400
|
|||||||||||||||||||
| Net income |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
133,894
|
-
|
-
|
-
|
-
|
133,894
|
|||||||||||||||||||
| Balance, December 31, 1990 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
92
|
-
|
-
|
-
|
-
|
566,333
|
(374,324)
|
-
|
-
|
-
|
-
|
192,009
|
|||||||||||||||||||
| Shares issued for cash |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1
|
-
|
-
|
-
|
-
|
273,686
|
-
|
-
|
-
|
-
|
-
|
273,686
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4
|
-
|
-
|
-
|
-
|
64,884
|
-
|
-
|
-
|
-
|
-
|
64,884
|
|||||||||||||||||||
| Conversion of stock |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(6)
|
-
|
60,000
|
60
|
-
|
(6)
|
-
|
-
|
-
|
-
|
-
|
54
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(346,316)
|
-
|
-
|
-
|
-
|
(346,316)
|
|||||||||||||||||||
| Balance, December 31, 1991 |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
91
|
-
|
60,000
|
60
|
-
|
904,897
|
(720,640)
|
-
|
-
|
-
|
-
|
184,317
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
20
|
-
|
-
|
-
|
-
|
16,000
|
-
|
-
|
-
|
-
|
-
|
16,000
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5
|
-
|
-
|
-
|
-
|
15,520
|
-
|
-
|
-
|
-
|
-
|
15,520
|
|||||||||||||||||||
| Conversion of warrants |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
6
|
-
|
-
|
-
|
-
|
15,000
|
-
|
-
|
-
|
-
|
-
|
15,000
|
|||||||||||||||||||
See report of independent registered public accounting firm
and notes to the consolidated financial statements.
F-6
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
|
Class A
Preferred Stock |
Class B
Preferred Stock |
Class C
Preferred Stock |
Class D
Preferred Stock |
Class A
Common Stock |
Class B
Common Stock |
Warrants Subscribed
|
Additional
Paid-in Capital |
Deficit
Accumulated During the Development Stage |
Notes
Receivable- Common Stock |
Treasury Stock
|
Accumulated
Other Comprehensive Loss |
Total
Stockholders' Equity (Deficit) |
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||||||||
| Sale of Class B common stock |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
60,000
|
-
|
-
|
14,940
|
-
|
-
|
-
|
-
|
-
|
14,940
|
|||||||||||||||||||
| Issuance of stock to |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||||||
| unconsolidated subsidiary |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5
|
-
|
-
|
-
|
-
|
71,664
|
-
|
-
|
-
|
-
|
-
|
71,664
|
|||||||||||||||||||
| Conversion of stock |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
6
|
-
|
(60,000)
|
-
|
-
|
6
|
-
|
-
|
-
|
-
|
-
|
6
|
|||||||||||||||||||
| Cancellation of shares |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(7)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(154,986)
|
-
|
-
|
-
|
-
|
(154,986)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Balance, December 31, 1992 |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
126
|
-
|
60,000
|
60
|
-
|
1,038,027
|
(875,626)
|
-
|
-
|
-
|
-
|
162,461
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||
| Shares issued for license agreement |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
13
|
-
|
-
|
-
|
-
|
6,250
|
-
|
-
|
-
|
-
|
-
|
6,250
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
67
|
-
|
-
|
-
|
-
|
13,913
|
-
|
-
|
-
|
-
|
-
|
13,913
|
|||||||||||||||||||
| Warrant conversion |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
56
|
-
|
-
|
-
|
-
|
304,999
|
-
|
-
|
-
|
-
|
-
|
304,999
|
|||||||||||||||||||
| Cancellation of shares |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(32)
|
-
|
-
|
-
|
-
|
(7,569)
|
-
|
-
|
-
|
-
|
-
|
(7,569)
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(929,900)
|
-
|
-
|
-
|
-
|
(929,900)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Balance, December 31, 1993 |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
230
|
-
|
60,000
|
60
|
-
|
1,355,620
|
(1,805,526)
|
-
|
-
|
-
|
-
|
(449,846)
|
|||||||||||||||||||
| Adjustment to give effect to |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||||
| recapitalization on February 1, 1994 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
31
|
-
|
-
|
-
|
-
|
385,424
|
-
|
-
|
-
|
-
|
-
|
385,424
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,486
|
2
|
-
|
-
|
-
|
24,784
|
-
|
-
|
-
|
-
|
-
|
24,786
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
