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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-KSB
____________________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 000-29204
GLOBAL MATRECHS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 58-2153309
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
90 Grove Street, Suite 201, Ridgefield, Connecticut 06877
(Address of principal executive offices)
Issuer's telephone number: (203) 431-6665
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange
Title of Each Class on which registered
Common Stock, par value OTC Bulletin Board
$0.0001 per share
Securities Registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. [ ] Yes [X] No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $620
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the issuer, based upon the average of the closing
price for the Common Stock on May 6, 2005 as reported on the OTC Bulletin Board,
was approximately $3,917,831. Determining whether or not any of our stockholders
(other than directors and officers of the Company) are affiliates would require
unreasonable effort and expense. We have therefore assumed that other than
directors and officers of the Company, none of our stockholders is an affiliate.
As of May 6, 2005, the issuer had outstanding 75,297,187 shares of
common stock.
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TABLE OF CONTENTS
PART I...................................................................... 3
Item 1. BUSINESS........................................................ 3
Item 2. PROPERTIES...................................................... 14
Item 3. LEGAL PROCEEDINGS............................................... 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 14
PART II..................................................................... 15
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCK MATTERS........................................... 15
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
RESULTS OF CONDITION AND OPERATIONS............................. 15
Item 7. FINANCIAL STATEMENTS............................................ 31
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................. 56
Item 8A. CONTROLS AND PROCEDURES......................................... 56
PART III.................................................................... 57
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 57
Item 10. EXECUTIVE COMPENSATION.......................................... 58
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................. 59
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 61
Item 13. EXHIBITS........................................................ 62
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.......................... 72
SIGNATURES.................................................................. 74
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains certain statements, such as statements
regarding Global Matrechs' future plans, that constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
including certain statements contained under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" concerning our
expectations, beliefs, and/or strategies regarding increased future revenues and
operations, and certain statements contained under "Business" concerning our
future business plans. When used in this Form 10-KSB, the words "expects",
"believes," "intends," "anticipates" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected or implied by such forward-looking statements. Such risks
and uncertainties include those risks identified under the heading entitled
"--Factors Affecting Future Performance" contained in "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations," such
as our ability to obtain additional financing, the commercial viability of the
technologies that we license from Eurotech, our ability to market the
technologies that we license from Eurotech, changes in the value and condition
of our assets, the loss of key personnel, whether we are able to complete the
proposed transactions described in this Form 10-KSB, a change in control of the
Company or changes in financial markets and general economic conditions.
HISTORY AND RECENT DEVELOPMENTS
RECENT DEVELOPMENTS
NON-RELIANCE ON HISTORICAL FINANCIAL STATEMENTS
On April 15, 2005, the Company's management, in consultation with the
Company's independent registered public accounting firm, concluded that the
Company's historical financial information related to fiscal 2001 through fiscal
2003 and for the first three fiscal quarters of 2004 accounted incorrectly for
certain convertible preferred stock instruments. As such, the management has
concluded that the Company's historical financial statements should no longer be
relied upon. While the Company does not intend to amend its previously filed
annual and quarterly reports covering the periods noted above, the Company has
restated historical financial information for the periods required to be
presented in this annual report on Form 10-KSB to reflect the correct accounting
treatment. The Company has also included in this annual report on Form 10-KSB
five years of restated financial information highlighting the differences
resulting from the application of the change in accounting treatment to its
historical financial statements and restated selected quarterly information for
2003 and 2004.
SECOND PURCHASE AGREEMENT WITH SOUTHRIDGE PARTNERS
On January 31, 2005, we entered into a Second Securities Purchase
Agreement with Southridge Partners LP, one of our existing investors, whereby we
agreed to sell a convertible promissory note in the principal amount of $250,000
and warrant to purchase up to 10,000,000 shares of our common stock to
Southridge in exchange for its $250,000 investment. Under the terms of this
purchase agreement, Southridge may, at its option, and at any time prior to July
1, 2005, purchase an additional note in the principal amount of up to
$1,500,000, and otherwise on substantially the same terms as the note issued on
January 31, 2005.
The note is convertible, at the option of the holder, into shares of
our common stock at a conversion price of $0.02 per share. Southridge may
require us to repurchase some or all of its note if the market price of our
common stock falls below $0.03 per share for ten (10) consecutive trading days,
at a repurchase price equal to 140%
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of the principal amount of the note. In the event we default under the terms of
the note, the entire outstanding principal (and any outstanding interest accrued
thereon) shall become immediately due and payable, and the interest rate will
rise to 18% per annum.
We have secured the payment of the notes with a subordinated security
interest in our accounts, general intangibles, inventories, and other
collateral. In addition, in the event we propose to register securities under
the Securities Act of 1933, as amended, we are required to notify Southridge in
advance of such registration and, at its request (subject to limited
exceptions), include the shares of our common stock underlying the note and
warrant on the registration statement filed in connection with such registration
(and assume any expenses associated therewith).
The warrant has an expiration date of January 31, 2010. It contains a
cashless exercise provision whereby the holder may pay the exercise price
associated with any exercise by having us withhold a number of shares otherwise
issuable upon such exercise having a fair market value equal to the applicable
aggregate exercise price. In the event such provision is used with respect to an
exercise, we would receive no proceeds upon such exercise.
ENTRANCE INTO EXCHANGE AGREEMENT WITH WOODWARD LLC
On January 31, 2005, we entered into an Exchange Agreement with
Woodward LLC pursuant to which we acquired promissory notes, and have
accordingly assumed all rights pertaining thereto, issued by Eurotech Ltd. The
notes are currently in default and have an aggregate outstanding principal
amount of $290,000. The notes carry a default annual interest rate of 18% and
are past due in their entirety. In exchange for these notes, we issued to
Woodward a promissory note in the principal amount of $250,000.
Under the terms of the Exchange Agreement, in the event we propose to
register securities under the Securities Act of 1933, as amended, we are
required to notify Woodward in advance of such registration and, at its request
(subject to limited exceptions), include the shares of our common stock
underlying the note on the registration statement filed in connection with such
registration, and assume any expenses associated therewith.
SOUTHRIDGE EXERCISES OPTION TO PURCHASE ADDITIONAL NOTES AND WARRANTS
On March 2, 2005, Southridge Partners LP exercised its option to
purchase an additional note and warrant under its Second Securities Purchase
Agreement. In connection with such exercise, we issued to Southridge a
convertible promissory note in the principal amount of $175,000 and a warrant to
purchase up to 7,000,000 shares of our common stock in exchange for its $175,000
investment. The note is convertible, at the option of the holder, into shares of
our common stock at a conversion price of $0.02 per share. Southridge may
require us to repurchase some or all of its note if the market price of our
common stock falls below $0.03 per share for ten (10) consecutive trading days,
at a repurchase price equal to 140% of the principal amount of the note. In the
event we default under the terms of the note, the entire outstanding principal
(and any outstanding interest accrued thereon) shall become immediately due and
payable, and the interest rate will rise to 18% per annum. The note matures on
March 2, 2007.
SOUTHRIDGE EXERCISES OPTION TO PURCHASE ADDITIONAL NOTES AND WARRANTS
On April 11, 2005, Southridge Partners LP exercised its option to
purchase an additional note and warrant pursuant to the Second Securities
Purchase Agreement. In connection with such exercise, we issued to Southridge a
convertible promissory note in the principal amount of $125,000 and a warrant to
purchase up to 5,000,000 shares of our common stock to Southridge in exchange
for its $125,000 investment. The note is convertible, at the option of the
holder, into shares of our common stock at a conversion price of $0.02 per
share. Southridge may require us to repurchase some, or all, of its note if the
market price of our common stock falls below $0.03 per share for ten (10)
consecutive trading days, at a repurchase price equal to 140% of the principal
amount of the note. In the event we default under the terms of the note, the
entire outstanding principal (and any outstanding interest accrued thereon)
shall become immediately due and payable, and the interest rate will rise to 18%
per annum. The note matures on April 11, 2007.
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DESCRIPTION OF BUSINESS
The Company is currently operating in two major segments. These
segments are defined as the Licensed Technologies Sector which consists of the
marketing and sales of the technologies licensed from Eurotech and the Specialty
Lighting subsidiary which consists of the design, development, manufacture and
sales of specialty lighting and architectural products acquired in the merger
with True To Form Ltd, Inc, acquired December 31, 2004. The Company is targeting
the pursuit of the Homeland Securities market with both segments.
On May 22, 2003, we completed a transaction with Eurotech pursuant to
which we now license EKOR, now called NuCap(TM), HNIPU, EMR/AC, Rad-X, Firesil,
LEM and RBHM technologies from Eurotech. Currently, we are licensing the
EKOR(TM), HNIPU, EMR/AC, Rad-X, Firesil, LEM and RBHM technologies from
Eurotech, Ltd. We intend to use these licenses to derive revenue by partnering
with other technology firms to sell raw materials to producers or to sublicense
the technologies and collect royalties and/or licensing fees.
On December 31, 2004 we acquired True To Form Ltd, Inc.. As a result of
the merger, True To Form is now our wholly owned subsidiary. True To Form
designs, develops, manufactures and sells specialty lighting products to
targeted segments of the traditional lighting industry and has recently
established a division that will focus on the homeland security market. True To
Form markets high-end lighting and architectural products for both commercial
and residential applications, including pendants, surface and ceiling
luminaries, table and floor lamps, commercial down-lights, bath fixtures, and
custom fixtures.
The Company's Internet related business was sold on May 31, 2004 to
Tulix Systems, Inc. As a part of the sales agreement the Company acquired 15%
equity ownership of Tulix. The Company is a minority stock holder in Tulix and
exercises no management input or control of its operations.
HISTORY
HomeCom Communications, Inc. ("HomeCom"), now Global Matrechs, Inc.
("Global Matrechs"), was organized in 1994 to provide complex web-based software
applications and integration services to businesses seeking to take advantage of
the Internet. Over time, the Company evolved into a Web design, financial
applications and solutions provider to the financial services market, including
banking, insurance, securities brokerage firms and other financially oriented
web portals.
On May 31, 2004, the Company completed the sale of its remaining
Internet business to Tulix Systems, Inc. ("Tulix"), a company in which Gia
Bokuchava, Nino Doijashvili and Timothy R. Robinson, who were officers and
directors of the Company, are officers, directors and founding shareholders. The
Company recorded a loss on the sale of this business of $125,030 in the fourth
quarter of 2003 and recorded an additional loss of $124,385 in the second
quarter of 2004 for adjustments to the closing as provided for in the closing
documents. With the consummation of this Purchase Agreement, Global Matrechs has
completely exited from all Internet-related enterprises.
The Company currently operates in two distinct segments. The first
segment consists of licenses, products, and services which find their origin in
the technologies licensed from Eurotech. The second consists of the design,
manufacture, and sales of specialty lighting and architectural fixtures acquired
through the purchase of True To Form Ltd., Inc.
The Company's licensed technologies business commenced on May 22, 2003
upon the completion of its transaction with Eurotech, Ltd. ("Eurotech"). The
Company had entered into a License and Exchange Agreement with Eurotech and,
with respect to Articles V and VI thereof, Polymate, Ltd. and Greenfield Capital
Partners LLC, on March 27, 2003 (as amended, the "Exchange Agreement"). In
connection with the completion of the transaction, the Company entered into a
License Agreement, dated May 22, 2003 with Eurotech (as amended, the "License
Agreement"). Pursuant to the Exchange Agreement and the License Agreement,
Eurotech has licensed to the Company its rights to EKOR(TM) (now called
NuCap(TM)), HNIPU, Electro Magnetic Radiography/Acoustic Core (EMR/AC), Rad-X,
Firesil, LEM and Rapidly Biodegradable Hydrophobic Material (RBHM) technologies,
which are more fully described herein. In exchange for the licenses of these
technologies, the Company (i) issued to Eurotech 11,250 shares of Series F
Convertible Preferred Stock and 1,069 shares of Series G Convertible Preferred
Stock, and (ii) agreed to pay Eurotech a royalty of seven percent (7%) on net
sales generated by the licensed
5
technologies and a royalty of four percent (4%) on net sales generated by
products and services that are improvements on the licensed technologies.
The License Agreement provides that the licenses granted to the Company
thereunder will become terminable at the option of Eurotech (i) if the Company
has not affected a commercial sale of any licensed technology or improved
licensed technology by April 1, 2006, and (ii) in certain other circumstances.
In connection with this transaction, we issued 1,500 shares of Series F
Convertible Preferred Stock to Polymate and 750 shares of Series F Convertible
Preferred Stock to Greenfield (Polymate was issued shares as partial
consideration for Polymate's agreement to modify its rights to receive royalties
from Eurotech; Greenfield was issued shares as consideration for its acting as
an advisor to the Company and participating in the negotiation of the
transaction with Eurotech on behalf of the Company). The holders of the
outstanding shares of Series F Preferred Stock cancelled their outstanding
shares of Series F Preferred Stock in exchange for the right to receive shares
of Series H Convertible Preferred Stock, which were issued to them on September
30, 2003.
We expanded our offerings when, on December 31, 2004, we acquired our
subsidiary, True To Form Ltd. ("True To Form"), a company in the business of
designing, developing, and manufacturing specialty lighting products. We
acquired True To Form from its sole shareholder, Mark J. Allen, who is also a
member of our board of directors. Mr. Allen will continue as the President of
True To Form and was appointed Executive Vice President of the Company. The
transaction was the result of arm's length negotiations and was unanimously
approved by the disinterested directors of the Company. The consideration was
determined on the basis of these negotiations and the advice of our financial
advisor, who is not affiliated with us or Mr. Allen.
The consideration paid to Mr. Allen in the transaction consisted of:
o the issuance by True To Form of a secured note in the initial
principal amount of $500,000; and
o the issuance to Mr. Allen by Global Matrechs of 10,000,000 shares
of our common stock.
The number of shares of common stock issued in the transaction is
subject to adjustment based on the price of our common stock and the revenues of
the acquired business on December 31, 2006. In general, assuming that True To
Form generates gross revenues of at least $3,000,000 for the twelve months ended
December 31, 2006, the value of the shares issued in the transaction (based on
the average closing price of the shares for the five trading days ended on or
prior to December 31, 2006) will be at least $2.5 million but no more than $3.5
million. If the value is less than $2.5 million, we are obligated to issue
additional shares or, at our option, make cash payments to make up the
difference. If the value of the shares is greater than $3.5 million, any excess
shares will be returned to us and retired or held as treasury stock. If True To
Form does not meet the revenue target, the share consideration will be a minimum
of $2.0 million and a maximum of $3.0 million.
Global Matrechs has provided True To Form with an initial working
capital loan of approximately $200,000 and will enter into an employment
agreement with Mr. Allen. In connection with the transaction, we have also
issued a warrant to our financial advisor in the amount of 2,000,000 shares of
common stock at an exercise price of $0.03 per share. The merger agreement
provides that until the secured note is paid in full, Mr. Allen has the right to
designate a majority of the directors of True To Form. The merger agreement also
provides Mr. Allen with limited registration rights related to the share
consideration.
PRODUCTS AND SERVICES
Licensed Technologies
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NUCAP(TM)
NuCap(TM), formerly called EKOR(TM), was developed jointly by
scientists at the I.V. Kurchatov Institute, or Kurchatov, and members of the
Euro-Asian Physical Society, or EAPS, both based in Moscow, Russia. EKOR(TM) was
the brand name for a family of materials designed for long-term isolation of
hazardous and radioactive materials. As a silicon-based elastomer, NuCap(TM)'s
adhesive properties allow it to stick to a wide variety of wet or dry surfaces
and materials. When applied, NuCap(TM) materials surround and immobilize
radioactive or hazardous debris ranging from fine dust to large pieces of
equipment and, in combination with their fire-resistant and water-
6
proof properties, prevent such debris from migrating by water or as air-borne
particles. NuCap(TM) materials also possess other highly desirable performance
characteristics such as chemical resistance, fire resistance, heat resistance,
and resistance to environmental aging and degradation from radiation. In
addition to its unique combination of performance characteristics, NuCap(TM)
comes in multiple product forms and can be applied using specified methods for
waste-coating and encapsulation. We believe that this allows NuCap(TM) to be
used as a solution for a broad spectrum of nuclear and hazardous waste
management problems.
The NuCap(TM) product family's performance characteristics and
flexibility of form make it a tool for a broad spectrum of applications. There
are currently five basic forms of NuCap(TM)
1. Sealer Plus, which can be sprayed to coat containers or cover
contaminated surfaces;
2. Foam, which is pumped in a range of densities to fill crevices,
ducts or pipes;
3. Grout, applied in a pour and mix method, which can be used to
make shapes for shielding or to macroencapsulate items to form an
unleachable monolith for transportation or disposal;
4. Matrix, applied in a pour and mix method, which can be used to
microencapsulate radioactive or hazardous wastes to form an
elastomeric monolith for transportation or disposal; and
5. StoneStore, applied in a pour and mix method, which can be used
to microencapsulate highly radioactive waste and will form a
ceramic monolith for permanent disposal. StoneStore is still in
the research and development stage.
In tests conducted at Kurchatov, NuCap(TM) has been shown to be highly
resistant to radiation and structural degradation from exposure to radiation. It
has also proven to be fire resistant, waterproof, and capable of being
formulated in densities that display considerable structural strength and
weight-bearing properties of 100 pounds per square inch.
MARKETING OF NUCAP(TM)
Eurotech described its efforts to market EKOR(TM) as it was called
prior to our changing the name as well as the other technologies in its public
filings. These descriptions are summarized in this report. NuCap(TM)'s
acceptance into nuclear waste management has been slower than Eurotech
anticipated. Eurotech has stated that it believes that significant technical
issues remain, including those dealing with the residue from production of
nuclear weapons and the disposal of nuclear fuel being discharged from nuclear
power plants. With respect to residue from the production of nuclear weapons,
the technical issues relate to the fact that the residue could take a number of
forms (liquid, wet slurry, partially dried sludge, calcined salts, etc.) and
have a variety of ph factors. The amount of waste that NuCap(TM) can effectively
encapsulate differs depending on the form and ph factor of the waste. Thus, each
project must be addressed separately, and sometimes we will need to develop the
appropriate form of NuCap(TM) on a project-by-project basis. We do not believe,
that this issue will be a significant obstacle for us, as we believe that the
modification of NuCap(TM) is no longer as resource-intensive as previously
expected and can be accomplished relatively efficiently, especially with our new
manufacturing partners. For example, a sheet form of NuCap(TM) was recently
developed by Global Matrechs for use in a project with INEEL. With respect to
the technical issues that Eurotech had perceived with respect to the disposal of
nuclear fuel being discharged from nuclear power plants, we do not intend to
market NuCap(TM) for this purpose. We believe that NuCap(TM) is a
technologically advanced material that has properties that make it a superior
cost effective and safer isolation technology even for some non-radioactive
hazardous materials and a unique sealant for potential applications in the
construction industry.
In 2001, Eurotech successfully replicated the formula for EKOR(TM) to
make EKOR(TM) products in the United States. In March 2001, the EKOR(TM) family
of products was presented to waste management professionals at the annual Waste
Management Symposium in Tucson, Arizona. As a result of the interest generated
at the symposium, Eurotech presented EKOR(TM) for use in a variety of
applications at Department of Energy ("DOE") sites to various waste management
professionals. Specifically, Eurotech had discussions with the Savannah River
Site (or SRS, near Aiken, South Carolina), Oak Ridge National Laboratory (or
ORNL, in Oak Ridge, Tennessee), Fernald Closure Site (in Fernald, Ohio),
Battelle Memorial Institute (or BMI, in Columbus, Ohio), Rocky Flats
7
Environmental Testing Site (or RFETS, near Denver, Colorado), Los Alamos
National Laboratory (or LANL, Los Alamos, New Mexico), Lawrence Livermore
National Laboratory (or LLNL, Livermore, California), Hanford Reservation
(Richland, Washington) and Idaho National Engineering & Environmental Laboratory
(or INEEL, Idaho Falls, Idaho). Eurotech also had a number of meetings with DOE
staff at their headquarters in Washington, D.C. and Germantown, Maryland. This
included the introduction to companies doing project and management work at DOE
and commercial sites, and had arranged demonstrations at the above mentioned
facilities and at its production facility in California for staff from RFETS and
ORNL. Early demonstrations of the Sealer product, as a solution that required
mixing of a paste and catalyst and significant monitoring of specialized
application equipment, revealed that the Sealer product needed further
development to be more user-friendly. The Sealer product is a paste, with the
consistency of thick brick mortar. While this thickness enables Sealer to be
applied to vertical walls, tanks, drums, and ceilings, a sprayable version of
Sealer, or even a thinner paste version that could be more easily applied, would
be more user-friendly. To address this issue, Sealer Plus was developed, which
Eurotech introduced in November 2001 and initially demonstrated at BMI in
January 2002. Sealer Plus is a low viscosity version of EKOR(TM). Sealer that
can be sprayed with high-pressure paint spray equipment. We seek to further
develop Sealer to make the Sealer more easily applied in a foam consistency,
which we believe will make Sealer more user-friendly. The demonstration of
EKOR(TM) Grout at INEEL enabled Eurotech to demonstrate its ability to operate
in an underwater environment. INEEL has certain components that are being stored
underwater because of their behavior when exposed to air. Global Matrechs has
prepared specially-requested samples for further testing at INEEL and Hanford
Where Global Matrechs had a successful demonstration in April of this year.
During 2002, NuCap(TM) was selected as an approved waste stabilization
material at multiple DOE sites. This selection meant that NuCap(TM) had passed
the applications testing necessary to be judged usable on specific forms of
waste at specific sites. For example, Battelle Memorial Institute, Columbus,
Ohio, under a site decommissioning contract from the DOE, applied NuCap(TM)
within a series of reactor drain pipes to immobilize residual radioactive
contamination, to protect workers, the public and the environment during
facility sectioning and disposal. NuCap(TM) is being considered by the Pacific
Northwest National Laboratory, a DOE national laboratory, to stabilize Alpha
Dust in the H-Basin Fuel Pool, which could provide protection to workers during
facility decommissioning. NuCap(TM) has been tested at the DOE Argonne National
Laboratory to immobilize surrogate radioactive calcined waste and salts. Initial
evaluations of NuCap(TM) is promising for applications in the area of High Level
Waste Immobilization.
During 2003 and 2004, the Company manufactured a number of samples for
potential customers in the European community. The Company is in the process of
completing agreements with a commercial partner to manufacture, market and
deliver NuCap(TM) to these potential customers.
We intend to market NuCap(TM) for use in nuclear waste encapsulation
and nuclear debris fixation for nuclear cleanup projects, nuclear facility
decontamination and decommissionings, and nuclear waste transportation and
disposal. As part of this strategy, we intend to seek affiliations and joint
ventures with large prime contractors in the nuclear industry on a project by
project basis. While we see opportunities for NuCap(TM) and our other
technologies, however, we can offer no assurance that our efforts will be more
successful, or as successful as Eurotech's efforts.
HNIPU
HNIPU is a hybrid polyurethane that does not involve the toxic
isocyanates utilized in the production of conventional polyurethane and that has
lower permeability and greater chemical resistance qualities as compared to
conventional polyurethane. We believe that these advanced characteristics, in
addition to the potential reduced risk from the elimination of isocyanates in
its production, make HNIPU superior to conventional polyurethanes in connection
with their use in a number of industrial application contexts such as
manufacturing automotive components, paints, foams, plastics and truck bed
liners; aerospace sealants, industrial adhesives, coatings, flooring, glues;
industrial equipment and machinery; and consumer goods such as appliances,
footwear, furniture and plastic products. Because of HNIPU's lower permeability
and improved chemical resistance, we think that industrial paints and coatings
are a potential target market for HNIPU.
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MARKETING OF HNIPU
On November 17, 2003, Global Matrechs entered into an agreement with
Environmental Friendly Materials, GMBH ("EFM"), a German company, for the
manufacture and sale of HNIPU for the European marketplace. EFM has been given
non-exclusive license to manufacture and distribute HNIPU and intends to
manufacture it at various locations across Europe. We have applied for approval
to sell HNIPU in the United States from the EPA and if and when we are on their
approved list of products we expect to complete another non-exclusive agreement
for the North American territory
Because HNIPU represents a new class of polymer compounds closely
related to polyurethanes, we expect that a variety of products will emerge from
the development of variations and improvements to the existing HNIPU binders
that have worldwide industrial applications. For this reason, we intend to seek
to license HNIPU to large industrial polymer and chemical manufacturers who can
sell the various HNIPU binders to international industrial manufacturers. The
focus will be to transfer the existing binder product technologies under
licensing agreements from the laboratory to the manufacturer. We intend to
follow up on existing agreements, current evaluations, and active discussion for
HNIPU binder production.
EMR/AC
Eurotech licensed certain rights to Acoustic Core and Electromagnetic
Radiography for specific markets, consisting of (i) illicit material detection,
(ii) above surface or subsurface nuclear or other hazardous material
remediation, (iii) marine dredging sites (inland and ocean) and (iv) oil
exploration, from Trylon Metrics, Inc. pursuant to an agreement dated July 2001,
as amended in October 2001. Eurotech licenses the illicit materials detection
application to another company and licenses the remaining three applications to
Global Matrechs.
Both technologies use a non-contact inspection methodology that creates
signals that are then interpreted by a digital analyzer that allows
identification of elemental or compound materials from their empirically
determined properties. Acoustic Core is used in applications that are
predominately wet (i.e., riverbeds, wetlands, etc.) and EMR is used in dry
environments. Completed research and development studies have verified that
Acoustic Core and EMR can identify materials by their acoustic or
electromagnetic signatures, but the feature of these technologies that we
believe is unique is their ability to map in three dimensions the existence of
target materials at extremely low concentrations at depths of up to 300 feet.
The capabilities of these technologies complement the NuCap(TM) product line by,
for example, allowing tanks of waste to be monitored for leaks and the leaks,
when discovered, targeted for repair. Acoustic Core and EMR may have
applications in markets that involve subsurface evaluation, from contamination
discovery and monitoring to resource discovery.
Both Acoustic Core and EMR have been tested at DOE sites (Oak Ridge and
INEEL) on a variety of materials. Sandia National Laboratory conducted an
in-depth evaluation of the science behind these technologies in 1999 and
concluded that they provide a unique capability to identify and map in three
dimensions low levels of material concentration at substantial depths. We
believe that these products are more cost effective than other current methods.
During the fourth quarter of 2001, Eurotech submitted several proposals to the
DOE for evaluation of areas of potential contamination and to commercial
entities being pressured by the EPA for potential subsurface contamination, but
these technologies have not been selected for inclusion in currently funded
programs to date.
MARKETING OF EMR/AC
In conjunction with the marketing of NuCap(TM), we intend to market
EMR/AC(TM) to a variety of facilities requiring detection of nuclear waste
contaminants and other environmentally hazardous substances in subsurface soil
and ground water resulting from leaking storage tanks or toxic chemical spills.
We are currently seeking a manufacturing partner for EMR/AC(TM), and we are
waiting until we find such a partner to pursue our marketing strategy for
EMR/AC(TM).
RAD-X
Rad-X is a technology intended for use as an interior fire-resistant
fixative for equipment or facilities with contaminated surfaces. Rad-X differs
from NuCap(TM) Sealer Plus in that it is not weather-resistant and does not have
the chemical, radiation and aging resistance needed for long-term protection.
Rad-X provides a low-cost fixative for surfaces that are scheduled for
disassembly or dismantlement and need strong adhesion (glue-down of contaminated
particles that could become airborne) and fire-resistance properties. Rad-X was
first marketed in 2001.
9
MARKETING OF RAD-X
According to Eurotech's public filings, Eurotech had invested less than
$20,000 in the creation of the Rad-X product line. Rad-X was initially created
for feasibility testing at DOE's Rocky Flats Environmental Testing Site, or
RFETS, and was delivered in late September 2001. Testing of Rad-X at other
laboratories occurred in November 2001. This testing confirmed its fire and
smoke resistance properties. We believe that Rad-X can satisfy proposed DOE
fire/smoke criteria for certain specialized applications. Eurotech has marketed
Rad-X in connection with NuCap(TM) at DOE sites that performed decommissioning
or hazardous material management in 2002, and if the opportunity arises, we will
continue this strategy. We are currently seeking a manufacturing partner for
Rad-X, and we are waiting until we find such a partner to pursue our marketing
strategy for Rad-X.
