matech10q063009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the quarterly period ended June 30, 2009
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from _____________ to _____________.
Commission
file number: 333-23617
Matech
Corp.
(Exact
name of registrant as specified in its charter)
Delaware
|
95-4622822
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
11661 San Vicente Boulevard,
Suite 707, Los Angeles, CA 90049
(Address
of principal executive offices)
(310)
208-5589
(Registrant’s
telephone number, including area code)
n/a
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
x
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer
|
o
|
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
o
|
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No x
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes o
No o
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date: as of August 17, 2009, there were 73,965,739 shares of our
Class A common stock issued and 72,396,570 common shares outstanding, and
600,000 shares of Class B common stock issued and
outstanding.
Transitional
Small Business Disclosure Format (Check one): Yes
o
No x
MATECH
CORP.
PART I – FINANCIAL INFORMATION
MATECH
CORP
|
|
|
|
|
|
|
(Formerly
known as Material Technologies, Inc.)
|
|
|
|
|
|
|
(A
Development Stage Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
176,345 |
|
|
$ |
114,474 |
|
Accounts
receivable
|
|
|
41,961 |
|
|
|
40,434 |
|
Inventories
|
|
|
141,341 |
|
|
|
74,319 |
|
Prepaid
expenses and other current assets
|
|
|
359,227 |
|
|
|
62,000 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
718,874 |
|
|
|
291,227 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
78,601 |
|
|
|
105,570 |
|
Loan
fee, net
|
|
|
- |
|
|
|
131,710 |
|
Intangible
assets, net
|
|
|
1,764 |
|
|
|
1,226 |
|
Deposit
|
|
|
2,348 |
|
|
|
2,348 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
801,587 |
|
|
$ |
532,081 |
|
See notes
to consolidated financial statements.
MATECH
CORP
|
|
|
|
|
|
|
(Formerly
known as Material Technologies, Inc.)
|
|
|
|
|
|
|
(A
Development Stage Company)
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
670,207 |
|
|
$ |
865,936 |
|
Deferred
revenue - related party
|
|
|
90,000 |
|
|
|
- |
|
Loans
payable - related party
|
|
|
- |
|
|
|
2,611 |
|
Current
portion of payable due on legal settlement
|
|
|
54,033 |
|
|
|
55,523 |
|
Current
portion of research and development sponsorship payable
|
|
|
25,000 |
|
|
|
25,000 |
|
Current
portion of Convertible debentures and accrued interest payable, net of
discount
|
|
|
1,859,325 |
|
|
|
3,440,861 |
|
Notes
payable
|
|
|
299,542 |
|
|
|
309,614 |
|
Total
current liabilities
|
|
|
2,998,107 |
|
|
|
4,699,545 |
|
|
|
|
|
|
|
|
|
|
Legal
settlement payable
|
|
|
155,978 |
|
|
|
130,338 |
|
Research
and development sponsorship payable, net of current
portion
|
|
|
778,549 |
|
|
|
797,468 |
|
Convertible
debentures and accrued interest payable, net of discount
|
|
|
335,834 |
|
|
|
606,697 |
|
Derivative
and warrant liabilities
|
|
|
210,497,575 |
|
|
|
304,973,847 |
|
|
|
|
211,767,936 |
|
|
|
306,508,350 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
214,766,043 |
|
|
|
311,207,895 |
|
|
|
|
|
|
|
|
|
|
Minority
interest in consolidated subsidiary
|
|
|
825 |
|
|
|
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 as of December 31, 2008 and June 30,
2009
|
|
|
- |
|
|
|
- |
|
Class
B preferred stock, $0.001 par value, liquidation preference
of
|
|
|
|
|
|
|
|
|
$10,000
per share; 15 shares authorized; 0 shares issued
and
|
|
|
|
|
|
|
|
|
outstanding
as of December 31, 2008 and June 30, 2009
|
|
|
- |
|
|
|
- |
|
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 as of December 31, 2008 and June 30, 2009
|
|
|
1 |
|
|
|
1 |
|
Class
D preferred stock, $0.001 par value, liquidation preference
of
|
|
|
|
|
|
|
|
|
$0.001
per share; 20,000,000 shares authorized; 0 shares issued
|
|
|
|
|
|
|
|
|
and
outstanding as of December 31, 2008 and June 30,
2009
|
|
|
- |
|
|
|
- |
|
Class
E convertible preferred stock, $0.001 par value, no
liquidation
|
|
|
|
|
|
|
|
|
preference;
60,000 shares authorized; 49,250 shares issued and
|
|
|
|
|
|
|
|
|
outstanding
as of December 31, 2008 and 0 shares issued and
|
|
|
|
|
|
|
|
|
outstanding
as of June 30, 2009
|
|
|
49 |
|
|
|
- |
|
Class
A Common Stock, $0.001 par value, 1,699,400,000 shares
|
|
|
|
|
|
|
|
|
authorized;
99,408,963 shares issued and 24,389,794 shares
|
|
|
|
|
|
|
|
|
outstanding
as of December 31, 2008; 107,416,290 shares
issued
|
|
|
|
|
|
|
|
|
and
31,934,351 shares outstanding as of June 30,
2009
|
|
|
24,390 |
|
|
|
31,935 |
|
Class
B Common Stock, $0.001 par value, 600,000 shares
authorized,
|
|
|
|
|
|
|
|
|
issued
and outstanding as of December 31, 2008 and June 30,
2009
|
|
|
600 |
|
|
|
600 |
|
Warrants
subscribed
|
|
|
10,000 |
|
|
|
10,000 |
|
Additional
paid-in-capital
|
|
|
367,125,759 |
|
|
|
369,583,095 |
|
Deficit
accumulated during the development stage
|
|
|
(581,117,806 |
) |
|
|
(680,292,371 |
) |
Treasury
stock ( 24,635 shares at cost at December 31,2008 and
|
|
|
|
|
|
|
|
|
25,448
shares at cost at June 30, 2009)
|
|
|
(8,274 |
) |
|
|
(9,899 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' deficit
|
|
|
(213,965,281 |
) |
|
|
(310,676,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
801,587 |
|
|
$ |
532,081 |
|
See notes
to consolidated financial statements.
MATECH
CORP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Formerly
known as Material Technologies, Inc.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A
Development Stage Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
October 21, 1983
|
|
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
(Inception)
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
through
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5,392,085 |
|
Revenue
from bridge testing
|
|
|
- |
|
|
|
1,543 |
|
|
|
1,090 |
|
|
|
65,724 |
|
|
|
476,970 |
|
Other
|
|
|
- |
|
|
|
50,000 |
|
|
|
- |
|
|
|
140,000 |
|
|
|
424,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
- |
|
|
|
51,543 |
|
|
|
1,090 |
|
|
|
205,724 |
|
|
|
6,293,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridge
testing costs
|
|
|
- |
|
|
|
625 |
|
|
|
- |
|
|
|
109,252 |
|
|
|
182,509 |
|
Research
and development
|
|
|
150,847 |
|
|
|
126,897 |
|
|
|
309,840 |
|
|
|
211,463 |
|
|
|
21,302,285 |
|
General
and administrative
|
|
|
5,517,443 |
|
|
|
1,602,077 |
|
|
|
25,845,768 |
|
|
|
2,648,153 |
|
|
|
333,726,110 |
|
Modification
of research and development sponsorship agreement
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,963,120 |
|
(Gain)
loss on settlement of lawsuits
|
|
|
- |
|
|
|
(45,223 |
) |
|
|
- |
|
|
|
(45,223 |
) |
|
|
1,222,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
5,668,290 |
|
|
|
1,684,376 |
|
|
|
26,155,608 |
|
|
|
2,923,645 |
|
|
|
362,396,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(5,668,290 |
) |
|
|
(1,632,833 |
) |
|
|
(26,154,518 |
) |
|
|
(2,717,921 |
) |
|
|
(356,102,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(Loss) on modification of convertible debt
|
|
|
(964,730 |
) |
|
|
2,722,195 |
|
|
|
(964,730 |
) |
|
|
2,722,195 |
|
|
|
2,343,710 |
|
Loss
on subscription receivable
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
(1,368,555 |
) |
Interest
expense
|
|
|
(606,028 |
) |
|
|
(811,591 |
) |
|
|
(977,019 |
) |
|
|
(1,977,779 |
) |
|
|
(16,623,656 |
) |
Other-than-temporary
impairment of marketable securities available for
sale
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,785,947 |
) |
Loss
on shareholder settlement relating to failure to register common
shares
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(39,407,195 |
) |
Net
unrealized and realized loss of marketable securities
|
|
|
- |
|
|
|
(22 |
) |
|
|
(8 |
) |
|
|
(1,825 |
) |
|
|
(9,400,043 |
) |
Change
in fair value of investments derivative liability
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(210,953 |
) |
Change
in fair value of derivative and warrant liabilities
|
|
|
(71,103,676 |
) |
|
|
21,746,506 |
|
|
|
(62,544,101 |
) |
|
|
(97,198,467 |
) |
|
|
(250,177,363 |
) |
Interest
income
|
|
|
3,080 |
|
|
|
32 |
|
|
|
15,523 |
|
|
|
32 |
|
|
|
483,088 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(25,992 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
(72,671,354 |
) |
|
|
23,657,120 |
|
|
|
(64,470,335 |
) |
|
|
(96,455,844 |
) |
|
|
(324,172,906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(78,339,644 |
) |
|
|
22,024,287 |
|
|
|
(90,624,853 |
) |
|
|
(99,173,765 |
) |
|
|
(680,275,771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
(800 |
) |
|
|
(800 |
) |
|
|
(16,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(78,339,644 |
) |
|
$ |
22,024,287 |
|
|
$ |
(90,625,653 |
) |
|
$ |
(99,174,565 |
) |
|
$ |
(680,292,371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$ |
(500.20 |
) |
|
$ |
0.70 |
|
|
$ |
(614.04 |
) |
|
$ |
(3.36 |
) |
|
|
|
|
Weighted
average Class A common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding - basic and diluted
|
|
|
156,617 |
|
|
|
31,465,322 |
|
|
|
147,589 |
|
|
|
29,532,376 |
|
|
|
|
|
See notes
to consolidated financial statements.