223
|
-
|
-
|
-
|
-
|
223
|
-
|
-
|
-
|
-
|
-
|
223
|
|||||||||||||||||||
| Issuance of shares for the |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||||
| modification of agreements |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
34
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(377,063)
|
-
|
-
|
-
|
-
|
(377,063)
|
|||||||||||||||||||
| Balance, December 31, 1994 |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,004
|
2
|
60,000
|
60
|
-
|
1,766,051
|
(2,182,589)
|
-
|
-
|
-
|
-
|
(416,476)
|
|||||||||||||||||||
| Issuance of shares for the |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||||||
| modification of agreements |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
153
|
-
|
-
|
-
|
153
|
-
|
-
|
-
|
-
|
-
|
153
|
||||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
-
|
-
|
-
|
-
|
(197,546)
|
-
|
-
|
-
|
-
|
(197,546)
|
|||||||||||||||||||
| Balance, December 31, 1995 |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,157
|
2
|
60,000
|
60
|
-
|
1,766,204
|
(2,380,135)
|
-
|
-
|
-
|
-
|
(613,869)
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
165
|
-
|
-
|
-
|
-
|
16,466
|
-
|
-
|
-
|
-
|
-
|
16,466
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
70
|
-
|
-
|
-
|
-
|
174,040
|
-
|
-
|
-
|
-
|
-
|
174,040
|
|||||||||||||||||||
| Issuance of shares for the | |||||||||||||||||||||||||||||||||||||||
| modification of agreements |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
250
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
| Cancellation of shares held in | |||||||||||||||||||||||||||||||||||||||
| treasury |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(62)
|
-
|
-
|
-
|
-
|
(154,600)
|
-
|
-
|
-
|
-
|
-
|
(154,600)
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(450,734)
|
-
|
-
|
-
|
-
|
(450,734)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Balance, December 31, 1996 |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,580
|
2
|
60,000
|
60
|
-
|
1,802,110
|
(2,830,869)
|
-
|
-
|
-
|
-
|
(1,028,697)
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
100
|
-
|
-
|
-
|
-
|
100,000
|
-
|
-
|
-
|
-
|
-
|
100,000
|
|||||||||||||||||||
| Conversion of indebtedness |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
800
|
1
|
-
|
-
|
-
|
165,999
|
-
|
-
|
-
|
-
|
-
|
166,000
|
|||||||||||||||||||
| Class A common stock issued for | |||||||||||||||||||||||||||||||||||||||
| cancellation of $372,000 accrued | |||||||||||||||||||||||||||||||||||||||
| wages due officer |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,500
|
2
|
-
|
-
|
-
|
371,998
|
-
|
-
|
-
|
-
|
-
|
372,000
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
247
|
-
|
-
|
-
|
-
|
2,471
|
-
|
-
|
-
|
-
|
-
|
2,471
|
|||||||||||||||||||
| Adjustment to give effect to | |||||||||||||||||||||||||||||||||||||||
| recapitalization on March 9, 1997 |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
560
|
1
|
-
|
-
|
-
|
(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(133,578)
|
-
|
-
|
-
|
-
|
(133,578)
|
|||||||||||||||||||
| Balance, December 31, 1997 |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5,787
|
6
|
60,000
|
60
|
-
|
2,442,577
|
(2,964,447)
|
-
|
-
|
-
|
-
|
(521,804)
|
|||||||||||||||||||
| Shares issued for cancellation of | |||||||||||||||||||||||||||||||||||||||
| indebtedness |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,430
|
2
|
-
|
-
|
-
|
169,998
|
-
|
-
|
-
|
-
|
-
|
170,000
|
|||||||||||||||||||
| Conversion of options |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
500
|
1
|
-
|
-
|
-
|
124,999
|
-
|
-
|
-
|
-
|
-
|
125,000
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,122
|
1
|
-
|
-
|
-
|
112,161
|
-
|
-
|
-
|
-
|
-
|
112,162
|
|||||||||||||||||||
| Shares issued for cancellation of | |||||||||||||||||||||||||||||||||||||||
| redeemable preferred stock |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
50
|
-
|
-
|
-
|
-
|
150,000
|
-
|
-
|
-
|
-
|
-
|
150,000
|
|||||||||||||||||||
| Shares returned to treasury and | |||||||||||||||||||||||||||||||||||||||
| cancelled |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(560)
|
(1)
|
-
|
-
|
-
|
1
|
-
|
-
|
-
|
-
|
-
|
-
|
See report of independent registered public accounting firm
and notes to the consolidated financial statements.