RAPIDLY BIODEGRADABLE HYDROPHOBIC MATERIAL ("RBHM")
RBHM is a new, hydrophobic (water resistant), strong, cheap, and
completely biodegradable cellulose-based composite material. RBHM is intended to
improve the properties of both paper and plastic packaging materials. The
material can be used as a commodity in trade, industry, and agriculture for a
wide range of applications. To date, most attempts to produce biodegradable
products for consumers have focused on developing plastics that could
biodegrade. RBHM takes a different approach - making cellulose-based material
with the same physical properties as plastic, except the material biodegrades
completely in the same time as regular paper bags. RBHM consists of cellulose
(paper) and biodegradable organic additives. Biodegradation of RBHM occurs in
wet soil through normal enzymatic action of various microorganisms - fungi and
bacteria. We believe that the main advantages of RBHM are:
o Strength. RBHM's strength characteristics, especially combined
with low elongation and acquired water resistance of the
material, make RBHM unique and desirable for packaging
applications.
o Water Resistance. RBHM keeps water resistance for one week. Most
of the existing biodegradable packaging products are not
hydrophobic at all and will fail if wetted during use.
o Biodegradable Nature. Enzymes begin breaking down RBHM in the
presence of moisture in natural environments such as soil. Then
microorganisms decompose the material with rapidly occurring
metabolic reactions. RBHM is completely converted into carbon
dioxide, water, and biomass in two to three months in wet soil.
o Reproducible Natural Raw Materials. RBHM uses cellulose, a widely
available and renewable raw material.
o Relatively Low Cost. The main obstacle to widespread use of
biodegradable polymers has been cost. Biodegradable polymers are
traditionally significantly more expensive than commodity
polymers. The high costs involved in the production of
biodegradable polymers means that they cannot compete favorably
with conventional polymers. This high cost has deterred the
widespread adoption of biodegradable plastics in major consumer
applications. At an additional cost of less than 10%, and
sometimes less depending on the type of material treated,
materials treated with RBHM provide plastic-like performance and
are biodegradable.
We believe that there is a large number of potential applications for a
technology like RBHM. Because RBHM can be applied on sheets, films and fibers,
it is suitable for a range of single-use products, including, among others,
grocery and waste bags, the top, and back sheets of disposable diapers, and
disposable eating utensils.
MARKETING OF RBHM
Eurotech had marketed RBHM through its web site during 2001 and 2002.
We are currently seeking a manufacturing partner for RBHM, and we are waiting
until we find such a partner to pursue our marketing strategy for RBHM, which
will be through our website.
10
LIQUID EBONITE MATERIAL ("LEM")
LEM is a synthetic liquid rubber with enhanced mechanical, permeability
and anti-corrosive qualities as compared to conventional sheet rubber coverings.
In laboratory testing, coverings made with LEM, as compared to conventional
sheet rubber coverings, have displayed greater resistance to harsh chemicals
such as acids, alkalis and benzene, and have been successfully applied to
intricate and complex surfaces such as sieve meshing. Based on the physical and
chemical properties of LEM, and on the basis of such tests, we believe that LEM
coverings are capable of providing superior protection to small-diameter piping
and to the intricate parts of pumps, fans, and centrifuge rotors. LEM can be
applied to form surface coverings using standard coating techniques, including
spraying and dipping.
MARKETING OF LEM
Eurotech had marketed LEM through its web site during 2001 and 2002.
We are currently seeking a manufacturing partner for LEM, and we are waiting
until we find such a partner to pursue our marketing strategy for LEM, which
will be through our website.
FIRESIL(TM) - FIRE PROTECTION ORGANOMINERAL COATING - FIRE-STOP FOR
RESIDENTIAL AND COMMERCIAL APPLICATION
Firesil(TM) is an environmentally compatible fire-stop material with
good adhesion properties to hydrophilic and hydrophobic surfaces and exhibits
strong fire resistance, thermostability, and water resistance characteristics.
MARKETING OF FIRESIL(TM)
We intend to market Firesil(TM) directly to corporations that are
prospective candidates for sub-licensing the technology. Eurotech had
Firesil(TM) tested by an accredited lab to ASTM protocol and it passed these
tests. We are currently seeking a manufacturing partner for Firesil(TM), and
will wait until we find such a partner to pursue a marketing strategy for
Firesil(TM).
COMPETITION
The licensed technologies are targeted at highly competitive markets.
Due to the nature and size of some of the markets and some of the projects for
which the licensed technologies may be applicable, there are sometimes other
competitors who may have significantly greater name recognition and greater
financial and other resources than we do. Many of these competitors also have
technologies that are very competitive with the licensed technologies. For
example, NuCap(TM) is a composite material based on a silicone polymer that is
different from other silicones produced by manufacturers such as GE Silicones
and Dow Corning, but the products produced by those manufacturers compete with
NuCap(TM). As another example, some of the major producers of polyurethanes used
in coatings and finishes, sealants and adhesives, which products may compete
with the HNIPU technology, include Akzo Nobel, Dow Chemical and Kansai.
INTELLECTUAL PROPERTY RIGHTS
GENERAL
Many entities, including some developing technologies similar to ours,
now have and may in the future obtain patents and other intellectual property
rights that cover or affect products or services directly or indirectly related
to the technologies that we license from Eurotech. In general, if a court
determines that one or more of the licensed technologies infringes on
intellectual property held by others, we would be required to cease infringing
on intellectual property held by others, we would be required to cease
developing or marketing those products or to obtain licenses to develop and
market those products from the holders of the intellectual property, or to
redesign those products in such a way as to avoid infringing the patent claims.
If a competitor holds intellectual property rights, the entity might be
predisposed to exercise its right to prohibit our use of its intellectual
property in our products and services, thus impacting our competitive position.
11
There can be no assurance that we are aware of all patents and other
intellectual property rights that the licensed technologies may potentially
infringe. In addition, patent applications in the United States are confidential
until the Patent and Trademark Office issues a patent and, accordingly, we
cannot evaluate the extent to which the licensed technologies may infringe
claims contained in pending patent applications. Further, it is often not
possible to determine definitively whether a claim of infringement is valid,
absent protracted litigation, which we may not have the resources to pursue.
We cannot estimate the extent to which we may be required in the future
to obtain licenses with respect to patents held by others and the availability
and cost of any such licenses. Those costs, and their impact on our financial
position, could be material. Damages in patent infringement cases can also
include a tripling of actual damages in certain cases. To the extent that we are
required to pay royalties to third parties to whom we are not currently making
payments, these increased costs of doing business could negatively affect our
liquidity and operating results.
In addition, there may be entities developing and marketing
technologies which infringe on patents and intellectual property rights held by
us. Patent infringement claims are protracted and costly. We may not have the
resources to adequately protect our intellectual property. Any expenditures to
pursue intellectual property rights by us could negatively affect us.
NUCAP(TM) INTELLECTUAL PROPERTY RIGHTS
The Euro-Asian Physical Society (EAPS) has patented EKOR(TM) in the
U.S., Russia, and other industrialized countries. On March 23, 1999, the U.S.
Patent and Trademark Office issued to EAPS Patent No. 5,886,060 on the process
for manufacturing one of the EKOR(TM) compound variants. Pursuant to sub-license
agreement, Eurotech became the exclusive global licensee of all right, title and
interest (inclusive of all patent and other intellectual property rights now or
in the future) in EKOR(TM). We are a licensee of Eurotech and have renamed the
product NuCap(TM). We do not know if additional proprietary technology that we
have developed relating to NuCap(TM) will prove patentable. We have applied for
trademark protection for the mark "NuCap" with the U.S. Patent and Trademark
Office.
HNIPU INTELLECTUAL PROPERTY RIGHTS
U.S. Patent Number 6120905 for HNIPU network polymers and composites
formed there from was issued on September 19, 2000. Patents for this technology
have also been issued in Europe (EP 1088021, PCT WO 9965969) and Australia
(4441099). These patents have been assigned to Eurotech. The method of synthesis
of cyclocarbonates and nonisocyanate or hybrid nonisocyanate network
polyurethanes is patent applied for in the United States, which application has
been assigned to Eurotech. We are a licensee of Eurotech. As a regular part of
our business activities, we intend to submit patent applications to protect our
developed intellectual property, improvements and extensions, although we do not
know whether any technologies that we develop will be patentable.
EMR/AC INTELLECTUAL PROPERTY RIGHTS
U.S. Patent Number 4,922,467 for Acoustic Detection Apparatus (Acoustic
Core) was issued to David Caulfield on May 1, 1990 and subsequently assigned to
Ocean Data Equipment Corporation. This patent was significantly improved, for
which U.S. Patent Number 6,545,945 was issued on April 8, 2003. Electromagnetic
Radiography technology has been protected under trade secret laws. The worldwide
exclusive licensing rights to these technologies for the detection of nuclear
and hazardous materials at nuclear remediation and marine dredging sites, and
for oil exploration, were obtained by Eurotech and, except to the extent related
to the illicit materials detection application of these technologies, were
subsequently licensed to Global Matrechs.
RAD-X INTELLECTUAL PROPERTY RIGHTS
Eurotech had protected its interest in Rad-X by treating the
formulation as proprietary property and entering into confidentiality agreements
with its partners.
12
RBHM INTELLECTUAL PROPERTY RIGHTS
Rademate, an entity in which Eurotech is an investor, was issued U.S.
Patent #6294265 for "Hydrophobic biodegradable cellulose-containing material"
for RBHM on September 25, 2001. Rademate has one application with the Israeli
Patent Office (126306), dated September 23, 1998, which is pending. Eurotech has
licensed to us the intellectual property rights that it has in RBHM.
LEM INTELLECTUAL PROPERTY RIGHTS
Eurotech has acquired the intellectual property rights associated with
U.S. Patent #6303683 (issued October 16, 2001) for Liquid Ebonite mixtures and
coatings, and concretes formed therefrom and an application filed under the
Patent Cooperation Treaty (PCT/US99/16883) on July 26,1999 by Dr. Igor Figovsky,
the inventor of these technologies. We are a licensee of Eurotech.
FIRESIL(TM) INTELLECTUAL PROPERTY RIGHTS
Eurotech acquired the formula for Firesil(TM) from Dr. Figovsky, its
inventor, in 2000. Eurotech terminated previously initiated patent applications
and has elected to protect this formula as a trade secret. Eurotech owns the
federally registered trademark "Firesil". We are a licensee of Eurotech.
GOVERNMENT REGULATION
The use of NuCap(TM) is subject to U.S. environmental safety laws and
regulations pertaining to the safe use and containment of hazardous and nuclear
waste. Based on the results of tests conducted by Eurotech, we believe that the
NuCap(TM) compounds meet current applicable regulations for safe use,
containment and storage of hazardous and nuclear materials. It is, however,
possible that more stringent or different standards may be adopted or applied in
the future that might influence the intended use for NuCap(TM) and it is also
possible that the standards, if adopted or applied, may materially increase the
cost to us of using NuCap(TM) compounds or prevent their use altogether. We are
not aware of any other U.S. or foreign laws or regulations that significantly
hinder the marketing, sale, or use of NuCap(TM) based materials.
The manufacture of HNIPU and operation of EMR/AC(TM) equipment is not
expected to be impacted adversely by government regulations. HNIPU's MSDS
identifies the limited risks associated with the manufacture, handling and
application of the non-isocyanate polyurethane. OSHA outlines operational
regulations as related to acoustic frequencies and power levels as might be
applied to EMR/AC(TM) operations. We have currently applied to the EPA for
approval of HNIPU to be sold in the United States
The manufacture and use of HNIPU is subject to U.S. environmental
safety laws and regulations pertaining to the safe use of chemicals and
polymeric materials. While HNIPU does not use highly toxic compounds like
isocyanates, it is still subject to governmental regulations, but based on
preliminary assessments by Eurotech we believe that HNIPU compounds will meet
current and future regulations. If we are successful in licensing various HNIPU
binders to chemical and polymer manufacturers, we expect that the licensees will
bear the costs of applying for governmental approvals required for manufacturing
and industrial usage. We are not aware of any other U.S. or foreign laws or
regulations that significantly hinder the marketing, sale, or use of HNIPU based
materials.
Specialty Lighting
True To Form designs, develops, manufactures and sells specialty
lighting products to targeted segments of the traditional lighting industry and
has recently established a division that will focus on the homeland security
market. True To Form designs, manufactures and markets high-end lighting and
architectural products for commercial, hospitality and residential applications,
including pendants, surface and ceiling luminaries, table and floor lamps,
commercial down-lights, bath fixtures, and custom fixtures.
13
SALES AND MARKETING
True To Form markets primarily to architects, interior designers,
lighting consultants and high-end designer showrooms.
CUSTOMERS
The Company's specialty fixtures subsidiary has recently worked on
projects for Wynn Design and Development, The Mandalay Bay Group and the Luxor
Hotel.
Employees
---------
Global Matrechs (including True To Form) currently employs seven
individuals and two full-time consultants.
ITEM 2. PROPERTIES
As of December 31, 2004 the Company occupied approximately 550 square
feet in one office building in Ridgefield, Connecticut on a lease that goes
through September 2006. With the acquisition of True To Form we have added
approximately 10,000 square feet of combined warehouse and offices.
On June 1, 2004 the Company was released from liability by Piedmont Ivy
and Associates, the landlord, and Tulix Systems, Inc. for the approximately
7,000 square feet it had leased in Atlanta, Georgia. That lease, which had an
expiration date of October 31, 2004, was transferred to, and assumed by Tulix
Systems, Inc. as a part of the sale of the Internet Services Division.
ITEM 3. LEGAL PROCEEDINGS
On February 9, 2005 Global Matrechs, Inc, filed suit in the Supreme
Court of the State of New York, County of New York against Eurotech, Ltd. for
its failure to fulfill its obligations under the license agreement between the
parties dated May 22, 2003. The suit also seeks the enforcement of the notes
issued by Eurotech to Woodward, LLC which were assumed by Global Matrechs in the
exchange agreement between Global Matrechs and Woodward on January 31, 2005. The
complaint seeks damages totaling $672,677 plus interest and attorney's fees
which are yet to be determined.
On April 13, 2005 Carey Naddell, CEO of Eurotech, Ltd., filed suit
against the Company for damages based upon an alleged breach of a written
service agreement. The Company has responded and believes the action is without
merit. We will diligently defend this action.
We are not a party to any other material legal proceedings. From time
to time, we are involved in various routine legal proceedings incidental to the
conduct of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of 2004.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK MATTERS
Our Common Stock has been quoted on the OTC Bulleting Board under the
symbol GMTH (f/k/a HCOM) since December 8, 2000. Prior to that date it was
quoted on the NASDAQ SmallCap Market. The following table shows for the periods
indicated the range of high and low bid prices as quoted on the OTC Bulletin
Board. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not represent actual transactions.
HIGH LOW
2003
First quarter $ .100 $ .001
Second quarter .070 .030
Third quarter .085 .036
Fourth quarter .070 .016
2004
First quarter $ .160 $ .040
Second quarter .150 .060
Third quarter .140 .040
Fourth quarter .080 .030
HOLDERS OF RECORD
We had approximately 141 holders of record of our Common Stock as of
May 6, 2005.
DIVIDENDS
We have not paid any cash dividends on our capital stock to date and do
not foresee that we will have earnings with which to pay dividends in the
foreseeable future. Our board of directors would determine the amount of future
dividends, if any, based upon our earnings, financial condition, capital
requirements and other conditions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED FINANCIAL DATA
On April 15, 2005, the Company's management, in consultation with the
Company's independent registered public accounting firm, concluded that the
Company's historical financial information related to fiscal 2001 through fiscal
2003 and for the first three fiscal quarters of 2004 accounted incorrectly for
certain convertible preferred stock instruments. In lieu of amending our
previously filed annual and quarterly reports covering these periods, the
Company has restated its selected financial data for the five years ended
December 31, 2004 and has restated its quarterly financial data for the 2003 and
2004 interim quarters to reflect the following changes:
1. The Company determined that Preferred Series B, C, D and E shares
were subject to EITF 00-19, effective as of June 30, 2001. In
accordance with EITF 00-19, the Company has reclassified
Preferred Series C, D and E shares from equity to temporary
equity, at redemption value. In accordance with EITF 00-19, the
Company recorded Preferred Series B at redemption value. The
transition adjustment was recorded as a deemed dividend as of
June 30, 2001.
2. The Company had determined that the above-mentioned issues were
subject to FAS 150, effective as of July 1, 2003. The Company had
implemented FAS 150 in its original filing, reporting a
cumulative effect of a change in accounting principle. In
consideration of the implementation of EITF 00-19, the cumulative
effect
15
of a change in accounting principle impact in the accompanying
restated financial statement is zero.
3. The Company has determined that all increases to the stated value
of the above-mentioned Preferred series should be recorded as a
deemed dividend for periods prior to the implementation of FAS
150 and interest expense for all periods subsequent to the
implementation of FAS 150.
4. The Company has determined that Preferred Series G stock is not
subject to FAS 150 and has been reclassified as temporary equity
in the restated selected financial data.
5. The Company determined that effective March 13, 2003, the Company
entered into an agreement with the holder of Series B Preferred
shares which waived any amounts due and owing in respect of
penalties resulting from the Company's failure to have available
a sufficient number of authorized shares of common stock for
conversion and waived any default by the Company in respect of
registration rights. Accordingly, the accrued penalties were
reversed during the quarter ended March 31, 2003, and recorded as
a recovery of a deemed preferred stock dividend. The penalties
were removed from all subsequent reporting periods.
6. The Company determined that effective March 14, 2003, the Company
entered into an agreement with the holder of Series C, D and E
Preferred shares which waived any amounts due and owing in
respect of penalties resulting from the Company's failure to have
available a sufficient number of authorized shares of common
stock for conversion and waived any default by the Company in
respect of registration rights. Accordingly, the accrued
penalties were reversed during the quarter ended March 31, 2003,
and recorded as a recovery of a deemed preferred stock dividend.
The penalties were removed from all subsequent reporting periods.
7. The Company has determined that Series B, C, D Preferred shares
should be included in the weighted average shares outstanding on
a diluted basis for the period commencing with the expiration of
the mandatory conversion date and the date that the mandatory
conversion was extended. Series B Preferred shares had a
mandatory conversion date of March 25, 2002. On March 13, 2003,
the mandatory conversion date was extended to March 31, 2004.
Series C Preferred shares had a mandatory conversion date of July
22, 2002 and on March 14, 2003, the mandatory conversion date was
extended to March 31, 2004. Series D preferred shares had a
mandatory conversion date of September 28, 2002, and March 14,
2003, the mandatory conversion date was extended to March 31,
2004. Series E preferred shares had a mandatory conversion date
of April 14, 2003, and on March 14, 2003 was extended to March
31, 2004.
8. The Company has determined that the beneficial conversion feature
associated with Preferred Series B, C, D and E shares are subject
to FAS 133. Accordingly, the beneficial conversion feature has
been established as of June 30, 2001, at fair value.
9. The Company has determined that during August 2004, the
shareholders of Preferred series B, C, D and E waived their
mandatory conversion rights. As of September 30, 2004, the Series
have been reclassified to temporary equity.
10. Earnings per share has been restated to give effect to the above
changes.
In addition, in the financial statements included with this annual
report on Form 10-KSB, we have provided restated financial information for each
of the affected periods presented. The following selected financial data of
Global Matrechs, Inc. should be read in conjunction with the financial
statements and related notes, as well as the other portions of this section.
16
GLOBAL MATRECHS, INC.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the periods
indicated as restated for matters described in Note of the Notes to Consolidated
Financial Statements.
2004
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
(as previously (as previously (as previously
reported) (restated) reported) (restated) reported) (restated)
-------------------------- -------------------------- --------------------------
Selected Balance Sheet Data:
Total assets 1,220,218 1,220,218 941,694 941,694 888,136 888,136
========================== ========================== ==========================
Accounts payable and accrued expenses 3,079,203 529,455 3,176,982 393,316 3,306,729 376,941
Notes payable, current 364,000 380,851
Convertible preferred stock 5,596,453 5,670,865
Beneficial conversion feature 9,432 9,584
-------------------------- -------------------------- --------------------------
Total current liabilities 3,079,203 6,499,340 3,176,982 6,073,765 3,306,729 757,792
-------------------------- -------------------------- --------------------------
Notes payable 364,000 -- 477,500 477,500 380,851
Convertible preferred stock 6,442,133 -- 6,442,133 -- 6,433,333 --
-------------------------- -------------------------- --------------------------
Total liabilities 9,885,336 6,499,340 10,096,615 6,551,265 10,120,913 757,792
-------------------------- -------------------------- --------------------------
Temporary equity -- 1,069,000 -- 1,069,000 -- 6,802,698
-------------------------- -------------------------- --------------------------
Common and preferred stock 1,635 1,635 1,635 1,635 1,243 1,243
Treasury stock (8,659) (8,659) (8,659) (8,659) (327,484) (327,484)
Additional paid in capital 19,228,820 20,264,189 19,288,820 20,324,189 19,934,134 20,970,571
Accumulated deficit (27,886,914) (26,605,287) (28,436,717) (26,995,736) (28,840,670) (27,316,684)
-------------------------- -------------------------- --------------------------
Total stockholders' deficit (8,665,118) (6,348,122) (9,154,921) (6,678,571) (9,232,777) (6,672,354)
-------------------------- -------------------------- --------------------------
Total liabilities and stockholders'
deficit 1,220,218 1,220,218 941,694 941,694 888,136 888,136
========================== ========================== ==========================
Revenues 620 620 -- -- -- --
Income (loss) from operations (311,815) (311,815) (231,996) (231,996) (203,176) (203,176)
Other income (expense) (241,716) (82,212) (244,596) (85,091) (200,777) (117,620)
Derivative adjustment of beneficial
conversion feature (152) (151) (152)
Income (loss) on disposal or discontinued
operations 43,189 43,189 (73,211) (73,211) -- --
Net income (loss) (510,342) (350,990) (549,803) (390,449) (403,953) (320,948)
Basic and diluted earnings per share (0.0340) (0.0234) (0.0367) (0.0260) (0.0271) (0.0214)
Weighted number of shares outstanding 14,999,157 14,999,157 14,999,157 14,999,157 14,926,337 14,999,157
17
2003
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
(as previously (as previously (as previously
reported) (restated) reported) (restated) reported) (restated)
-------------------------- -------------------------- --------------------------
Selected Balance Sheet Data:
Total assets 499,610 499,610 1,461,129 1,461,129 1,412,861 1,412,861
========================== ========================== ==========================
Accounts payable and accrued expenses 2,120,999 434,231 2,204,961 358,596 2,417,271 336,172
Notes payable, current -- -- 100,000 100,000 -- 175,000
Convertible preferred stock -- -- -- -- -- 5,447,629
Beneficial conversion feature -- 8,824 -- 8,976 -- 9,128
-------------------------- -------------------------- --------------------------
Total current liabilities 2,120,999 443,055 2,304,961 467,572 2,417,271 5,967,929
-------------------------- -------------------------- --------------------------
Notes payable -- -- -- -- 175,000 --
Convertible preferred stock -- -- -- -- 6,442,133 1,069,000
-------------------------- -------------------------- --------------------------
Total liabilities 2,120,999 443,055 2,304,961 467,572 9,034,404 7,036,929
-------------------------- -------------------------- --------------------------
Temporary equity 251,750 5,298,805 251,750 6,442,217
-------------------------- -------------------------- --------------------------
Common and preferred stock 1,503 1,500 1,514 1,500 1,635 1,635
Treasury stock (8,659) (8,659) (8,659) (8,659) (8,659) (8,659)
Additional paid in capital 23,789,980 20,421,514 24,616,594 20,264,324 19,228,821 20,264,190
Accumulated deficit (25,655,963) (25,656,605) (25,705,031) (25,705,825) (26,843,340) (25,881,234)
-------------------------- -------------------------- --------------------------
Total stockholders' deficit (1,873,139) (5,242,250) (1,095,582) (5,448,660) (7,621,543) (5,624,068)
-------------------------- -------------------------- --------------------------
Total liabilities and stockholders'
deficit 499,610 499,610 1,461,129 1,461,129 1,412,861 1,412,861
========================== ========================== ==========================
Revenues 406,522 406,522 411,218 411,218 410,005 410,005
Income (loss) from continuing operations 69,352 69,532 (67,353) (67,353) (98,119) (98,119)
Other income (expense) 70,191 70,191 18,285 18,285 (237,460) (77,138)
Derivative adjustment of beneficial
conversion feature -- (151) -- (152) -- (152)
Cumulative effect of change in accounting
principle -- -- -- -- (802,730) --
Net income (loss) 139,723 139,572 (49,068) (49,220) (1,138,309) (175,409)
Deemed preferred stock dividend (176,764) (91,581) (159,597) (157,178) -- --
Recovery of deemed preferred stock dividend -- 1,527,171 -- -- -- --
Net income (loss) applicable to common
shareholders (37,041) 1,575,162 (208,665) (206,398) (1,138,309) (175,409)
Basic earnings per share (0.0025) 0.1050 (0.0139) (0.0138) (0.0759) (0.0117)
Weighted number of shares outstanding-basic 14,999,156 14,999,156 14,999,156 14,999,156 14,999,156 14,999,156
Diluted earnings per share (0.0025) 0.0055 (0.0139) (0.0138) (0.0759) (0.0117)
Weighted number of common shares
outstanding-diluted 14,999,156 284,874,235 14,999,156 14,999,156 14,999,156 14,999,156
18
GLOBAL MATRECHS, INC.
SELECTED FINANCIAL DATA
The following selected financial data of Global Matrechs, Inc. should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the financial statements and related notes. See Note
1 to financial statements for discussion on the restated financial data.