MATECH
CORP
|
|
|
|
|
|
|
|
|
|
(Formerly
known as Material Technologies, Inc.)
|
|
|
|
|
|
|
|
|
|
(A
Development Stage Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
October 21, 1983
|
|
|
|
For
the Six Months Ended
|
|
|
(Inception)
|
|
|
|
June
30,
|
|
|
through
|
|
|
|
2008
|
|
|
2009
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(90,625,653 |
) |
|
$ |
(99,174,565 |
) |
|
$ |
(680,292,371 |
) |
Adjustments
to reconcile net loss to net cash used in in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
(gain) on modification of convertible debt
|
|
|
964,730 |
|
|
|
(2,722,195 |
) |
|
|
(2,343,710 |
) |
Impairment
loss
|
|
|
- |
|
|
|
- |
|
|
|
21,391,528 |
|
Loss
on charge off of subscription receivables
|
|
|
|
|
|
|
|
|
|
|
1,368,555 |
|
Stock
based compensation
|
|
|
3,625,200 |
|
|
|
1,745,247 |
|
|
|
212,223,628 |
|
Increase
in debt for services and fees
|
|
|
1,100,000 |
|
|
|
120,000 |
|
|
|
5,796,625 |
|
Officer's
stock based compensation
|
|
|
19,885,333 |
|
|
|
- |
|
|
|
86,460,675 |
|
Issuance
of common stock for modification of
|
|
|
|
|
|
|
|
|
|
|
|
|
research and development sponsorship agreement
|
|
|
- |
|
|
|
- |
|
|
|
7,738,400 |
|
Issuance
of common stock in settlement for failure to
|
|
|
|
|
|
|
|
|
|
|
|
|
register common shares
|
|
|
- |
|
|
|
- |
|
|
|
39,407,195 |
|
Change
in fair value of derivative and warrant liabilities
|
|
|
- |
|
|
|
|
|
|
|
155,214,096 |
|
Net realized and unrealized loss on marketable securities
|
|
|
- |
|
|
|
1,825 |
|
|
|
7,897,530 |
|
Other-than-temporary
impairment of marketable
|
|
|
|
|
|
|
|
|
|
|
|
|
securities available for sale
|
|
|
- |
|
|
|
- |
|
|
|
9,785,946 |
|
Legal
fees incurred for note payable
|
|
|
- |
|
|
|
- |
|
|
|
1,456,142 |
|
Accrued
interest expense added to principal
|
|
|
135,816 |
|
|
|
286,978 |
|
|
|
2,204,472 |
|
Amortization
of discount on convertible debentures
|
|
|
824,072 |
|
|
|
1,582,392 |
|
|
|
14,105,423 |
|
Change
in fair value of investments derivative liability
|
|
|
62,544,101 |
|
|
|
97,198,467 |
|
|
|
100,421,790 |
|
Accrued
interest income added to principal
|
|
|
25,433 |
|
|
|
- |
|
|
|
(305,885 |
) |
Depreciation
and amortization
|
|
|
10,621 |
|
|
|
25,230 |
|
|
|
275,201 |
|
Other
non-cash adjustments
|
|
|
- |
|
|
|
(45,224 |
) |
|
|
(159,954 |
) |
(Increase)
decrease in trade receivables
|
|
|
108,661 |
|
|
|
1,527 |
|
|
|
(90,761 |
) |
(Increase)
decrease in inventories
|
|
|
(86,748 |
) |
|
|
67,023 |
|
|
|
(74,318 |
) |
(Increase)
decrease in prepaid expenses and other
|
|
|
|
|
|
|
|
|
|
|
- |
|
current assets
|
|
|
(17,257 |
) |
|
|
197,559 |
|
|
|
511,403 |
|
(Decrease)
increase in accounts payable and accrued
|
|
|
|
|
|
|
|
|
|
|
- |
|
expenses
|
|
|
(130,968 |
) |
|
|
240,952 |
|
|
|
2,780,447 |
|
(Decrease)
Increase in deferred revenue - related party
|
|
|
- |
|
|
|
(90,000 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,636,659 |
) |
|
|
(564,784 |
) |
|
|
(14,227,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of marketable securities
|
|
|
300,000 |
|
|
|
848 |
|
|
|
3,759,324 |
|
Purchase
of marketable securities
|
|
|
- |
|
|
|
- |
|
|
|
(2,206,379 |
) |
Investment
in certificate of deposits and commercial paper
|
|
|
(565,000 |
) |
|
|
- |
|
|
|
(1,965,000 |
) |
Redemptions
of certificate of deposits and commercial paper
|
|
|
1,565,000 |
|
|
|
- |
|
|
|
1,965,000 |
|
Payment
received on officer loans
|
|
|
3,803 |
|
|
|
- |
|
|
|
876,255 |
|
Funds
advanced to officers
|
|
|
- |
|
|
|
- |
|
|
|
(549,379 |
) |
Proceeds
received in acquisition of consolidated subsidiaries
|
|
|
- |
|
|
|
- |
|
|
|
600,000 |
|
Purchase
of property and equipment
|
|
|
(17,167 |
) |
|
|
(51,660 |
) |
|
|
(425,080 |
) |
Investment
in joint ventures
|
|
|
- |
|
|
|
- |
|
|
|
(102,069 |
) |
Proceeds
from foreclosure
|
|
|
- |
|
|
|
- |
|
|
|
44,450 |
|
Proceeds
from the sale of property and equipment
|
|
|
- |
|
|
|
- |
|
|
|
19,250 |
|
Payment
for license agreement
|
|
|
- |
|
|
|
- |
|
|
|
(6,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in ) investing activities
|
|
|
1,286,636 |
|
|
|
(50,812 |
) |
|
|
2,010,122 |
|
See notes
to consolidated financial statements.
MATECH
CORP
|
|
|
|
|
|
|
|
|
|
(Formerly
known as Material Technologies, Inc.)
|
|
|
|
(A
Development Stage Company)
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
October 21, 1983
|
|
|
|
For
the Three Months Ended
|
|
(Inception)
|
|
|
|
June
30,
|
|
|
through
|
|
|
|
2008
|
|
|
2009
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of common stock and warrants
|
|
|
18,624 |
|
|
$ |
- |
|
|
$ |
9,464,577 |
|
Proceeds
from convertible debentures and other notes
payable
|
|
|
55,000 |
|
|
|
600,000 |
|
|
|
3,952,766 |
|
Proceeds
from the sale of preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
473,005 |
|
Fees
incurred in debt financing
|
|
|
- |
|
|
|
- |
|
|
|
(1,505,932 |
) |
Capital
contributions
|
|
|
- |
|
|
|
- |
|
|
|
301,068 |
|
Purchase
of treasury stock
|
|
|
(3,266 |
) |
|
|
(4,298 |
) |
|
|
(181,212 |
) |
Principal
reduction on notes payable
|
|
|
- |
|
|
|
(41,977 |
) |
|
|
(166,977 |
) |
Payment
on proposed reorganization
|
|
|
- |
|
|
|
- |
|
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
70,358 |
|
|
|
553,725 |
|
|
|
12,332,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(279,665 |
) |
|
|
(61,871 |
) |
|
|
114,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period |
|
|
809,710 |
|
|
|
176,345 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
530,045 |
|
|
$ |
114,474 |
|
|
$ |
114,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
Interest
paid during the period
|
|
$ |
281 |
|
|
$ |
- |
|
|
|
|
|
Income
taxes paid during the period
|
|
$ |
800 |
|
|
$ |
800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
January 2009, the Company issued its President 274,000 shares of its
common stock in a cashless
|
exercise
of 274,347 options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
February 2009, the Company issued 6,000,000 shares of its common stock in
a conversion of
|
$600,000
of convertible debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
April 2009, the Company issued 100,000 shares of its common stock in
conversion of $57,584
|
of
indebtedness. Under the original terms of the loan, the lender had the
right to convert the amount
|
due
into 3.5% of the total number of Company shares outstanding on the date of
conversion. The Company
|
considered
the shares that would have been issued under the original terms of the
loan and the actual
|
100,000
shares issued as a modification of a loan and recognized a gain on the
transaction of
|
$2,722,195.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
May 2009, the Company settled a fee dispute with its former legal counsel
and recognized a
|
$45,224
gain on the settlement that was credited to operations.
|
|
|
|
|
|
|
|
|
|
|
In
May 2009, the Company issued 449,730 shares of its common stock in
conversion of 49,250
|
shares
of its Class E Convertible Preferred Stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2009, the Company issued 720,828 shares of
its common
|
stock
for consulting services valued at $1,807,247 of which $62,000 has been
recorded as prepaid
|
as
of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008, the Company issued 4,230 shares of its
Class A common shares in
|
the
conversion of $491,132 of convertible debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008, the Company issued 13,207 shares of
its Class A common stock
|
for
consulting services valued at $3,668,400.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008, the Company issued 378 shares of its
Class A common stock
|
pursuant
to the anti-dilution provisions of a settlement
agreement.
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008, a former employee returned 450 shares
of the Company's Class A
|
common
stock to treasury which were subsequently
cancelled.
|
See notes
to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008. the Company's president returned
30,000 shares of the Company's
|
Class
A common stock to treasury which were subsequently
cancelled.
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008, the Company issued 34,500 shares of
its Class A common stock
|
in
consideration of the exercise of cashless warrants. The Company accrued
derivative liability in connection with the
|
granting
of the warrants, which had a balance of $1,151,900 on the date of
exercise. The liability balance was credited to
equity.
|
During
the six months ended June 30, 2008, the Company issued 78 shares of its
Class A common stock for $18,624.
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008, the Company issued 1,040 shares of the
Company's common stock
|
was
issued through the conversion of 1,300 shares of the Company's Class E
preferred shares.
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008, the Company contingent obligation to
Mr. Beck under a settlement agreement
|
was
reduced to $0, therefore the Company reduced its legal settlement
liability by the remaining accrued provision of
$230,000,
|
which
was credited to equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008, the Company obtained $55,000 through
the issuance of convertible debt. In connection
|
with
this debt, the Company recognized a beneficial conversion feature of
$28,140 that was credited to equity.
|
|
|
|
|
|
|
|
|
|
|
During
the six months ended June 30, 2008, the Company recognized compensation
expense of $8,800 on the grant of
|
options
to its employees and officers for the purchase of 800.000 shares of Class
A common stock. In addition, during the six months
|
the
Company granted options to its President for the purchase of 400,000,000
shares of its Class A common stock and granted
options
|
to
a consultant to purchase 15,390,546 shares of its Class A common stock.