F-7
MATERIAL TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
|
Class A
Preferred Stock |
Class B
Preferred Stock |
Class C
Preferred Stock |
Class D
Preferred Stock |
Class A
Common Stock |
Class B
Common Stock |
Warrants Subscribed
|
Additional
Paid-in Capital |
Deficit
Accumulated During the Development Stage |
Notes
Receivable- Common Stock |
Treasury Stock
|
Accumulated
Other Comprehensive Loss |
Total
Stockholders' Equity (Deficit) |
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||||||||
| Modification of royalty agreement |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
733
|
1
|
-
|
-
|
-
|
7,331
|
-
|
-
|
-
|
-
|
-
|
7,332
|
|||||||||||||||||||
| Issuance of warrants to officer |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
27,567
|
-
|
-
|
-
|
-
|
-
|
27,567
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(549,187)
|
-
|
-
|
-
|
-
|
(549,187)
|
|||||||||||||||||||
| Balance, December 31, 1998 |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
10,062
|
10
|
60,000
|
60
|
-
|
3,034,634
|
(3,513,634)
|
-
|
-
|
-
|
-
|
(478,930)
|
|||||||||||||||||||
| Shares issued for cancellation | |||||||||||||||||||||||||||||||||||||||
| of indebtedness |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,175
|
2
|
-
|
-
|
-
|
166,665
|
-
|
-
|
-
|
-
|
-
|
166,667
|
|||||||||||||||||||
| Shares issued as compensation |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,255
|
1
|
-
|
-
|
-
|
95,098
|
-
|
-
|
-
|
-
|
-
|
95,099
|
|||||||||||||||||||
| Shares issued for modification of | |||||||||||||||||||||||||||||||||||||||
| licensing agreement |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
672
|
1
|
-
|
-
|
-
|
(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
433
|
-
|
-
|
-
|
-
|
173,540
|
-
|
-
|
-
|
-
|
-
|
173,540
|
|||||||||||||||||||
| Net loss |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(539,283)
|
-
|
-
|
-
|
-
|
(539,283)
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Balance, December 31, 1999 |
350
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
14,597
|
14
|
60,000
|
60
|
-
|
3,469,936
|
(4,052,917)
|
-
|
-
|
-
|
-
|
(582,907)
|
|||||||||||||||||||
| Shares issued as compensation- | |||||||||||||||||||||||||||||||||||||||
| as restated |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
700
|
1
|
-
|
-
|
-
|
824,515
|
-
|
-
|
-
|
-
|
-
|
824,516
|
|||||||||||||||||||
| Shares issued to investors pursuant | |||||||||||||||||||||||||||||||||||||||
| to settlement agreement |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
65
|
1
|
-
|
-
|
-
|
(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
| Shares issued for cash and non- | |||||||||||||||||||||||||||||||||||||||
| recourse promissory note |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5,000
|
5
|
-
|
-
|
-
|
1,994,995
|
-
|
-
|
-
|
-
|
-
|
1,995,000
|
|||||||||||||||||||
| Shares issued for cash |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
400
|
-
|
-
|
-
|
-
|
281,694
|
-
|
-
|
-
|
-
|
-
|
281,694
|
|||||||||||||||||||
| Shares issued for cancellation of | |||||||||||||||||||||||||||||||||||||||
| indebtedness |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
100
|
-
|
-
|
-
|
-
|
100,000
|
-
|
-
|
-
|
-
|
-
|
100,000
|
|||||||||||||||||||
| Shares issued as compensation | |||||||||||||||||||||||||||||||||||||||
| pursuant to escrow agreement |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4,184
|
4
|
-
|
-
|
-
|
4,180
|
-
|
-
|
-
|
-
|
-
|
4,184
|
|||||||||||||||||||
| Shares returned from escrow |
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(400)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
| Common shares converted into |