Year ended December 31,
-------------------------------------------------------------------------------
2000 2001 2002
as previously as previously
issued as restated issued as restated
Statement of Operations Data:
Revenues -- -- -- -- --
Cost of Revenues -- -- -- -- --
------------ ---------------------------- ----------------------------
Gross Profit (loss) -- -- -- -- --
------------ ---------------------------- ----------------------------
Operating expenses:
General and administrative 1,192,406 286,949 286,949 187,449 187,449
Depreciation and amortization 1,605,345 -- -- -- --
Asset impairment 1,436,078 493,905 493,905 52,584 52,584
------------ ---------------------------- ----------------------------
Total operating expenses 4,233,829 780,851 780,851 240,033 240,033
------------ ---------------------------- ----------------------------
Operating loss (4,233,829) (780,851) (780,851) (240,033) (240,033)
------------ ---------------------------- ----------------------------
Other expenses (income):
Interest expense (income) (5,981) -- -- -- --
Derivative adjustment of beneficial
conversion feature -- -- -- -- 491
Other expense (income), net (90,793) (146,362) (146,362) (26,637) (26,637)
------------ ---------------------------- ----------------------------
Loss from continuing operations before
income taxes (4,137,055) (634,489) (634,489) (213,396) (213,887)
Income tax provision (benefit) -- -- -- -- --
------------ ---------------------------- ----------------------------
Loss from continuing operations (4,137,055) (634,489) (634,489) (213,396) (213,887)
Gain (loss) from discontinued operations (2,223,295) (212,515) (212,515) 118,001 118,001
Cumulative effect of change in accounting
principle -- -- -- -- --
Gain (loss) on disposal of business segment (3,000,377) 394,453 394,453 -- --
------------ ---------------------------- ----------------------------
Net loss (9,360,727) (452,461) (452,461) (95,395) (95,886)
Deemed preferred stock dividend (1,526,728) (708,778) (2,150,368) (706,733) (1,004,681)
Recovery of deemed preferred stock dividend 1,527,171
------------ ---------------------------- ----------------------------
Net loss applicable to common shareholders (10,887,455) (1,161,239) (2,602,829) (802,128) (1,100,567)
------------ ---------------------------- ----------------------------
Net income (loss) per common share
Basic Continuing operations (0.6620) (0.1360) (0.2817) (0.0610) (0.0814)
Cumulative effect of change in
accounting principle -- -- --
Discontinued operations (0.6110) 0.0180 0.0180 0.0080 0.0080
------------ ---------------------------- ----------------------------
Total (1.2730) (0.1180) (0.2637) (0.0530) (0.0734)
------------ ---------------------------- ----------------------------
Weighted average common shares outstanding 8,549,693 9,869,074 9,869,074 14,999,157 14,999,157
------------ ---------------------------- ----------------------------
Diluted Continuing operations (0.66200) (0.1360) (0.2817) (0.0610) (0.0131)
Cumulative effect of change
in accounting principle -- -- -- --
Discontinued operations (0.61100) 0.0180 0.0180 0.0080 0.0080
------------ ---------------------------- ----------------------------
Total (1.27300) (0.1180) (0.2637) (0.0530) (0.0051)
------------ ---------------------------- ----------------------------
Weighted average common and
convertible shares outstanding 8,549,693 9,869,074 9,869,074 14,999,157 214,687,508
------------ ---------------------------- ----------------------------
Balance Sheet Data:
Working capital (deficit) (823,406) (960,154) (968,336) (1,705,568) (1,714,241)
Total assets 2,528,973 665,391 665,391 507,554 507,554
Long-term liabilities 357,757 -- -- -- --
Total liabilities 2,298,013 1,533,124 1,541,306 2,109,069 2,117,742
Convertible preferred stock 251,750 251,750 4,840,932 251,750 5,207,224
Stockholders' equity (deficit) (20,790) (1,119,483) (5,716,847) (1,853,265) (6,817,412)
19
Year ended December 31,
------------------------------------------------
2003 2004
as previously
issued as restated
Statement of Operations Data:
Revenues 8,246 8,246 620
Cost of Revenues 8,731 8,731 558
---------------------------- ------------
Gross Profit (loss) (485) (485) 62
---------------------------- ------------
Operating expenses:
General and administrative 325,281 325,281 1,273,929
Depreciation and amortization 115,059 115,059 197,244
Asset impairment -- --
---------------------------- ------------
Total operating expenses 440,340 440,340 1,471,173
---------------------------- ------------
Operating loss (440,825) (440,825) (1,471,111)
---------------------------- ------------
Other expenses (income):
Interest expense (income) 480,135 159,492 1,340,868
Derivative adjustment of beneficial
conversion feature 607 455
Other expense (income), net (91,826) (91,826) (211,395)
---------------------------- ------------
Loss from continuing operations before
income taxes (829,134) (509,098) (2,601,039)
Income tax provision (benefit) -- -- --
---------------------------- ------------
Loss from continuing operations (829,134) (509,098) (2,601,039)
Gain (loss) from discontinued operations 176,008 176,008 94,363
Cumulative effect of change in accounting
principle (802,730) --
Gain (loss) on disposal of business segment (125,030) (125,030) (124,385)
---------------------------- ------------
Net loss (1,580,886) (458,120) (2,631,061)
Deemed preferred stock dividend (336,361) (248,759)
Recovery of deemed preferred stock dividend
---------------------------- ------------
Net loss applicable to common shareholders (1,917,247) 820,292 (2,631,061)
---------------------------- ------------
Net income (loss) per common share
Basic Continuing operations (0.0780) 0.0517 (0.1547)
Cumulative effect of change in
accounting principle (0.0530)
Discontinued operations 0.0030 0.0030 (0.0020)
---------------------------- ------------
Total (0.1280) 0.0547 (0.1567)
---------------------------- ------------
Weighted average common shares outstanding 14,999,157 14,999,157 16,790,165
---------------------------- ------------
Diluted Continuing operations (0.0780) 0.0228 (0.1547)
Cumulative effect of change
in accounting principle (0.0530)
Discontinued operations 0.0030 0.0030 (0.0020)
---------------------------- ------------
Total (0.1280) 0.0258 (0.1567)
---------------------------- ------------
Weighted average common and
convertible shares outstanding 14,999,157 31,820,137 16,790,165
---------------------------- ------------
Balance Sheet Data:
Working capital (deficit) (2,461,688) (5,932,177) (1,574,634)
Total assets 1,350,281 1,350,281 3,115,073
Long-term liabilities 6,697,133 -- 415,302
Total liabilities 9,505,057 6,278,413 2,753,736
Convertible preferred stock -- 1,069,000 6,128,223
Stockholders' equity (deficit) (8,154,776) (5,997,132) (5,766,886)
20
GLOBAL MATRECHS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For Each of the Three Years in the Period Ended December 31, 2004
Preferred Common
-------------------------- --------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance, December 31, 2001, as issued 198.00 3 14,999,157 1,500
Adjustments to opening balances (198.00) (3)
----------- ----------- ----------- -----------
Balance, December 31, 2001, as restated -- -- 14,999,157 1,500
Guaranteed return to Series B, C, D and E
preferred stockholders
Amortization of beneficial conversion feature
to Series E preferred stockholders
Penalties on preferred stock
Net loss
----------- ----------- ----------- -----------
Balance, December 31, 2002 -- -- 14,999,157 1,500
Issuance of Series H preferred stock 13,500.00 135
Guaranteed return to Series B, C, D and E
preferred stockholders
Amortization of beneficial conversion feature
to Series E and G preferred stockholders
Recovery of deemed preferred stock dividend
Net loss
----------- ----------- ----------- -----------
Balance, December 31, 2003 13,500.00 135 14,999,157 1,500
Issuance of Series I preferred stock
Receipt of Treasury stock (4,905,000) (490)
Issuance of Common Stock 2,151,081 215
Beneficial Conversion feature on promissory
notes, net of expenses
Warrant feature on promissory notes
Issuance of warrants for services rendered
Conversion of Series H preferred stock to
common stock (1,500) (15) 1,500,000 150
Conversion of temporary equity to common
stock 22,150,193 2,215
Acquisition of True To Form Ltd. 10,000,000 1,000
Net loss
----------- ----------- ----------- -----------
Balance, December 31, 2004 12,490.50 125 45,895,431 4,590
=========== =========== =========== ===========
21
Additional
Treasury Paid-In Accumulated Stockholders'
Stock Capital Deficit Deficit
----------- ----------- ----------- -----------
Balance, December 31, 2001, as issued (8,659) 24,587,964 (25,700,291) (1,119,483)
Adjustments to opening balances (4,597,361) (4,597,364)
----------- ----------- ----------- -----------
Balance, December 31, 2001, as restated (8,659) 19,990,603 (25,700,291) (5,716,847)
Guaranteed return to Series B, C, D and E
preferred stockholders (297,948) (297,948)
Amortization of beneficial conversion feature
to Series E preferred stockholders (68,344) (68,344)
Penalties on preferred stock (638,387) (638,387)
Net loss (95,886) (95,886)
----------- ----------- ----------- -----------
Balance, December 31, 2002 (8,659) 18,985,924 (25,796,177) (6,817,412)
Issuance of Series H preferred stock (135) --
Guaranteed return to Series B, C, D and E
preferred stockholders (148,824) (148,824)
Amortization of beneficial conversion feature
to Series E and G preferred stockholders (99,947) (99,947)
Recovery of deemed preferred stock dividend 1,527,171 1,527,171
Net loss (458,120) (458,120)
----------- ----------- ----------- -----------
Balance, December 31, 2003 (8,659) 20,264,189 (26,254,297) (5,997,132)
Issuance of Series I preferred stock 490.50 5 5
Receipt of Treasury stock (318,825) 319,312 (3)
Issuance of Common Stock 104,850 105,065
Beneficial Conversion feature on promissory
notes, net of expenses 526,459 526,459
Warrant feature on promissory notes 684,810 684,810
Issuance of warrants for services rendered 258,942 258,942
Conversion of Series H preferred stock to
common stock (135) --
Conversion of temporary equity to common
stock 683,814 686,029
Acquisition of True To Form Ltd. 599,000 600,000
Net loss (2,631,061) (2,631,061)
----------- ----------- ----------- -----------
Balance, December 31, 2004 (327,484) 23,441,241 (28,885,358) (5,766,886)
=========== =========== =========== ===========
CRITICAL ACCOUNTING POLICIES. This section discusses certain critical accounting
policies that we consider important to our financial condition and results of
operations, and that required significant judgment and estimates on the part of
management in application. Our significant accounting policies, including the
critical accounting policies discussed in this section, are summarized in the
notes to the accompanying consolidated financial statements.
Revenue Recognition
Revenue from the sale of products related to our licensed technology is
recognized upon shipment of the product provided that title passes, the price is
fixed or determinable and collection of the receivable is probable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
GENERAL
Except for historical information contained herein, some matters
discussed in this report constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward looking
statements include, but may not be limited to, those statements regarding the
Company's expectations, beliefs, intentions, or strategies regarding the future.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements. The Company notes
that a variety of risk factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements including,
among other things, our ability to obtain additional financing, the commercial
viability of the technologies that we
22
license from Eurotech, our ability to market these technologies, and other
factors discussed in this report and in our other securities filings.
On May 31, 2004, the Company completed the sale of its remaining
Internet business to Tulix Systems, Inc. ("Tulix"), a company in which Gia
Bokuchava, Nino Doijashvili and Timothy R. Robinson, who were officers and
directors of the Company, are officers, directors and founding shareholders.
With the consummation of this Purchase Agreement the Company has completely
exited from all Internet related enterprises.
The Company is currently operating in two major segments. These
segments are defined as the Licensed Technologies Division, which consists of
the marketing of the technologies licensed from Eurotech, and the Specialty
Lighting Division, which consists of the design, development, manufacture and
sales of specialty lighting and architectural products acquired in the merger
with True To Form, Limited. The Company is targeting the pursuit of the Homeland
Securities market with both segments.
On May 22, 2003, we completed a transaction with Eurotech pursuant to
which we now license NuCap(TM) (formerly called EKOR(TM)), HNIPU, EMR/AC, Rad-X,
Firesil, LEM and RBHM technologies from Eurotech. We intend to use these
licenses to derive revenue by partnering with other technology firms to sell raw
materials to producers or to sublicense the technologies and collect royalties
and/or licensing fees.
On December 31, 2004 we acquired True To Form, Limited. As a result of
the merger, True To Form is now our wholly owned subsidiary. True To Form
designs, develops, manufactures and sells specialty lighting products to
targeted segments of the traditional lighting industry and has recently
established a division that will focus on the homeland security market. True To
Form markets "high-end" lighting and architectural products for both commercial
and residential applications, including pendants, surface and ceiling
luminaries, table and floor lamps, commercial down-lights, bath fixtures, and
custom fixtures.
Our revenues and operating results have varied substantially from
period-to-period, and should not be relied upon as an indication of future
results.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO YEAR ENDED DECEMBER 31,
2004
LICENSED TECHNOLOGIES
REVENUES. Revenues for the Licensed Technologies division were $620 for
the year ending December 31, 2004. These consisted of the sale of samples of
EKOR(TM) and HNIPU and were recognized upon shipment of the materials. Revenues
for the year ending December 31, 2003 were $8,246 which consisted of $7,801 for
the sale of RAD-X and $445 for the sale of EKOR(TM).
COST OF REVENUES. Cost of revenues includes costs of raw materials
including handling and freight charges. Costs of revenues were $558 and $8,731
for the years ending December 31, 2004 and 2003, respectively. This represents a
90% cost in 2004 and a 105% cost in 2003.
23
GROSS PROFIT. December 31, 2004 saw a gross profit of $62 whereas gross
losses for the year ending December 31, 2003 were $485. The losses were a result
of product cost and handling exceeding the value of revenue generated.
SALES AND MARKETING. There were no such expenditures in 2004 or 2003.
As of the end of 2004 there have been no expenditures for sales and marketing
related to the Licensed Technologies Division.
PRODUCT DEVELOPMENT. There were no such expenditures in 2004 or 2003.
As of the end of 2004 there have been no expenditures for product development
related to the Licensed Technologies Division.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries for administrative personnel, insurance and other administrative
expenses, as well as expenses associated with maintaining the corporation's
records and reporting in compliance with its status as a public corporation.
General and administrative expenses increased from $325,281 in 2003 to
$1,273,929 in 2004. The General and administrative costs for 2003 represent a
partial year, whereas the 291% increase in expenditures for 2004 represent the
cost of a full years operations. Much of the increase is the cost of
professional services for legal and promotional firms.
DEPRECIATION AND AMORTIZATION. Amortization was $197,244 in the year
ending December 31, 2004 and $115,059 in the year ending December 31, 2003. The
71.4% increase is due to a full year of amortization of the value of the
licensed technologies, and the amortization of the beneficial conversion
features of the loans taken during the second and third quarter.
INTEREST EXPENSE. Interest expense for the year ending December 31,
2004 consisted of $34,072 in interest expense on various loans, $212,162 in
interest charges on the Series B, C, D and E preferred stock, $1,030,646 of
amortization of beneficial conversion feature associated with various
convertible loans and $63,988 of interest expense related to the amortization of
warrants associated with various convertible loans. Interest expense for the
year ending December 31, 2003 consisted of $10,668 in interest expense on the
notes related to the Licensed Technologies Division, $148,824 in interest
charges on the Series B, C, D and E preferred stock.
OTHER INCOME. Other income for the years ending December 31, 2004 and
2003 was $211,395 and $91,826 respectively. This income predominantly consists
of the settlement of accrued expenses which were settled for less than the
amount which had been estimated.
DISCONTINUED OPERATIONS. The company recorded net income of $94,363 and
$176,008 in the years ending December 31, 2004 and 2003, respectively, for its
discontinued Internet Services unit. The decrease was due to the sale of the
internet unit closing on May 31, 2004, less than half-way through the year.
YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO YEAR ENDED DECEMBER 31,
2003
REVENUES. Revenues for the Licensed Technologies division were $8,246
for the year ending December 31, 2003. Revenues consisted of $7,801 for the sale
of RAD-X and $445 for the sale of EKOR(TM). The Licensed Technologies unit did
not begin operation until the first quarter of 2003.
COST OF REVENUES. Cost of revenues includes costs of raw materials
including handling and freight charges. Costs of revenues were $8,731 for the
year ending December 31, 2003. The Licensed Technologies unit did not begin
operation until the first quarter of 2003.
GROSS PROFIT. Gross losses for the year ending December 31, 2003 were
$485. These losses were a result of product cost and handling exceeding the
value of revenue generated. The Licensed Technologies unit did not begin
operation until the first quarter of 2003.
SALES AND MARKETING. The Company ceased all sales and marketing efforts
related to our Internet Services Division in 2001. There were no such
expenditures in 2002 or 2003. As of the end of 2003 there have been no
expenditures for sales and marketing related to the Licensed Technologies
Division.
24
PRODUCT DEVELOPMENT. The Company ceased all product development efforts
related to our Internet Services Division in 2001. There were no such
expenditures in 2002 or 2003. As of the end of 2003 there have been no
expenditures for product development related to the Licensed Technologies
Division.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries for administrative personnel, insurance and other administrative
expenses, as well as expenses associated with maintaining the corporation's
records and reporting in compliance with its status as a public corporation.
General and administrative expenses increased from $187,449 in 2002 to $325,281
in 2003. The increase is due to the additional expenses associated with the
launch of the Licensed Technologies Division.
DEPRECIATION AND AMORTIZATION. With the write down of the carrying
value of all fixed assets in the fourth quarter of 2000, the Company has
suspended depreciation of its remaining assets in anticipation of a sale.
Amortization expense of $115,059, which represents seven months of amortization
of the intangible Licensed Technologies, was recognized in the year ending
December 31, 2003.
INTEREST EXPENSE. Interest expense for the year ending December 31,
2003 consisted of $10,668 in interest expense on the notes related to the
Licensed Technologies Division, $148,824 in interest charges on the Series B, C,
D and E preferred stock.
OTHER INCOME. Other income for the year ending December 31, 2003
consisted of $4,597 in interest earned on money market accounts, $18,388 in the
reversal of accruals related to defaults on the lease for our Atlanta offices
during the first quarter of 2001, and $68,841 in the reversal of accruals
related to defaults on leases of capital equipment during the third quarter of
2001 which were resolved at a lower cost than estimated.
DISCONTINUED OPERATIONS. The company recorded net income of $176,008 in
the year ending December 31, 2003 for its discontinued Internet Services unit.
This compares to net income of $118,001 in the year ending December 31, 2002.
This increase of $58,007 was due primarily to growth in hosting revenue due to
Roadrunner, and reductions in the cost of internet network services.
OFF-BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
stockholders.
25
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Our sources of capital are extremely limited. We have incurred
operating losses since inception and as of December 31, 2004, we had an
accumulated deficit of $28,885,358 and a working capital deficit of $1,574,634.
On September 30, 2003, we entered into a private equity credit
agreement with Brittany Capital Management LLC under which we had an option to
issue and sell to Brittany up to $10,000,000 of our common stock over three
years. In connection with this agreement, we filed a registration statement on
Form SB-2 with the Securities Exchange Commission to register 25,651,000 shares
of our common stock for resale by Brittany and Econ Investor Relations. However,
the registration statement was not declared effective by the Securities and
Exchange Commission. In December 2004, the private equity credit agreement
terminated in accordance with its terms, and we withdrew the registration
statement.
In June 2004 we entered into a second exchange agreement with Brittany
to acquire certain of their shares of our common stock at a price of $0.10 per
share. On September 22, 2004, we issued 490.5 shares of our Series I convertible
preferred stock to Brittany in exchange for Brittany's surrender of 4,905,000
shares of our common stock.. In addition Brittany agreed to loan us $100,000
under a convertible note. As of December 31, 2004 we had borrowed $75,000 under
this agreement.
On October 19, 2004, we entered into a securities purchase agreement
with Southridge Partners LP. Southridge purchased a nonnegotiable 2% secured
convertible promissory note in the principal amount of $250,000 and we issued it
a warrant to purchase 10,000,000 shares of our common stock. On October 21,
2004, we entered into a securities purchase agreement with Dean M. DeNuccio. Mr.
DeNuccio purchased a nonnegotiable 2% secured convertible promissory note in the
principal amount of $25,000 and we issued to Mr. DeNuccio a warrant to purchase
1,000,000 shares of our common stock. On November 5, 2004, we entered into a
securities purchase agreement with Colonial Fund, LLC. Colonial purchased a
nonnegotiable 2% secured convertible promissory note in the principal amount of
$50,000 and we issued it a warrant to purchase 2,000,000 shares of our common
stock.
Each of these promissory notes are convertible into shares of our
common stock at a conversion price of $0.02 and each of the warrants are
exercisable for $0.025 per share of our common stock. The promissory notes
mature in two years and the warrants expire in five years. Should our common
stock fall below $0.03 cents for ten consecutive trading days, any holder of
these notes may force prepayment at 140% of the principle amount plus interest.
Conversion and exercise rights are restricted in that any of these note or
warrant holders may not at any time have beneficial ownership of more than
4.999% of the total number of issued and outstanding shares of our common stock.
On October 22, 2004 and November 5, 2004, Global Matrechs, Inc.,
entered into securities purchase agreements with Dean M. DeNuccio and Colonial
Fund LLC relating to the private placement of 2% secured convertible promissory
notes in the aggregate principal amount of $75,000 with a maturity of two (2)
years and warrants to purchase 3,000,000 shares of its common stock at an
exercise price of $0.025 per share, which expire in five years in exchange for
aggregate consideration equal to the principal amount of the Notes. The Company
received approximately $70,000 in proceeds after deducting offering expenses.
The Notes are convertible, at the option of the holders, into shares of
common stock of the Company at a conversion price of $0.02 per share. Each
Purchaser may require the Company to repurchase some or all of its Note if the
market price of the common stock of the Company falls below $0.03 per share for
ten (10) consecutive trading days, at a repurchase price equal to 140% of the
principal amount of the Note.
On December 3, 2004, the Company and Deer Creek Fund, LLC entered into
a securities purchase agreement relating to the private placement of a 2%
secured convertible promissory notes in the aggregate principal amount of
$50,000 with a maturity of two (2) years and a warrant to purchase 2,000,000
shares of its common stock at an exercise price of $0.025 per share, which
expires in five years. The Company has received approximately $45,000 in net
proceeds after deducting offering expenses.
26
The Note is convertible, at the option of the holder, into shares of
common stock of the Company at a conversion price of $0.02 per share. The holder
of the Note may require the Company to repurchase some or all of its Note if the
market price of the common stock of the Company falls below $0.03 per share for
ten (10) consecutive trading days, at a repurchase price equal to 140% of the
principal amount being repurchased.
We can provide no assurance that the financing sources described above,
or any other financing that we may obtain in the future (if we are able to
obtain financing from any other sources, and we can provide no assurances that
we will be able to obtain any such financing), will enable us to sustain our
operations. The aforementioned factors raise substantial doubt about our ability
to continue as a going concern. The financial statements included herein have
been prepared assuming we are a going concern and do not include any adjustments
that might result should we be unable to continue as a going concern.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1 to Notes to Consolidated Financial Statements for a complete
discussion of recently issued accounting standards and their expected impact on
our consolidated financial statements.
FACTORS AFFECTING FUTURE PERFORMANCE
OUR BUSINESS, AS CURRENTLY CONSTITUTED, HAS LIMITED OPERATING HISTORY.
THEREFORE, WE MAY NOT BE ABLE TO ACCURATELY FORECAST FUTURE RESULTS AND
OPERATING LOSSES IN FUTURE PERIODS COULD BE GREATER THAN EXPECTED.
On May 31, 2004, the Company completed the sale of its remaining Internet
business, which had been in operation since 1994, to Tulix Systems, Inc.
("Tulix"), a company in which Gia Bokuchava, Nino Doijashvili and Timothy R.
Robinson, who were officers and directors of the Company, are officers,
directors and founding shareholders. We did not begin to focus on our licensed
technologies business until May 22, 2003 when we completed a transaction with
Eurotech, Ltd. Thus, our current business has a limited operating history. As a
result, it is difficult to accurately forecast our revenues and we lack
meaningful historical financial data upon which to base planned operating
expenses. We may be unable to adjust our spending in a timely enough manner to
compensate for any unexpected revenue shortfall. Conversely, we might not be
able to respond effectively to an unexpected increase in sales activities,
should one occur. This inability could cause our net losses in a given quarter
to be greater than expected.
WE HAVE A HISTORY OF OPERATING LOSSES, AND THERE IS NO ASSURANCE THAT WE WILL
ACHIEVE PROFITABILITY IN THE FUTURE.
We have a history of operating losses. If we continue to experience operating
losses, an investment in our common stock is at risk of being lost. We cannot
predict when, or if, we will ever achieve profitability. As of December 31,
2004, we had an accumulated deficit of approximately $28,885,358.
WE HAVE A GOING-CONCERN QUALIFICATION IN THE REPORT BY OUR REGISTERED
INDEPENDENT PUBLIC ACCOUNTING FIRM FOR OUR FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 2004, WHICH MAY MAKE CAPITAL RAISING MORE DIFFICULT AND MAY
REQUIRE US TO SCALE BACK OR CEASE OPERATIONS, PUTTING OUR INVESTORS' FUNDS AT
RISK.
The report of our registered independent public accounting firm dated May 10,
2005 includes a going-concern qualification, which indicates an absence of
obvious or reasonably assured sources of future funding that will be required by
us to maintain ongoing operations. If we are unable to obtain additional
funding, we may not be able to continue operations. To date, we have funded our
operations through sales of equity and issuances of debt. Additionally, as of
December 31, 2004, we had an accumulated deficit of approximately $28,885,358
and a working capital deficiency of $1,574,634. We may be unable to meet our
future obligations unless additional funding sources are obtained.
27
WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL REQUIRED TO FUND OUR OPERATIONS
AND FINANCE OUR GROWTH.
The continued development of our current technologies or acquisitions of new
technologies will require additional capital. We incurred net losses of $458,120
and $2,631,061 for the years ended December 31, 2003 and December 31, 2004,
respectively. We may be unable to obtain additional funds in a timely manner or
on acceptable terms, which would render us unable to fund our operations or
expand our business. If we are unable to obtain capital when needed, we may have
to restructure our business or delay or abandon our development and expansion
plans. Although we have been successful in the past in obtaining financing for
working capital and capital expenditures, we will have ongoing capital needs as
we expand our business. If we raise additional funds through the sale of equity
or convertible securities, your ownership percentage of our common stock will be
reduced. In addition, these transactions may dilute the value of our common
stock. We may have to issue securities that have rights, preferences and
privileges senior to our common stock. The terms of any additional indebtedness
may include restrictive financial and operating covenants that would limit our
ability to compete and expand.
THE MANAGEMENT OF OUR FINANCES AND THE QUALITY AND TIMELINESS OF OUR FINANCIAL
REPORTING MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO INCREASE THE SIZE AND
CAPABILITIES OF OUR INTERNAL ADMINISTRATIVE AND FINANCE FUNCTION AS OUR BUSINESS
GROWS.
We have engaged an outside accounting firm (other than our independent
registered public accounting firm) to provide financial management and
accounting services on a temporary basis. If we are unable to continue to obtain
sufficient financial management and accounting services on a cost-effective
basis, our ability to effectively manage our finances and the quality and
timeliness of our financial reporting could be adversely affected.
IF WE FAIL TO REALIZE SOME OR ALL OF THE OF THE ANTICIPATED BENEFITS FROM OUR
ACQUISITION OF TRUE TO FORM, OUR BUSINESS WILL SUFFER.
Our combined company may fail to realize some or all of the anticipated benefits
and synergies of the transaction as a result of, among other things, lower than
expected revenues for True To Form, unanticipated costs, deterioration in the
U.S. economy as a whole or the commercial lighting industry in particular, and
other factors. In addition, the integration of True to Form's business and
operations with those of Global Matrechs may take longer than anticipated, may
be more costly than anticipated and may have unanticipated adverse effects on
Global Matrechs existing strategic focus.
WE FACE INTENSE COMPETITION, WHICH COULD RESULT IN LOWER REVENUES AND HIGHER
RESEARCH AND DEVELOPMENT EXPENDITURES AND COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
If we do not develop or acquire new and enhanced products, or if we are not able
to invest adequately in our research and development activities, our business,
financial condition and results of operations could be negatively impacted. Many
of our competitors have significantly more cash and resources than we have. Our
competitors may introduce products that are competitively priced, have increased
performance or functionality, or incorporate technological advances that we have
not yet developed or implemented. To remain competitive, we must continue to
develop, market and sell new and enhanced systems and products at competitive
prices, which will require significant research and development expenditures.
IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS MAY SUFFER.
Recently, we have expanded our operations to pursue existing and potential new
market opportunities. This growth has placed, and is expected to continue to
place, a strain on our personnel, management, financial and other resources. To
manage our growth effectively, we must, among other things:
28
o successfully attract, train, motivate and manage a larger number of
employees for sales and customer support activities;
o control working capital requirements; and
o improve the efficiency of our operating, administrative, financial
and accounting systems, procedures and controls.
If we fail to manage our growth properly, we may incur unnecessary expenses and
the efficiency of our operations may decline.
WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO EXPAND OUR
OPERATIONS.
To meet our growth objectives, we must attract and retain highly skilled
technical, operational, managerial and sales and marketing personnel. If we fail
to attract and retain the necessary personnel, we may be unable to achieve our
business objectives and may lose our competitive position, which could lead to a
significant decline in net sales. We face significant competition for these
skilled professionals from other companies, research and academic institutions,
government entities and other organizations.
OUR SUCCESS DEPENDS ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES.
We depend upon the continued services of our senior management for our continued
success. The loss of any member of senior management could have a serious
negative impact upon our business and operating results. We can provide no
assurances that we will be able to retain our senior management or other key
personnel.
OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR PROPRIETARY TECHNOLOGY.
