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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
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(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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 0-29204
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GLOBAL MATRECHS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2153309
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
90 Grove Street
Suite 202
Ridgefield, CT 06877
(Address of principal executive offices)
(203) 431-6665
(Issuer's telephone number)
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Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
------ -------
As of August 06, 2004, there were 14,999,157 shares of our common
stock, par value $0.0001 per share, outstanding.
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GLOBAL MATRECHS, INC.
FORM 10-Q/A
QUARTERLY REPORT
JUNE 30, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................3
Consolidated Balance Sheets.....................................3
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.............................8
Item 3. Quantitative and Qualitative Disclosure About Market Risk......13
Item 4. Controls and Procedures........................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................13
Item 2. Changes in Securities and Use of Proceeds......................13
Item 3. Defaults Upon Senior Securities................................14
Item 6. Exhibits and Reports on Form 8-K...............................14
SIGNATURES................................................................16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GLOBAL MATRECHS, INC.
Consolidated Balance Sheets as of
June 30, 2004 and December 31,2003
June 30, December 31,
2004 2003
---------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 268 $ 71,818
Note receivable, net 70,408 --
Accounts receivable, net 18,028 274,418
Prepaid expenses 28,500 27,257
---------- -----------
Total current assets 117,204 373,493
Furniture, fixtures and equipment
held for sale -- 105,624
Investment in Tulix 51,949 --
Licensed Technology rights, net 772,541 871,164
---------- -----------
Total assets $ 941,694 $ 1,350,281
========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,176,982 $ 2,807,924
---------- -----------
Total current liabilities 3,176,982 2,807,924
Notes payable 477,500 255,000
Convertible preferred stock 6,442,133 6,442,133
---------- -----------
Total liabilities 10,096,615 9,505,057
---------- -----------
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value,
15,000,000 shares authorized,
14,999,156 shares issued and
outstanding at June 30, 2004 and
December 31, 2003 1,500 1,500
Preferred stock, Series H, $.01 par
value, 13,500 shares authorized,
13,500 shares issued and outstanding
at June 30, 2004 and December 31,
2003, convertible, participating,
$13,500,000 liquidation value at
June 30, 2004 and December 31, 2003 135 135
Treasury stock, 123,695 shares at June
30, 2004 and December 31, 2003 (8,659) (8,659)
Additional paid-in capital 19,288,820 19,228,820
Accumulated deficit (28,436,717) (27,376,572)
---------- -----------
Total stockholder deficit (9,154,921) (8,154,776)
---------- -----------
Total liabilities and stockholder
deficit $ 941,694 $ 1,350,281
========== ===========
The accompanying notes are an integral part of these financial statements.
3
GLOBAL MATRECHS, INC.
Consolidated Statements of Operations
for the Six and Three Months ended June 30, 2004 and 2003
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------
2004 2003 2004 2003
--------- ---------- ------------ ---------
(unaudited)
Revenues $ -- $ 7,801 $ 620 $ 7,801
Cost of revenues -- 6,708 558 6,708
--------- -------- -------- ----------
Gross profit -- 1,093 62 1,093
Operating expenses:
General and administrative 182,685 106,867 445,251 137,957
Depreciation and amortization 49,311 16,437 98,622 16,437
--------- -------- -------- ----------
Total operating expenses 231,996 123,304 543,873 154,394
--------- -------- -------- ----------
Operating loss (231,996) (122,211) (543,811) (153,301)
Other expenses (income)
Interest expense 247,724 1,233 489,440 1,233
Other income, net (3,128) (19,518) (3,128) (89,709)
--------- -------- --------- ----------
Loss from continuing operations
before income taxes (476,592) (103,926) (1,030,123) (64,825)
Income tax provision (benefit) -- -- -- --
--------- -------- --------- ----------
Loss from continuing operations (476,592) (103,926) (1,030,123) (64,825)
Income from discontinued
operatins 51,174 54,858 94,363 155,480
Loss on disposal of business
segment (124,385) -- (124,385) --
--------- -------- --------- ----------
Net income (loss) (549,803) (49,068) (1,060,145) 90,655
Deemed preferred stock dividend -- (159,597) -- (336,361)
--------- -------- --------- ----------
Loss applicable to common
shareholders $ (549,803) $ (208,665) $(1,060,145) $ (245,706)
========= ======== ========= ==========
Income (loss) per share -
basic and diluted:
Continuing operations $ (0.032) $ (0.018) $ (0.069) $ (0.027)
Discontinued operations (0.005) 0.004 (0.002) 0.010
--------- -------- --------- ----------
$ (0.037) $ (0.014) $ (0.071) $ (0.016)
========= ======== ========= ==========
Weighted number of shares
outstanding 14,999,157 14,999,157 14,999,157 14,999,157
The accompanying notes are an integral part of these financial statements.
