U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________

FORM 10-QSB

_________________

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2006

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER 0-29204

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GLOBAL MATRECHS, INC.

(Exact name of small business issuer as specified in its charter)

Delaware	58-2153309
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

90 Grove Street

Suite 201

Ridgefield, CT 06877

(Address of principal executive offices)

(203) 431-6665

(Issuer's telephone number)

__________________

Check whether the issuer (1) filed all reports required to be filed by Section 13 of 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 ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x

As of May 11, 2006, there were 322,738,374 shares of our common stock, par value $0.0001 per share, outstanding.

Transitional Small Business Disclosure Format (check one):    Yes ¨ No x

 

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Global Matrechs, Inc.

Form 10-QSB

Quarterly Report

March 31, 2006

Table of Contents

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheet	2
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition
	and Results of Operations	9
Item 3.	Controls and Procedures	20
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 5.	Other Information	22
Item 6.	Exhibits	22

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GLOBAL MATRECHS, INC.

BALANCE SHEET

AS OF MARCH 31, 2006

		March 31, 2006
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	60,783
Investment in available for sale marketable securities			95,556
Note Receivable			50,000
Inventory			28,590
Prepaid Expenses			13,467
TOTAL CURRENT ASSETS			248,396
Note receivable			250,000
Investment in Tulix at cost			51,949
TOTAL ASSETS		$	550,345
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	1,382,691
Note payable			200,000
Convertible notes payable - net of debt discount			4,873,234
Derivative liability			633,338
TOTAL CURRENT LIABILITIES			7,089,263
Convertible preferred stock		$	4,035,159

 

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STOCKHOLDERS' DEFICIT:
Preferred stock, Series H, $.01 par value,
13,500 shares authorized, 10,162 shares
issued and outstanding at March 31, 2006,
convertible, participating, $10,162,000
liquidation value at March 31, 2006			101
Preferred stock, Series I, $.01 par value,
490.5 shares authorized, 490.5 shares
issued and outstanding at March 31, 2006,
convertible, participating, $49,050 liquidation
value at March 31, 2006			5
Common stock, $.0001 par value, 300,000,000 shares authorized,
280,452,084 shares issued and outstanding at March 31, 2006			28,045
Additional paid-in capital			26,820,596
Accumulated deficit			(37,289,786	)
Accumulated other comprehensive loss			(133,038	)
TOTAL STOCKHOLDERS’ DEFICIT			(10,574,077	)
Total liabilities and stockholder deficit		$	550,345

 

The accompanying notes are an integral part of these financial statements.

 

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GLOBAL MATRECHS, INC.

STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

		Three Months Ended March 31,
		2006			2005 restated
		(unaudited)			(unaudited)
Revenues		$	125		$	—
Cost of revenues			—			—
Gross profit			125			—
Operating expenses:
Selling, general and administrative			342,594			452,915
Depreciation and amortization			—			49,311
Total operating expenses			342,594			502,226
Loss from continuing operations			(342,469	)		(504,607	)
Other expenses (income)
Interest expense			346,604			1,800,720
Change in fair value of derivative instruments			129,202			64,918
Interest income			(44	)		(1,225	)
Total other expenses, net			475,762			1,864,413
Net loss from continuing operations			(818,231	)		(2,366,639	)
Discontinued Operations:
Income from discontinued operations			—			49,985
Net loss applicable to common shareholders			(818,231	)		(2,316,654	)
Comprehensive loss Unrealized loss on available for sale marketable securities			(13,111	)		—
Total comprehensive loss		$	(831,342	)	$	(2,316,654	)
Net loss per share - basic and diluted:
Net loss from continuing operations		$	(0.00	)	$	(0.04	)
Net income from discontinued operations			—			(0.00	)
		$	(0.00	)	$	(0.04	)
Weighted number of shares outstanding - basic
and diluted			198,527,008			57,918,004

The accompanying notes are an integral part of these financial statements.

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GLOBAL MATRECHS, INC.

STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

 

			Three Months Ended March 31,
			2006			2005 restated
			(unaudited)			(unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss		$	(818,231	)	$	(2,366,639	)
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Amortization of intangibles			—			49,311
Change in fair value of derivative instruments			133,645			64,918
Amortization of beneficial conversion feature			282,506			1,786,325
Change in fair value of derivative conversion feature			—			—
Common stock issued in exchange for services
Performed			—			82,261
Loan to Tulix			—			(1,225	)
Change in operating assets and liabilities:
Prepaid expenses			(6,577	)		17,250
Accounts payable and accrued expenses			(22,662	)		64,813
Net cash used in continuing operating activities			(431,319	)		(302,986	)
Net cash used in discontinued operating activities (including income from operations of $49,985)			—			(100,151	)
Net cash used in operating activities			(431,319	)		(403,137	)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from warrant exercise			5,750
Proceeds from equity line			418,359
Proceeds from issuance of convertible loans						425,000
Net cash provided by continuing financing activities			424,109			425,000
Net cash used in discontinued financing activities			—			(110,429	)
Net cash provided by financing activities			424,109			314,571
Net increase (decrease) in cash and cash equivalents			(7,210	)		(88,566	)
Cash and cash equivalents at beginning of period			67,993			131,471
Cash and cash equivalents at end of period		$	60,783		$	42,905
Non-cash investing and financing activities:
Unrealized Loss on securities held for sale		$	13,111			—
Conversion of preferred shares
into 68,150,954 shares of common stock as March 31, 2006		$	175,903			—

The accompanying notes are an integral part of these financial statements.

 

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NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Global Matrechs, Inc. (the “Company”, “we” or “us”), have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-QSB and Rule 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended March 31, 2006 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2006.

2.  GOING CONCERN MATTERS

As reflected in the accompanying financial statements, the Company has incurred significant losses since its incorporation resulting in an accumulated deficit as of March 31, 2006 of approximately $37,289,786. 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 continues to experience negative cash flows from operations and is dependent on continued financing from investors to sustain its activities. During 2005, the Company sold its former wholly-owned subsidiary True To Form, Ltd. (“True To Form”, “TTF”), which subsidiary represented all significant revenues generated by the Company in 2005. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is planning to obtain additional capital principally through the sale of debt and equity securities. The realization of assets and satisfaction of liabilities in the normal course of business is dependent upon the Company obtaining additional equity capital and ultimately obtaining profitable operations. However, no assurances can be given that the Company will be successful in these activities. Should any of these events not occur, the accompanying financial statements will be materially affected. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NON-RELIANCE ON HISTORICAL FINANCIAL STATEMENTS

 

Other Income. Other income in the quarter ended March 31, 2005 consisted of $1,225 in interest charged to Tulix for interest on their notes.

 

Interest Expense. Interest expense for the quarter ended March 31, 2006 was $346,604 compared to March 31, 2005 which was $1,800,720. For 2006 it consisted of $314,157 and for 2005 it consisted of $1,795,989 of interest in connection with the beneficial conversion features and amortization of warrant features related to convertible notes, and $32,447 and $14,571, respectively, in accrued interest expense on other borrowings.  Amortization of debt discount and the beneficial conversion feature for the three months ended March 31, 2006 was $221, 060 and $59,116, respectively.

Other Expenses. Other expenses for the quarter ended March 31, 2006 consisted of $129,202 versus $64,918 for the comparable period in 2005. The expenses were the result of a change in the fair value of our derivative instruments.

Liquidity and Capital Resources

Our sources of capital are extremely limited. We have incurred operating losses since inception and as of March 31, 2006, we had an accumulated deficit of $37,289,786 and a working capital deficit of $6,840,867.

Cash Provided by Financing Activities

 

During the three months ended March 31, 2006, we financed our business primarily by drawing down on our equity line, the terms of which are described below. Cash provided by financing activities for the year ended March 31, 2006 was $424,109, compared to $425,000 for the year ended March 31, 2005.  Of the amount recieved for the three months ended March 31, 2006, $368,359 represents proceeds from draws under the new facility established January 10, 2006.

Private Equity Credit Line

 

Summary. On January 10, 2006, we entered into the Private Equity Credit Agreement with Brittany Capital Management Limited, a limited liability company organized and existing under the laws of The Bahamas. Under the Private Equity Credit Agreement, we may draw up to $15 million from time to time, at our discretion, in exchange for shares of our common stock, subject to conditions outside of the control of Brittany further described below.