Our ability to compete depends significantly upon our trade secrets and our
other proprietary technology. The steps we have taken to protect our technology
may be inadequate to prevent others from using what we regard as our technology
to compete with us. Existing trade secrets, copyright and trademark laws offer
only limited protection. In addition, the laws of some foreign countries do not
protect our proprietary technology to the same extent as the laws of the United
States, which could increase the likelihood of misappropriation. Furthermore,
other companies could independently develop similar or superior technology
without violating our intellectual property rights. Any misappropriation of our
technology or the development of competing technology could seriously harm our
competitive position, which could lead to a substantial reduction in net sales.
If we resort to legal proceedings to enforce our intellectual property rights,
the proceedings could be burdensome, disruptive and expensive, distract the
attention of management, and there can be no assurance that we would prevail.
CLAIMS BY OTHERS THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS COULD HARM
OUR BUSINESS AND FINANCIAL CONDITION.
Our industries are characterized by the existence of a large number of patents
and frequent claims and related litigation regarding patent and other
intellectual property rights. We cannot be certain that our products do not and
will not infringe issued patents, patents that may be issued in the future, or
other intellectual property rights of others.
We do not conduct exhaustive patent searches to determine whether the technology
used in our products infringes patents held by third parties. In addition,
product development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies.
29
We may face claims by third parties that our products or technology infringe
their patents or other intellectual property rights. Any claim of infringement
could cause us to incur substantial costs defending against the claim, even if
the claim is invalid, and could distract the attention of our management. If any
of our products are found to violate third-party proprietary rights, we may be
required to pay substantial damages. In addition, we may be required to
re-engineer our products or obtain licenses from third parties to continue to
offer our products. Any efforts to re-engineer our products or obtain licenses
on commercially reasonable terms may not be successful, which would prevent us
from selling our products, and, in any case, could substantially increase our
costs and have a material adverse effect on our business, financial condition
and results of operations.
NEW CORPORATE GOVERNANCE REQUIREMENTS ARE LIKELY TO INCREASE OUR COSTS AND MAKE
IT MORE DIFFICULT TO ATTRACT QUALIFIED DIRECTORS.
We face new corporate governance requirements under the Sarbanes-Oxley Act of
2002, as well as rules adopted by the SEC. We expect that these laws, rules and
regulations will increase our legal and financial compliance costs and make some
activities more difficult, time-consuming and costly. We also expect that these
new requirements will make it more difficult and more expensive for us to obtain
director and officer liability insurance. We may be required to accept reduced
coverage or incur significantly higher costs to obtain coverage. These new
requirements are also likely to make it more difficult for us to attract and
retain qualified individuals to serve as members of our board of directors or
committees of the board, particularly the audit committee.
WE ARE NOT SUBJECT TO THE SAME CORPORATE GOVERNANCE STANDARDS AS LISTED
COMPANIES, INCLUDING WITHOUT LIMITATION, THE REQUIREMENT THAT WE HAVE A MAJORITY
OF INDEPENDENT DIRECTORS.
Registered exchanges and the Nasdaq National Market have enhanced corporate
governance requirements that apply to issuers that list their securities on
those markets. Our common stock is quoted on the OTC Bulletin Board which does
not have comparable requirements. For instance, we are not required to have any
independent directors or to adopt a code of ethics.
Currently, we have no independent directors and therefore management has
significant influence over decisions made on behalf of the stockholders. In
certain circumstances, management may not have the same interests as the
stockholders and conflicts of interest may arise.
Furthermore, certain relationships with our officers, directors and affiliates
may also involve inherent conflicts of interest. We do not have a policy to
resolve conflicts of interest. Notwithstanding the exercise of their fiduciary
duties as directors and executive officers and any other duties that they may
have to us or our other stockholders in general, these persons may have
interests different than yours.
30
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm................... 32
Consolidated Balance Sheets as of December 31, 2003 and 2004.............. 33
Consolidated Statements of Operations for each of the Three
Years in the Period Ended December 31, 2004............................... 34
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for each of the Three Years in the Period Ended December 31, 2004......... 35
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 2004............................... 36
Notes to Consolidated Financial Statements................................ 37
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Global Matrechs, Inc.
We have audited the accompanying consolidated balance sheets of Global
Matrechs, Inc. and subsidiaries as of December 31, 2004 and 2003 and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 2004, 2003 and 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amount and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Global
Matrechs, Inc. and subsidiaries as of December 31, 2004 and 2003 and the results
of its operations and its cash flows for the years ended December 31, 2004, 2003
and 2002 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced recurring losses and negative
cash flows since its inception and has an accumulated deficit. The Company is
dependent on continued financing from investors to sustain its activities and
there is no assurance that such financing will be available. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
/S/ Sherb & Co., LLP
-----------------------------
Sherb & Co., LLP
CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK, NEW YORK
MAY 10, 2005
32
GLOBAL MATRECHS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
2003 2004
AS RESTATED
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 71,818 $ 131,470
Accounts receivable, net 274,418 94,551
Prepaid expenses 27,257 397,015
Inventory -- 67,906
Loan to Tulix -- 72,858
------------ ------------
Total current assets 373,493 763,800
Fixed Assets 105,624 28,430
Prepaid expenses, non-current -- 125,292
Deposits -- 2,575
Investment in Tulix -- 51,949
Intangible Assets (see Note 3) 986,223 986,223
Less: Accumulated Amortization (115,059) (312,304)
Goodwill -- 1,469,108
------------ ------------
Intangibles, net 871,164 2,143,027
------------ ------------
Total assets $ 1,350,281 $ 3,115,073
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 501,372 $ 763,880
Convertible loans payable 255,000 1,949,554
Convertible loans payable - discount -- (375,000)
------------ ------------
Total current liabilities 756,372 2,238,434
Long term notes -- 415,302
Convertible preferred stock 5,522,041 --
------------ ------------
Total liabilities 6,278,413 2,753,736
------------ ------------
Convertible Preferred Stock 1,069,000 6,128,223
------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value, 300,000,000 shares
authorized and 45,895,431 shares issued and
outstanding at December 31, 2004 and 15,000,000
shares authorized, 14,999,156 shares issued and
outstanding at December 31, 2003 1,500 4,590
Preferred stock, Series H, $.01 par value, 13,500
shares authorized, 12,000 shares issued and
outstanding at December 31, 2004 and 13,500 shares
authorized and 13,500 shares issued and outstanding
at December 31, 2003, convertible, participating,
$12,000,000 liquidation value at December 31, 2004
and $13,500,000 liquidation value at December 31, 2003 135 125
Preferred stock, Series I, $.01 par value, 13,500
shares authorized, 13,500 shares issued and outstanding
at December 31, 2004 and December 31, 2003, convertible,
participating, $13,500,000 liquidation value at December
31, 2004 and December 31, 2003 -- --
Treasury Stock (8,659) (327,484)
Additional Paid in Capital 20,264,189 23,441,241
Accumulated deficit (26,254,297) (28,885,358)
------------ ------------
Total stockholders' deficit
(5,997,132) (5,766,886)
------------ ------------
Total liabilities and stockholders' deficit
$ 1,350,281 $ 3,115,073
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
33
GLOBAL MATRECHS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2003
AS RESTATED AS RESTATED 2004
------------- ------------- -------------
Revenues $ -- $ 8,246 $ 620
Total Cost of Sales -- 8,731 558
------------- ------------- -------------
Gross profit -- (485) 62
------------- ------------- -------------
Operating expenses:
Sales and Marketing
Product Development
General and Administrative 187,449 325,281 1,273,929
Depreciation and Amortization -- 115,059 197,244
Asset Impairment Charge 52,584 -- --
------------- ------------- -------------
Total Operating Expenses 240,033 440,340 1,471,173
------------- ------------- -------------
Operating loss (240,033) (440,825) (1,471,111)
Other expenses (income):
Interest Expense 491 159,492 1,340,868
Other expense (income), net (26,637) (91,826) (211,395)
------------- ------------- -------------
Total other expenses (income) (26,146) 67,666 1,129,473
------------- ------------- -------------
Income (loss) from continuing operations
before income taxes (213,887) (508,491) (2,600,584)
Income tax provision (benefit)
------------- ------------- -------------
Loss from continuing operations (213,887) (508,491) (2,600,584)
Income from discontinued operations 118,001 176,008 94,363
Gain (loss) on disposal of business segment -- (125,030) (124,385)
Derivative adjustment of beneficial conversion
feature -- (607) (455)
------------- ------------- -------------
Net income (loss) (95,886) (458,120) (2,631,061)
Deemed preferred stock dividend, net of recovery (1,004,681) 1,278,412 --
------------- ------------- -------------
Net income (loss) applicable to common shareholders $ (1,100,567) $ 820,292 $ (2,631,061)
------------- ------------- -------------
Net income (loss) per share - basic
Continuing operations $ (0.081) $ 0.043 $ (0.155)
Discontinued operations 0.008 0.011 (0.002)
------------- ------------- -------------
Net income (loss) per share - basic $ (0.073) $ 0.054 $ (0.157)
------------- ------------- -------------
Weighted average common shares outstanding 14,999,157 14,999,157 16,790,165
------------- ------------- -------------
Net income (loss) per share - diluted
Continuing operations $ (0.013) $ 0.023 $ (0.155)
Discontinued operations 0.008 0.003 (0.002)
------------- ------------- -------------
Net income (loss) per share - diluted $ (0.005) $ 0.026 $ (0.157)
------------- ------------- -------------
Weighted average common shares outstanding 214,687,508 31,820,137 16,790,165
------------- ------------- -------------
The accompanying notes are an integral part of these
consolidated financial statements.
34
GLOBAL MATRECHS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
PREFERRED COMMON ADDITIONAL
------------------------------------ TREASURY PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT DEFICIT
------------------------------------------------------------------------------------------
Balance, December 31, 2001, as issued 198 $3 14,999,157 $1,500 $(8,659) $24,587,964 $(25,700,291) $ (1,119,483)
Adjustments to opening balances (198) (3) (4,597,361) (4,597,364)
------------------------------------------------------------------------------------------
Balance, December 31, 2001, as
restated -- -- 14,999,157 1,500 (8,659) 19,990,603 (25,700,291) (5,716,847)
Guaranteed return to Series B, C, D
and E preferred stockholders (297,948) (297,948)
Amortization of beneficial
conversion feature to Series E
preferred stockholders (68,344) (68,344)
Penalties on preferred stock (638,387) (638,387)
Net loss (95,886) (95,886)
------------------------------------------------------------------------------------------
Balance, December 31, 2002, as
restated -- -- 14,999,157 1,500 (8,659) 18,985,924 (25,796,177) (6,817,412)
Issuance of Series H preferred stock 13,500 135 (135) --
Guaranteed return to Series B, C, D
and E preferred stockholders (148,824) (148,824)
Amortization of beneficial
conversion feature to Series E and G
preferred stockholders (99,947) (99,947)
Recovery of deemed preferred stock
dividend 1,527,171 1,527,171
Net loss (458,120) (458,120)
------------------------------------------------------------------------------------------
Balance, December 31, 2003, as
restated 13,500 135 14,999,157 1,500 (8,659) 20,264,189 (26,254,297) (5,997,132)
Issuance of Series I preferred stock 490 5 5
Receipt of Treasury stock (4,905,000) (490) (318,825) 319,312 (3)
Issuance of Common Stock 2,151,081 215 104,850 105,065
Beneficial Conversion Feature on
promissory notes, net of expenses 526,459 526,459
Warrant feature on promissory notes 684,810 684,810
Conversion of temporary equity to
common shares 22,150,193 2,215 683,814 686,029
Issuance of warrants for services
rendered 258,942 258,942
Conversion of Series H Stock (1,500) (15) 1,500,000 150 (135)
Purchase of True To Form 10,000,000 1,000 599,000 600,000
Net loss (2,631,061) (2,631,061)
------------------------------------------------------------------------------------------
Balance, December 31, 2004 12,490 125 45,895,431 4,590 (327,484) 23,441,241 (28,885,358) (5,766,886)
The accompanying notes are an integral part of these
consolidated financial statements.
35
GLOBAL MATRECHS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31,
2002 2003
as restated as restated 2004
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (95,886) $ (458,120) $(2,631,061)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization -- 115,059 197,244
Write down of investment, fixed assets and intangibles 52,584 -- --
Provision for (recovery of) bad debts (24,813) 3,499 (47,232)
Deferred rent expense (5,480) -- --
Loss (gain) on sale of division -- (125,030) 124,385
Derivative adjustment of beneficial conversion feature 491 607 --
Increase in stated value of additional paid in capital for
convertible preferred stock and convertible notes payable -- 148,824 1,920,245
Change in operating assets and liabilities:
Accounts receivable (64,202) (34,758) 321,650
Prepaid expenses (20,358) (6,899) (214,853)
Accounts payable and accrued expenses (56,962) 35,223 (137,451)
----------- ----------- -----------
Net cash used in operating activities (214,626) (321,595) (467,073)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixture and equipment (38,378) (21,929) --
Loan to related party -- -- (71,225)
----------- ----------- -----------
Net cash used in investing activities (38,378) (21,929) (71,225)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable -- 255,000 597,950
----------- ----------- -----------
Net cash provided by financing activities -- 255,000 597,950
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (253,004) (88,524) 59,652
CASH AND CASH EQUIVALENTS, beginning of year 413,346 160,342 71,818
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 160,342 $ 71,818 $ 131,470
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
36
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION--GOING CONCERN
On May 31, 2004, the Company completed the sale of its remaining
Internet business to Tulix Systems, Inc. ("Tulix"), a company in which Gia
Bokuchava, Nino Doijashvili and Timothy R. Robinson, who were officers and
directors of the Company, are officers, directors and founding shareholders.
With the consummation of this Purchase Agreement the Company has completely
exited from all Internet related enterprises. This segment is treated as a
discontinued operation in all periods presented.
The Company is currently operating in two major segments. These
segments are defined as the Licensed Technologies Division which consists of the
marketing of the technologies licensed from Eurotech and the Specialty Lighting
Division which consists of the design, development, manufacture and sales of
specialty lighting and architectural products acquired in the merger with True
To Form, Limited.
On May 22, 2003, we completed a transaction with Eurotech pursuant to
which we now license NuCap(TM), HNIPU, EMR/AC, Rad-X, Firesil, LEM and RBHM
technologies from Eurotech. Currently, we are licensing the EKOR, HNIPU, EMR/AC,
Rad-X, Firesil, LEM and RBHM technologies from Eurotech, Ltd.. We intend to use
these licenses to derive revenue by partnering with other technology firms to
sell raw materials to producers or to sublicense the technologies and collect
royalties and/or licensing fees.
On December 31, 2004 we acquired True To Form, Limited. As a result of
the merger, True To Form is now our wholly owned subsidiary. True To Form
designs, develops, manufactures and sells specialty lighting products to
targeted segments of the traditional lighting industry and has recently
established a division that will focus on the homeland security market. True To
Form markets "high-end" lighting and architectural products for both commercial
and residential applications, including pendants, surface and ceiling
luminaries, table and floor lamps, commercial down-lights, bath fixtures, and
custom fixtures
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern which contemplate
the realization of assets and liquidation of liabilities in the normal course of
business. The Company has incurred significant losses since its incorporation,
resulting in an accumulated deficit at December 31, 2004 of approximately $28.8
million. The Company continues to experience negative cash flows from operations
and is dependent on continued financing from investors to sustain its
activities. There is no assurance that such financing will be available. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
RESTATED FINANCIAL STATEMENTS
The accompanying financial statements reflect the following restatements:
The Company determined that Preferred Series B, C, D and E shares were
subject to EITF 00-19, effective as of June 30, 2001. In accordance with EITF
00-19, the Company has reclassified Preferred Series C, D and E shares from
equity to temporary equity, at redemption value. In accordance with EITF 00-19,
the Company recorded Preferred Series B at redemption value. The transition
adjustment was recorded as a deemed dividend as of June 30, 2001.
The Company had determined that the above-mentioned issues were subject
to FAS 150, effective as of July 1, 2003. The Company had implemented FAS 150 in
its original filing, reporting a cumulative effect of a change in accounting
principle. In consideration of the implementation of EITF 00-19, the cumulative
effect of a change in accounting principle impact in the accompanying restated
financial statement is zero.
The Company has determined that all increases to the stated value of
the above-mentioned Preferred series should be recorded as a deemed dividend for
periods prior to the implementation of FAS 150 and interest expense for all
periods subsequent to the implementation of FAS 150.
37
The Company has determined that Preferred Series G stock is not subject
to FAS 150 and has been reclassified as temporary equity in the restated
financial statements.
The Company determined that effective March 13, 2003, the Company
entered into an agreement with the holder of Series B Preferred shares which
waived any amounts due and owing in respect of penalties resulting from the
Company's failure to have available a sufficient number of authorized shares of
common stock for conversion and waived any default by the Company in respect of
registration rights. Accordingly, the accrued penalties were reversed during the
quarter ended March 31, 2003, and recorded as a recovery of a deemed preferred
stock dividend. The penalties were removed from all subsequent reporting
periods.
The Company determined that effective March 14, 2003, the Company
entered into an agreement with the holder of Series C, D and E Preferred shares
which waived any amounts due and owing in respect of penalties resulting from
the Company's failure to have available a sufficient number of authorized shares
of common stock for conversion and waived any default by the Company in respect
of registration rights. Accordingly, the accrued penalties were reversed during
the quarter ended March 31, 2003, and recorded as a recovery of a deemed
preferred stock dividend. The penalties were removed from all subsequent
reporting periods.
The Company has determined that Series B, C, D Preferred shares should
be included in the weighted average shares outstanding on a diluted basis for
the period commencing with the expiration of the mandatory conversion date and
the date that the mandatory conversion was extended. Series B Preferred shares
had a mandatory conversion date of March 25, 2002. On March 13, 2003, the
mandatory conversion date was extended to March 31, 2004. Series C Preferred
shares had a mandatory conversion date of July 22, 2002 and on March 14, 2003,
the mandatory conversion date was extended to March 31, 2004. Series D preferred
shares had a mandatory conversion date of September 28, 2002, and March 14,
2003, the mandatory conversion date was extended to March 31, 2004. Series E
preferred shares had a mandatory conversion date of April 14, 2003, and on March
14, 2003 was extended to March 31, 2004.
The Company has determined that the beneficial conversion feature
associated with Preferred Series B, C, D and E shares are subject to FAS 133.
Accordingly, the beneficial conversion feature has been established as of June
30, 2001, at fair value.
The Company has determined that during August 2004, the shareholders of
Preferred series B, C, D and E waived their mandatory conversion rights. As of
September 30, 2004, the Series have been reclassified to temporary equity.
Earnings per share has been restated to give effect to the above
changes.
ASSET IMPAIRMENT
The Company evaluates the recoverability and carrying value of its
long-lived assets at each balance sheet date, based on guidance in SFAS No. 144,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. Among other factors considered in such evaluation is the
historical and projected operating performance of business operations, the
operating environment and business strategy, competitive information and market
trends. The Company recognized a charge of $52,584 during the year ending
December 31, 2002 for asset impairment.
INTANGIBLE ASSETS
Intangible assets represent the technologies licensed from Eurotech and
the Goodwill recognized in the purchase of True To Form, Ltd. The licenses were
valued at $986,223 and are being amortized on a straight line basis over five
years. The current intangible balance for the licenses is $673,919 which
represents the original valuation less $312,304 amortized through December 31,
2004.
The Goodwill for True To Form was valued at $1,469,108. Acquired
goodwill is considered to have an indefinite life pursuant to Statement of
Financial Accounting Standards No. SFAS 142, "Goodwill and Other Intangible
Assets," and accordingly is not amortized but subject to periodic impairment
tests.
38
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, subsequent to acquisition, after the
elimination of all significant intercompany accounts and transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH FLOWS, CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, management considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
Interest paid during 2004 and 2003 were $0 and $0 respectively. Income
taxes paid during 2004 and 2003 were $0 and $0 respectively.
During the year ending December 31, 2004, the Company entered into the
following non-cash investing and financing transactions:
Exchange of warrants for services rendered $258,942
Issuance of common stock for services rendered 104,850
Acquisition of True To Form Ltd, Inc. 1,469,108
Conversion of preferred stock to common stock 683,814
ACCOUNTS RECEIVABLE, NET
Accounts receivable are shown net of the allowance for doubtful accounts.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
THREE YEARS ENDING ON DECEMBER 31,
ADDITIONS
(REDUCTIONS) DEDUCTIONS
BALANCE AT CHARGED TO (A/R BALANCE AT
BEGINNING OF COSTS AND WRITTEN OFF END OF
DESCRIPTION PERIOD EXPENSES TO BAD DEBT) PERIOD
----------------------------- ------------ ---------- ----------- ----------
Year ending December 31, 2002 (68,546) (21,113) 45,926 (43,733)
Year ending December 31, 2003 (43,733) (10,479) 6,980 (47,232)
Year ending December 31, 2004 (47,232) (72,782) 120,014 --
FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment are recorded at cost less accumulated
depreciation, which is computed using the straight-line method over the
estimated useful lives of the related assets. Furniture and fixtures are
depreciated over a 5 year life; computer equipment is depreciated over a 3 year
life. Assets recorded under capital leases are amortized over the shorter of
their useful lives or the term of the related leases using the straight-line
method. Maintenance and repairs are charged to expense as incurred. Upon sale,
retirement or other disposition of these assets, the cost and the related
accumulated depreciation are removed from the respective accounts and any gain
or loss on the disposition is included in income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments
approximates fair value.
REVENUE RECOGNITION
Revenue from the sale of products related to our licensed technology is
recognized upon shipment of the product provided that title passes, the price is
fixed or determinable and collection of the receivable is probable.
ADVERTISING EXPENSES
Advertising costs are expensed when incurred. No advertising expenses
were incurred for the years ended December 31, 2002, 2003 or 2004.
39
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method as described by Statement of Financial Accounting Standards No. 109,
Accounting For Income Taxes ("SFAS No. 109").
Under SFAS 109 the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
The Company provides a valuation allowance for deferred tax assets
which are determined by management to be below the threshold for realization
established by SFAS 109.
BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share are calculated according to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"). Due to the net loss position of the Company for each of the three years
in the period ending December 31, 2004, the numerator and denominator are the
same for both basic and diluted loss per share.
The table below illustrates the calculation of the loss per share amounts
attributable to continuing and discontinued operations applicable to common
shareholders.
Years ended December 31,
--------------------------------------------
2002 2003
as restated as restated 2004
------------ ------------ ------------
Net loss from continuing operations (213,887) (509,098) (2,600,584)
Less: Deemed preferred stock dividend (1,004,681) (248,759)
Add: Recovery of preferred stock dividend -- 1,527,171 --
------------ ------------ ------------
Loss from continuing operations applicable to common (1,218,568) 769,314 (2,600,584)
shareholders
Income (loss) from discontinued operations 118,001 50,978 (30,477)
------------ ------------ ------------
Net income(loss) applicable to common shareholders (1,100,567) 820,292 (2,631,061)
------------ ------------ ------------
Net income(loss) per share:
Continuing operations (0.08) 0.043 (0.155)
Discontinued operations 0.01 0.011 (0.002)
------------ ------------ ------------
Net income (loss) per share - basic (0.07) 0.054 (0.157)
------------ ------------ ------------
Weighted average common shares outstanding - basic 14,999,157 14,999,157 16,790,165
------------ ------------ ------------
Net income (loss) per share - diluted
Continuing operations (0.029) 0.023 (0.155)
Discontinued operations 0.003 0.003 (0.002)
------------ ------------ ------------
Net income (loss) per share - diluted (0.026) 0.026 (0.157)
------------ ------------ ------------
Weighted average common shares outstanding - diluted 214,687,508 31,820,137 16,790,165
------------ ------------ ------------
The Company has not declared or paid any dividends to the shareholders
of the Preferred Stock. However, the Preferred Stock possesses conversion rights
(the "Beneficial Conversion Feature") that are analogous to dividends.
Accordingly, the Beneficial Conversion Feature has been accounted for as a
Deemed Preferred Stock Dividend. (See footnotes 7, 8, 9 and 10).
40
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R
requires companies to recognize in the statement of operations the grant-date
fair value of stock options and other equity-based compensation issued to
employees. FAS No. 123R is effective beginning in the Company's second quarter
of fiscal 2006. The Company is in process of evaluating the impact of this
pronouncement on its financial position.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company believes that the adoption of this standard will have no material impact
on its financial statements.
In December 2003, the FASB issued Interpretation No. 46 (as revised),
"Consolidation of Variable Interest Entities." Implementation of the provisions
of FIN 46 is effective for the first reporting period after March 15, 2004. FIN
46 requires the consolidation of entities that are controlled by a company
through interests other than voting interests. Under the requirements of this
interpretation, an entity that maintains a majority of the risks or reward
associated with VIEs , also known as Special Purpose Entities, is viewed to be
effectively in the same position as the parent in a parent-subsidiary
relationship. The Company has determined that it has not created or entered into
any VIEs that would require consolidation. The Company believes the adoption of
the provisions of FIN 46 in the first quarter of 2004 will have no impact on its
results of operations, cash flows or financial position.
In April 2003, the FASB issued Statement No. 149, "Amendment of
Statement No. 133 on Derivative Instruments and Hedging Activities" (SFAS No.
149). This Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133. The provisions of
this Statement are effective for all derivatives and hedging activity that the
Company enters into after June 30, 2003. The adoption of this Statement had no
impact on the Company's results of operations, cash flows or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146), which addresses the
recognition, measurement, and reporting of costs associated with exit or
disposal activities and supercedes EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" (EITF 94-3). The
fundamental difference between SFAS No. 146 and EITF 94-3 is the requirement
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred rather than at the date an entity
commits to an exit plan, which by itself, does not create an obligation that
meets the definition of a liability. SFAS No. 146 also requires that the initial
measurement of a liability be recorded at fair value. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with an early application encouraged. The adoption of this
statement had no impact on the Company's results of operations, cash flows or
financial position.
41
STOCK BASED COMPENSATION
The Company applies the intrinsic value method, Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25),
in accounting for employee stock-based compensation arrangements. The Company
has included the pro-forma disclosures required under SFAS No. 123, "Accounting
for Stock-Based Compensation". Non-employee stock compensation arrangements are
accounted for under FAS 123 and EITF 96-18, "Accounting for Equity Instruments
that are Issued to Other than Employees, or in Conjunction with Selling Goods or
Services."
Based on calculations using the Black-Scholes option-pricing model, the
weighted average grant date fair value of options and warrants was $0, $0 and $0
in 2002, 2003 and 2004, respectively. The fair value has been estimated using
the following assumptions used for grants in 2002, 2003 and 2004, respectively:
no dividend yield for all periods; an expected life of 5 years for all periods;
volatility of 110%, 110% and 110%; and weighted average risk free interest rates
was not applicable.
The pro forma impact on the Company's net loss per share had
compensation cost for all of the Company's stock-based compensation plans been
recorded at the date of grant based on the method prescribed by SFAS No. 123 is
shown below:
FOR THE THREE YEARS
ENDED DECEMBER 31,
-------------------------------------
2002 2003
AS RESTATED AS RESTATED 2004
----------- ----------- -----------
Loss applicable to common shareholders:
As reported (1,100,567) 820,292 (2,631,061)
Pro forma (1,270,276) 727,151 (2,645,961)
Basic income (loss) per share:
As reported (0.070) 0.050 (0.157)
Pro forma (0.080) 0.050 (0.158)
Diluted income (loss) per share:
As reported (0.006) 0.026 (0.157)
Pro forma (0.006) 0.023 (0.158)
OTHER MATTERS
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment, net, are comprised of the following
as of:
DECEMBER 31,
-----------------------
2003 2004
--------- ---------
Furniture and fixtures 7,199 7,199
Computer equipment 8,548 8,548
Vehicles 32,160 32,160
--------- ---------
47,907 47,907
Less:accumulated depreciation and amortization 11,236 19,477
--------- ---------
36,361 28,430
Fixed assets held for sale (Tulix) 105,624
--------- ---------
142,295 28,430
42
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31, 2004
-----------------
Licensed technology rights:
Basis 986,223
Amortization to date (312,304)
Subtotal 673,919
True To Form Goodwill:
Basis 1,469,108
Total 2,143,027
Intangible assets represent the technologies licensed from Eurotech and
the Goodwill recognized in the purchase of True To Form, Inc. The licenses were
valued at $986,223 and are being amortized on a straight line basis over five
years. The current intangible balance for the licenses is $673,919 which
represents the original valuation less $312,304 amortized through December 31,
2004. The Goodwill for True To Form was valued at $1,469,108. Acquired goodwill
is considered to have an indefinite life pursuant to Statement of Financial
Accounting Standards No. SFAS 142, "Goodwill and Other Intangible Assets," and
accordingly is not amortized but subject to periodic impairment tests.