4
GLOBAL MATRECHS, INC.
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
--------------------
2004 2003
---------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (1,060,145) $ 90,655
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Amortization 101,123 --
Provision for bad debts 23,481 14,665
Loss on sale of division 124,385 --
Change in operating assets and liabilities:
Accounts receivable (25,499) (28,817)
Prepaid expenses (1,243) (6,444)
Accounts payable and accrued expenses 608,297 (206,866)
----------- --------
Net cash used in operating activities (229,601) (136,807)
----------- --------
Cash flow from investing activities:
Investment in Tulix (51,949) --
Loan to Tulix (70,000) --
Purchase of furniture, fixtures, and equipment -- (21,929)
----------- --------
Net cash used in investing activities (121,949) (21,929)
----------- --------
Cash flow from financing activities:
Issuance of note payable 280,000 100,000
----------- --------
Net cash provided by financing activities 280,000 100,000
Net decrease in cash and cash equivalents (71,550) (58,736)
Cash and cash equivalents at beginning of period 71,818 160,342
----------- --------
Cash and cash equivalents at end of period $ 268 $ 101,606
=========== ========
Supplemental data:
Non-cash activities:
Preferred stock issued for acquisition of
technology licenses -- 986,223
Accrued penalty on preferred stock -- 319,194
Beneficial conversion feature 60,000 --
The accompanying notes are an integral part of these financial statements.
5
GLOBAL MATRECHS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of Regulation
S-X of the Securities and Exchange Commission. The accompanying unaudited
financial statements reflect, in the opinion of management, all adjustments
necessary to achieve a fair statement of the financial position and results of
operations of Global Matrechs, Inc. (the "Company," "we" or "us") for the
interim periods presented. All such adjustments are of a normal and recurring
nature. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003, as filed with the Commission
on May 13, 2004.
2. GOING CONCERN MATTERS AND RECENT EVENTS
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern, which contemplate
the realization of assets and liquidations of liabilities in the normal course
of business. The Company has incurred significant losses since its incorporation
resulting in an accumulated deficit as of June 30, 2004 of approximately $28.4
million. The Company continues to experience negative cash flows from
operations. These factors raise doubt about the Company's ability to continue as
a going concern.
On May 31, 2004, the Company completed the sale of its internet hosting
and website maintenance 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.
Mr. Robinson, Dr. Bokuchava, and Dr. Doijashvili have subsequently
resigned from the Company and have released the Company from all further
employment obligations.
On May 22, 2003, we executed a note in favor of one of our preferred
shareholders, McNab, LLC ("the Holder") that, as amended, provided that we might
borrow up to $460,000 for use solely in connection with the technologies that we
have licensed from Eurotech. Advances under this agreement, which advances were
secured by a security agreement, bore interest at a rate of 10% per annum and
were scheduled to mature on December 31, 2004. As of June 30, 2004, we had
borrowed $460,000 under this agreement and had accrued $29,476 in interest
charges. On July 1, 2004, the Company issued a Convertible Note ("the Note")
with a face value of $542,950 which bears an interest rate of 5% per annum and
matures on July 1, 2006 in satisfaction and replacement of the original note and
all obligations thereunder. The Holder of the Note is entitled at any time, at
its option, subject to certain provisions to convert the note into the Company's
Common Stock at a rate equal to the lesser of (a) five cents ($0.05) or (b) the
Current Market Price, as defined within the Note, multiplied by eighty percent
(80%). The Company has the right to redeem the Note at any time by making a cash
payment to the Holder in the amount of 130% of the outstanding principal amount
of the Note plus any accrued interest. The note contains a beneficial conversion
feature which will be recognized by the Company valued at $325,770. This
beneficial conversion feature will be amortized over the two year life of the
note.