The Company recognized a derivative liability of
$6,400,000
|
on
the granting of these options.
|
|
|
|
|
|
|
|
See notes
to consolidated financial statements.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
NOTE 1 –
BASIS OF PRESENTATION
The
accompanying unaudited financial statements contain all adjustments (consisting
only of normal recurring adjustments) which, in the opinion of management, are
necessary to present fairly the financial position of the Company as of June 30,
2009, and the results of its operations for the three and six months ended June
30, 2009 and 2008, and for the period from October 21, 1983 (inception) to June
30, 2009, and its cash flows for the six months ended June 30, 2009
and 2008, and for the period from October 21, 1983 (inception) to June 30, 2009.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to rules and regulations of
the U.S. Securities and Exchange Commission (the “Commission”). The Company
believes that the disclosures in the financial statements are adequate to make
the information presented not misleading. However, the financial statements
included herein should be read in conjunction with the financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008 filed with the Commission on April 15,
2009.
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As shown in the accompanying financial
statements, the Company is in the development stage and, at June 30, 2009, has
an accumulated deficit of $680,292,371, continues to sustain operating losses on
a monthly basis, and expects to incur operating losses for the foreseeable
future. Management of the Company will need to raise additional debt
and/or equity capital to finance future activities. However, no
assurances can be made that current or anticipated future sources of funds will
enable the Company to finance future periods’ operations. In light of
these circumstances, substantial doubt exists about the Company’s ability to
continue as a going concern. These condensed consolidated financial statements
do not include any adjustments relating to the recoverability and classification
of recorded assets or liabilities that might be necessary should the Company be
unable to continue as a going concern.
NOTE 2 – RECENT ACCOUNTING
PRONOUNCEMENTS
RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS
SFAS No. 161 - In
March 2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.
This
Statement is intended to enhance the current disclosure framework in Statement
133. The Statement requires that objectives for using derivative instruments be
disclosed in terms of underlying risk and accounting designation. This
disclosure better conveys the purpose of derivative use in terms of the risks
that the entity is intending to manage. Disclosing the fair values of derivative
instruments and their gains and losses in a tabular format should provide a more
complete picture of the location in an entity’s financial statements of both the
derivative positions existing at period end and the effect of using derivatives
during the reporting period. Disclosing information about credit-risk-related
contingent features should provide information on the potential effect on an
entity’s liquidity from using derivatives. Finally, this Statement requires
cross-referencing within the footnotes, which should help users of financial
statements locate important information about derivative
instruments.
This
Statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption.
The
adoption of SFAS No 160 has not had a significant impact on our financial
statements.
FASB issued Staff Position
No. 142-3 - In April 2008, the FASB issued Staff Position
No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP
142-3”). FSP 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is
effective for the Company in the first quarter of 2009. The adoption of FSP
142-3 has not had a significant impact on our financial statements.
FASB issued Staff Position
No. EITF 03-6-1 - In June 2008, the FASB issued Staff Position
No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities” (“EITF 03-6-1”). EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting, and therefore, need to be included in
the earnings allocation in calculating earnings per share under the two-class
method described in FASB Statement of Financial Accounting Standards
No. 128, “Earnings per Share.” EITF 03-6-1 requires companies to treat
unvested share-based payment awards that have non-forfeitable rights to dividend
or dividend equivalents as a separate class of securities in calculating
earnings per share. EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008. EITF 03-6-1 is effective for the Company in the first
quarter of 2009. The adoption of EITF 03-6-1 has not had a significant impact on
our financial statements
SFAS No. 157 - The
Company adopted in the first quarter of fiscal 2009, the Statement of Financial
Accounting Standards No. 157, Fair Value Measurements, (“SFAS
No. 157”) for all financial assets and financial liabilities and for all
non-financial assets and non-financial liabilities recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value, and enhances fair value measurement disclosure.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
The
effect on the Company’s periodic fair value measurements for financial and
non-financial assets and liabilities was not material.
In
October 2008, the Financial Accounting Standards Board (“FASB”) issued
Financial Staff Position 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active, (“FSP 157-3”). FSP 157-3 clarifies
the application of SFAS No. 157 in a market that is not active, and
addresses application issues such as the use of internal assumptions when
relevant observable data does not exist, the use of observable market
information when the market is not active, and the use of market quotes when
assessing the relevance of observable and unobservable data. FSP 157-3 is
effective for all periods presented in accordance with SFAS No. 157. The
adoption of FSP 157-3 did not have a significant impact on our financial
statements or the fair values of our financial assets and
liabilities.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”). FSP FAS 157-4 provides additional guidance for estimating
fair value measurements in accordance with FASB Statement No. 157 when
there is not an active market or where the price inputs being used represent
distressed sales. FSP FAS 157-4 provides additional guidance on the major
categories for which equity and debt securities disclosures are to be presented
and amends the disclosure requirements of FASB Statement No. 157 to require
disclosure in interim and annual periods of the inputs and valuation
technique(s) used to measure fair value and a discussion of changes in valuation
techniques and related inputs, if any, during the period. FSP FAS 157-4
shall be applied prospectively and is effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting this FSP must
also early adopt FSP No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairment (“FSP FAS 115-2 and
FAS 124-2”). The adoption of FSP FAS 157-4 did not have an impact on the
Company’s financial position, results of operations and cash flows.
In
December 2008, the FASB issued Financial Staff Position (“FSP”) Financial
Accounting Standard No. 140-4 and FASB Interpretation 46(R)-8, Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities (“FSP FAS 140-4” and “FIN
46(R)-8”). The document increases disclosure requirements for public companies
and is effective for reporting periods (interim and annual) that end after
December 15, 2008. FSP FAS 140-4 and FIN 46(R)-8 became effective
for us on December 31, 2008. The adoption of FSP FAS 140-4 and
FIN 46(R)-8 did not have a significant impact on our financial
statements.
In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment models of FAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
other-than-temporary
impairment has occurred. The adoption of FSP EITF 99-20-1 did not have a
material impact on the Company’s consolidated financial statements.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP. The adoption of
FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s
consolidated financial statements.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and
APB 28-1”). FSP FAS 107-1 and APB 28-1 require companies to disclose in
interim financial statements the fair value of financial instruments within the
scope of FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments. However, companies are not required to provide in interim periods
the disclosures about the concentration of credit risk of all financial
instruments that are currently required in annual financial statements. The
fair-value information disclosed in the footnotes must be presented together
with the related carrying amount, making it clear whether the fair value and
carrying amount represent assets or liabilities and how the carrying amount
relates to what is reported in the balance sheet. FSP FAS 107-1 and APB
28-1 also requires that companies disclose the method or methods and significant
assumptions used to estimate the fair value of financial instruments and a
discussion of changes, if any, in the method or methods and significant
assumptions during the period. The FSP shall be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. An entity
early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP
FAS 157-4 as well as FSP FAS 115-2 and FAS 124-2. The Company
will adopt the disclosure requirements of this pronouncement for the quarter
ended June 30, 2009, in conjunction with the adoption of FSP
FAS 157-4, FSP FAS 115-2 and FAS 124-2.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 will be effective for interim or
annual periods ending after June 15, 2009 and will be applied prospectively. The
Company has adopted the requirements of this pronouncement for the quarter ended
June 30, 2009.
In June
2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial
Assets” (“SFAS 166”). Statement 166 is a revision to FASB Statement No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and
will require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. SFAS 166 enhances
information reported to users of financial statements by providing greater
transparency about transfers of financial assets and an entity’s continuing
involvement in transferred financial assets.
SFAS 166
will be effective at the start of a reporting entity’s first fiscal year
beginning after November 15, 2009. Early application is not permitted. The
Company does not anticipate the adoption of SFAS 166 will have an impact on its
consolidated results of operations or consolidated financial
position.
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”). Statement 167 is a revision to FASB Interpretation No. 46 (Revised
December 2003), Consolidation
of Variable Interest Entities, and changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. SFAS 167 will require a reporting entity to provide additional
disclosures about its involvement with variable interest entities and any
significant changes in risk exposure due to that involvement. A reporting entity
will be required to disclose how its involvement with a variable interest entity
affects the reporting entity’s financial statements. SFAS 167 will be effective
at the start of a reporting entity’s first fiscal year beginning after November
15, 2009. Early application is not permitted. The Company is currently
evaluating the impact, if any, of adoption of SFAS 167 on its financial
statements.
In June
2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of
FASB Statement No. 162” (“SFAS 168”). Statement 168 establishes the FASB Accounting Standards
Codification TM
(Codification) as the single source of authoritative U.S. generally
accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied
by nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
registrants.
SFAS 168 and the Codification are effective for financial statements issued for
interim and annual periods ending after September 15, 2009. When effective, the
Codification will supersede all existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting literature not included
in the Codification will become nonauthoritative. Following SFAS 168, the FASB
will not issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting
Standards Updates, which will serve only to: ( a ) update the Codification;
( b ) provide
background information about the guidance; and ( c ) provide the bases for
conclusions on the change(s) in the Codification. The adoption of SFAS 168 will
not have an impact on the Company’s consolidated financial
statements.
NOTE
3 – ACCOUNTS RECEIVABLE
Accounts
receivable as of June 30, 2009, consist of the following:
Trade
receivables
|
|
$ |
40,434 |
|
NOTE
4 – INVENTORIES
Inventories
at June 30, 2009 consist of the following:
Inventories
consist of sensors and other parts used in the Company’s bridge testing
operations.
NOTE 5 – PROPERTY AND
EQUIPMENT
Property
and equipment at June 30, 2009 consisted of the following:
Office
and computer equipment
|
|
$ |
27,645 |
|
Manufacturing
equipment
|
|
|
282,181 |
|
|
|
|
309,826 |
|
Less
accumulated depreciation
|
|
|
(204,256 |
) |
|
|
$ |
105,570 |
|
Depreciation
charged to operations for the three months ended June 30, 2009 and 2008 amount
to $5,041 and $5,041, respectively. Depreciation charged to
operations for the six months ended June 30, 2009 and 2008 amount to $24,691 and
$10,083, respectively.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
NOTE 6 – INTANGIBLE
ASSETS
Intangible
assets consist of the following at June 30, 2009:
|
Period
of
|
|
|
|
|
Amortization |
|
|
|
Patent
costs
|
17
years |
|
$ |
28,494 |
|
License
agreement (see Note 7)
|
17
years
|
|
|
6,250 |
|
Website
|
5
years
|
|
|
5,200 |
|
|
|
|
|
39,944 |
|
Less
accumulated amortization
|
|
|
|
(38,718 |
) |
|
|
|
$ |
1,226 |
|
Amortization
charged to operations for the three months ended June 30, 2009 and 2008 was
$269, and $269, respectively. Amortization charged to operations for the six
months ended June 30, 2009 and 2008 was $538, and $539,
respectively.