4. SEGMENT INFORMATION
On May 31, 2004, the Company completed the sale of its remaining
Internet business to Tulix Systems, Inc. ("Tulix"), a company in which Gia
Bokuchava, Nino Doijashvili and Timothy R. Robinson, who were officers and
directors of the Company, are officers, directors and founding shareholders.
With the consummation of this Purchase Agreement the Company has completely
exited from all Internet related enterprises. This segment is treated as a
discontinued operation in all periods presented.
The Company is currently operating in two major segments. These
segments are defined as the Licensed Technologies Division which consists of the
marketing of the technologies licensed from and the Specialty Lighting Division
which consists of the design, development, manufacture and sales of specialty
lighting and architectural products acquired in the merger with True To Form,
Limited. The Company will commence reporting the income statement of True To
Form the first quarter of 2005.
43
5. COMMITMENTS AND CONTINGENCIES
FACILITIES LEASES:
As of December 31, 2004 the Company occupied approximately 550 square
feet in one office building in Ridgefield, Connecticut on a lease that goes
through September 2006. With the acquisition of True To Form we have added
approximately 10,000 sq feet combined warehouse and offices. True to Form leases
its warehouse and administrative offices located in Braintree, Massachusetts
under a lease arrangement, which provides for, among other things, monthly base
rental payments of approximately $3,500 through February 28, 2005 plus real
estate taxes and insurance. The total rent expense under this arrangement was
$61,063 and $58,850 for the years ended December 31, 2004 and 2003 respectively.
Commencing in July 2003 and ending in July 2004 True to Form contracted
for additional warehouse and light manufacturing space located in Slymar,
California under a lease, which provides for, among other things, monthly rental
payments of approximately $875. The total lease expense under this arrangement
for the year ended December 31, 2003 was $8,450. As of July 16, 2004 the Company
had not renewed the lease but was continuing to occupy the space on a month to
month basis.
As of March 26, 2004 we occupy approximately 7,000 square feet in one
office building in Atlanta, Georgia under a lease expiring in October 2004. This
facility serves as our headquarters and computer center. We have abandoned an
office in New York City where we used to occupy approximately 3,400 square feet
under a lease that expired in January 2003. On June 1, 2004 the Company was
released from liability by Piedmont Ivy and Associates, the landlord, and Tulix
Systems, Inc. for the approximately 7,000 square feet it had leased in Atlanta,
Georgia. That lease, which had an expiration date of October 31, 2004, was
transferred to, and assumed by Tulix Systems, Inc. as a part of the sale of the
Internet Services Division.
As of December 31, 2003 we have an accrual for real estate disposition
liabilities of approximately $81,317, which we believe will be sufficient to
settle all obligations related to the closing and abandonment of our offices in
New York.
Rental expense under operating leases was approximately $157,772,
$177,825 and $ 49,776 for the years ended December 31, 2002, 2003 and 2004
respectively.
OPERATING LEASES:
The Company has entered into various operating leases for equipment, which
expire at different times through May 2006; these leases call for, among other
things, monthly rental payment of approximately $407.
The total equipment lease expense for the years ended December 31, 2004 and 2003
was $5,547 and $8,751, respectively.
The minimum future rental payments, in the aggregate, under non-cancelable
facility and operating leases having remaining terms in excess of one year as of
December 31, 2004 are as follows:
Year Ending
December 31, Amount
------------ -------
2005 $ 4,884
2006 2,035
-------
$ 6,919
44
LEGAL PROCEEDINGS:
On February 9, 2005 Global Matrechs, Inc, filed suit in the Supreme
Court of the State of New York, County of New York against Eurotech, Ltd. for
its failure to fulfill its obligations under the license agreement between the
parties dated May 22, 2003. The suit also seeks the enforcement of the notes
issued by Eurotech to Woodward, LLC which were assumed by Global Matrechs in the
exchange agreement between Global Matrechs and Woodward on January 31, 2005. The
complaint seeks damages totaling $672,677 plus interest and attorney's fees
which are yet to be determined.
On April 13, 2005 Carey Naddell, CEO of Eurotech, Ltd., filed suit
against the Company for damages based upon an alleged breach of a written
service agreement. The Company has responded and feels at this time there is no
merit to this action. We will diligently defend this action.
OTHER:
Various legal proceedings may arise in the normal course of business.
Additionally, the Company's software and equipment are vulnerable to computer
viruses or similar disruptive problems caused by customers or other Internet
users. Computer viruses or problems caused by third parties could lead to
interruptions, delays or cessation in service to the Company's customers.
Moreover, customers of the Company could use computer files and information
stored on or transmitted to Web server computers maintained by the Company to
engage in illegal activities that may be unknown or undetectable by the Company,
including fraud and misrepresentation, and unauthorized access to computer
systems of others. Furthermore, inappropriate use of the Internet by third
parties could also jeopardize the security of customers' confidential
information that is stored in the Company's computer systems. Any such actions
could subject the Company to liability to third parties. The Company does not
have errors and omissions, product liability or other insurance to protect
against risks caused by computer viruses or other misuse of software or
equipment by third parties. Although the Company attempts to limit its liability
to customers for these types of risks through contractual provisions, there can
be no assurance that these provisions will be enforceable. Management does not
believe that there are currently any asserted or unasserted claims that will
have a material adverse effect on the financial position, results of operations
or cash flows of the Company.
6. EQUITY AND CONVERTIBLE DEBT TRANSACTIONS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an
45
asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and, otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. For financial instruments created before the issuance date of this
statement, transition shall be achieved by reporting the cumulative effect of a
change in accounting principle by initially measuring the financial instrument
at fair value.
Since the Series B, C, D, E and G Preferred Stock represent financial
instruments that embody unconditional obligations that will be settled with a
variable number of the Company's common equity shares, based on a fixed monetary
amount that was known at inception, the Company reclassified its Series B, C, D,
and E Preferred Stock as a liability and initially reported a loss of $802,730
as a cumulative effect of a change in accounting principle in the 2003 financial
statements, beginning with the reporting period July 1, 2003 (the effective date
of FAS 150). The restated financial statements reflected the adoption of EITF
No. 00-19, effective as of June 30, 2001. With the adoption of EITF No. 00-19,
the adoption of FAS 150 did not require a cumulative effect of a change in
accounting principle.
On August 14, 2004, the mandatory conversion rights of Series B, C D
and E Preferred Stock were terminated. At that time, these liabilities were
reclassified to temporary equity.
In accordance with the terms of the private placement agreements
underlying our Series B, C, D, E, and G Preferred Stock, penalties accrue at the
rate of 2% per 30 day period of the outstanding purchase price of the
unregistered securities. Prior to the adoption of SFAS No. 150, these penalties
were recorded as deemed dividends in the amounts of $637,572, $638,387 and
$319,194 for the years ended December 31, 2001, 2002 and 2003 respectively.
Since the adoption of SFAS No. 150, and for the period from July 1, 2003 until
December 31, 2003, the Company has recorded $319,194 in interest expense related
to the penalty and $150,273 in interest expense related to the required increase
in stated value as called for in the conversion rate calculation of the Series
B, C, D and E Preferred stock. On March 13, 2003 the holders of Series B, and on
March 14, 2003, the holder of Series C, D and E preferred stock waived all
penalties incurred. The restated financial statements reflect the reversal of
all of these accrued penalties, originally reported as deemed stock dividends or
interest expense.
During 2004, the Company entered into a series of promissory notes,
which are convertible into common shares, and have cashless warrants. See Note
13 to the financial statements.
7. ISSUANCE OF SERIES B PREFERRED STOCK
The Company issued Series B Preferred Stock totaling $2,500,000 on
March 25, 1999 (the "Issuance Date"). The Series B Preferred Stock investors
were issued 125 shares of preferred stock, having a stated value of $20,000 per
share, and 225,000 warrants to purchase common stock at $5.70 per share. The
Company paid offering costs of $216,250 cash plus 25,000 warrants to purchase
common stock at $5.70 per share, resulting in net proceeds to the Company of
$2,283,750 for the preferred shares and warrants.
The Series B Preferred Stock bears no dividends and is convertible at
the option of the holder at the earlier of 90 days after issuance or the
effective date of a registration statement covering the shares. The warrants are
exercisable at any time and expire five years from the date of issuance.
The Series B Preferred Stock is convertible into common stock at a
conversion price equal to the lower of (a) the average of the closing price for
four consecutive trading days in the twenty-five consecutive trading days ending
one day prior to the conversion date ($4.86 at the Issuance date) and (b) $5.23.
The number of common shares into which the Series B Preferred Stock is
convertible is determined by dividing the stated value of the Series B Preferred
Stock, increased by 5% annually, by the conversion price. As the Series B
Preferred Stock was to be automatically convertible on March 24, 2002, the most
beneficial conversion ratio was determined to include the additional common
shares attributable to the 5% annual increase for the three year period ending
in 2002. After adjustment for this additional benefit the $4.86 conversion price
is reduced to $4.23, the most beneficial conversion price at the Issuance Date.
In determining the accounting for the beneficial conversion feature,
the Company first allocated the net proceeds of $2,283,750 to the preferred
stock and the warrants based on their relative fair values at the Issuance Date,
resulting in $1,766,217 assigned to the preferred stock and $517,533 assigned to
the warrants as of March 24,
46
1999. The Company then allocated $899,284 of the Series B net proceeds to
additional paid in capital for the beneficial conversion feature. The beneficial
conversion feature will be recognized as a deemed dividend to the preferred
shareholders over the minimum period in which the preferred shareholders can
realize that return. Approximately $18,000 and $2,672 of the beneficial
conversion was amortized in 2000 and 2001, respectively. During 1999, 10 shares
of Series B Preferred Stock were converted into 63,317 shares of common stock.
During 2000, 97.19 shares of Series B Preferred Stock were converted into
902,307 shares of common stock. During 2004, 5.36 share of Series B Preferred
Stock were converted into 5,598,298 shares of common stock.
The Company has the option to redeem the Series B Preferred Stock after
110 days for 120% of face value. Additionally, if the Company has issued common
stock upon conversion of the Series B Preferred Stock such that 19.99% of the
common stock outstanding is held by the preferred shareholders, the Company must
obtain approval of the shareholders before any more preferred shares can be
converted. If such approval is not obtained within 60 days of notice, the
preferred shareholders may require the Company to repurchase the remaining
Series B Preferred Stock at 120% of face value. Historically the Series B
Preferred Stock was presented outside of permanent equity as the outcome of the
shareholder vote, and possible redemption, was outside of the control of the
Company.
In March of 2002, the outstanding shares of our Series B preferred
stock were scheduled to convert automatically into shares of common stock,
pursuant to the Certificate of Designations governing our Series B preferred
stock; however, because we did not have a sufficient number of authorized shares
of Common Stock available for issuance upon conversion of these shares of Series
B preferred stock, no shares of Series B preferred stock were converted. On
March 13, 2003, the holders of Series B preferred stock waived all penalties
that were accruing as a result of the Company's inability to convert the shares
to common stock in March of 2002. On August 14, 2004, all mandatory conversion
rights were terminated.
The restatement of the historical financial statements reflects the
adoption of EITF No. 00-19 effective as of June 30, 2001. The adoption of EITF
No. 00-19 recorded Series B preferred stock at redemption value. This resulted
in an increase to the deemed dividend to Series B preferred stockholders in
2001, 2002 and 2003 of $153,757, 17,810 and $8,910, respectively. In addition,
the restatement of the historical financial statements reflected the reversal of
all penalties as of March 13, 2003.
8. ISSUANCE OF SERIES C PREFERRED STOCK
On July 28, 1999, the Company completed a private placement of
$3,500,000 principal amount of the Company's Series C Convertible Preferred
Stock, par value $.01 per share (the "Series C Preferred Stock") and warrants to
acquire up to 59,574 shares of Common Stock (the "Series C Preferred Warrants").
The Series C Preferred Stock has an initial stated value of $20,000 per share,
which stated value increases at the rate of 6% per year (such stated value, as
increased from time to time, is referred to as the "Series C Stated Value").
Each Series C Preferred Share is convertible, from and after 120 days following
the date of issuance, at the option of the holder, into such number of shares of
Common Stock as is determined by dividing the Series C Stated Value by the
lesser of (a) $5.875, and (b) 82.5% of the average of the closing bid prices for
the five trading days preceding the date of conversion. Any Series C Preferred
Stock issued and outstanding on July 22, 2002 to automatically be converted into
Common Stock at the conversion price then in effect.
In determining the accounting for the beneficial conversion feature,
the Company first allocated the net proceeds of $3,323,748 to the preferred
stock and the warrants based on their relative fair values at the Issuance Date,
resulting in $3,170,904 assigned to the preferred stock and $152,844 assigned to
the warrants as of July 27, 1999. The Company then allocated $1,678,505 of the
Series C net proceeds to additional paid in capital for the beneficial
conversion feature. The beneficial conversion feature will be recognized as a
deemed dividend to the preferred shareholders over the minimum period in which
the preferred shareholders can realize that return. Approximately $72,000 and
$190 of the beneficial conversion was amortized in 2000 and 2001, respectively.
During 1999, 37.5 shares of Series C Preferred Stock were converted into 281,460
shares of common stock. During 2000, 45.4 shares of Series C Preferred Stock
were converted in to 802,056 shares of common stock. During 2001, 1.63 shares of
Series C Preferred Stock was converted into 5,640,000 shares of Common Stock.
During 2004, 20.38 share of Series C Preferred Stock were converted into
15,626,358 shares of common stock.
47
The Company has the right, in its sole discretion, to redeem, from time
to time, any or all of the Series C Preferred Stock; provided that certain
conditions are met, including the availability of cash, credit or standby
underwriting facilities available to fund the redemption at 120% of the original
purchase price.
In July 2002, the outstanding shares of our Series C preferred stock
were scheduled to convert automatically into shares of common stock, pursuant to
the Certificate of Designations governing our Series C preferred stock; however,
because we did not have a sufficient number of authorized shares of common stock
available for issuance upon conversion of these shares of Series C preferred
stock, no shares of Series C preferred stock were converted. On March 14, 2003,
the holder of Series C preferred stock waived all penalties that were accruing
as a result of the Company's inability to convert the shares to common stock in
July of 2002. On August 14, 2004, all mandatory conversion rights were
terminated.
The Series C Preferred Warrants expired on July 27, 2004 and had an
exercise price of $7.34 per share, subject to adjustment under certain
circumstances.
The restatement of the historical financial statements reflects the
adoption of EITF No. 00-19 effective as of June 30, 2001. The adoption of EITF
No. 00-19 recorded Series C preferred stock at redemption value. This resulted
in an increase to the deemed dividend to Series C preferred stockholders in
2001, 2002 and 2003 of $565,585, 108,429 and $54,064, respectively. In addition,
the restatement of the historical financial statements reflected the reversal of
all penalties as of March 13, 2004.
9. ISSUANCE OF SERIES D PREFERRED STOCK
On September 28, 1999, the Company completed a private placement of
$1,500,000 principal amount of the Company's Series D Convertible Preferred
Stock, par value $.01 per share (the "Series D Preferred Stock") and warrants to
acquire up to 25,000 shares of Common Stock (the "Series D Preferred Warrants").
The Series D Preferred Stock has an initial stated value of $20,000 per share,
which stated value increases at the rate of 6% per year (such stated value, as
increased from time to time, is referred to as the "Series D Stated Value").
Each Series D Preferred Share is convertible, from and after 120 days following
the date of issuance, at the option of the holder, into such number of shares of
Common Stock as is determined by dividing the Series D Stated Value by the
lesser of (a) $5.875, and (b) 82.5% of the average of the closing bid prices for
the five trading days preceding the date of conversion. Any Series D Preferred
Stock issued and outstanding on September 22, 2002 was to automatically be
converted into Common Stock at the conversion price then in effect.
In determining the accounting for the beneficial conversion feature,
the Company first allocated the net proceeds of $1,423,750 to the preferred
stock and the warrants based on their relative fair values at the Issuance Date,
resulting in $1,387,477 assigned to the preferred stock and $36,273 assigned to
the warrants as of September 28, 1999. The Company then allocated $642,084 of
the Series D net proceeds to additional paid in capital for the beneficial
conversion feature. The beneficial conversion feature will be recognized as a
deemed dividend to the preferred shareholders over the minimum period in which
the preferred shareholders can realize that return. Approximately $280,000 and
$281,000 of the beneficial conversion was amortized in 1999 and 2000,
respectively. During 2000, 73.7 shares of Series D Preferred Stock were
converted into 589,573 shares of common stock. During 2004, .98 shares of Series
D Preferred Stock were converted into 965,538 shares of common stock.
The right of the holders of the Series D Preferred Stock to convert
their shares is also subject to the following restrictions: (i) during the
period beginning on the issuance date through the following 90 days, each holder
may not convert more than 25% of the Series D Preferred Stock purchased by such
holder; (ii) during the period beginning on the issuance date through the
following 120 days, each holder may not convert more than 50% of the Series D
Preferred Stock purchased by such holder; and (iii) during the period beginning
on the issuance date through the following 150 days, each holder may not convert
more than 75% of the Series D Preferred Stock purchased by such holder. At any
time after the issuance date, the Company shall have the right, in its sole
discretion, to redeem, from time.
48
In September 2002, the outstanding shares of our Series D preferred
stock were scheduled to convert automatically into shares of common stock,
pursuant to the Certificate of Designations governing our Series D preferred
stock; however, because we did not have a sufficient number of authorized shares
of common stock available for issuance upon conversion of these shares of Series
D preferred stock, no shares of Series D preferred stock were converted. . On
March 14, 2003, the holder of Series D preferred stock waived all penalties that
were accruing as a result of the Company's inability to convert the shares to
common stock in September of 2002. On August 14, 2004, all mandatory conversion
rights were terminated.
The restatement of the historical financial statements reflects the
adoption of EITF No. 00-19 effective as of June 30, 2001. The adoption of EITF
No. 00-19 recorded Series D preferred stock at redemption value. This resulted
in an increase to the deemed dividend to Series C preferred stockholders in
2001, 2002 and 2003 of $87,139, 1,550 and $775, respectively. In addition, the
restatement of the historical financial statements reflected the reversal of all
penalties as of March 13, 2004.
10. ISSUANCE OF SERIES E PREFERRED STOCK
On April 14, 2000, the Company completed a private placement of
$2,127,000 principal amount of the Company's Series E Convertible Preferred
Stock, par value $.01 per share (the "Series E Preferred Stock") and warrants to
acquire 66,667 shares of common stock (the "Series E Preferred Warrants"). The
Series E Preferred Stock has an initial stated value of $20,000 per share, which
stated value increases at the rate of 8% per year. Each Series E Preferred Share
is convertible 120 days following the date of issuance, at the option of the
holder, into such number of shares of common stock as is determined by dividing
the Series E Stated Value by the lesser of (a) $3.53, or (b) 82.5% of the
average of the closing bid prices for the five trading days preceding the date
of conversion. Any Series E Preferred Stock issued and outstanding on April 14,
2003 were to automatically be converted into Common Stock at the conversion
price then in effect. These provisions have now been waived by the holders of
the Series E preferred stock (see note 15).
Pursuant to certain registration rights granted to the investors in the
private placement, we are obligated to file a registration statement under the
Securities Act of 1933 with respect to a minimum of 1,808,293 shares of common
stock issuable upon conversion of the Series E Preferred Stock and exercise of
the Series E Preferred Warrants. The Company is obligated to pay penalties if
the Registration Statement is not filed and/or declared effective within the
specified time periods. As of March 13, 2003, penalties were waived to the
Series E Preferred Stock holders. On August 14, 2004, all mandatory conversion
rights were terminated.
At any time after the issuance date, the Company shall have the right,
in its sole discretion, to redeem, from time to time, any or all of the Series E
Preferred Stock; provided that certain conditions are met, including the
availability of cash, credit or standby underwriting facilities available to
fund the redemption. The redemption price will be calculated as (i) 105% of the
original purchase price for the first 30 days following the issuance date; (ii)
110% of the original purchase price for the next 90 days thereafter and (iii)
120% of the original purchase price after 120 days from the issuance date.
In determining the accounting for the beneficial conversion feature,
the Company first allocated the net proceeds of $1,855,426 to the Series E
Preferred Stock and the Series E Preferred Warrants based on their relative fair
values at the issuance date, resulting in $1,791,211 assigned to the Series E
Preferred Stock and $64,215 assigned to the Series E Preferred Warrants as of
April 14, 2000. The Company then allocated $1,059,347 of the Series E Preferred
Stock net proceeds to additional paid in capital for the beneficial conversion
feature. The beneficial conversion feature will be recognized as a deemed
dividend to the preferred shareholders over the minimum period in which the
preferred shareholders can realize that return. $1,058,656 had been amortized as
of December 31, 2003.
The Series E Preferred Warrants expired on April 14, 2005 and had an
exercise price of $3.35 per share, subject to adjustment under certain
circumstances.
The restatement of the historical financial statements reflects the
adoption of EITF No. 00-19 effective as of June 30, 2001. The adoption of EITF
No. 00-19 recorded Series D preferred stock at redemption value. This resulted
in an increase to the deemed dividend to Series C preferred stockholders in
2001, 2002 and 2003 of
49
$626,927, 170,160 and $85,080, respectively. In addition, the restatement of the
historical financial statements reflected the reversal of all penalties as of
March 13, 2004.
11. EUROTECH TRANSACTION AND ISSUANCE OF SERIES F, G AND H PREFERRED STOCK
On May 22, 2003, the Company entered into a License and Exchange
Agreement with Eurotech. Under the provisions of that agreement the Company
issued two series of preferred stock in consideration for the licensing
arrangement.
On May 22, 2003, the Company issued 13,500 shares of the Company's
Series F Convertible Preferred Stock, par value $.01 per share. Each Series F
Share was convertible into 10,000 shares of common stock and has a stated value
of $1,000 per share. The holders of the outstanding shares of Series F Preferred
Stock have cancelled and surrendered their Series F Shares and have been
subsequently issued shares of Series H Preferred Stock.
On September 30, 2003, the Company issued 13,500 shares of the
Company's Series H Convertible Preferred Stock, par value $.01 per share. Each
Series H Share is convertible into 10,000 shares of common stock and has a
stated value of $1,000 per share; provided, however, that no holder of Series H
shares may convert Series H shares into shares of common stock if the aggregate
shares of common stock beneficially owned by such holder and its affiliates
would exceed 9.9% of the outstanding shares of common stock following such
conversion (excluding, for purposes of the calculation, the unconverted Series H
Shares).
On May 22, 2003, the Company issued 1,069 shares of the Company's
Series G Convertible Preferred Stock, par value $.01 per share. The Series G
shares have a stated value of $1,000 per share. Each Series G Preferred Share is
convertible, from and after 120 days following the date of issuance, at the
option of the holder, into such number of shares of Common Stock as is
determined by dividing $1,000 per share by a number equal to 82.5% of the
average of the closing bid prices for the five trading days preceding the date
of conversion. No holder of Series G Shares may convert Series G Shares into
shares of common stock if the aggregate shares of Common Stock beneficially
owned by such holder and its affiliates would exceed 9.9% of the outstanding
shares of Common Stock following such conversion (excluding, for purposes of the
calculation, the unconverted Series G Shares). The Series G Preferred Stock has
no mandatory conversion date. In determining the accounting for the beneficial
conversion feature, the Company allocated $986,223 to the preferred stock based
on its relative fair value at the Issuance Date. The Company then allocated
$153,413 of the Series G value to additional paid in capital for the beneficial
conversion feature. The beneficial conversion feature will be recognized as a
deemed dividend to the preferred shareholders over the minimum period in which
the preferred shareholders can realize that return beginning on the date when
the shares are first convertible. During 2003, the beneficial conversion of
$153,413 was amortized.
12. ISSUANCE OF SERIES I PREFERRED STOCK
In June, the Company entered into a second exchange agreement with
Brittany to acquire 5,640,000 shares of the Company's common stock at $0.10 per
share. On September 24, 2004, Brittany received 490.5 shares of Series I
convertible preferred stock, $0.01 par value per share, of the Company in
exchange for 4,905,000 shares of common stock of the Company. Each share of
Series I preferred stock has a stated value of $100 and is convertible into
10,000 shares of common stock; provided, however, that a holder of Series I
preferred stock may not convert their shares if the aggregate number of shares
of common stock beneficially owned by the holder and its affiliates would exceed
9.9% of the outstanding shares of common stock following such conversion
(excluding, for purposes of this calculation, the unconverted shares of Series I
preferred stock). In addition, Brittany agreed to loan the Company up to
$100,000 . As of December 31, 2004, the Company had borrowed $75,000. See note
13.
13. ISSUANCE OF CONVERTIBLE PROMISSORY NOTES
On June 1, 2004, as part of the agreement to Issue Preferred Series I
(see Note 12), the Company borrowed $75,000 from Brittany. Under the terms of
the convertible promissory note, Brittany, at its option, can convert the note
into 1,500,000 shares of common stock at a price of $.05 per share or 80% of
fair market value, at the time of
50
conversion. The Company allocated $60,000 to the beneficial conversion feature,
to be amortized over a period of twenty-four months; the period in which the
holder can convert. During 2004, the Company amortized $17,500 of the beneficial
conversion feature to interest expense.
During September 2004, the Company restructured its borrowings from
McNab into a convertible promissory note of $542,950. Under the terms of the
convertible promissory note, McNab, at its option, can convert the note into
shares of common stock at a price of $.05 per share or 80% of fair market value,
at the time of conversion. The Company allocated $325,770 to the beneficial
conversion feature, to be amortized over a period of twenty-four months; the
term of the promissory note. During 2004, the Company amortized $81,443 of the
beneficial conversion feature to interest expense.
On October 19, 2004, we entered into a securities purchase agreement
with Southridge Partners LP. Southridge purchased a nonnegotiable 2% secured
convertible promissory note in the principal amount of $250,000 and we issued it
a warrant to purchase 10,000,000 shares of our common stock. On October 21,
2004, we entered into a securities purchase agreement with Dean M. DeNuccio. Mr.
DeNuccio purchased a nonnegotiable 2% secured convertible promissory note in the
principal amount of $25,000 and we issued to Mr. DeNuccio a warrant to purchase
1,000,000 shares of our common stock. On November 5, 2004, we entered into a
securities purchase agreement with Colonial Fund, LLC. Colonial purchased a
nonnegotiable 2% secured convertible promissory note in the principal amount of
$50,000 and we issued it a warrant to purchase 2,000,000 shares of our common
stock.
Each of these promissory notes are convertible into shares of our
common stock at a conversion price of $0.02 and each of the warrants are
exercisable for $0.025 per share of our common stock. The promissory notes
mature in two years and the warrants expire in five years. Should our common
stock fall below $0.03 cents for ten consecutive trading days, any holder of
these notes may force prepayment at 140% of the principle amount plus interest.
Conversion and exercise rights are restricted in that any of these note or
warrant holders may not at any time have beneficial ownership of more than
4.999% of the total number of issued and outstanding shares of our common stock.
On October 22, 2004 and November 5, 2004, Global Matrechs, Inc.,
entered into securities purchase agreements with Dean M. DeNuccio and Colonial
Fund LLC relating to the private placement of 2% secured convertible promissory
notes in the aggregate principal amount of $75,000 with a maturity of two (2)
years and warrants to purchase 3,000,000 shares of its common stock at an
exercise price of $0.025 per share, which expire in five years in exchange for
aggregate consideration equal to the principal amount of the Notes. The Company
received approximately $70,000 in proceeds after deducting offering expenses.