  

Put Shares. Each draw under the Private Equity Credit Agreement is structured as a put option, wherein we require Brittany to purchase a number of shares of our common stock after a discount to the market price is applied. For a given put, we must deliver a notice to Brittany indicating the dollar amount we wish to draw down. Five trading days after delivery of this notice, Brittany must deliver this amount in two equal installments, one each on the fifth and tenth trading day following the delivery of the notice. In exchange, we must issue to Brittany, in the case of the first installment, the number of shares of common stock obtained by dividing the amount of the installment by 92% of the average of the three closing bid prices immediately preceding the installment date, and in the case of the second installment, the number of shares obtained by dividing the amount of the installment by 92% of the average of the three lowest closing bid prices during the ten trading day period immediately preceding the installment date. We refer to the shares we sell under the agreement as “put shares.” The issuance of put shares to Brittany are to take place from time to time, at our discretion, over the course of a commitment period extending 36 months after the effective date of our registration statement.

 

We are required to draw down a minimum of one million dollars. If we draw a lesser amount, we must pay Brittany an amount equal to nine percent of the difference between that amount and the minimum. Based on our current assessment of our financing needs, we intend to draw in excess of the one million dollar minimum.

 

Blackout Shares. If we suspend sales of common stock pursuant to the registration statement covering shares issuable under the equity line within 15 trading days of a sale of common stock to Brittany and our stock price declines during the suspension period, we will be required to issue that number of additional shares of our common stock which, when combined with the shares purchased

 

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during the 15 trading days immediately preceding the suspension, will equal the number of shares Brittany would have received had the purchase been made at the conclusion of the suspension period (at the lower per share price). Any obligation to deliver blackout shares arising under the Private Equity Credit Agreement would be irrevocable, and Brittany would have no discretion regarding whether or not to receive them.

 

Fees. We are required to pay Greenfield Capital Partners, LLC, a registered broker-dealer, a finder’s fee, in cash, equal to 1% of the amounts we draw down from the equity line as consideration for services related to the establishment of the Private Equity Credit Agreement.

 

Number of shares issuable under the Private Equity Credit Agreement. We cannot predict the actual number of shares of common stock that may be issued under the Private Equity Credit Agreement, in part because the purchase price of the shares will fluctuate based on prevailing market conditions and we have not determined the total amount of cash advances we intend to draw. However, for illustrative purposes, we have calculated the number of shares we would have to issue in connection with a hypothetical draw amount of $50,000 based on the assumptions set forth below:

 

Shares Issuable Under Private Equity Credit Agreement for $50,000 Draw at Various Market Prices

 

	Hypothetical Market Price	Discounted Market Price	Shares to be issued
	$0.025	$0.0230	2,173,913
	$0.020	$0.0187	2,717,391
	$0.015	$0.0138	3,623,188
	$0.010	$0.0092	5,434,783
	$0.005	$0.0046	10,869,565

 

Based on the closing price of our stock of $0.009 on March 31, 2006, we would have to issue to Brittany 1,625,737,889 shares of our common stock in order to draw down the remaining $14,631,641 million available to us under the Private Equity Credit Agreement. We have registered the resale of 100,000,000 shares we may issue under the agreement pursuant to a Registration Statement on Form SB-2 (File # 333-131106), which was declared effective by the Securities & Exchange Commission on February 2, 2006. As of March 31, 2006, we had issued 57,525,076 shares under this agreement.

 

Dilution. The issuance and sale of shares under the Private Equity Credit Agreement will have a significant dilutive impact on our stockholders for the following reasons:

 

·   As described above, the lower our stock price is, the more shares we would have to issue for a given draw down amount, and the more shares we issue, the greater the extent of dilution to the ownership interest of our current stockholders. To illustrate, if we issue and sell all of the shares being offered under our current registration statement, they would represent approximately 40% of our outstanding common stock after giving effect to such issuance.

 

·   Because the shares we may issue under the Private Equity Credit Agreement are discounted, the issuance of these shares will also have a financially dilutive impact on our current stockholders.

 

·   The Brittany’s sale of material amounts of our common stock into the market may result in significant downward pressure on the price of the common stock as the supply of freely tradable shares increases. Furthermore, this downward pressure may encourage short sales, which could further depress on the price of the common stock.

 

Financing Activities in 2005

 

During 2005, we financed our business by drawing down on our equity line and through issuances of convertible debt.

 

Private Placements with Southridge Partners LP

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. 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

 

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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.

Under the terms of the purchase agreement, Southridge had the 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. During the nine months ended September 30, 2005, Southridge exercised this option on March 2, April 11, and May 2, 2005, purchasing notes in the aggregate principal amount of 425,000 and warrants to purchase up to 17,000,000 shares of our common stock. All of these transactions were exempt from registration pursuant to the provisions of Section 4(2) of the Securities Act, as amended. On July 8, 2005, we and Southridge Partners LP terminated its option to purchase additional notes.