Estimated
amortization expense for remaining life of the intangibles is as
follows:
NOTE 7 – LICENSE
AGREEMENTS
University of
Pennsylvania
In 1993,
the Company has entered into a license agreement with the University of
Pennsylvania (the “University”) for the development and marketing of
EFS.
Under the
terms of the agreement, the Company issued to the University 1 share of its
common stock, and a 5% royalty on sales of the product. The Company valued
the license agreement at $6,250. The license terminates upon the
expiration of the underlying patents, unless sooner terminated as provided in
the agreement. The Company is amortizing the license over 17
years.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
In addition to the license
agreement, the Company also agreed under a modified workout agreement relating
to a prior sponsorship agreement to pay the University, retroactive to January
1, 2005, the balance of $760,831, which accrues interest at a monthly
rate of 0.5% simple interest. The Company is obligated to pay $25,000
annually due on the anniversary date of the Workout Agreement. Further,
the Company is also obligated to pay within ten days following the filing of the
Company’s Forms 10-QSB or 10-KSB an amount equal to 10% of the Company’s
operating income (as defined) as reflected in the quarterly and annual
filings. Under the revised terms of the Workout Agreement, the Company’s
CEO’s annual cash salary is capped at $250,000. The Company agreed to pay
the University an amount equal to any cash salary paid to Mr. Bernstein in
excess of the $250,000, which will be credited against the balance of the
amounts due under the agreement.
Interest
expense charged to operations during the three months ended June 30, 2009 and
2008 amounted $9,511 and $9,885, respectively. Interest expense charged to
operations during the six months ended June 30, 2009 and 2008 amounted $18,918
and $19,770, respectively. The balance of the obligation (including
accrued interest) at June 30, 2009 was $822,468 and is reflected in research and
development sponsorship payable in the accompanying condensed consolidated
balance sheet. The current portion represents the minimum annual payment
under the Workout Agreement, while the remaining balance is reflected as
non-current as the Company does not expect to be required to make additional
payments during the next twelve months.
NOTE 8 – NOTES
PAYABLE
On May
27, 1994, the Company borrowed $25,000 from a shareholder. The loan is
evidenced by a promissory note bearing interest at 6.5 percent. The note
is secured by the Company’s patents and matured on May 31, 2002. The loan
has not been paid and is now in default. As additional consideration for
the loan, the Company granted to the shareholder a 1% royalty interest in the
Fatigue Fuse and a 0.5% royalty interest in EFS (see Note 10). The balance
due on this loan as of June 30, 2009 was $59,195. Interest charged to
operations during the three months ended June 30, 2009 and 2008 was $406 and
$406, respectively. Interest charged to operations during the six months
ended June 30, 2009 and 2008 was $812 and $812, respectively.
On April
28, 2003, the Company borrowed $10,000 from an unrelated third party. The
loan is unsecured, non-interest bearing and due on demand.
On March
5, 2007, the Company borrowed $200,000 from a shareholder. The loan is evidenced
by an unsecured promissory note that is assessed interest at an annual rate of
8%. The note matured on March 5, 2009 when the principal and accrued interest
became fully due and payable. The loan and accrued interest was not paid by the
due date and the Company is in default under the terms of the note. The balance
of the loan including accrued interest at June 30, 2009 is
$240,419. Interest charged to operations during
the three months ended June 30, 2009 and 2008 was $4,701 and $4,343,
respectively. Interest charged to operations during the three months ended
June 30, 2009 and 2008 was $9,261 and $8,602,
respectively.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
NOTE 9 – CONVERTIBLE
DEBENTURES
Palisades
On
September 23, 2003, the Company entered into a Class A Secured Convertible
Debenture (the “Debentures”) with Palisades, pursuant to which Palisades agreed
to loan the Company up to $1,500,000. On December 1, 2003, after Palisades
had funded $240,000 of the original Debentures, the Company entered into
additional Class A Secured Convertible Debentures with two additional investors,
pursuant to which such investors would loan the Company up to $650,000 each, and
the Company agreed that Palisades would not make additional advances under the
Debentures. The Company received a total of $1,125,000 under the
Debentures. The debentures and accrued interest were fully due and payable in
November 2008.
Effective
June 16, 2008, the Company and Investor Group (“Palisades’) entered into
Settlement Agreement and General Release whereby Palisades agreed to extend the
maturity date of the convertible debentures to December 31, 2009. Under the
modified terms of the underlying Notes, the Company is required to make minimum
monthly interest payments totaling $10,000, the first payment being made in
August 2008. Under the settlement and related escrow agreement, the
Company is required to deposit a number of shares equal to 9.99% of its issued
and outstanding Class A Common Stock into a brokerage account in the name of
Agent at a firm to be determined from time to time by Agent. The
Company also agreed to modify the terms of the notes to include the following
restrictions:
|
·
|
If
an Event of Default occurs under the Notes, and, if such Event of Default
is curable, such Event of Default continues for a period of 30 days
without being cured, then the 10% interest rate set forth in the Notes
will be increased to a Default Interest Rate of 18% per annum, and the
total balance of principal and accrued interest of the debentures shall
bear interest at the Default Interest Rate from the date of the occurrence
of such Event of Default.
|
|
·
|
In
addition, the entry of any judgment against the Company in excess of
$150,000, regardless of where, how, to whom or under what agreement such
liability arises, shall be an Event of Default under the Debentures,
unless (i) the Company pays such judgment within 60 days, or (ii) the
Company duly
files an appeal of such judgment and execution of such judgment is
stayed. Finally, the entry of any order or judgment in favor of
any judgment creditor or other creditor attaching the assets of the
Company shall be an Event of Default under these
debentures. The conversion price of the debentures shall not be
at any time more than $0.10 per share, regardless of any combination of
shares of the Common Stock of the Company by reverse split or
otherwise.
|
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
|
·
|
If
an Event of Default occurs which is not cured within its applicable cure
period, if it is curable, the conversion price of these debentures after
such cure period has expired shall be reduced to half of the pre-Event of
Default conversion price. For clarification, if the conversion
price before an Event of Default were the lesser of 50% of market price or
$0.10, then the new conversion price would be the lesser of 25% of market
price or $0.05.
|
|
·
|
The
Company shall not issue any shares of its Class A Common Stock without a
legend stating that such shares may not be sold, transferred, pledged,
assigned or alienated for a period of at least one year following the date
of the issuance of such certificate, other than shares issued to or with
the written consent of the Holder. Notwithstanding the
foregoing, this provision shall not apply to (i) any shares issued to
purchasers in a financing where the Company receives net proceeds of at
least Five Hundred Thousand Dollars ($500,000) and the shares are sold for
not less than fifty percent (50%) of the closing price of the Company’s
common stock reported as of the closing date of such financing, and (ii)
any shares issued in connection with an acquisition of assets by the
Company where (a) the Company provides to the Holder a fairness opinion as
to the value of the acquired assets, and (b) the Company receives assets
that are worth at least fifty percent (50%) of the closing price per share
of the Company’s common stock as of the closing date of the
acquisition.
|
|
·
|
The
Company shall not enter into any agreement pursuant to which any party
other than the Holder has pre-emptive rights, the right to receive shares
of any class of securities of the Company for no additional consideration,
the right to receive a set, pre-determined percentage of the outstanding
shares of the Company for any period of time, or any other similar right
that has the effect of maintaining a set percentage of the issued and/or
outstanding shares of any class or classes of the capital stock of the
Company.
|
|
·
|
The
Company shall not enter into any agreement giving another party
anti-dilution protection unless (1) all shares received pursuant to such
provision are subject to a two-year lock-up from the date of issuance, and
(2) all such shares received are subject to a “dribble-out,” following the
two-year lock-up, restricting their sale to not more than 1/20th
of 5% of the previous month’s total trading volume in any single trading
day.
|
|
·
|
The
Company will not file any Registration Statement on Form S-8 nor issue any
shares registered on Form S-8, exclusive of shares currently registered on
Form S-8. However, when the total capital in the Company’s cash
account drops below $500,000, the
|
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
|
|
Company
may issue up to $30,000 worth of securities registered on Form S-8, valued
at the market price of the common stock on the date of issuance, per
month, non-cumulative. Any issuance of S-8 shares will be
supported by an opinion of the Company’s counsel that such issuance
complies in all respects with federal securities laws. This
opinion will be provided to the legal representative of the Holder upon
request. Further, the Company will ensure that every entity or
individual that receives S-8 shares will be subject to a “dribble-out”
restricting their sale to not more than 1/20th
of 2% of the previous month’s total trading volume in any single trading
day, non-cumulative. The above-described dribble-out is not an
aggregate sale restriction for all entities and individuals receiving S-8
shares. |
|
|
|
|
·
|
The
Company acknowledges that the conversion price of the Debenture shall not
be effected by any such reverse split, and that after giving effect to
such reverse split, the conversion price shall remain the lesser of (i)
50% of the averaged ten closing prices for the Company’s Common Stock for
the ten trading days immediately preceding the Conversion Date or (ii)
$0.10. The Holder consents to this action. The
parties acknowledge that the Company is not obligated to complete this
reverse-split, or any reverse
split.
|
|
·
|
The
shareholder lockup provisions will not apply to up to any shares held by
Mr. Robert Bernstein, and sold by him personally in a bona-fide sale to an
unrelated, unaffiliated third party; provided, that (i) the number of
shares sold shall not exceed Two Million Five Hundred Thousand Dollars
($2,500,000) worth of stock, calculated based on the number of shares sold
multiplied by the closing price of the stock on the date such shares are
sold (if a market trade) or transferred on the books of the transfer agent
(if a private transfer). Once Two Million Five Hundred Thousand
Dollars ($2,500,000) worth of stock has been sold as calculated above, the
lockup on whatever remains of the shares owned by Mr. Bernstein (if
any) goes back into effect. In this regard, if Mr. Bernstein
sells any of his shares without legend, then he may only sell up to 1/20th
of 5% of the previous month’s total trading volume in any single trading
day, and he may not sell more than 1% of the issued and outstanding shares
of Matech during any 90 day period. Further, if Mr. Bernstein sells
any of his shares, he must have such shares transferred on the books of
the transfer agent within five business days of the sale. Mr.
Bernstein shall comply with all reporting requirements under Section 16 of
the Securities Exchange Act of 1934, as
amended.
|
As
further consideration for the Note Holders to extend the maturity date of the
debentures and to enter into the Settlement Agreement, the Company agreed to pay
an extension fee and a settlement fee totaling $554,910, which was added to the
outstanding balance of the debentures as of June 16, 2008 and grant the holders
warrants to purchase 35,000,000 shares of the Company’s Class A common stock at
an exercise price of the lesser of (i) $0.001 per share,
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
or (ii) 50% of
market price The warrants expire on October 16, 2016. Payment
of the warrant price may be in cash or cashless, at the option of the warrant
holder.