The Notes are convertible, at the option of the holders, into shares of
common stock of the Company at a conversion price of $0.02 per share. Each
Purchaser may require the Company to repurchase some or all of its Note if the
market price of the common stock of the Company falls below $0.03 per share for
ten (10) consecutive trading days, at a repurchase price equal to 140% of the
principal amount of the Note.
In determining the value of the beneficial conversion feature of the
Southridge, DeNuccio and Colonial notes, the Company first allocated $489,484,
$38,901 and $77,803, respectively to the value of the warrants. Since this value
exceeds the proceeds received, the differential was recorded as additional paid
in capital, discount on notes payable and a prepaid expense. The prepaid expense
is amortized over the 24 month period of the convertible note. The value of
beneficial conversion feature was valued at $625,000, $62,500 and $125,000,
respectively. Since the conversion is at the option of the holder, the value of
the beneficial conversion feature was amortized to interest expense in full
during 2004.
On December 3, 2004, the Company and Deer Creek Fund, LLC entered into
a securities purchase agreement relating to the private placement of a 2%
secured convertible promissory notes in the aggregate principal amount of
$50,000 with a maturity of two (2) years and a warrant to purchase 2,000,000
shares of its common stock at an exercise price of $0.025 per share, which
expires in five years. The Company has received approximately $45,000 in net
proceeds after deducting offering expenses.
The Note is convertible, at the option of the holder, into shares of
common stock of the Company at a conversion price of $0.02 per share. The holder
of the Note may require the Company to repurchase some or all of
51
its Note if the market price of the common stock of the Company falls below
$0.03 per share for ten (10) consecutive trading days, at a repurchase price
equal to 140% of the principal amount being repurchased.
In determining the value of the beneficial conversion feature of the
Deer Creek note, the Company first allocated $78,622 to the value of the
warrants. Since this value exceeds the proceeds received, the differential was
recorded as additional paid in capital, discount on notes payable and a prepaid
expense. The prepaid expense is amortized over the 24 month period of the
convertible note. The value of beneficial conversion feature was valued at
$100,000. Since the conversion is at the option of the holder, the value of the
beneficial conversion feature was amortized to interest expense in full during
2004.
14. STOCK OPTION PLANS
The Company's Employee Stock Option Plan (the "Stock Option Plan") was
adopted by the Company's stockholders in September 1996 and amended in 2005.
Shares of common stock may be sold or awarded to officers, key employees and
consultants. On March 3, 1999 at a Special Meeting of Stockholders, the
Company's stockholders approved an amendment to the Stock Option Plan which
increased the number of shares reserved for issuance under the Stock Option Plan
to 2,000,000 and in 2005 to 15,000,000 shares. Options granted under the Stock
Option Plan may be either (i) options intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code or (ii) non-qualified
stock options.
The options granted to purchase shares under the Stock Option Plan. The
options vest 25% per year and expire ten years after the grant date. The
exercise price of the options was at or above the fair market value of the stock
on the grant date.
The Company's Non-Employee Directors' Stock Option Plan (the
"Directors' Plan") was adopted by the Company's stockholders in September 1996.
Shares of common stock may be sold or awarded to directors who are not officers
or employees of the Company ("Non-Employee Directors"). The Company has reserved
300,000 shares of common stock for issuance under the Directors' Plan.
The Directors' Plan provides for the automatic granting of an option to
purchase 10,000 shares of common stock to each Non-Employee Director who is
first appointed or elected to the Board of Directors. Also, each Non-Employee
Director is automatically granted an option to purchase 5,000 shares of common
stock on the date of each annual meeting of the Company's stockholders.
Furthermore, the Directors' Plan allows the Board of Directors to make
extraordinary grants of options to Non-Employee Directors.
Option activity under all of the stock option plans is summarized as
follows:
YEAR ENDED DECEMBER 31,
WEIGHT-AVERAGED WEIGHT-AVERAGED WEIGHT-AVERAGED
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning of year 791,644 2.75 389,085 2.31 387,419 2.32
Granted
Exercised
Forfeited (402,559) 2.87 (1,666) 0.59
---------- ========== ==========
Outstanding at end of year 389,085 2.31 387,419 2.32 387,419 2.32
========== ========== ==========
Options exercisable at year end 239,081 3.32 329,419 2.61 387,419
========== ========== ==========
Shares available for future grant 1,610,915 1,612,581 1,612,581
Weighted-average fair value of
options granted during this year at
the shares' fair value 0.00 0.00 0.00
52
The following table summarizes information about fixed options outstanding at
December 31, 2004.
WEIGHTED AVERAGE REMAINING
EXERCISE PRICE SHARES CONTRACTUAL LIFE
-------- --------------------------
$0.59 - 0.75 231,095 5.1
$2.18 - 4.55 95,687 4.3
$6.00 - 6.13 60,637 3.4
--------
387,419 4.3
15. ACQUISITIONS, DIVESTITURES AND DISCONTINUED OPERATIONS
On May 31, 2004, the Company completed the sale of its remaining
Internet business to Tulix Systems, Inc. ("Tulix"), a company in which Gia
Bokuchava, Nino Doijashvili and Timothy R. Robinson, who were officers and
directors of the Company, are officers, directors and founding shareholders. The
Company recorded a loss on the sale of this business of $125,030 in the fourth
quarter of 2003 and recorded an additional loss of $124,385 in the second
quarter of 2004 for adjustments to the closing as provided for in the closing
documents. With the consummation of this Purchase Agreement Global Matrechs has
completely exited from all Internet related enterprises. The Company has removed
the results of this discontinued operation from the continuing operations of the
Company for all periods presented.
On December 31, 2004 we acquired True To Form, Limited for total
consideration of $1.1 million, consisting of $500,000 in notes to be held by
True To Form and guaranteed by its assets and 10,000,000 shares of the Company's
common stock. The acquisition has been accounted for as a purchase transaction.
The value of the shares was determined by using the average closing stock price
of the two days before and after the public announcement of the transaction. The
note is due in two payments with $100,000 due in 2005 and $400,000 due in 2010.
The note accrues an interest rate of 8% per annum. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of the acquisition of True th Form:
Accounts receivable $ 94,551
Inventories 67,906
Property and Equipment 28,430
Other assets 2,575
Goodwill 1,469,108
Current liabilities (399,959)
Long-term liabilities (162,611)
----------
$1,100,000
16. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows,
as of:
December 31,
-----------------------------------------
2002 2003 2004
----------- ----------- -----------
Temporary differences:
Allowance for uncollectibles $ 17,000 $ 19,000 $ -
Capital losses 167,000 167,000 167,000
Accrued legal fees 18,000 19,000 -
Deferred rent expense 83,000 33,000 -
Estimated loss on segment disposal 0 50,000 -
Net operating loss carryforward 7,849,000 8,001,000 8,125,000
----------- ----------- -----------
Deferred tax asset 8,134,000 8,289,000 8,292,000
Valuation allowance (8,010,000) (8,083,000) (8,292,000)
----------- ----------- -----------
Net deferred tax asset 124,000 206,000 -
Depreciation (124,000) (206,000) -
----------- ----------- -----------
Deferred tax liability -- -- -
----------- ----------- -----------
Net deferred tax asset (liability) $ -- $ -- $ -
=========== =========== ===========
53
At December 31, 2004, the Company had net operating loss carryforwards
for income tax purposes of approximately $21 million which begin to expire in
2011. Realization of these assets is contingent on having future taxable
earnings. In addition, certain stock transactions from 1997 through 2004 have
resulted in ownership changes as defined in Internal Revenue Code Section 382.
As a consequence of these ownership changes, the utilization of the Company's
net operating loss carryforwards is significantly limited. Based on the
cumulative losses in recent years and the limitation on the use of the Company's
net operating losses, management believes that a full valuation allowance should
be recorded against the deferred tax asset.
The difference between the expected income tax benefit and the actual
tax benefit computed by using the Federal statutory rate of 35% is as follows:
Year ended December 31,
2003 2004
---------- ----------
Expected income tax (benefit) at statutory $ (160,000) $ (921,000)
Federal rate of 35%
State tax (benefit), net of Federal effect (23,000) (132,000)
Permanent differences 46,000 844,000
Increase in valuation allowance 137,000 209,000
---------- ----------
$ -- $ --
========== ==========
17. SUBSEQUENT EVENTS
On January 31, 2005, we entered into a Second Securities Purchase
Agreement with Southridge Partners LP, one of our existing investors, whereby we
agreed to sell a convertible promissory note in the principal amount of $250,000
and warrant to purchase up to 10,000,000 shares of our common stock to
Southridge in exchange for its $250,000 investment. Under the terms of this
purchase agreement, Southridge may, at its option, and at any time prior to July
1, 2005, purchase an additional note in the principal amount of up to
$1,500,000, and otherwise on substantially the same terms as the note issued on
January 31, 2005.
The note is convertible, at the option of the holder, into shares of
our common stock at a conversion price of $0.02 per share. Southridge may
require us to repurchase some or all of its note if the market price of our
common stock falls below $0.03 per share for ten (10) consecutive trading days,
at a repurchase price equal to 140% of the principal amount of the note. In the
event we default under the terms of the note, the entire outstanding principal
(and any outstanding interest accrued thereon) shall become immediately due and
payable, and the interest rate will rise to 18% per annum.
We have secured the payment of the notes with a subordinated security
interest in our accounts, general intangibles, inventories, and other
collateral. In addition, in the event we propose to register securities under
the Securities Act of 1933, as amended, we are required to notify Southridge in
advance of such registration and, at its request (subject to limited
exceptions), include the shares of our common stock underlying the note and
warrant on the registration statement filed in connection with such registration
(and assume any expenses associated therewith).
The warrant has an expiration date of January 31, 2010. It contains a
cashless exercise provision whereby the holder may pay the exercise price
associated with any exercise by having us withhold a number of shares otherwise
issuable upon such exercise having a fair market value equal to the applicable
aggregate exercise price. In the event such provision is used with respect to an
exercise, we would receive no proceeds upon such exercise.
54
ENTRANCE INTO EXCHANGE AGREEMENT WITH WOODWARD LLC
On January 31, 2005, we entered into an Exchange Agreement with
Woodward LLC pursuant to which we acquired promissory notes, and have
accordingly assumed all rights pertaining thereto, issued by Eurotech Ltd. The
notes are currently in default and have an aggregate outstanding principal
amount of $290,000. The notes carry a default annual interest rate of 18% and
are past due in their entirety. In exchange for these notes, we issued to
Woodward a promissory note in the principal amount of $250,000.
Under the terms of the Exchange Agreement, in the event we propose to
register securities under the Securities Act of 1933, as amended, we are
required to notify Woodward in advance of such registration and, at its request
(subject to limited exceptions), include the shares of our common stock
underlying the note on the registration statement filed in connection with such
registration, and assume any expenses associated therewith.
SOUTHRIDGE EXERCISES OPTION TO PURCHASE ADDITIONAL NOTES AND WARRANTS
On March 2, 2005, Southridge Partners LP exercised its option to
purchase an additional note and warrant under its Second Securities Purchase
Agreement. In connection with such exercise, we issued to Southridge a
convertible promissory note in the principal amount of $175,000 and a warrant to
purchase up to 7,000,000 shares of our common stock in exchange for its $175,000
investment. The note is convertible, at the option of the holder, into shares of
our common stock at a conversion price of $0.02 per share. Southridge may
require us to repurchase some or all of its note if the market price of our
common stock falls below $0.03 per share for ten (10) consecutive trading days,
at a repurchase price equal to 140% of the principal amount of the note. In the
event we default under the terms of the note, the entire outstanding principal
(and any outstanding interest accrued thereon) shall become immediately due and
payable, and the interest rate will rise to 18% per annum. The note matures on
March 2, 2007
SOUTHRIDGE EXERCISES OPTION TO PURCHASE ADDITIONAL NOTES AND WARRANTS
On April 11, 2005, Southridge Partners LP exercised its option to
purchase an additional note and warrant pursuant to the Second Securities
Purchase Agreement. In connection with such exercise, we issued to Southridge a
convertible promissory note in the principal amount of $125,000 and a warrant to
purchase up to 5,000,000 shares of our common stock to Southridge in exchange
for its $125,000 investment. The note is convertible, at the option of the
holder, into shares of our common stock at a conversion price of $0.02 per
share. Southridge may require us to repurchase some, or all, of its note if the
market price of our common stock falls below $0.03 per share for ten (10)
consecutive trading days, at a repurchase price equal to 140% of the principal
amount of the note. In the event we default under the terms of the note, the
entire outstanding principal (and any outstanding interest accrued thereon)
shall become immediately due and payable, and the interest rate will rise to 18%
per annum. The note matures on April 11, 2007.
DECISION TO RESTATE FINANCIALS
On April 15, 2005, the Company's management, in consultation with the
Company's independent registered public accounting firm, concluded that the
Company's historical financial information related to fiscal 2001 through fiscal
2003 and for the first three fiscal quarters of 2004 accounted incorrectly for
certain convertible preferred stock instruments. As such, the management has
concluded that the Company's historical financial statements should no longer be
relied upon. While the Company does not intend to amend its previously filed
annual and quarterly reports covering the periods noted above, the Company has
restated historical financial information for the periods required to be
presented in this annual report on Form 10-KSB to reflect the correct accounting
treatment. The Company has also included in this annual report on Form 10-KSB
five years of restated financial information highlighting the differences
resulting from the application of the change in accounting treatment to its
historical financial statements and restated selected quarterly information for
2003 and 2004.
55
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our principal
executive officer, who is also our principal financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange
Act")) as of December 31, 2004, has concluded that our disclosure controls and
procedures are effective based on his evaluation of the controls and procedures
required by paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15.
(b) Changes in Internal Controls over Financial Reporting. No changes
in our internal control over financial reporting identified in connection with
the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15
occurred during our last fiscal quarter that have materially affected or are
reasonably likely to materially affect, our internal control over financial
reporting.
56
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The names and ages of the directors and executive officers of the
Company as of December 31, 2004 and certain information about them are set forth
below.
NAME AGE POSITION
Mark J. Allen 42 Director, Executive Vice President
Randolph Graves 64 Director, Vice President
Michael Sheppard 55 Director, President, Chief Executive Officer,
Chief Operations Officer and acting Chief
Financial Officer
BACKGROUND OF OUR DIRECTORS AND EXECUTIVE OFFICERS
Randolph A. Graves, Jr., DSc. has been a member of our Board of
Directors and served as Vice President of or Licensed Technology Division since
May 2003. In addition, Dr. Graves is the Chief Financial Officer of Eurotech,
Ltd., a position that he has held since November 2002. Prior to this Dr. Graves
was the Vice President for Technology, focusing on technology evaluation,
acquisition strategy, and analysis of commercial competitiveness. Dr. Graves
served as the Chairman and CEO of Eurotech from May 1995 until January 1998 and
was a member of the Board of Directors from the date of Eurotech's incorporation
until January 1998, from February 1999 to July 2001, and has again served as a
director since August 2001 to the present. He has also served in several other
capacities for Eurotech over the past three years. Dr. Graves also serves as a
director of DayStar Technologies, Inc. Dr. Graves has over thirty-five years
experience with technology development, management and application. He served
twenty-six years with NASA, finishing his career as a Senior Executive at NASA
Headquarters. He has served on numerous managerial and technical panels and
committees including a member of the White House's Federal Coordinating Council
on Science Engineering and Technology Subcommittee on High Performance Computing
and as NASA's member of NATO's Advisory Group on Aerospace Research and
Development Fluid Dynamics Panel. He is currently a member of George Washington
University's National Advisory Council for the School of Engineering Applied
Science. Dr. Graves was awarded a Sloan Fellowship at Stanford University's
Graduate School of Business in 1982. He also received NASA's Exceptional
Performance Award for his managerial activities at NASA Headquarters. Dr. Graves
has been a member of the Board since March 2003.
Michael Sheppard has served as a Vice President of our Licensed
Technology Division since May 2003 and in June was appointed President and CEO
in June 2004. Mr. Sheppard was the COO and President of Technest Holdings, Inc.
Mr. Sheppard joined Technest in 1997, and headed up the day-to-day strategy of
Technest. He resigned from Technest in December 2002. Prior to joining Technest,
Mr. Sheppard was the Chief Operating Officer of Freelinq Communications, a
provider of real time video-on-demand via ATM/XDSL technology. Mr. Sheppard has
also acted as the Chief Executive Officer and Chief Operating Officer of several
early stage development companies, overseeing the development of a corporate
infrastructure for each company. From 1980 to 1992, Mr. Sheppard served as the
President of Lee America, a Westward Communications Company whose North American
holdings included Panavision, Inc. Mr. Sheppard has an extensive background in
the entertainment industry and received a BA and an MFA in film from New York
University. Mr. Sheppard has been a member of the Board since November 2001.
Mark J. Allen has been a member of our Board of Directors since 2004
and has served as Executive Vice President since December 31, 2004. Mr. Allen is
the Founder and President, True To Form Limited, now a wholly owned subsidiary
of Global Matrechs. He conceived of True To Form, created its strategic plan,
staffed organization and established its infrastructure. He developed a national
customer base including such accounts as Dunkin Donuts, TOGO's Sandwich Shops,
Papa Gino's, Chick-Fil-A, Deangelos, Baskin Robbins, Swarovski Crystal Stores,
Aramark, Steve Wynn Designs, Hard Rock Hotels, Kentucky Fried Chicken, and
O'Charlies.
57
CODE OF ETHICS
We have not yet adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer, or
controller, or other persons performing similar functions. We have been unable
to adopt a code of ethics due to our limited financial resources and competing
demands on our management.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
officers, directors and persons who own more than ten percent of the Company's
stock, to file reports of ownership and changes of ownership with the Securities
Exchange Commission (SEC). Officers, directors and greater than ten percent
owners are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
the Company is not aware of any failure by its officers, directors, or greater
than ten-percent owners to comply with all section 16(a) filing requirements
applicable to them during the year ended December 31, 2004.
However, we believe that during the year ended December 31, 2004,
Michael Sheppard, Randolph Graves and Mark Allen should have filed initial
reports under Section 16(a) of the Securities Exchange Act of 1934. The
reporting requirements are related solely to their elections and appointments,
as applicable, as directors and/or officers of the Company.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are eligible to receive
$1,000 per Board meeting attended, although we have never made any payments to
our directors for attending meetings, are eligible to receive automatic grants
of stock options under the Company's Non-Employee Directors Stock Option Plan
and may receive additional grants of options under such plan at the discretion
of the Compensation Committee of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued
by the Company in 2004 to its Chief Executive Officer and each executive officer
of the Company whose total annual salary and bonus exceeded $100,000 (each, a
"Named Executive Officer"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
NUMBER OF
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS(1) COMPENSATION OPTION COMPENSATION
-------------------------- ---- ------- -------- ------------ ---------- ------------
Michael Sheppard 2004 158,000
President, Chief Executive 2003 119,000
Officer, Chief Operations 2002 0
Officer and action Chief
Financial Officer
Randolph Graves, Vice 2004 0
President 2003 0
2002 0
Mark J. Allen, 2004 0
Executive Vice 2003 0
President 2002 0
Gia Bokuchava (2) 2004 56,250
Chief Technical Officer 2003 111,250
2002 105,000
Timothy R. Robinson (2) 2004 56,250 40,000
2003 135,000
2002 135,000
(1) Each of the Company's executive officers also is eligible to receive cash
bonuses to be awarded at the discretion of the Compensation Committee of
the Board of Directors.
(2) Resigned effective May 31, 2004
58
No options were granted to or exercised by named executive officers in
2004. No executive officers held any options at December 31, 2004.
EMPLOYMENT CONTRACTS AND COMPENSATION POLICY
Pursuant to the Tulix Agreement, Mr. Robinson, Mr. Bokuchava, and Ms.
Doijashvili, on the one hand, and Global Matrechs, on the other hand, have
agreed to release one another from all claims arising out of the three
executives' respective employment with or separation from Global Matrechs, other
than Global Matrechs claims arising out of the Tulix Agreement or arising out of
any fraud, willful misconduct or criminal act. As such, the Company does not
intend to pursue any claims against Mr. Robinson, Mr. Bokuchava or Ms.
Doijashvili relating to the non-solicitation or non-competition provisions of
their employment agreements. In addition, the Company does not believe that
these individuals will be in competition with the Company, given that Tulix and
the Company will operate in different industries.
Principal employees of the Company, including executive officers, are
required to sign an agreement with the Company (i) restricting the ability of
the employee to compete with the Company during his or her employment and for a
period of eighteen months thereafter, (ii) restricting solicitation of customers
and employees following employment with the Company, and (iii) providing for
ownership and assignment of intellectual property rights to the Company.
There were no changes to the Company's executive compensation policies
in 2004.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information as of December 31, 2004:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
NUMBER OF SECURITIES WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
TO BE ISSUED UPON EXERCISE PRICE OF FUTURE ISSUANCE UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION PLANS (EXCLUDING
OUTSTANDING OPTIONS, OPTIONS, WARRANTS SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS COLUMN (A))
------------------------- -------------------- ----------------- -----------------------------
(a) (b) (c)
Equity Compensation Plans
approved by security
holders 329,419 $2.61 1,612,581
Equity Compensation Plans
not approved by
security holders N/A N/A N/A
Total 329,419 $2.61 1,612,581
59
BENEFICIAL OWNERSHIP OF COMMON STOCK
At the close of business on May 6, 2005, there were issued and
outstanding 75,297,187 shares of our common stock. The following table provides
information regarding beneficial ownership of our common stock as of May 6, 2005
by:
o Each person known by us to be the beneficial owner of more than five
percent of our common stock;
o Each of our directors;
o Each executive officer named in the summary compensation table
(including one former executive officer); and
o All of our current directors and executive officers as a group.
The persons named in this table have sole voting and investment power
with respect to the shares listed, except as otherwise indicated. The inclusion
of shares listed as beneficially owned does not constitute an admission of
beneficial ownership. Shares beneficially owned include shares that may be
purchased through the exercise of options that vest within 60 days of May 6,
2005, and shares issuable upon conversion of preferred stock, subject to
ownership limitations set forth in the applicable preferred stock designations.
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP CLASS (2)
---------------------------------------- -------------------- ----------
Woodward, LLC 8,273,498 9.9%(3)
c/o Navigator Management Ltd.,
P.O. Box 972 Road Town,
British Virgin Islands.
Polymate, Ltd. 8,273,498 9.9%(4)
B'nai Brith 16
Haifa, Israel
Greenfield Capital Partners LLC 8,273,498 9.9%(4)
90 Grove Street, Suite 206
Ridgefield, Connecticut 06877
Eurotech, Ltd. 8,273,498 9.9%(4)
10306 Eaton Place, Suite 220
Fairfax, Virginia 22030
Brittany Capital Management 4,905,000 6.5%
Cumberland House,
#27 Cumberland Street,
P.O. Box N-10818, Nassau,
New Providence Island, The Bahamas
Michael Sheppard 0 *
Randolph Graves 0 *
George Bokuchava, Phd (5) 64,559 *
Timothy Robinson (6) 50,668 *
Nino Doijashvili (7) 150,000 *
Mark J. Allen 10,000,000 13.3%
Current Directors and Executive Officers 10,000,000 13.3%
* Less than 1%.
60
(1) Except as otherwise noted, the address of each named beneficial
owner is c/o Global Matrechs, Inc., 90 Grove Street Suite 202 Ridgefield, CT
06877.
(2) Unless otherwise indicated below, the persons and entities named in
the table have sole voting and sole investment power with respect to all shares
of Common Stock beneficially owned, subject to community property laws where
applicable. Shares of Common Stock subject to options that are currently
exercisable or exercisable within sixty days of following the date of this
Report are deemed to be outstanding and to be beneficially owned by the person
holding such options for the purpose of computing the percentage ownership of
such person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Includes shares of common stock issuable upon conversion of Series
G Preferred Stock. The Certificate of Designations for the Series G preferred
stock prohibits any holder of Series G preferred stock from converting shares of
Series G preferred stock into shares of common stock if such conversion would
result in the Series G holder beneficially owning more than 9.9% of the
outstanding shares of common stock, calculated in accordance with Rule 13d-3
promulgated under the Exchange Act.
(4) Includes shares of common stock issuable upon conversion of Series
H Preferred Stock. The Certificate of Designations for the Series H preferred
stock prohibits any holder of Series H preferred stock from converting shares of
Series H preferred stock into shares of common stock if such conversion would
result in the Series H holder beneficially owning more than 9.9% of the
outstanding shares of common stock, calculated in accordance with Rule 13d-3
promulgated under the Exchange Act.
(5) Includes 25,000 shares of Common Stock issuable upon the exercise
of options outstanding at a weighted average exercise price of $4.48 per share.
(6) Includes 46,428 shares of Common Stock issuable upon exercise of
options outstanding at a weighted average exercise price of $0.59.
(7) Includes 150,000 shares of Common Stock issuable upon the exercise
of options outstanding at an exercise price of $0.75.
CHANGES IN CONTROL
The Company is not aware of any arrangements that could result in a
change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
We have closed an agreement with Tulix to sell substantially all of the
assets used in our hosting and web site maintenance business to Tulix. Timothy
R. Robinson, Gia Bokuchava and Nino Doijashvili, who were officers and directors
of both HomeCom and Tulix, own all of the outstanding stock of Tulix.
We have also closed the transactions contemplated by the Exchange
Agreement and entered into the License Agreement with Eurotech. Dr. Graves (and
formerly, Mr. Hahnfeldt), who was appointed to serve on the Board of Directors
of HomeCom and as an officer of our new Licensed Technologies Division in
connection with the transactions between HomeCom and Eurotech, is an officer,
director and shareholder of Eurotech.
We entered into a Private Equity Credit Agreement with Brittany Capital
Management LLC which, at the time, beneficially owned 5,640,000 shares of our
common stock, representing approximately 37.6% of the outstanding shares of our
common stock. The Private Equity Credit Agreement has since terminated in
accordance with its terms. In June 2004, the Company entered into a second
exchange agreement with Brittany to acquire 5,640,000 shares of the Company's
common stock at $0.10 per share. On September 24, 2004, Brittany received 490.5
shares of Series I convertible preferred stock, $0.01 par value per share, of
the Company in exchange for 4,905,000 shares of common stock of the Company.
Each share of Series I preferred stock has a stated value of $100
61
and is convertible into 10,000 shares of common stock; provided, however, that a
holder of Series I preferred stock may not convert their shares if the aggregate
number of shares of common stock beneficially owned by the holder and its
affiliates would exceed 9.9% of the outstanding shares of common stock following
such conversion (excluding, for purposes of this calculation, the unconverted
shares of Series I preferred stock). In addition, Brittany agreed to loan the
Company up to $100,000. As of December 31, 2004, the Company had borrowed
$75,000.
We have issued a Secured Promissory Note to McNab LLC, which owns the
outstanding shares of our Series C, Series D, and Series E preferred stock. See
"Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources," for a summary of our
arrangement with McNab LLC.
On December 31, 2004, we entered into an Agreement and Plan of Merger
with True To Form, and Mark J. Allen, the sole stockholder of True To Form.
Whereby we acquired True To Form. Mr. Allen was at the time, and remains, a
member of our board of directors. The consideration paid to Mr. Allen in the
transaction consisted of:
o the issuance by True To Form of a secured note in the initial
principal amount of $500,000; and
o the issuance to Mr. Allen by Global Matrechs of 10,000,000 shares
of our common stock.
The number of shares of common stock issued in the transaction is
subject to adjustment based on the price of our common stock and the revenues of
the acquired business on December 31, 2006. In general, assuming that True To
Form generates gross revenues of at least $3,000,000 for the twelve months ended
December 31, 2006, the value of the shares issued in the transaction (based on
the average closing price of the shares for the five trading days ended on or
prior to December 31, 2006) will be at least $2.5 million but no more than $3.5
million. If the value is less than $2.5 million, we are obligated to issue
additional shares or, at our option, make cash payments to make up the
difference. If the value of the shares is greater than $3.5 million, any excess
shares will be returned to us and retired or held as treasury stock. If True To
Form does not meet the revenue target, the share consideration will be a minimum
of $2.0 million and a maximum of $3.0 million.