6
On June 1, 2004, the Company issued to Brittany Capital Management, LTD
("Brittany") a Convertible Note ("the Note") with a face value of $75,000 which
bears an interest rate of 5% per annum and matures on June 1, 2006. As of June
30, 2004 the Company has borrowed $75,000 under this agreement and has accrued
$298 in interest. Brittany is entitled at any time, at its option, subject to
certain provisions to convert the note into the Company's Common Stock at a rate
equal to the lesser of (a) five cents ($0.05) or (b) the Current Market Price,
as defined within the Note, multiplied by eighty percent (80%). The Company has
the right to redeem the Note at any time by making a cash payment to the Holder
in the amount of 130% of the outstanding principal amount of the Note plus any
accrued interest. Upon issuance of the note the Company recognized a beneficial
conversion feature of $60,000 which is being amortized over the two year life of
the note.
3. SEGMENT INFORMATION
On May 31, 2004 the Company sold substantially all of the remaining
assets of the Company's Internet Services segment. With the execution of the
licensing agreement with Eurotech on May 22, 2003, and the closing of the sale
to Tulix Systems on May 31, 2004, our Licensed Technologies Division is now the
Company's only operating segment. The Internet Services segment has been
presented as a discontinued operation.
4. BASIC AND DILUTED LOSS PER SHARE
Loss per common share is computed by dividing net loss available to
common stockholders by the weighted average number of shares of common stock
outstanding for the period of time then ended. The effect of the Company's stock
options and convertible securities is excluded from the computations for the
three and six months ended June 30, 2004 and 2003, as it is antidilutive.
5. STOCK OPTIONS
The Company has adopted the disclosure requirement of Statement of
Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based
Compensation-Transition and Disclosure" effective December 15, 2002. SFAS 148
amends Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation and also amends the disclosure requirements of SFAS
123 to require prominent disclosure in both annual and interim financial
statements about the methods of accounting for stock-based employee compensation
and the effect of the method used on report results. As permitted by SFAS 148
and SFAS 123, the Company continues to apply the accounting provisions of APB
25, and related interpretations, with regard to the measurement of compensation
cost for options granted under the Company's Stock Option Plan. No compensation
expense has been recorded as all options granted had an exercise price equal to
the market value of the underlying stock on the grant date. The pro-forma effect
on our results of operations, had expense been recognized using the fair value
method described in SFAS 123, using the Black-Scholes option pricing model, is
shown below.
For the Three Months
Ended June 30,
---------------------
2004 2003
------- -------
Loss applicable to common shareholders:
As reported (549,803) (208,665)
Pro forma (553,528) (298,794)
Basic and diluted loss per share:
As reported (0.037) (0.01)
Pro forma (0.037) (0.02)
7
6. TAXES
There was no provision for cash payment of income taxes for the three
months ended June 30, 2004, as the Company anticipates a net taxable loss for
the year ended December 31, 2004.
7. CONVERTIBLE PREFERRED STOCK
In June 2004, the Company authorized, but did not issue, 490.5 shares
of Series I Convertible Preferred Stock, par value $.01 per share. Each Series I
share has a stated value of $100 per share and shall be convertible into 10,000
shares of common stock provided, however, that the holder of Series I shares may
not convert Series I shares into shares of common stock if the aggregate 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 Series I shares).
Also in June, the Company entered into a Second Exchange Agreement
("the Exchange Agreement") with Brittany to acquire their holdings of 5,640,000
shares of the Company's Common Stock ("the Securities") for a price of $0.10 per
share. In consideration Brittany shall receive shares of the newly issued Series
I Convertible Preferred Stock ("Series I"). On the Closing Date, as defined in
the agreement, the Company will issue 490.5 shares of Series I in exchange for
Brittany surrendering 4.905 million shares of the Securities. In consideration
for this Exchange Agreement Brittany agreed to loan the Company $100,000 under a
convertible note. As of June 30, 2004 the Company had borrowed $75,000 under
this agreement (see note 2).
As a requirement of the private placements of the Company's Series B,
C, D and E Convertible Preferred Stock, the Company was obligated to file and
have declared effective, within a specified time period, a registration
statement with respect to a minimum number of shares of common stock issuable
upon conversion of the Series B, C, D and E Preferred Stock. As of June 30,
2004, such registration statement has not been declared effective and penalties
are owed. In accordance with the terms of the agreement between the parties,
penalties accrue at a percentage of the purchase price of the unregistered
securities per 30 day period. The Company accrued penalties of $159,597 as
interest expense during the quarter ending June 30, 2004. As of June 30, 2004,
$2,484,752 has been accrued into accounts payable and accrued expenses for such
penalties.