The Company accounted for
the modification of the convertible debt pursuant to EITF 96-19 “Debtor's
Accounting for a Modification or Exchange of Debt Instruments” and recognized a
loss on the modification of $964,730 that was charged to
operations.
Further, Per EITF
00-19, paragraph 4, these convertible debentures do not meet the definition of a
“conventional convertible debt instrument” since the debt is not convertible
into a fixed number of shares. The debt can be converted into common stock
at a conversion price that is a percentage of the market price; therefore, the
number of shares that could be required to be delivered upon “net-share
settlement” is essentially indeterminate. Therefore, the convertible
debenture is considered “non-conventional,” which means that the conversion
feature must be bifurcated from the debt and shown as a separate derivative
liability. The Company recognized a derivative liability of $4,254,301 on June
16, 2008, with an offset to debt discount in the same amount.
In
addition, since the convertible debenture is convertible into an indeterminate
number of shares of common stock, it is assumed that the Company could never
have enough authorized and unissued shares to settle the conversion of the
warrants into common stock. Therefore, the warrants issued in connection
with this transaction are also shown as a derivative liability.
In
connection with the settlement agreement, the Company entered into a consulting
agreement with an affiliate of the debenture holders for a term commencing on
May 1, 2008 and terminating no earlier than May 1, 2010. For the duration of the
agreement, the Consultant agrees to assist the Company with implementing the
Company’s business plan, assist it in identifying, analyzing, structuring and
negotiating acquisitions and related activities. Under the terms of the
consulting agreement, the Company agreed to pay a fee of $20,000 per month and
reimburse the Consultant for reasonable expenses it incurred relating to the
Company’s business. As further consideration, the Company granted warrants to
the consultant to purchase 5,000,000 shares of the Company’s Class A common
stock at an exercise price of the lesser of (i) $0.10 per share, or (ii) 50% of
market price The warrants expire on October 16, 2013. Payment
of the warrant price may be in cash or cashless, at the option of the warrant
holder. The warrant shares are stated after giving effect to a one for
one-thousand reverse stock split completed in October 2008.
During
the six months ended June 30, 2009, the holders advanced an additional $700,000
that was added to principal and increased principal for monthly consulting fees
totaling $120,000. Also during the six months period, the Company issued
6,000,000 shares of its Class A common stock through the conversion of $600,000
of indebtedness. The Company failed to pay the required interest payments due
for the six months ended June 30, 2009.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
The
balance of the Debenture, including accrued interest, at June 30, 2009 was
$3,440,861 (net of unamortized discount of $1,110,665). Interest charged to
operation in on the face amount of the debentures for the three months ended
June 30, 2009 and 2008 was $105,645 and $106,578, respectively. Interest charged
to operation in on the face amount of the debentures for the six months ended
June 30, 2009 and 2008 was $204,909 and $226,909, respectively. Amortization
expense of the discount also charged to operations as interest expense for the
three months ended June 30, 2009 and 2008 amounted to $573,413 and $482,651,
respectively. Amortization expense of the discount also charged to operations as
interest expense for the six months ended June 30, 2009 and 2008 amounted to
$1,476,627 and $809,044, respectively.
At June
30, 2009, the fair value of the derivative liabilities relating to the above
indicated convertible debt amounted to $93,306,280.
Mitchell
On April
25, 2008, the Company borrowed $55,000 from an individual in exchange for
issuing a convertible promissory note. The note is assessed interest at an
annual rate of 4.71%. Principal and accrued interest is fully due and payable on
April 25, 2011. Until the note and accrued interest are fully paid, the lender
has the right to convert the amount due him into shares of the Company’s Class A
common stock equaling 3.5% of the shares outstanding on date of
conversion.
On April
24, 2009, the principal balance and accrued interest totaling $57,584 were fully
converted into 100,000 shares of the Company’s common stock. The Company
considered the change in the number of shares that should have been issued under
the conversion feature of the original loan agreement and the actual shares
issued to be a modification under the provisions of the EITF 86-18 “Debtor’s
Accounting for Modification of Debt Terms” and recognized a gain of $2.722,195,
the difference between the value of the 1,134,603 shares that would have been
issued under the conversion terms of the original agreement and
$57,584.
Interest
charged to operations for the three months ended June 30, 2009 and 2008 amounted
to $131 and $468, respectively. Interest charged to operations for the six
months ended June 30, 2009 and 2008 amounted to $791 and $468, respectively. The
beneficial conversion feature is treated as a discount against the face amount
of the debt and is amortized into interest expense over the term of note.
Amortization expense on the discount charged to operations for the three months
ended June 30, 2009 and 2008 amounted to $19,402 and $1,696, respectively.
Amortization expense on the discount charged to operations for the six months
ended June 30, 2009 and 2008 amounted to $21,715 and $1,696,
respectively.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
Kruetzfeld
In July
2008, the Company entered into a financing agreement to borrow a total of
$1,000,000 through the issuance of a convertible note. Interest accrues on the
outstanding loan balance at an annual rate of 10% per annum. Principal is due on
the maturity date with accrued interest due quarter; however, the
Company has the right to defer interest payments until the maturity date so long
as it does not have positive earnings before interest, taxes,
depreciation and amortization (“EBITDA”). The maturity date of the
note is December 31, 2011. The balance owed on the note, including
accrued interest, is convertible at the election of the holder into so many free
trading shares of the Company’s common stock based upon a conversion price of
the lesser of (i) 50% of the averaged ten closing prices for the Company’s
common stock for the ten (10) trading days immediately preceding the conversion
date or (ii) $0.10. The Company is required to reserve the number
of free trading shares of Common Stock required pursuant to and upon
the terms set forth in the Subscription Agreement (approximately 100,000,000
shares), to permit the conversion of this Debenture. The Company has pledged
significantly all of its assets as collateral on this loan.
As the
number of shares that could be required to be delivered upon “net-share
settlement” is essentially indeterminate, the convertible debenture must be
bifurcated from the debt and shown as a separate derivative liability. The
Company recognized a beneficial conversion feature of $715,266 and a derivative
liability of the same amount upon receipt of the loan.
The
balance of the Debenture, including accrued interest, at June 30, 2009 was
$606,697 (net of unamortized discount of $484,641). Interest charged to
operations on the debenture for the three months ended June 30, 2009 and 2008
amounted to $26,547 and $0, respectively. Interest charged to operations on the
debenture for the six months ended June 30, 2009 and 2008 amounted to $51,892
and $0, respectively. The beneficial conversion feature is treated as a discount
against the face amount of the debt and is amortized into interest expense over
the term of note. Amortization expense on the discount charged to operations for
the three months ended June 30, 2009 and 2008 amounted to $55,434 and $0,
respectively. Amortization expense on the discount charged to operations for the
six months ended June 30, 2009 and 2008 amounted to $84,050 and $0,
respectively.
The
Company incurred loan fees in connection with obtaining the loan totaling
$180,000 that is being amortized into interest expense over the term of the
note. The amount charged to interest expense during the three months ended June
30, 2009 and 2008 amounted to $13,170 and $0, respectively. The amount charged
to interest expense during the six months ended June 30, 2009 and 2008 amounted
to $102,559 and $0, respectively. The unamortized balance of deferred loan fees
is reflected on the balance sheet as an asset and its balance as of June 30,
2009 amounted to $131,710.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
At June
30, 2009, the fair value of the derivative liability was
$22,372,425.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Royalties
A summary
of royalty interests that the Company has granted and are outstanding as of June
30, 2009 follows:
|
|
Fatigue Fuse
|
|
|
EFS
|
|
University
of Pennsylvania (see Note 7)
|
|
|
|
|
|
|
Net
sales of licensed products
|
|
|
- |
|
|
|
7.00 |
% |
Net
sales of services
|
|
|
- |
|
|
|
2.50 |
% |
Shareholder
|
|
|
1.00 |
% |
|
|
0.50 |
% |
Litigation
GEM
The
Company has also been named as a defendant in a lawsuit alleging breach of
contract due to the Company’s failure to pay certain amounts due to a consultant
for services. The Company settled with the plaintiff in October 2008.
Under the terms of the settlement, the Company agreed to pay $250,000 with a
down payment of $15,000 due by November 30, 2008. The remaining balance is
payable in monthly installments of $5,000. In addition, the Company is required
to pay the Plaintiff a percentage of any net sums/dollars received by the
Company for any equity or debt instrument, including sale by Robert Bernstein of
his stock, as follows to reduce the $250,000 settlement amount:
5% up to
the first 2 million dollars
4% for
$2,000,001 to $4,000,000
3% over
$4,000,000
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
In the
event the Company is determined to be in default under the settlement agreement,
it is required to pay the plaintiff $250,000 less any amounts already paid, plus
10% interest on the remaining amount of the $250,000 settlement (commencing
October 7, 2008 to the date of default), plus $36,000 as a penalty. At September
30, 2008, the Company valued the obligation at its fair value of $222,852, based
upon the present value of the required future cash flows using an annual
interest rate of 6%. The balance of the obligation at June 30, 2009 amounted to
$185,861. Interest charged to operations during the three months ended June 30,
2009 and 2008 relating to this obligation amounted to $2,835 and $0,
respectively. Interest charged to operations during the three months ended June
30, 2009 and 2008 relating to this obligation amounted to $5,850 and $0,
respectively.
Maturities
of the obligation are as follows:
2010
|
|
$ |
55,523 |
|
2011
|
|
|
53,639 |
|
2012
|
|
|
56,947 |
|
2013
|
|
|
19,752 |
|
|
|
$ |
185,861 |
|
In the
ordinary course of business, the Company may from time to time be involved in
other 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 its financial condition and/or results
of operations. However, in the opinion of its management, matters
currently pending or threatened against the Company are not expected to have a
material adverse effect on its financial position or results of
operations.
Indemnities and
Guarantees
During
the normal course of business, the Company has made certain indemnities and
guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with
the Company’s officers under which the Company may be required to indemnify such
person for liabilities arising out of their employment relationship. They
also include indemnities made to the holders of the convertible debentures, Mr.
Beck, with regards to his settlement with the Company, and the sellers of
investments in securities. The duration of these indemnities and
guarantees varies, and in certain cases, is indefinite. The majority of
these indemnities and guarantees do not provide for any limitation of the
maximum potential future payments the Company would be obligated to make.