In June 2004, the Company entered into a second exchange agreement with
Brittany to acquire 5,640,000 shares of the Company's common stock at $0.10 per
share. On September 24, 2004, Brittany received 490.5 shares of Series I
convertible preferred stock, $0.01 par value per share, of the Company in
exchange for 4,905,000 shares of common stock of the Company. Each share of
Series I preferred stock has a stated value of $100 and is convertible into
10,000 shares of common stock; provided, however, that a holder of Series I
preferred stock may not convert their shares if the aggregate number of shares
of common stock beneficially owned by the holder and its affiliates would exceed
9.9% of the outstanding shares of common stock following such conversion
(excluding, for purposes of this calculation, the unconverted shares of Series I
preferred stock). In addition, Brittany agreed to loan the Company up to
$100,000 . As of December 31, 2004, the Company had borrowed $75,000.
ITEM 13. EXHIBITS.
Exhibit Description
------- ------------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated January 31,2001, for the Acquisition
of Certain Assets of HomeCom Communications, Inc., InsureRate, Inc. and
FIMI Securities, Inc. by Digital Insurance, Inc. (Incorporated by
62
reference to Exhibit 2.1 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2000, as filed with the Commission on
April 12, 2001.)
2.2 Asset Purchase Agreement by and between Netzee, Inc. and HomeCom
Communications, Inc. dated as of March 15, 2001. (Incorporated by
reference to Exhibit 2.2 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2000, as filed with the Commission on
April 12, 2001.)
2.3 Asset Purchase Agreement by and between HomeCom Communications, Inc.
and Tulix Systems, Inc., dated March 24, 2003. (Incorporated by
reference to Exhibit 2.3 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2002, as filed with the Commission on
April 15, 2003.)
2.4 License and Exchange Agreement, dated March 27, 2003, by and among
HomeCom Communications, Inc., Eurotech, Ltd. and, with respect to
Articles V and VI thereof, Polymate, Ltd. and Greenfield Capital
Partners LLC. (Incorporated by reference to Exhibit 2.4 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2002, as filed with the Commission on April 15, 2003.)
2.5 Amendment No. 1 to License and Exchange Agreement, effective as of
June 27, 2003, by and among HomeCom Communications, Inc., Eurotech,
Ltd., and, solely with respect to Article V and Article XI of the
License and Exchange Agreement, Polymate, Ltd. and Greendfield Capital
Partners LLC. (Incorporated herein by reference to Exhibit 10.6 of Form
10-Q of the Registrant for the quarter ended June 30, 2003, as filed
with the Commission on September 25, 2003.)
2.6 Agreement and plan of merger (Incorporated herein by reference to
Exhibit 2.1 of Form 8-K of the Registrant as filed with the Commission
on January 6, 2005.)
3.1 Restated Certificate of Incorporation of the Registrant. (Incorporated
herein by reference to exhibit of the same number in the Form S-1
Registration Statement of the Registrant (Registration No. 333-12219).)
3.2 Restated Bylaws of the Registrant. (Incorporated herein by reference
to exhibit of the same number in the Form S-1 Registration Statement of
the Registrant (Registration No. 333-12219).)
3.3 Certificate of Designation of Series A Convertible Preferred stock.
(Incorporated herein by reference to exhibit of the same number in the
Form S-1/A Registration Statement of the Registrant (Registration No.
333-42599).)
3.4 Certificate of Designation of Series B Convertible Preferred Stock.
(Incorporated herein by reference to Exhibit 10.49 in the Form 10-K of
the Registrant filed with the Commission on March 31, 1999.)
3.5 Certificate of Designation of Series C Convertible Preferred Stock.
(Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Registration No.
333-88491).)
3.6 Certificate of Designation of Series D Convertible Preferred Stock.
(Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Registration No.
333-88491).)
63
3.7 Certificate of Designation of Series E Convertible Preferred Stock.
(Incorporated herein by reference to exhibit of the same number in the
Form S-3 Registration Statement of the Registrant (Registration No.
333-38326).)
3.8 Certificate of Designation of Series F Convertible Preferred Stock.
(Incorporated by reference to Exhibit 3.8 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002, as filed with
the Commission on April 15, 2003.)
3.9 Certificate of Designation of Series G Convertible Preferred Stock.
(Incorporated by reference to Exhibit 3.9 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002, as filed with
the Commission on April 15, 2003.)
3.10 Certificate of Designation of Series H Convertible Preferred Stock.
(Incorporated herein by reference to Exhibit 3.1 of Form 10-Q of the
Registrant for the quarter ended September 30, 2003, as filed with the
Commission on October 29, 2003.)
3.11 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of HomeCom Communications, Inc., as filed with the
Secretary of State of Delaware on June 14, 2004 (Incorporated herein by
reference to Exhibit 3.1 of Form 8-K of the Registrant as filed with
the Commission on June 15, 2004).
3.12 Certificate of Amendment of Certificate of Designations, Preferences
and Rights of Series B Convertible Preferred Stock of HomeCom
Communications, Inc. (Incorporated herein by reference to Exhibit 3.2
of Form 8-K of the Registrant as filed with the Commission on June 15,
2004.)
3.13 Certificate of Amendment of Certificate of Designations, Preferences
and Rights of Series C Convertible Preferred Stock of HomeCom
Communications, Inc. (Incorporated herein by reference to Exhibit 3.3
of Form 8-K of the Registrant as filed with the Commission on June 15,
2004.)
3.14 Certificate of Amendment of Certificate of Designations, Preferences
and Rights of Series D Convertible Preferred Stock of HomeCom
Communications, Inc. (Incorporated herein by reference to Exhibit 3.4
of Form 8-K of the Registrant as filed with the Commission on June 15,
2004.)
3.15 Certificate of Amendment of Certificate of Designations, Preferences
and Rights of Series E Convertible Preferred Stock of HomeCom
Communications, Inc. (Incorporated herein by reference to Exhibit 3.5
of Form 8-K of the Registrant as filed with the Commission on June 15,
2004.)
3.16 Certificate of designations, preferences and rights of Series I
Convertible Preferred Stock (Incorporated herein by reference to
Exhibit 3.1 of Form 10-Q of the Registrant as filed with the Commission
on August 16, 2004.)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Restated Certificate of
64
Incorporation and Bylaws of the Registrant defining rights of the
holders of Common Stock of the Registrant. (Incorporated herein by
reference to exhibit of the same number in the Form S-1 Registration
Statement of the Registrant (Registration No. 333-12219).)
4.2 Specimen Stock Certificate. (Incorporated herein by reference to
exhibit of the same number in the Form S-1 Registration Statement of the
Registrant (Registration No. 333-12219).)
4.3 Form of Warrant. (Incorporated herein by reference to exhibit of the
same number in the Form S-1 Registration Statement of the Registrant
(Registration No. 333-12219).)
4.4 2% Secured Convertible Promissory Note dated October 19, 2004 issued
to Southridge Partners LP (Incorporated herein by reference to Exhibit
4.1 of Form 8-K of the Registrant as filed with the Commission on
October 18, 2004.)
4.5 Common Stock Purchase Warrant dated October 19, 2004 issued to
Southridge Partners LP (Incorporated herein by reference to Exhibit 99.2
of Form 8-K of the Registrant as filed with the Commission on October
18, 2004.)
4.6 Form of 2% Secured Convertible Promissory Note (Incorporated herein by
reference to Exhibit 4.1 of Form 8-K of the Registrant as filed with the
Commission on November 4, 2004.)
4.7 Form of Common Stock Purchase Warrant (Incorporated herein by
reference to Exhibit 99.2 of Form 8-K of the Registrant as filed with
the Commission on November 4, 2004.)
4.8 2% Secured Convertible Promissory Note dated December 3, 2004 issued
to Deer Creek Fund, LLC (Incorporated herein by reference to Exhibit
99.1 of Form 8-K of the Registrant as filed with the Commission on
December 8, 2004.)
4.9 Common Stock Purchase Warrant dated December 3, 2004 issued to Deer
Creek Fund, LLC (Incorporated herein by reference to Exhibit 99.2 of
Form 8-K of the Registrant as filed with the Commission on December 8,
2004.)
4.10 Form of Warrants issued to Trilogy Capital Partners, Inc.
(Incorporated herein by reference to Exhibit 99.2 of Form 8-K of the
Registrant as filed with the Commission on December 22, 2004.)
4.11 Form of Warrants issued to Consultant (Incorporated herein by
reference to Exhibit 99.1 of Form 8-K of the Registrant as filed with
the Commission on December 29, 2004.)
4.12 Common Stock Purchase Warrant issued to Southridge Partners LP
(Incorporated herein by reference to Exhibit 4.1 of Form 8-K of the
Registrant as filed with the Commission on February 4, 2005.)
4.13 Nonnegotiable 2% Secured Convertible Promissory Note issued to
Woodward LLC (Incorporated herein by reference to Exhibit 10.4 of Form
8-K of the Registrant as filed with the Commission on February 4,
2005.)
65
4.14 Common Stock Purchase Warrant issued to Southridge Partners LP
(Incorporated herein by reference to Exhibit 4.1 of Form 8-K of the
Registrant as filed with the Commission on March 7, 2005.)
4.15 --Nonnegotiable 2% Secured Convertible Promissory Note issued to
Southridge Partners LP (Incorporated herein by reference to Exhibit 4.2
of Form 8-K of the Registrant as filed with the Commission on March 7,
2005.)
4.16 Common Stock Purchase Warrant issued to Southridge Partners LP
(Incorporated herein by reference to Exhibit 4.1 of Form 8-K of the
Registrant as filed with the Commission on April 15, 2005.)
4.17 Nonnegotiable 2% Secured Convertible Promissory Note issued to
Southridge Partners LP (Incorporated herein by reference to Exhibit 4.2
of Form 8-K of the Registrant as filed with the Commission on April 15,
2005.)
10.1 HomeCom Communications, Inc. Stock Option Plan and form of Stock
Option Certificate. (Incorporated herein by reference to exhibit of the
same number in the Form S-1 Registration Statement of the Registrant
(Registration No. 333-12219).) (1)
10.2 HomeCom Communications, Inc. Non-Employee Directors Stock Option Plan
and form of Stock Option Certificate. (Incorporated herein by reference
to exhibit of the same number in the Form S-1 Registration Statement of
the Registrant (Registration No. 333-12219).) (1)
10.3 Form of Employment Agreement entered into between the Registrant and
each of its executive officers except Harvey W. Sax. (Incorporated
herein by reference to Exhibit 10.4 of the Form S-1 Registration
Statement of the Registrant (Registration No. 333-12219).) (1)
10.4 Lease Agreement between Property Georgia OBJLW One Corporation and the
Registrant dated January 22, 1996. (Incorporated herein by reference to
Exhibit 10.5 of the Form S-1 Registration Statement of the Registrant
(Registration No. 333-12219).)
10.5 Form of Warrant to purchase 200,000 shares of Common Stock at an
exercise price of $4.00 per share issued by the Registrant to First
Granite Securities, Inc. (Incorporated herein by reference to Exhibit
10.24 of the Form S-1 Registration Statement of the Registrant
(Registration No. 333-42599).)
10.6 Form of Warrant to purchase 200,000 shares of Common Stock at an
exercise price of $6.00 per share issued by the Registrant to First
Granite Securities, Inc. (Incorporated herein by reference to Exhibit
10.25 of the Form S-1 Registration Statement of the Registrant
(Registration No. 333-42599).)
10.7 Form of Securities Purchase Agreement between the Registrant,
66
Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of
December 23, 1997. (Incorporated herein by reference to Exhibit 10.26 of
the Form S-1/A Registration Statement of the Registrant (Registration
No. 333-42599).)
10.8 Form of Registration Rights Agreement between the Registrant,
Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of
December 23, 1997. (Incorporated herein by reference to Exhibit 10.27 of
the Form S-1/A Registration Statement of the Registrant (Registration
No. 333-42599).)
10.9 Form of Warrant to purchase 18,750 shares of Common Stock issued by
the Registrant to Sovereign Partners, L.P. (Incorporated herein by
reference to Exhibit 10.28 of the Form S-1/A Registration Statement of
the Registrant (Registration No. 333-42599).)
10.10 Form of Warrant to purchase 56,250 shares of Common Stock issued by
the Registrant to Dominion Capital Fund, LTD. (Incorporated herein by
reference to Exhibit 10.29 of the Form S-1/A Registration Statement of
the Registrant (Registration No. 333-42599).)
10.11 Form of Warrant to purchase 25,000 shares of Common Stock for an
aggregate purchase price of $92,500 by the Registrant to Hamilton Dorsey
Alston Company. (Incorporated herein by reference to Exhibit 10.34 of
the Form S-1/A Registration Statement of the Registrant (Registration
No. 333-42599).)
10.12 Form of Warrant to purchase 50,000 shares of Common Stock issued by
the Registrant to The Malachi Group, Inc. (Incorporated herein by
reference to Exhibit 10.37 of the Form S-1 Registration Statement of the
Registrant filed (Registration No. 333-45383).)
10.13 Letter Agreement, dated April 17, 1998 by and among Sovereign
Partners, L.P., Dominion Capital Fund and HomeCom. (Incorporated herein
by reference to Exhibit 10 of the Form 8-K of the Registrant filed with
the Commission on April 28, 1998.)
10.14 Securities Purchase Agreement dated as of March 25, 1999 by and among
HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View Funds,
L.P., and Liberty View Fund, L.L.C. (Incorporated herein by reference to
Exhibit 10.50 of the Form 10-K of the Registrant filed with the
Commission on March 31, 1999.)
10.15 Registration Rights Agreement dated as of March 25, 1999 by and among
HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View Funds,
L.P., and Liberty View Fund, L.L.C. (Incorporated herein by reference to
Exhibit 10.51 of the Form 10-K of the Registrant filed with the
Commission on March 31, 1999.)
10.16 Transfer Agent Instructions dated as of March 25, 1999. (Incorporated
herein by reference to Exhibit 10.52 of the Form 10-K of the Registrant
filed with the Commission on March 31, 1999.)
10.17 Transfer Agent Legal Opinion dated as of March 25, 1999. (Incorporated
herein by reference to Exhibit 10.53 of the Form 10-K of the Registrant
67
filed with the Commission on March 31, 1999.)
10.18 Warrant Agreement, dated as of March 25, 1999, by and among CPR (USA),
Inc. and HomeCom Communications, Inc. (Incorporated herein by reference
to Exhibit 10.55 of the Registration Statement on Form S-3 of the
Registrant (Registration No. 333-79761).)
10.19 Warrant Agreement, dated as of March 25, 1999, by and among Liberty
View Fund, L.L.C. and HomeCom Communications, Inc. (Incorporated herein
by reference to Exhibit 10.56 of the Registration Statement on Form S-3
of the Registrant (Registration No. 333-79761).)
10.20 Warrant Agreement, dated as of March 25, 1999, by and among Liberty
View Funds, L.P. and HomeCom Communications, Inc. (Incorporated herein
by reference to Exhibit 10.57 of the Registration Statement on Form S-3
of the Registrant (Registration No. 333-79761).)
10.21 Warrant Agreement, dated as of March 25, 1999, by and among J.P.
Turner & Company, L.L.C and HomeCom Communications, Inc. (Incorporated
herein by reference to Exhibit 10.59 of the Registration Statement on
Form S-3 of the Registrant (Registration No. 333-79761).)
10.22 Securities Purchase Agreement dated as of July 23, 1999 by and among
HomeCom Communications, Inc. and MacNab LLC. (Incorporated herein by
reference to Exhibit 10.65 of the Form S-1 Registration Statement of the
Registrant (Registration No. 333-88491).)
10.23 Registration Rights Agreement dated as of July 23, 1999 by and among
HomeCom Communications, Inc. and MacNab LLC. (Incorporated herein by
reference to Exhibit 10.66 of the Form S-1 Registration Statement of the
Registrant (Registration No. 333-88491).)
10.24 Transfer Agent Instructions dated as of September 28, 1999.
(Incorporated herein by reference to Exhibit 10.67 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.25 Transfer Agent Legal Opinion dated as of July 23, 1999. (Incorporated
herein by reference to Exhibit 10.68 of the Form S-1 Registration
Statement of the Registrant (Registration No. 333-88491).)
10.26 Placement Agency Agreement dated as of July 23, 1999 by and between
HomeCom Communications, Inc. and Greenfield Capital Partners.
(Incorporated herein by reference to Exhibit 10.69 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.27 Warrant Agreement, dated as of July 23, 1999, by and between HomeCom
Communications, Inc. and MacNab LLC. (Incorporated herein by reference
to Exhibit 10.70 of the Form S-1 Registration Statement of the
Registrant (Registration No. 333-88491).)
68
10.28 Securities Purchase Agreement dated as of September 27, 1999 by and
among HomeCom Communications, Inc. and Jackson LLC. (Incorporated herein
by reference to Exhibit 10.71 of the Form S-1 Registration Statement of
the Registrant (Registration No. 333-88491).)
10.29 Registration Rights Agreement dated as of September 27, 1999 by and
among HomeCom Communications, Inc. and Jackson LLC. (Incorporated herein
by reference to Exhibit 10.72 of the Form S-1 Registration Statement of
the Registrant (Registration No. 333-88491).)
10.30 Transfer Agent Instructions dated as of September 28, 1999.
(Incorporated herein by reference to Exhibit 10.73 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.31 Transfer Agent Legal Opinion dated as of September 28, 1999.
(Incorporated herein by reference to Exhibit 10.74 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.32 Placement Agency Agreement dated as of September 27, 1999 by and
between HomeCom Communications, Inc. and Greenfield Capital Partners.
(Incorporated herein by reference to Exhibit 10.75 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.33 Warrant Agreement, dated as of September 27, 1999, by and between
HomeCom Communications, Inc. and Jackson LLC. (Incorporated herein by
reference to Exhibit 10.76 of the Form S-1 Registration Statement of the
Registrant (Registration No. 333-88491).)
10.34 Securities Purchase Agreement dated as of April 14, 2000 by and among
HomeCom Communications, Inc. and McNab LLC. (Incorporated herein by
reference to Exhibit 10.86 of the Form S-3 Registration Statement of the
Registrant (Registration No. 333-38326).)
10.35 Registration Rights Agreement dated as of April 14, 2000 by and among
HomeCom Communications, Inc. and McNab LLC. (Incorporated herein by
reference to Exhibit 10.87 of the Form S-3 Registration Statement of the
Registrant (Registration No. 333-38326).)
10.36 Transfer Agent Instructions dated as of April 14, 2000. (Incorporated
herein by reference to Exhibit 10.88 of the Form S-3 Registration
Statement of the Registrant (Registration No. 333-38326).)
10.37 Transfer Agent Legal Opinion dated as of April 14, 2000. (Incorporated
herein by reference to Exhibit 10.89 of the Form S-3 Registration
Statement of the Registrant (Registration No. 333-38326).)
10.38 Warrant Agreement, dated as of April 14, 2000, by and between HomeCom
Communications, Inc. and McNab LLC. (Incorporated herein by reference to
Exhibit 10.90 of the Form S-3 Registration Statement of the Registrant
(Registration No. 333-38326).)
10.39 Employment Agreement between the Registrant and Timothy R. Robinson
dated August 1, 2000. (Incorporated herein by reference to Exhibit 10.86
of the Form 10-K of the Registrant filed with the Commission on April
12, 2001.) (1)
10.40 Amendment to employment Agreement between Registrant and George
Bokchava dated January 10, 2001. (Incorporated herein by reference to
69
Exhibit 10.87 of the Form 10-K of the Registrant filed with the
Commission on April 12, 2001.)
10.41 Separation and Release Agreement, dated March 29, 2001, between
HomeCom Communications, Inc. and Harvey Sax. (Incorporated herein by
reference to Exhibit 10.1 of Form 10-Q of the Registrant filed with the
Commission on May 21, 2001.)
10.42 License Agreement, dated May 22, 2003, by and between HomeCom
Communications, Inc. and Eurotech, Ltd. (Incorporated by reference to
Exhibit 10.1 of the Registrant's Current Report on Form 8-K, as filed
with the Commission on June 6, 2003.)
10.43 Secured Promissory Note, dated May 22 2003, by HomeCom Communications,
Inc. in favor of MacNab LLC. (Incorporated by reference to Exhibit 10.2
of the Registrant's Current Report on Form 8-K, as filed with the
Commission on June 6, 2003.)
10.44 Security Agreement, dated May 22, 2003, by and between HomeCom
Communications, Inc. and MacNab LLC. (Incorporated by reference to
Exhibit 10.3 of the Registrant's Current Report on Form 8-K, as filed
with the Commission on June 6, 2003.)
10.45 Stock Exchange Agreement, effective as of June 27, 2003, by and among
HomeCom Communications, Inc., Eurotech, Ltd., Greenfield Capital
Partners LLC and Polymate, Ltd. (Incorporated herein by reference to
Exhibit 10.4 of Form 10-Q of the Registrant for the quarter ended June
30, 2003, as filed with the Commission on September 25, 2003.)
10.46 Amendment No. 1 to License Agreement, effective as of June 27, 2003,
by and among HomeCom Communications, Inc. and Eurotech, Ltd.
(Incorporated herein by reference to Exhibit 10.5 of Form 10-Q of the
Registrant for the quarter ended June 30, 2003, as filed with the
Commission on September 25, 2003.)
10.47 Private Equity Credit Agreement, dated September 30, 2003, by and
between HomeCom Communications, Inc. and Brittany Capital Management
LLC. (Incorporated herein by reference to Exhibit 10.1 of Form 10-Q of
the Registrant for the quarter ended September 30, 2003, as filed with
the Commission on October 29, 2003.)
10.48 Registration Rights Agreement, dated September 30, 2003, by and
between HomeCom Communications, Inc. and Brittany Capital Management
LLC. (Incorporated herein by reference to Exhibit 10.2 of Form 10-Q of
the Registrant for the quarter ended September 30, 2003, as filed with
the Commission on October 29, 2003.)
10.49 License Agreement, dated as of August 15, 2003, by and between HomeCom
Communications, Inc. and Kristul Group. (Incorporated herein by
reference to Exhibit 10.49 of Form 10-K of the Registrant for the year
ended December 31, 2003, as filed with the Commission on May 13, 2004.)
10.50 Assignment and Consent Agreement, dated November 17, 2003, by and
among Joseph Kristul, Kristul Group, Environmental Friendly Materials,
GMBH and HomeCom Communications, Inc. (Incorporated herein by reference
70
to Exhibit 10.50 of Form 10-K of the Registrant for the year ended
December 31, 2003, as filed with the Commission on May 13, 2004.)
10.51 Secured Promissory Note, dated May 31, 2004, by Tulix
Systems, Inc. in favor of HomeCom Communications, Inc. (Incorporated
herein by reference to Exhibit 10.1 of Form 8-K of the Registrant as
filed with the Commission June 15, 2004.)
10.52 Security Agreement, dated May 31, 2004, by and between HomeCom
Communications, Inc. and Tulix Systems, Inc.(Incorporated herein by
reference to Exhibit 10.2 of Form 8-K of the Registrant as filed with
the Commission June 15, 2004.)
10.53 Shareholders' Agreement, dated May 31, 2004, by and among
HomeCom Communications, Inc., Tulix Systems, Inc., Gia
Bokuchava, Nino Doijashvili and Timothy R. Robinson (Incorporated
herein by reference to Exhibit 10.3 of Form 8-K of the Registrant as
filed with the Commission June 15, 2004.)
10.54 Indemnification Agreement, dated May 31, 2004, by and
between HomeCom Communications, Inc. and Tulix Systems, Inc.
(Incorporated herein by reference to Exhibit 10.4 of Form 8-K of the
Registrant as filed with the Commission June 15, 2004.)
10.55 Second Exchange Agreement with Brittany Capital Management Ltd. dated
June 1, 2004 (Incorporated herein by reference to Exhibit 10.1 of Form
10-Q of the Registrant as filed with the Commission August 16, 2004.)
10.56 Convertible Note issued to Brittany Capital Management, Ltd. dated
June 1, 2004 (Incorporated herein by reference to Exhibit 10.2 of Form
10-Q of the Registrant as filed with the Commission August 16, 2004.)
10.57 Securities Purchase Agreement dated October 19, 2004 between Global
Matrechs, Inc. and Southridge Partners LP (Incorporated herein by
reference to Exhibit 99.1 of Form 8-K of the Registrant as filed with
the Commission on October 18, 2004.)
10.58 Form of Securities Purchase Agreement (Incorporated herein by
reference to Exhibit 99.1 of Form 8-K of the Registrant as filed with
the Commission on November 4, 2004.)
10.59 Securities Purchase Agreement dated December 3, 2004 between Global
Matrechs, Inc. and Deer Creek Fund, LLC (Incorporated herein by
reference to Exhibit 99.3 of Form 8-K of the Registrant as filed with
the Commission on December 8, 2004.)
10.60 Letter of Engagement with Trilogy Capital Partners, Inc. (Incorporated
herein by reference to Exhibit 99.1 of Form 8-K of the Registrant as
filed with the Commission on December 22, 2004.)
10.61 Secured note (Incorporated herein by reference to Exhibit 10.1 of
Form 8-K of the Registrant as filed with the Commission on January 6,
2005.)
10.62 Security agreement (Incorporated herein by reference to Exhibit 10.2
of Form 8-K of the Registrant as filed with the Commission on January
6, 2005.)
71
10.63 Guaranty (Incorporated herein by reference to
Exhibit 10.3 of Form 8-K of the Registrant as filed with the Commission
on January 6, 2005.)
10.64 Collateral pledge agreement (Incorporated herein by reference to
Exhibit 10.4 of Form 8-K of the Registrant as filed with the Commission
on January 6, 2005.)
10.65 Second Securities Purchase Agreement with Southridge Partners LP
(Incorporated herein by reference to Exhibit 10.1 of Form 8-K of the
Registrant as filed with the Commission on February 4, 2005.)
10.66 Nonnegotiable 2% Secured Convertible Promissory Note issued to
Southridge Partners LP (Incorporated herein by reference to Exhibit
10.2 of Form 8-K of the Registrant as filed with the Commission on
February 4, 2005.)
10.67 Exchange Agreement with Woodward LLC (Incorporated herein by
reference to Exhibit 10.3 of Form 8-K of the Registrant as filed with
the Commission on February 4, 2005.)
10.68 Second Securities Purchase Agreement (Incorporated herein by
reference to Exhibit 10.1 of Form 8-K of the Registrant as filed with
the Commission on April 15, 2005.)
21.1 List of Subsidiaries. (Incorporated herein by reference to exhibit of
the same number in the Form S-1 Registration Statement of the Registrant
(Registration No. 333-42599).)
31.1 Certification by CEO of Periodic Report Pursuant to Rule 13a-14(a) or
Rule 15d-14(a)*
31.2 Certification by CFO of Periodic Report Pursuant to Rule 13a-14(a) or
Rule 15d-14(a)*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
* Filed herewith
(1) Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth fees billed to us by our auditors during
the fiscal years ended December 31, 2004 and December 31, 2003 for: (i) services
rendered for the audit of our annual financial statements and the review of our
quarterly financial statements, (ii) services by our auditor that are reasonably
related to the performance of the audit or review of our financial statements
and that are not reported as Audit Fees, (iii) services rendered in connection
with tax compliance, tax advice and tax planning, and (iv) all other fees for
services rendered.
72
December 31, December 31,
2004 2003
---- ----
(i) Audit Fees $40,000 $40,000
(ii) Audit Related Fees $0 $0
(iii) Tax Fees $6,000 $6,000
(iv) All Other Fees $0 $0
AUDIT FEES. Consists of fees billed for professional services rendered for the
audit of Homecom Communications, Inc.'s financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by Sherb & Company, LLC in connection with
statutory and regulatory filings or engagements.
AUDIT-RELATED FEES. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of Homecom
Communications, Inc.'s financial statements and are not reported under "Audit
Fees."