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.

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.

Private Placements with McNab LLC

On June 14, July 13, August 1, September 14, 2005, and October 3, 2005, we entered into Securities Purchase Agreements with McNab LLC, each in substantially the same form, pursuant to which we sold nonnegotiable 2% secured convertible promissory notes in the aggregate principal amount of $595,000, and common stock purchase warrants to purchase up to 23,800,000 shares of our common stock, $.0001 par value per share, for an aggregate purchase price of $595,000. The notes and warrants are on substantially the same terms as the notes and warrants issued to Southridge, as described above.

Debt Issuance to Southridge Partners LP.

 

On December 7, 2005, we issued a promissory note in the original principal amount of $200,000 to Southridge Partners LP. It accrues interest on the unpaid principal balance at a rate of 8% per year. The note originally had a maturity date of February 10, 2006, but on March 29, 2006, the maturity date was extended to July 20, 2006. In the event of a default, the annual interest rate will increase to 18% and Southridge may, at its option, demand immediate payment of all amounts due under the promissory note.

Going Concern and Financing Requirements

The report of our registered independent public accounting firm dated March, 27 2006 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 equity investments and issuances of debt. Additionally, we had an accumulated deficit of approximately $36,471,555 and $37,289,786 as of December 31, 2005 and March 31, 2006, respectively. This deficit indicates that we may be unable to meet our future obligations unless additional funding sources are obtained. There is no assurance that we will be able to raise any additional capital that we require to continue operations.

 

Our consolidated unaudited interim financial statements included with this Quarterly Report on Form 10-QSB have been prepared assuming that we will continue as a going concern. As shown in the accompanying consolidated unaudited financial statements, we had negative working capital of approximately $6,840,866.

 

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In the event that we are unable to raise additional financing on acceptable terms, then we may have to scale back our plan of operations and operating expenditures or seek the protection of the bankruptcy courts. We anticipate that we will continue to incur losses until such time as the revenues we are able to generate revenue from sales and licensing of our products exceed our increased operating expenses. There can be no assurance that we will be able to generate revenue. 

Off-Balance Sheet Arrangements

 

We have no 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.

 

 

Facilities Leases

 

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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 sought 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 sought damages totaling $672,677 plus interest and attorney’s fees which are yet to be determined. This litigation was settled in connection with the settlement of claims with Eurotech and Carey Naddell individually described below.

On April 13, 2005 Carey Naddell, CEO of Eurotech, Ltd., filed suit against the Company in the United States District Court - Southern District of New York for damages in the amount of at least $240,000 with interest attorney’s fees and disbursement based upon an alleged breach of a written service agreement.

 

On June 24, 2005, Eurotech, Ltd. filed a complaint against Global Matrechs in the Supreme Court of the State of New York, County of New York, (Index No. 108773/05) for an alleged failure to fulfill our obligations under our License and Exchange Agreement

 

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dated March 27, 2003 with Eurotech, Ltd. thereby depriving Eurotech, Ltd. of its contractual right to convert 700 Series H Preferred Stock and selling 7 million shares of our common stock. Eurotech, Ltd. is seeking damages in an amount to be determined at trial but believed according to the defendant to exceed $100,000 plus interest and attorney’s fees which are yet to be determined.

On March 16, 2006, we, Naddell and Eurotech executed a full mutual release of claims, completing a settlement of each of the above-described actions.

In connection with the Eurotech matter, Eurotech will return 2,500 shares of Series H, convertible Preferred Stock to the Company in full settlement of claims relating to its failure to fulfill obligations under the license agreement, and Eurotech’s obligations to Woodward, which were assumed by the Company on January 31, 2005.

In connection with the Cary Naddell matter, a settlement was reached whereby this former consultant received $175,000 in full settlement of related claims for compensation of past services.

 

At December 31, 2005, based on settlement date of March 15, 2006, the Company accrued a settlement liability and related settlement expense of $175,000. Under the terms of the settlement, $25,000 was due and paid at closing, and the balance of $150,000 is payable in seven (7) equal monthly installments of $21,428.57 commencing on April 15, 2006 with final installment payment due on or before October 15, 2006. The Company made its first payment due under this settlement.

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.