Historically, the Company has not been obligated to make significant payments
for these obligations and no liability has been recorded for these indemnities
and guarantees in the accompanying consolidated balance sheet.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
NOTE 11 – EMPLOYEE BENEFIT
PLAN
On
December 14, 2007, the Company adopted a 401k retirement plan for its employees.
To be eligible to participate in the plan, an employee must be at least 21 years
for age and work for the Company for six consecutive months. Company
contributions and employee match are discretionary. During the six months ended
June 31, 2009, the Company did not contribute to the plan.
NOTE 12
–
STOCKHOLDERS' EQUITY
Class A Preferred
Stock
The
holders of the Class A convertible preferred stock have a liquidation preference
of $720 per share. Such amounts shall be paid on all outstanding Class A
preferred shares before any payment shall be made or any assets distributed to
the holders of the common stock or any other stock of any other series or class
ranking junior to the shares as to dividends or assets.
These
shares are convertible to shares of the Company's common stock at a conversion
price of $0.72 (“initial conversion price”) per share of Class A preferred stock
that will be adjusted depending upon the occurrence of certain events. The
holders of these preferred shares shall have the right to vote and cast that
number of votes that the holder would have been entitled to cast had such holder
converted the shares immediately prior to the record date for such vote.
The holders of these shares shall participate in all dividends declared and paid
with respect to the common stock to the same extent had such holder converted
the shares immediately prior to the record date for such dividend.
Class B Preferred
Stock
The
Company has designated 15 shares of Class B preferred stock, of which no shares
have been issued. The holders of Class B preferred shares are entitled to
a liquidation preference of $10,000 per share. Such amounts shall be paid
on all outstanding Class B preferred shares before any payment shall be made or
any assets distributed to the holders of common stock or of any other stock of
any series or class junior to the shares as to dividends or assets, but junior
to Class A preferred shareholders. Holders of Class B preferred shares are
not entitled to any liquidation distributions in excess of $10,000 per
share.
The
shares are redeemable by the holder or the Company at $10,000 per share.
The holders of these shares shall have the right to vote at one vote per Class B
preferred share and shall participate in all common stock dividends declared and
paid according to a formula as defined in the series designation.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
Class C Preferred
Stock
Each
shareholder of Class C preferred stock is entitled to receive a cumulative
dividend of 8% per annum for a period of two years. Dividends do not
accrue or are payable except out of earnings before interest, taxes,
depreciation and amortization. At June 30, 2009, no dividends are payable
to Class C preferred shareholders. Holders of the Class C preferred stock
are junior to holders of the Company’s Class A and B preferred stock, but hold a
higher position than common shareholders in terms of liquidation rights.
Holders of Class C preferred stock have no voting rights. Holders of Class
C preferred stock have the right to convert their shares to common stock on a
300-to-1 basis.
The
Company requires an approval of at least two-thirds of the holders of Class C
preferred shareholders to alter or change their rights or privileges by way of a
reverse stock split, reclassification, merger, consolidation or otherwise, so as
to adversely affect the manner by which the shares of Class C preferred stock
are converted into common shares. As of June 30, 2009, there were 1,517 shares
of Class C Preferred Stock outstanding.
Class D Preferred
Stock
Holders
of Class D preferred stock have a $0.001 liquidation preference, no voting
rights and are junior to holders of all classes of preferred stock but senior to
common shareholders in terms of liquidation rights. Class D preferred
stockholders are entitled to dividends as declared by the Company’s Board of
Directors, which have not been declared as of June 30, 2009. Holders of
Class D preferred stock have the right to convert their shares to common stock
on a 300-to-1 basis. As of June 30, 2009, there were no Class D Preferred shares
outstanding.
Class E Convertible
Preferred Stock
On
January 26, 2007, the Company amended its certificate of incorporation by filing
a certificate of designation of rights, preferences, privilege and restrictions
of the Company’s new created Class E convertible preferred stock. The
Company has authorized 60,000 shares, each with an original issue price of
$19.50 per share. In each calendar quarter, the holders of the then
outstanding Class E Convertible Preferred Stock shall be entitled to receive
non-cumulative dividends in an amount equal to 5% of the original purchase price
per annum. All dividends may be accrued by the Corporation until converted into
common shares. After one year from the issuance date, the holders of Class E
convertible preferred stock have the right to convert the preferred shares held
into shares of the Company’s common stock at the average closing bid price of
the ten days prior to the date of conversion. Class E Preferred Shares have no
liquidation preference, and has ten votes per share.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
In
connection with the acquisition of SATI, the Company issued 50,000 shares of
Class E convertible preferred which were valued at the shares original purchase
price of $19.50 per share. The Company also issued an additional 5,000 shares to
a consultant in connection with the SATI acquisition, which were valued at
$97,500 and charged to equity as costs of the offering.
In May
2009, the Company issued 449,730 shares of its common stock in the conversion of
49,250 shares of Class E Preferred Stock.
As of
June 30, 2009, there were no shares of Class E Preferred Stock
outstanding.
Class A Common
Stock
The
holders of the Company's Class A common stock are entitled to one vote per share
of common stock held.
During
the three months ended June 30, 2009, the Company issued 1,087,230 shares of its
common stock And cancelled 75,000,000 shares that were held in
reserve.
From time
to time, the Company issues its common shares and holds the shares in escrow on
behalf of another party until consummation of certain transactions. The
following is a reconciliation of shares issued and outstanding as of June 30,
2009:
Issued
shares
|
|
|
33,503,520 |
|
Less
shares held in escrow:
|
|
|
|
|
Shares
issued to the Company and held in escrow
|
|
|
(1,569,169 |
) |
|
|
|
|
|
Outstanding
shares
|
|
|
31,934,351 |
|
Class B Common
Stock
The
holders of the Company's Class B common stock are not entitled to dividends, nor
are they entitled to participate in any proceeds in the event of a liquidation
of the Company. However, the holders are entitled to 600,000 votes for
each share of Class B common stock held. As of June 30, 2009, there were 600,000
shares of Class B Common Stock outstanding.
Common Shares Issued for Non
Cash Consideration
The value
assigned to shares issued for services were charged to operations in the period
issued.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
During
the three months ended June 30, 2009, the Company issued 1,087,230 shares of its
Class A common stock of which 449,730 shares were issued in conversion of 49,250
shares of the Company’s Class E Preferred Stock, 100,000 shares were issued in
the conversion of $57,584 of convertible debt, 537,500 shares for consulting and
other services valued at $1,238,930 of which $62,000 was considered prepaid at
June 30, 2009.
Stock
Options
During
2008, the Company granted options to two consultants to purchase 15,390,546
shares of the Company’s common stock at an exercise price of $0.025
per share. The Consultants’ option agreement allow for cashless exercises. Also
in 2008, the Company granted options to its President to purchase 30,000,000
shares at an exercise price of $.011 per share. The President’s option agreement
also allows for cashless exercises and in 2009, the President exercised 274,347
options for the purchase of 270,000 shares. The Company deemed these options to
purchase the remaining 45,116,199 shares to be derivatives based upon their
terms pursuant to EITF 00-19 “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock”. At June 30,
2009, the Company recorded a derivative liability on these options totaling
$100,306,903.
Stock
Warrants
As
discussed in Note 9. the Company issued warrants to purchase 35,000,000 shares
of its common stock to Palisades at $0.001 per share and warrants to a
consultant to purchase 5,000,000 shares a $0.10 per share. Warrant agreements on
both grants allow for cashless exercises. The Company deemed these warrants to
purchase the 40,000,000 shares to be derivatives based upon their terms pursuant
to EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock”. At June 30, 2009, the Company
recorded a derivative liability on these options totaling
$88,952,238.
The
following table summarizes the warrants and options outstanding at June 30,
2009:
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
|
|
|
|
|
Weighed
|
|
|
|
Options/
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
Balance
– December 31, 2008
|
|
|
112,640,746 |
|
|
$ |
0.05 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
(274,347 |
) |
|
$ |
(.011 |
) |
Forfeited
|
|
|
- |
|
|
|
- |
|
Balance
– June 30, 2009
|
|
|
112,366,399 |
|
|
$ |
. 0.05 |
|
NOTE 13 – RELATED PARTY
TRANSACTIONS
During
the six months ended June 30, 2009, the Company’s President advanced the Company
$50,000. The Company adjusted the President’s loan account for expenses incurred
by the Company on behalf of the President. As of June 30, 2009, the Company owed
$2,611 to its President.
As
indicated in Note 12, in January 2009, the Company issued 274,000 shares of its
common stock to its President on the cashless exercise of 274,347
options.
On
November 21, 2006, the Company entered into a stock grant and general release
agreement with the Company’s CEO, for the purpose of showing the Company’s
appreciation for the CEO’s work over the past several years. Under
the agreement, the CEO was issued 30,000,000 shares of the Company’s Class A
common stock, restricted in accordance with Rule 144, and subject to forfeiture
back to the Company in accordance with the terms of the agreement, if he is not
employed by the Company for 3 years from the date of the
agreement. Additionally under the terms of the agreement, the CEO has
released the Company from any and all claims he may have against the Company for
any monies owed to him as of the date of the agreement. The value
assigned to the shares issued to the CEO has been determined to be $180,000,000
based on the Company’s trading price of the shares on date of
issuance. The value will be recorded as additional compensation
expense over the 36 month term of the agreement. During the six
months ended June 30, 2008, the Company charged to operations $19,885,333. The
30,000,000 shares were returned to the Company for cancelation in April
2008.
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
NOTE 14 – FAIR
VALUE
The
Company adopted Statement of Financial Accounting Standard No. 157, Fair Value
Measurements (“SFAS 157”), to measure the fair value of certain of its financial
assets required to be measured on a recurring basis. The adoption of SFAS 157
did not impact the Company’s consolidated financial position or results of
operations. SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). SFAS
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants on the measurement date. A fair value measurement assumes that the
transaction to sell the asset or transfer the liability occurs in the principal
market for the asset or liability. The three levels of the fair value hierarchy
under SFAS 157 are described below:
Level
1. Valuations based on quoted prices in active markets for identical assets
or liabilities that an entity has the ability to access.
Level
2. Valuations based on quoted prices for similar assets or liabilities,
quoted prices for identical assets or liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by observable
data for substantially the full term of the assets or liabilities.
The
Company’s Level 2 assets consist of a derivative and warrant liability. The
Company determines the fair value of its Level 2 assets based upon the trading
prices of its common stock on the date of issuance and when applicable, on the
last day of the quarter. The Company uses the Black-Sholes Option Model in
valuing the fair value of level 2 assets.