TAX FEES. Consists of fees billed for professional services for tax compliance,
tax advice and tax planning.
ALL OTHER FEES. Consists of fees for products and services other than the
services reported above. There were no management consulting services provided
in fiscal 2004 or 2003.
PRE-APPROVAL POLICIES AND PROCEDURES. The Company does not have an audit
committee. The Board of Directors has approved Sherb & Company, LLC to serve as
the Company's outside accounting firm. It is the policy of the Company that all
services provided by Sherb & Company, LLC shall be pre-approved by the Board of
Directors. Sherb & Company, LLC will provide the Board of Directors with an
engagement letter outlining the scope of the audit services proposed to be
performed during the fiscal year and the estimated fees for such services.
Pre-approval of audit and permitted non-audit services may be given by the Board
of Directors at any time up to one year before the commencement of such services
by Sherb & Company, LLC. Pre-approval must be detailed as to the particular
services to be provided. Pre-approval may be given for a category of services,
provided that (i) the category is narrow enough and detailed enough that
management of the Company will not be called upon to make a judgment as to
whether a particular proposed service by Sherb & Company, LLC fits within such
pre-approved category of services and (ii) the Board of Directors also
establishes a limit on the fees for such pre-approved category of services.
73
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GLOBAL MATRECHS, INC.
By: /s/ Michael Sheppard
------------------------------
Michael Sheppard
Title: President, Chief Executive Officer,
Chief Operating Officer and acting Chief
Financial Officer
Date: May 11, 2005
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ Michael Sheppard
------------------------------
Michael Sheppard
Title: President, Chief Executive Officer,
Chief Operating Officer and acting Chief
Financial Officer (principal executive
officer and principal accounting officer)
Date: May 11, 2005
By: /s/ Mark Allen
------------------------------
Mark Allen
Title: Director
Date: May 11, 2005
By: /s/ Randolph Graves
------------------------------
Randolph Graves
Title: Director
Date: May 11, 2005
74
EXHIBIT INDEX
Exhibit Description
------- ------------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated January 31,2001, for the Acquisition
of Certain Assets of HomeCom Communications, Inc., InsureRate, Inc. and
FIMI Securities, Inc. by Digital Insurance, Inc. (Incorporated by
reference to Exhibit 2.1 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2000, as filed with the Commission on
April 12, 2001.)
2.2 Asset Purchase Agreement by and between Netzee, Inc. and HomeCom
Communications, Inc. dated as of March 15, 2001. (Incorporated by
reference to Exhibit 2.2 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2000, as filed with the Commission on
April 12, 2001.)
2.3 Asset Purchase Agreement by and between HomeCom Communications, Inc.
and Tulix Systems, Inc., dated March 24, 2003. (Incorporated by
reference to Exhibit 2.3 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2002, as filed with the Commission on
April 15, 2003.)
2.4 License and Exchange Agreement, dated March 27, 2003, by and among
HomeCom Communications, Inc., Eurotech, Ltd. and, with respect to
Articles V and VI thereof, Polymate, Ltd. and Greenfield Capital
Partners LLC. (Incorporated by reference to Exhibit 2.4 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2002, as filed with the Commission on April 15, 2003.)
2.5 Amendment No. 1 to License and Exchange Agreement, effective as of
June 27, 2003, by and among HomeCom Communications, Inc., Eurotech,
Ltd., and, solely with respect to Article V and Article XI of the
License and Exchange Agreement, Polymate, Ltd. and Greendfield Capital
Partners LLC. (Incorporated herein by reference to Exhibit 10.6 of Form
10-Q of the Registrant for the quarter ended June 30, 2003, as filed
with the Commission on September 25, 2003.)
2.6 Agreement and plan of merger (Incorporated herein by reference to
Exhibit 2.1 of Form 8-K of the Registrant as filed with the Commission
on January 6, 2005.)
3.1 Restated Certificate of Incorporation of the Registrant. (Incorporated
herein by reference to exhibit of the same number in the Form S-1
Registration Statement of the Registrant (Registration No. 333-12219).)
3.2 Restated Bylaws of the Registrant. (Incorporated herein by reference
to exhibit of the same number in the Form S-1 Registration Statement of
the Registrant (Registration No. 333-12219).)
3.3 Certificate of Designation of Series A Convertible Preferred stock.
(Incorporated herein by reference to exhibit of the same number in the
Form S-1/A Registration Statement of the Registrant (Registration No.
333-42599).)
75
3.4 Certificate of Designation of Series B Convertible Preferred Stock.
(Incorporated herein by reference to Exhibit 10.49 in the Form 10-K of
the Registrant filed with the Commission on March 31, 1999.)
3.5 Certificate of Designation of Series C Convertible Preferred Stock.
(Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Registration No.
333-88491).)
3.6 Certificate of Designation of Series D Convertible Preferred Stock.
(Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Registration No.
333-88491).)
3.7 Certificate of Designation of Series E Convertible Preferred Stock.
(Incorporated herein by reference to exhibit of the same number in the
Form S-3 Registration Statement of the Registrant (Registration No.
333-38326).)
3.8 Certificate of Designation of Series F Convertible Preferred Stock.
(Incorporated by reference to Exhibit 3.8 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002, as filed with
the Commission on April 15, 2003.)
3.9 Certificate of Designation of Series G Convertible Preferred Stock.
(Incorporated by reference to Exhibit 3.9 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002, as filed with
the Commission on April 15, 2003.)
3.10 Certificate of Designation of Series H Convertible Preferred Stock.
(Incorporated herein by reference to Exhibit 3.1 of Form 10-Q of the
Registrant for the quarter ended September 30, 2003, as filed with the
Commission on October 29, 2003.)
3.11 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of HomeCom Communications, Inc., as filed with the
Secretary of State of Delaware on June 14, 2004 (Incorporated herein by
reference to Exhibit 3.1 of Form 8-K of the Registrant as filed with
the Commission on June 15, 2004).
3.12 Certificate of Amendment of Certificate of Designations, Preferences
and Rights of Series B Convertible Preferred Stock of HomeCom
Communications, Inc. (Incorporated herein by reference to Exhibit 3.2
of Form 8-K of the Registrant as filed with the Commission on June 15,
2004.)
3.13 Certificate of Amendment of Certificate of Designations, Preferences
and Rights of Series C Convertible Preferred Stock of HomeCom
Communications, Inc. (Incorporated herein by reference to Exhibit 3.3
of Form 8-K of the Registrant as filed with the Commission on June 15,
2004.)
3.14 Certificate of Amendment of Certificate of Designations, Preferences
and Rights of Series D Convertible Preferred Stock of HomeCom
Communications, Inc. (Incorporated herein by reference to Exhibit 3.4
76
of Form 8-K of the Registrant as filed with the Commission on June 15,
2004.)
3.15 Certificate of Amendment of Certificate of Designations, Preferences
and Rights of Series E Convertible Preferred Stock of HomeCom
Communications, Inc. (Incorporated herein by reference to Exhibit 3.5
of Form 8-K of the Registrant as filed with the Commission on June 15,
2004.)
3.16 Certificate of designations, preferences and rights of Series I
Convertible Preferred Stock (Incorporated herein by reference to
Exhibit 3.1 of Form 10-Q of the Registrant as filed with the Commission
on August 16, 2004.)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Restated Certificate of
Incorporation and Bylaws of the Registrant defining rights of the
holders of Common Stock of the Registrant. (Incorporated herein by
reference to exhibit of the same number in the Form S-1 Registration
Statement of the Registrant (Registration No. 333-12219).)
4.2 Specimen Stock Certificate. (Incorporated herein by reference to
exhibit of the same number in the Form S-1 Registration Statement of the
Registrant (Registration No. 333-12219).)
4.3 Form of Warrant. (Incorporated herein by reference to exhibit of the
same number in the Form S-1 Registration Statement of the Registrant
(Registration No. 333-12219).)
4.4 2% Secured Convertible Promissory Note dated October 19, 2004 issued
to Southridge Partners LP (Incorporated herein by reference to Exhibit
4.1 of Form 8-K of the Registrant as filed with the Commission on
October 18, 2004.)
4.5 Common Stock Purchase Warrant dated October 19, 2004 issued to
Southridge Partners LP (Incorporated herein by reference to Exhibit 99.2
of Form 8-K of the Registrant as filed with the Commission on October
18, 2004.)
4.6 Form of 2% Secured Convertible Promissory Note (Incorporated herein by
reference to Exhibit 4.1 of Form 8-K of the Registrant as filed with the
Commission on November 4, 2004.)
4.7 Form of Common Stock Purchase Warrant (Incorporated herein by
reference to Exhibit 99.2 of Form 8-K of the Registrant as filed with
the Commission on November 4, 2004.)
4.8 2% Secured Convertible Promissory Note dated December 3, 2004 issued
to Deer Creek Fund, LLC (Incorporated herein by reference to Exhibit
99.1 of Form 8-K of the Registrant as filed with the Commission on
December 8, 2004.)
4.9 Common Stock Purchase Warrant dated December 3, 2004 issued to Deer
Creek Fund, LLC (Incorporated herein by reference to Exhibit 99.2 of
Form 8-K of the Registrant as filed with the Commission on December 8,
2004.)
77
4.10 Form of Warrants issued to Trilogy Capital Partners, Inc.
(Incorporated herein by reference to Exhibit 99.2 of Form 8-K of the
Registrant as filed with the Commission on December 22, 2004.)
4.11 Form of Warrants issued to Consultant (Incorporated herein by
reference to Exhibit 99.1 of Form 8-K of the Registrant as filed with
the Commission on December 29, 2004.)
4.12 Common Stock Purchase Warrant issued to Southridge Partners LP
(Incorporated herein by reference to Exhibit 4.1 of Form 8-K of the
Registrant as filed with the Commission on February 4, 2005.)
4.13 Nonnegotiable 2% Secured Convertible Promissory Note issued to
Woodward LLC (Incorporated herein by reference to Exhibit 10.4 of Form
8-K of the Registrant as filed with the Commission on February 4,
2005.)
4.14 Common Stock Purchase Warrant issued to Southridge Partners LP
(Incorporated herein by reference to Exhibit 4.1 of Form 8-K of the
Registrant as filed with the Commission on March 7, 2005.)
4.15 Nonnegotiable 2% Secured Convertible Promissory Note issued to
Southridge Partners LP (Incorporated herein by reference to Exhibit 4.2
of Form 8-K of the Registrant as filed with the Commission on March 7,
2005.)
4.16 Common Stock Purchase Warrant issued to Southridge Partners LP
(Incorporated herein by reference to Exhibit 4.1 of Form 8-K of the
Registrant as filed with the Commission on April 15, 2005.)
4.17 Nonnegotiable 2% Secured Convertible Promissory Note issued to
Southridge Partners LP (Incorporated herein by reference to Exhibit 4.2
of Form 8-K of the Registrant as filed with the Commission on April 15,
2005.)
10.1 HomeCom Communications, Inc. Stock Option Plan and form of Stock
Option Certificate. (Incorporated herein by reference to exhibit of the
same number in the Form S-1 Registration Statement of the Registrant
(Registration No. 333-12219).) (1)
10.2 HomeCom Communications, Inc. Non-Employee Directors Stock Option Plan
and form of Stock Option Certificate. (Incorporated herein by reference
to exhibit of the same number in the Form S-1 Registration Statement of
the Registrant (Registration No. 333-12219).) (1)
10.3 Form of Employment Agreement entered into between the Registrant and
each of its executive officers except Harvey W. Sax. (Incorporated
herein by reference to Exhibit 10.4 of the Form S-1 Registration
Statement of the Registrant (Registration No. 333-12219).) (1)
10.4 Lease Agreement between Property Georgia OBJLW One Corporation and the
Registrant dated January 22, 1996. (Incorporated herein by reference to
Exhibit 10.5 of the Form S-1 Registration Statement of the Registrant
(Registration No. 333-12219).)
78
10.5 Form of Warrant to purchase 200,000 shares of Common Stock at an
exercise price of $4.00 per share issued by the Registrant to First
Granite Securities, Inc. (Incorporated herein by reference to Exhibit
10.24 of the Form S-1 Registration Statement of the Registrant
(Registration No. 333-42599).)
10.6 Form of Warrant to purchase 200,000 shares of Common Stock at an
exercise price of $6.00 per share issued by the Registrant to First
Granite Securities, Inc. (Incorporated herein by reference to Exhibit
10.25 of the Form S-1 Registration Statement of the Registrant
(Registration No. 333-42599).)
10.7 Form of Securities Purchase Agreement between the Registrant,
Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of
December 23, 1997. (Incorporated herein by reference to Exhibit 10.26 of
the Form S-1/A Registration Statement of the Registrant (Registration
No. 333-42599).)
10.8 Form of Registration Rights Agreement between the Registrant,
Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of
December 23, 1997. (Incorporated herein by reference to Exhibit 10.27 of
the Form S-1/A Registration Statement of the Registrant (Registration
No. 333-42599).)
10.9 Form of Warrant to purchase 18,750 shares of Common Stock issued by
the Registrant to Sovereign Partners, L.P. (Incorporated herein by
reference to Exhibit 10.28 of the Form S-1/A Registration Statement of
the Registrant (Registration No. 333-42599).)
10.10 Form of Warrant to purchase 56,250 shares of Common Stock issued by
the Registrant to Dominion Capital Fund, LTD. (Incorporated herein by
reference to Exhibit 10.29 of the Form S-1/A Registration Statement of
the Registrant (Registration No. 333-42599).)
10.11 Form of Warrant to purchase 25,000 shares of Common Stock for an
aggregate purchase price of $92,500 by the Registrant to Hamilton Dorsey
Alston Company. (Incorporated herein by reference to Exhibit 10.34 of
the Form S-1/A Registration Statement of the Registrant (Registration
No. 333-42599).)
10.12 Form of Warrant to purchase 50,000 shares of Common Stock issued by
the Registrant to The Malachi Group, Inc. (Incorporated herein by
reference to Exhibit 10.37 of the Form S-1 Registration Statement of the
Registrant filed (Registration No. 333-45383).)
10.13 Letter Agreement, dated April 17, 1998 by and among Sovereign
Partners, L.P., Dominion Capital Fund and HomeCom. (Incorporated herein
by reference to Exhibit 10 of the Form 8-K of the Registrant filed with
the Commission on April 28, 1998.)
10.14 Securities Purchase Agreement dated as of March 25, 1999 by and among
HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View Funds,
L.P., and Liberty View Fund, L.L.C. (Incorporated herein by reference to
Exhibit 10.50 of the Form 10-K of the Registrant filed with the
Commission on March 31, 1999.)
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10.15 Registration Rights Agreement dated as of March 25, 1999 by and among
HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View Funds,
L.P., and Liberty View Fund, L.L.C. (Incorporated herein by reference to
Exhibit 10.51 of the Form 10-K of the Registrant filed with the
Commission on March 31, 1999.)
10.16 Transfer Agent Instructions dated as of March 25, 1999. (Incorporated
herein by reference to Exhibit 10.52 of the Form 10-K of the Registrant
filed with the Commission on March 31, 1999.)
10.17 Transfer Agent Legal Opinion dated as of March 25, 1999. (Incorporated
herein by reference to Exhibit 10.53 of the Form 10-K of the Registrant
filed with the Commission on March 31, 1999.)
10.18 Warrant Agreement, dated as of March 25, 1999, by and among CPR (USA),
Inc. and HomeCom Communications, Inc. (Incorporated herein by reference
to Exhibit 10.55 of the Registration Statement on Form S-3 of the
Registrant (Registration No. 333-79761).)
10.19 Warrant Agreement, dated as of March 25, 1999, by and among Liberty
View Fund, L.L.C. and HomeCom Communications, Inc. (Incorporated herein
by reference to Exhibit 10.56 of the Registration Statement on Form S-3
of the Registrant (Registration No. 333-79761).)
10.20 Warrant Agreement, dated as of March 25, 1999, by and among Liberty
View Funds, L.P. and HomeCom Communications, Inc. (Incorporated herein
by reference to Exhibit 10.57 of the Registration Statement on Form S-3
of the Registrant (Registration No. 333-79761).)
10.21 Warrant Agreement, dated as of March 25, 1999, by and among J.P.
Turner & Company, L.L.C and HomeCom Communications, Inc. (Incorporated
herein by reference to Exhibit 10.59 of the Registration Statement on
Form S-3 of the Registrant (Registration No. 333-79761).)
10.22 Securities Purchase Agreement dated as of July 23, 1999 by and among
HomeCom Communications, Inc. and MacNab LLC. (Incorporated herein by
reference to Exhibit 10.65 of the Form S-1 Registration Statement of the
Registrant (Registration No. 333-88491).)
10.23 Registration Rights Agreement dated as of July 23, 1999 by and among
HomeCom Communications, Inc. and MacNab LLC. (Incorporated herein by
reference to Exhibit 10.66 of the Form S-1 Registration Statement of the
Registrant (Registration No. 333-88491).)
10.24 Transfer Agent Instructions dated as of September 28, 1999.
(Incorporated herein by reference to Exhibit 10.67 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.25 Transfer Agent Legal Opinion dated as of July 23, 1999. (Incorporated
herein by reference to Exhibit 10.68 of the Form S-1 Registration
Statement of the Registrant (Registration No. 333-88491).)
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10.26 Placement Agency Agreement dated as of July 23, 1999 by and between
HomeCom Communications, Inc. and Greenfield Capital Partners.
(Incorporated herein by reference to Exhibit 10.69 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.27 Warrant Agreement, dated as of July 23, 1999, by and between HomeCom
Communications, Inc. and MacNab LLC. (Incorporated herein by reference
to Exhibit 10.70 of the Form S-1 Registration Statement of the
Registrant (Registration No. 333-88491).)
10.28 Securities Purchase Agreement dated as of September 27, 1999 by and
among HomeCom Communications, Inc. and Jackson LLC. (Incorporated herein
by reference to Exhibit 10.71 of the Form S-1 Registration Statement of
the Registrant (Registration No. 333-88491).)
10.29 Registration Rights Agreement dated as of September 27, 1999 by and
among HomeCom Communications, Inc. and Jackson LLC. (Incorporated herein
by reference to Exhibit 10.72 of the Form S-1 Registration Statement of
the Registrant (Registration No. 333-88491).)
10.30 Transfer Agent Instructions dated as of September 28, 1999.
(Incorporated herein by reference to Exhibit 10.73 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.31 Transfer Agent Legal Opinion dated as of September 28, 1999.
(Incorporated herein by reference to Exhibit 10.74 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.32 Placement Agency Agreement dated as of September 27, 1999 by and
between HomeCom Communications, Inc. and Greenfield Capital Partners.
(Incorporated herein by reference to Exhibit 10.75 of the Form S-1
Registration Statement of the Registrant (Registration No. 333-88491).)
10.33 Warrant Agreement, dated as of September 27, 1999, by and between
HomeCom Communications, Inc. and Jackson LLC. (Incorporated herein by
reference to Exhibit 10.76 of the Form S-1 Registration Statement of the
Registrant (Registration No. 333-88491).)
10.34 Securities Purchase Agreement dated as of April 14, 2000 by and among
HomeCom Communications, Inc. and McNab LLC. (Incorporated herein by
reference to Exhibit 10.86 of the Form S-3 Registration Statement of the
Registrant (Registration No. 333-38326).)
10.35 Registration Rights Agreement dated as of April 14, 2000 by and among
HomeCom Communications, Inc. and McNab LLC. (Incorporated herein by
reference to Exhibit 10.87 of the Form S-3 Registration Statement of the
Registrant (Registration No. 333-38326).)
10.36 Transfer Agent Instructions dated as of April 14, 2000. (Incorporated
herein by reference to Exhibit 10.88 of the Form S-3 Registration
Statement of the Registrant (Registration No. 333-38326).)
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10.37 Transfer Agent Legal Opinion dated as of April 14, 2000. (Incorporated
herein by reference to Exhibit 10.89 of the Form S-3 Registration
Statement of the Registrant (Registration No. 333-38326).)
10.38 Warrant Agreement, dated as of April 14, 2000, by and between HomeCom
Communications, Inc. and McNab LLC. (Incorporated herein by reference to
Exhibit 10.90 of the Form S-3 Registration Statement of the Registrant
(Registration No. 333-38326).)
10.39 Employment Agreement between the Registrant and Timothy R. Robinson
dated August 1, 2000. (Incorporated herein by reference to Exhibit 10.86
of the Form 10-K of the Registrant filed with the Commission on April
12, 2001.) (1)
10.40 Amendment to employment Agreement between Registrant and George
Bokchava dated January 10, 2001. (Incorporated herein by reference to
Exhibit 10.87 of the Form 10-K of the Registrant filed with the
Commission on April 12, 2001.)
10.41 Separation and Release Agreement, dated March 29, 2001, between
HomeCom Communications, Inc. and Harvey Sax. (Incorporated herein by
reference to Exhibit 10.1 of Form 10-Q of the Registrant filed with the
Commission on May 21, 2001.)
10.42 License Agreement, dated May 22, 2003, by and between HomeCom
Communications, Inc. and Eurotech, Ltd. (Incorporated by reference to
Exhibit 10.1 of the Registrant's Current Report on Form 8-K, as filed
with the Commission on June 6, 2003.)
10.43 Secured Promissory Note, dated May 22 2003, by HomeCom Communications,
Inc. in favor of MacNab LLC. (Incorporated by reference to Exhibit 10.2
of the Registrant's Current Report on Form 8-K, as filed with the
Commission on June 6, 2003.)
10.44 Security Agreement, dated May 22, 2003, by and between HomeCom
Communications, Inc. and MacNab LLC. (Incorporated by reference to
Exhibit 10.3 of the Registrant's Current Report on Form 8-K, as filed
with the Commission on June 6, 2003.)
10.45 Stock Exchange Agreement, effective as of June 27, 2003, by and among
HomeCom Communications, Inc., Eurotech, Ltd., Greenfield Capital
Partners LLC and Polymate, Ltd. (Incorporated herein by reference to
Exhibit 10.4 of Form 10-Q of the Registrant for the quarter ended June
30, 2003, as filed with the Commission on September 25, 2003.)
10.46 Amendment No. 1 to License Agreement, effective as of June 27, 2003,
by and among HomeCom Communications, Inc. and Eurotech, Ltd.
(Incorporated herein by reference to Exhibit 10.5 of Form 10-Q of the
Registrant for the quarter ended June 30, 2003, as filed with the
Commission on September 25, 2003.)
10.47 Private Equity Credit Agreement, dated September 30, 2003, by and
between HomeCom Communications, Inc. and Brittany Capital Management
LLC. (Incorporated herein by reference to Exhibit 10.1 of Form 10-Q of
the Registrant for the quarter ended September 30, 2003, as filed with
the Commission on October 29, 2003.)
82
10.48 Registration Rights Agreement, dated September 30, 2003, by and
between HomeCom Communications, Inc. and Brittany Capital Management
LLC. (Incorporated herein by reference to Exhibit 10.2 of Form 10-Q of
the Registrant for the quarter ended September 30, 2003, as filed with
the Commission on October 29, 2003.)
10.49 License Agreement, dated as of August 15, 2003, by and between HomeCom
Communications, Inc. and Kristul Group. (Incorporated herein by
reference to Exhibit 10.49 of Form 10-K of the Registrant for the year
ended December 31, 2003, as filed with the Commission on May 13, 2004.)
10.50 Assignment and Consent Agreement, dated November 17, 2003, by and
among Joseph Kristul, Kristul Group, Environmental Friendly Materials,
GMBH and HomeCom Communications, Inc. (Incorporated herein by reference
to Exhibit 10.50 of Form 10-K of the Registrant for the year ended
December 31, 2003, as filed with the Commission on May 13, 2004.)
10.51 Secured Promissory Note, dated May 31, 2004, by Tulix
Systems, Inc. in favor of HomeCom Communications, Inc. (Incorporated
herein by reference to Exhibit 10.1 of Form 8-K of the Registrant as
filed with the Commission June 15, 2004.)
10.52 Security Agreement, dated May 31, 2004, by and between HomeCom
Communications, Inc. and Tulix Systems, Inc.(Incorporated herein by
reference to Exhibit 10.2 of Form 8-K of the Registrant as filed with
the Commission June 15, 2004.)
10.53 Shareholders' Agreement, dated May 31, 2004, by and among
HomeCom Communications, Inc., Tulix Systems, Inc., Gia
Bokuchava, Nino Doijashvili and Timothy R. Robinson (Incorporated
herein by reference to Exhibit 10.3 of Form 8-K of the Registrant as
filed with the Commission June 15, 2004.)
10.54 Indemnification Agreement, dated May 31, 2004, by and
between HomeCom Communications, Inc. and Tulix Systems, Inc.
(Incorporated herein by reference to Exhibit 10.4 of Form 8-K of the
Registrant as filed with the Commission June 15, 2004.)
10.55 Second Exchange Agreement with Brittany Capital Management Ltd. dated
June 1, 2004 (Incorporated herein by reference to Exhibit 10.1 of Form
10-Q of the Registrant as filed with the Commission August 16, 2004.)
10.56 Convertible Note issued to Brittany Capital Management, Ltd. dated
June 1, 2004 (Incorporated herein by reference to Exhibit 10.2 of Form
10-Q of the Registrant as filed with the Commission August 16, 2004.)
10.57 Securities Purchase Agreement dated October 19, 2004 between Global
Matrechs, Inc. and Southridge Partners LP (Incorporated herein by
reference to Exhibit 99.1 of Form 8-K of the Registrant as filed with
the Commission on October 18, 2004.)
10.58 Form of Securities Purchase Agreement (Incorporated herein by
reference to Exhibit 99.1 of Form 8-K of the Registrant as filed with
the Commission on November 4, 2004.)
83
10.59 Securities Purchase Agreement dated December 3, 2004 between Global
Matrechs, Inc. and Deer Creek Fund, LLC (Incorporated herein by
reference to Exhibit 99.3 of Form 8-K of the Registrant as filed with
the Commission on December 8, 2004.)
10.60 Letter of Engagement with Trilogy Capital Partners, Inc. (Incorporated
herein by reference to Exhibit 99.1 of Form 8-K of the Registrant as
filed with the Commission on December 22, 2004.)
10.61 Secured note (Incorporated herein by reference to Exhibit 10.1 of
Form 8-K of the Registrant as filed with the Commission on January 6,
2005.)
10.62 Security agreement (Incorporated herein by reference to Exhibit 10.2
of Form 8-K of the Registrant as filed with the Commission on January
6, 2005.)
10.63 Guaranty (Incorporated herein by reference to
Exhibit 10.3 of Form 8-K of the Registrant as filed with the Commission
on January 6, 2005.)
10.64 Collateral pledge agreement (Incorporated herein by reference to
Exhibit 10.4 of Form 8-K of the Registrant as filed with the Commission
on January 6, 2005.)
10.65 Second Securities Purchase Agreement with Southridge Partners LP
(Incorporated herein by reference to Exhibit 10.1 of Form 8-K of the
Registrant as filed with the Commission on February 4, 2005.)
10.66 Nonnegotiable 2% Secured Convertible Promissory Note issued to
Southridge Partners LP (Incorporated herein by reference to Exhibit
10.2 of Form 8-K of the Registrant as filed with the Commission on
February 4, 2005.)
10.67 Exchange Agreement with Woodward LLC (Incorporated herein by
reference to Exhibit 10.3 of Form 8-K of the Registrant as filed with
the Commission on February 4, 2005.)
10.68 Second Securities Purchase Agreement (Incorporated herein by
reference to Exhibit 10.1 of Form 8-K of the Registrant as filed with
the Commission on April 15, 2005.)
21.1 List of Subsidiaries. (Incorporated herein by reference to exhibit of
the same number in the Form S-1 Registration Statement of the Registrant
(Registration No. 333-42599).)
31.1 Certification by CEO of Periodic Report Pursuant to Rule 13a-14(a) or
Rule 15d-14(a)*
31.2 Certification by CFO of Periodic Report Pursuant to Rule 13a-14(a) or
Rule 15d-14(a)*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
* Filed herewith
(1) Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB.
84