Level 3.
Valuations based on inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
The table
below presents a reconciliation for all assets and liabilities measured at fair
value on a recurring basis.
|
June
30, 2009 |
|
Fair
Value Measurements* |
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Derivative
and warrant liability
|
$
-
|
$
304,973,847
|
$
- |
$
304,973,847 |
|
|
Warrant Liability
|
|
Balance
– January 1, 2009
|
|
$ |
210,497,575 |
|
Total
realized and unrealized losses
|
|
|
|
|
included
in operations
|
|
|
97,198,467 |
|
Derivative
liability adjusted in
|
|
|
|
|
connection
with conversion of
|
|
|
|
|
Mitchell debt
|
|
|
(2,722,195 |
) |
Balance
– June 30, 2009
|
|
$ |
304,973,847 |
|
MATECH
CORP
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three and six months ended June 30, 2009 and
2008
NOTE 15 – SUBSEQUENT
EVENTS
In July
2009, Mr. Robert Bernstein, the Company’s President was issued 500,000 shares of
the Company common stock through a cashless exercise of 500,750
options.
Also in
July 2009, the Company issued 39,762,119 shares of the Company common stock
through cashless exercises of 40,000,000 warrants.
In August
2009. the Company issued 200,000 shares of the Company’s common stock for past
and ongoing legal services.
Also in
August 2009, the Company entered into an agreement with the University of
Pennsylvania to defer the upcoming $25,000 payment. The deferred payment is
evidence by a promissory note bearing interest an annual rate of 18%. The
$25,000 and accrued interest are fully due on August 1, 2010.
In
addition, the Company and Kruetzfeld Ltd. (“Kruetzfeld”) agreed to extend and
modify the terms of the Secured Loan Agreement as discussed in Note 9. The
agreed upon modified terms increases the amount that Kruetzfeld will advance the
Company to a maximum of $1,000,000 under the same terms and conditions of the
existing secured debenture.
In
addition, Kreutzfeld agreed to suspend the Company’s obligation to register the
shares underlying the Secured Convertible Debenture for a period of ninety days
in consideration for the Company guaranteeing Kruetzfeld 1,700,000 shares of its
common stock if Palisades makes a valid claim for the 1,700,000 shares it issued
Kruezfeld in a separate transaction. In addition, the Company agreed to employee
Anthony Cataldo as Co-Chief Executive Officer at a monthly salary of
$18,000. Under the modified terms, all future contracts entered into
by the Company and all Company checks will require joint signatures from Messrs.
Bernstein and Cataldo.
During
the period that any portion of the Convertible Debenture is outstanding,
Kruezfeld has ant-dilution rights protection. The Company is required to file an
S-1 registering the underlying shares pertaining to the Secured Debenture.
Cataldo has the right to retained on behalf of the Company an independent
financial consultant to assist the Company in its preparation of the S-1 filing
and a review of the Company’s underlying capitalization. Kruezfeld has the right
to designate an additional member of the Company’s Board.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
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 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: (1) the Fatigue Fuse; and
(2) the Electrochemical Fatigue Sensor. We generate very little
revenue from the sale and licensing of our products, and thus we are a
development stage company.
Our
biggest challenge is funding the commercialization of our products until we can
generate sufficient revenue to support our operations. We try to keep our
overhead low and utilize outside consultants as much as possible in order to
reduce expenses, and thus far we have been successful in raising enough capital
through loans and financing to fund operations. For the foreseeable
future, we plan to continue to raise capital in this manner.
Our
condensed consolidated financial statements are prepared using the accrual
method of accounting in accordance with accounting principles generally accepted
in the United States of America and have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. We have sustained operating losses since
our inception (October 21, 1983). In addition, we have used substantial
amounts of working capital in our operations. Further, at June 30, 2009,
the deficit accumulated during the development stage amounted to approximately
$310,676,639.
In view
of these matters, realization of a major portion of the assets in the
accompanying condensed consolidated balance sheet is dependent upon our ability
to meet our financing requirements and the success of our future
operations. During 2007, we received approximately $4,000,000 in private
financing, primarily from the sale of equity and debt securities. In 2008,
we received approximately $1,055,000 in private financing, also primarily from
the sale of equity and debt securities. We plan to continue to raise
funds through the sale of our securities for the foreseeable
future. We have begun marketing our current technologies while
continuing to develop new methods and applications. We will need to raise
additional capital to finance future activities and no assurances can be made
that current or anticipated future sources of funds will enable us to finance
future operations. In light of these circumstances, substantial doubt
exists about our ability to continue as a going concern. The condensed
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or liabilities that might
be necessary should we be unable to continue as a going concern.
Results
of Operations for the Six Months Ended June 30, 2009 as Compared to the Six
Months Ended June 30, 2008
Revenues and Loss from
Operations
Our
revenue, research and development costs, general and administrative expenses,
and loss from operations for the six months ended June 30, 2009 as compared to
the six months ended June 30, 2008 are as follows:
|
|
Six
months
Ended
June
30, 2009
|
|
|
Six
months
Ended
June
30, 2008
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
205,724 |
|
|
$ |
1,090 |
|
|
|
18,773.76 |
% |
Research
and Development costs |
|
|
(211,463 |
) |
|
|
(309,840 |
) |
|
|
(31.75 |
)% |
General
and Administrative expenses |
|
|
(2,648,153 |
) |
|
|
(25,845,768 |
) |
|
|
(89.75 |
)% |
Loss
on legal settlement |
|
|
(45,223 |
) |
|
|
-- |
|
|
|
n/a |
|
Loss
from operations |
|
$ |
(2,717,921 |
) |
|
$ |
(26,154,518 |
) |
|
|
(89.61 |
%) |
Revenue
for 2009 consisted of $65,724 from bridge testing and $140,000 from services
fees earned on a contract with a related party. Revenues for 2008 was derived
exclusively from bridge testing.
Of the
$211,463 in research and development costs for the six months ended June 30,
2008, $146,745 was incurred in salaries to our in-house engineering staff which
included an officer and director, $64,718 was paid to outside consultants and
for related expense reimbursements,
Of the
$309,840 in research and development costs for the six months ended June 30,
2008, $159,355 was incurred in salaries to our in-house engineering staff which
included an officer and director, $115,985 was paid to outside consultants and
for related expense reimbursements, and we valued the issuance of 150 shares of
our common stock that were issued to one consultant at $34,500. Of the
$159,355 is R&D salaries, $4,400 was compensation expense recognized on
the
granting
of options to our staff to purchase a total of 400 shares of our common stock.
These options were cancelled in November 2008.
General
and administrative expenses were $2,648,153 and $25,845,768,
respectively, for the six months ended June 30, 2009 and 2008. The major
expenses incurred during each of the quarters were:
|
|
Six
months
Ended
June
30, 2009
|
|
|
Six
months
Ended
June
30, 2008
|
|
Consulting
services |
|
$ |
1,919,547 |
|
|
$ |
4,790,293 |
|
Officer’s
salary |
|
|
163,917 |
|
|
|
251,000 |
|
Officer’s
stock based compensation |
|
|
-- |
|
|
|
19,887,533 |
|
Secretarial
salaries |
|
|
101,083 |
|
|
|
65,497 |
|
Office
expense |
|
|
27,089 |
|
|
|
36,865 |
|
Professional
fees |
|
|
159,407 |
|
|
|
444,936 |
|
Rent |
|
|
16,902 |
|
|
|
16,197 |
|
Marketing
& Promo |
|
|
70,554 |
|
|
|
111,214 |
|
Payroll
taxes |
|
|
34,761 |
|
|
|
35,008 |
|
Travel |
|
|
16,950 |
|
|
|
67,830 |
|
Insurance |
|
|
45,461 |
|
|
|
33,777 |
|
Telephone |
|
|
10,130 |
|
|
|
10,617 |
|
Of the
$1,919,547 in consulting expense for the six months ended June 30, 2009,
$1,745,247 relates to the issuance of 658,828 shares of
common stock. In addition, we charged $120,000 in consulting fees through
an increase in convertible debt by the same amount.
Of the
$4,790,293 in consulting expense for the six months ended June 30, 2008,
$3,581,900 relates to the issuance of 11,057 shares of common
stock. In addition, we charged $1,100,000 in consulting fees through an
increase in convertible debt by the same amount.
Other Income and Expenses
and Net Loss
Our gain
on modification of convertible debt, modification of research and development
sponsorship agreement, loss on subscription receivables, interest expense,
other-than-temporary impairment of marketable securities, change in fair value
of derivative and warrant liabilities, loss on settlement of lawsuits, and net
loss for the six months ended June 30, 2009 as compared to the six months ended
June 30, 2008 are as follows:
|
|
Six
months Ended
June
30, 2009
|
|
|
Six
months Ended
June
30, 2008
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense |
|
$ |
(1,977,779 |
) |
|
$ |
(977,019 |
) |
|
|
(102.43 |
% |
Gain
(loss) on modification of
convertible debt |
|
|
2,722,195 |
|
|
|
(964,730 |
) |
|
|
(382.17 |
)% |
Net
unrealized and realized loss
of marketable securities |
|
|
(1,825 |
) |
|
|
(8 |
) |
|
|
(22,712.50 |
)% |
Change
in fair value of derivative
and warrant liabilities |
|
|
(97,198,467 |
) |
|
|
(62,544,101 |
) |
|
|
55.41 |
% |
Interest
income |
|
|
32 |
|
|
|
15,523 |
|
|
|
(99.79 |
)% |
Provision
for income taxes |
|
|
(800 |
) |
|
|
(800 |
) |
|
|
0 |
% |
Net
loss |
|
$ |
(96,455,844 |
) |
|
$ |
(90,625,653 |
) |
|
|
6.43 |
% |
Our
interest expense includes amortization of debt discounts totaling $1,582,392
during the six months ended June 30, 2009 and $824,073 during the six months
ended June 30, 2008. The change in fair value of derivative and warrant
liabilities represents the change in derivative values related to warrants and
convertible debt with Palisades Capital, LLC and Kreutzfeld and Mitchell (See
Note 8 to the financial statements).
Liquidity
and Capital Resources
Introduction
During
the six months ended June 30, 2009, as with the six months ended June 30, 2008,
we did not generate positive cash flow. As a result, we funded our
operations through the private sale of equity and debt securities, the issuance
of our securities in exchange for services, and loans.
Our cash,
investments in marketable securities held for trading, investments in marketable
securities available for sale, accounts receivable, prepaid services, prepaid
expenses and other current assets, total current assets, total assets, total
current liabilities, and total liabilities as of June 30, 2009, as compared to
June 30, 2008, were as follows:
|
|
June
30, 2009
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
114,474 |
|
|
$ |
530,045 |
|
Accounts
receivable
|
|
$ |
40,434 |
|
|
$ |
-- |
|
Inventories
|
|
$ |
74,319 |
|
|
$ |
148,964 |
|
Prepaid
expenses and other
|
|
$ |
62,000 |
|
|
$ |
62,941 |
|
Total
current assets
|
|
$ |
291,227 |
|
|
$ |
741,950 |
|
Total
assets
|
|
$ |
532,081 |
|
|
$ |
836,232 |
|
Total
current liabilities
|
|
$ |
4,699,545 |
|
|
$ |
3,886,056 |
|
Total
liabilities
|
|
$ |
311,207,595 |
|
|
$ |
11,610,448 |
|
Cash
Requirements
For the
six months ended June 30, 2009, our net cash used in operations was $564,784
compared to $1,636,659 for the six months ended June 30,
2008.
Negative
operating cash flows during the six months ended June 30, 2009 were primarily
created by a net loss from operations of $99,174,565, offset by the issuance of
stock for services of $1,745,247, increase in debt for services of $120,000,
realized loss on sale of the Company’s common stock held in treasury of $1,825,
amortization of discount on convertible debentures of $1,582,392,
increase
in accrued interest on debt of $286,978, an increase in our
derivative liability of $97,198,467 and a decrease on the gain from the
modification of the Mitchell convertible debt of $2,722,195. There was
also a net increase in assets of $246,115 and net increase in liabilities of
$150,952.
Negative
operating cash flows during the six months ended June 30, 2008 were primarily
created by a net loss from operations of $90,625,653, offset by the loss on the
modification of the Palisades convertible debt of $964,730, issuance of stock
for services of $3,625,200, amortization of discount on convertible debentures
of $824,073 increase in officer stock based compensation of $19,885,333 and
increase in derivative liabilities of $62,544,100. There was also a
decrease in accrued interest on debt of $135,816, net decrease in assets of
$104,005 and net decrease in liabilities of $130,968.
Sources and Uses of
Cash
Net cash
provided by (used in) investing activities for the six months ended June 30,
2009 and 2008 were $(50,812) and $1,286,636, respectively. For the six
months ended June 30, 2009, net cash came from the proceeds on the sale of 587
shares of the Company’s common stock that was held in treasury totaling $848
offset by the purchase of equipment totaling $51,660. For the six months ended
June 30, 2008 and, the net cash came primarily from the sale of securities and
maturities of other investments in the amount of $1,865,000, offset by the
amount for purchase of securities of $(565,000). Net cash from investment
activities during the quarter ended June 30, 2008 was further decreased by the
$17,167 on the purchase of property and equipment and increased by an officer
loan repayment of $3,803.
Net cash
provided by financing activities for the six months ended June 30, 2009 and
2008, was $553,725 and 70,358, respectively. For the six months ended June
30, 2009, the net cash provided was from advances on our convertible debt
totaling $600,000 of which $4,298 was used to purchase 1,400 shares of our
common stock held in treasury and debt payments totaling $41,977. For the six
months ended June 30, 2008, the net cash used pertained to the purchase of
200,000 shares of our common stock still held in treasury totaling $3,266 and an
increase in the amount of indebtedness of $55,000. In addition, during the six
month ended June 30, 2008, the Company received $18,624 through the issuance of
77,600 of its common stock.
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 securities. If we are unsuccessful in raising the required
capital, we may have to curtail operations.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. In consultation with our Board of Directors, we
have identified the following accounting policies that we believe are key to an
understanding of our 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 our
research is recognized at the time services are rendered and
billed.
The
second critical accounting policy relates to research and development
expense. Costs incurred in the development of our products are expensed as
incurred.
The third
critical accounting policy relates to the valuation of non-monetary
consideration issued for services rendered. We value all services rendered in
exchange for our 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.
Our
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 an offset to equity on the grantor’s balance sheet
once the equity instrument is granted for accounting
purposes. Accordingly, we record the fair value of nonforfeitable
common stock issued for future consulting services as prepaid services in our
consolidated balance sheet.
The
fourth critical accounting policy is our 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”). We record a BCF
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 Instrument(s).” In those
circumstances, the convertible debt will be recorded net of the discount related
to the BCF. We amortize 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, we bifurcate our embedded derivative
instruments and record 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 we 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, we are 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, we
will record a non-operating, non-cash charge. If the fair value of the
derivatives is lower at the subsequent balance sheet date, we will record
non-operating, non-cash income. We value our 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).
The
seventh critical accounting policy is our accounting for the fair market value
of non-marketable securities we have acquired. Non-marketable securities
are originally recorded at cost. In the case of non-marketable
securities we acquired with our common stock, we value the securities at a
significant discount to the stated per share cost based upon our historical
experience with similar transactions as to the amount ultimately realized from
the sale of the shares. Such investments are reduced when we have
indications that a permanent decline in value has occurred. At such time
as quoted market prices become available, the net cost basis of these securities
will be reclassified to the appropriate category of marketable securities.
Until that time, the securities will be recorded at their net cost basis,
subject to an impairment analysis (see below).
In
accordance with the guidance of EITF 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, we assess any
decline in value of available-for-sale securities and non-marketable securities
below cost as to whether such decline is other than temporary. If a
decline is determined to be other than temporary, the decline is recorded as a
reduction of the cost basis of the security and is included in the statement of
operations as an impairment write down of the investment.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
Stephen
Beck
On
February 3, 2009, Match Corp (“the Company”) entered into a settlement agreement
with Stephen Forrest Beck (“Beck”). Under the terms of the settlement, Beck
shall receive no less than $1,750,000 through 1) the sale of Company shares
issued to him, 2) $100,000 due him on the execution of the agreement and 3) 7.5%
of the net proceeds received by the Company on sale of its equity
Upon the
execution of the agreement, the Company agrees to pay Beck $100.000, which is
due on or before August 1, 2009 or when the Company has at least $750,000 in
cash, whichever is later. Also upon execution of the agreement, Beck will
receive Company free-trading common shares equaling 2.67% of the Company’s total
common shares outstanding as of the date of the agreement (“the 2.67% shares”).
The proceeds from the sale of these shares will be attributable to the $1.75M.
Of the shares issued, Beck is entitled to receive all proceeds received from the
sale of 66.66% of the shares originally received. The agreement
contains anti-dilution provisions. If Beck receives $1.75M prior to selling all
of the 2.67% shares originally received, he must return to the Company all
original shares remaining in excess of 66.66%.. He is also entitled to keep all
shares issued pursuant to the anti-dilution provisions of the
agreement.
The
Company further agrees to pay Beck 7.5% of all net proceeds received from the
sale of the Company’s equity, including net cash received from the exercise of
warrants and options. The cash proceeds of which will also be attributable to
the $1.75M.
The
Company agrees to place 5 million shares of its common stock into escrow. If
Beck does not receive a total of $1.75M through the sale of the original 2.67%
shares issued to him and from the other indicated consideration, additional
shares will be issued to him from escrow. These issued escrow shares will be
freed trading and available for sale. The Company is obligated to
place back into escrow shares of its common stock so that the total shares held
in escrow will be 5 million, until such time as the Beck receives the
$1.75M.
No shares
issued to Beck can be sold until four months after the execution of the
agreement or until the Company has raised $7.5 million, whichever is
earlier.
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
Item
2.
Unregistered Sales of Equity Securities and Use of Proceeds
On April
1, 2009, the Company issued 48,500 shares of restricted common stock to Dian
Griesel for consulting services in reliance upon Section 4(2) under the
Securities Act of 1933.
On April
9, 2009, the Company issued 75,000 shares of restricted common stock to Horst
Danning for consulting services in reliance upon Section 4(2) under the
Securities Act of 1933.
On April
21, 2009, the Company issued 80,000 shares of restricted common stock to Barry
E. Mitchell for consulting services in reliance upon Section 4(2) under the
Securities Act of 1933.
On April
23, 2009, the Company issued 62,000 shares of restricted common stock to The
Investor Relations Group for consulting services in reliance upon Section 4(2)
under the Securities Act of 1933.
On April
23, 2009, the Company issued 250,000 shares of restricted common stock to David
Bernard for consulting services in reliance upon Section 4(2) under the
Securities Act of 1933.
On May 1,
2009, the Company issued 10,000 shares of restricted common stock to Barry E.
Mitchell for consulting services in reliance upon Section 4(2) under the
Securities Act of 1933.
On May 1,
2009, the Company issued 100,000 shares of restricted common stock to John Moran
for consulting services in reliance upon Section 4(2) under the Securities Act
of 1933.
On May
21, 2009, the Company issued 13,500 shares of restricted common stock to The
Investor Relations Group for consulting services in reliance upon Section 4(2)
under the Securities Act of 1933.
On May
27, 2009, the Company issued 5,000,000 shares of restricted common stock to AJR
Leonard Consulting Inc. for consulting services in reliance upon Section 4(2)
under the Securities Act of 1933.
On May
28, 2009, the Company issued 40,000 shares of restricted common stock to Mesut
Pervizpour for consulting services in reliance upon Section 4(2) under the
Securities Act of 1933.
On May
28, 2009, the Company issued 449,730 shares of restricted common stock to UTEK
Corporation for the acquisition of technology in reliance upon Section 4(2)
under the Securities Act of 1933.
On June
17, 2009, the Company issued 13,500 shares of restricted common stock to The
Investor Relations Group for consulting services in reliance upon Section 4(2)
under the Securities Act of 1933.
On June
19, 2009, the Company issued 5,000,000 shares of restricted common stock to
MATECH Corp. Treasury Stock reserved for the payment of consulting services to
Stephen F. Beck in reliance upon Section 4(2) under the Securities Act of
1933.
On July
10, 2009, sixteen holders of warrants to purchase 39,762,219 shares of common
stock of the Company exercised their warrants and were issued 39,762,119 shares
of the common stock of the Company in reliance upon Rule 144 under the
Securities Act of 1933.
Item
3. Defaults Upon Senior
Securities.
There
have been no events which are required to be reported under this
item.
Item 4. Submission of Matters to a Vote of
Security Holders.
None.
None.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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/s/
Robert M. Bernstein
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Dated:
August 18, 2009
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By:
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Robert
M. Bernstein
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Its:
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President,
Chief Executive Officer, and Chief Financial
Officer
(Principal Executive Officer, Principal Financial
Officer
and Principal Accounting Officer)
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