The terms of the Company's Series B, C, D, and E Convertible Preferred
Stock provides for a guaranteed return on unconverted shares of 5% for series B,
6% for series C and D, and 8% for series E. This increase in the stated value of
the preferred shares has been recorded as interest expense in the amount of
$74,320 for the quarter ending June 30, 2004. As of June 30, 2004, $298,913 has
been accrued into accounts payable and accrued expenses for such increases.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements included in this quarterly report on Form 10-Q made by our
management, other than statements of historical fact, are forward-looking
statements. Examples of forward-looking statements include statements regarding
our future financial results, operating results, business strategies, projected
costs, products, competitive positions and plans, customer preferences, consumer
trends, anticipated product development, and objectives of management for future
operations. In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "should," "would," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue," or
the negative of these terms or other comparable terminology. Any expectations
based on these forward-looking statements are subject to risks and uncertainties
8
and other important factors, including those discussed in the section entitled
"Forward Looking Statements - Trends, Risks and Uncertainties." These and many
other factors could affect our future financial and operating results, and could
cause actual results to differ materially from expectations based on
forward-looking statements made in this document or elsewhere by us or on our
behalf. The following discussion and analysis should be read in conjunction with
our condensed consolidated financial statements and related notes appearing
elsewhere in this report.
General
On May 22, 2003, we completed a transaction pursuant to which we now
license EKOR(TM), HNIPU, EMR/AC, Rad-X, Firesil, LEM and RBHM technologies from
Eurotech. Our business now consists exclusively of the marketing of these
technologies. Our previous internet services business was sold on May 31, 2004
to Tulix Systems, Inc. and is presented as a discontinued operation.
EKOR(TM)
We are currently seeking a commercial partner with whom to manufacture,
market, sell and deliver EKOR to customers in Europe. We intend to market
EKOR(tm)(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 EKOR(TM) and our other technologies, we can offer no assurance
that our efforts will be successful.
HNIPU
HNIPU is a hybrid polyurethane that does not involve the toxic
isocyanates utilized in the production of conventional polyurethane and 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.
On November 17, 2003, we entered into an agreement with Environmental
Friendly Materials, GMBH, a German company, for the manufacture and sale of
HNIPU for the European marketplace. Environmental Friendly Materials has been
given non-exclusive license to manufacture and distribute HNIPU and intends to
manufacture it at various locations across Europe. Environmental Friendly
Materials has told us that it anticipates beginning production in the fourth
quarter of 2004.
On July 8, 2004 we announced that we had completed our first phase of
marketing and delivering samples of HNIPU. Our marketing partner, Environmental
Friendly Materials, has been actively marketing the HNIPU flooring version to
about 50 European companies. It has finished delivering the first round of
samples for testing to over 20 companies throughout Europe.
In addition, Environmental Friendly Materials has arranged for the
manufacturing facilities in Estonia to support and manufacture the commercial
size samples and will fulfill all initial orders. We expect to receive our first
responses from the delivered samples shortly. Our first manufacturing trial run
will start in August. As Europe tends to be the leader on environmental issues,
we see the market entry in this market as a significant milestone. Environmental
Friendly Materials has indicated to us that based on the response from their
9
marketing effort, it hopes to start delivering its first orders received in the
fourth quarter 2004.
Because HNIPU represents a new class of polymer compounds closely
related to polyurethanes, we hope 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.
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
Three months ended June 30, 2004 and 2003
Net Sales. Net sales decreased 100% from $7,801 in the quarter ended
June 30, 2003 to $0 in the quarter ended June 30, 2004. Revenues in the quarter
ended June 30, 2003 consisted of $7,801 in sales of EKOR and are recognized at
the time that products are shipped or services are provided.
Cost of Sales. Cost of sales includes the cost of materials, handling,
shipping, and any associated customs clearance costs. Cost of sales decreased
from $6,708, or 86.0% of revenues, in the quarter ended June 30, 2003 to $0 in
the quarter ended June 30, 2004.
Gross Profit. Gross profit decreased 100% from $1,093 in the quarter
ended June 30, 2003 to $0 in the quarter ended June 30, 2004. This reflects the
absence of sales in the quarter ended June 30, 2004.
General and Administrative. General and administrative expense includes
salaries for administrative personnel, insurance and other administrative
expenses, as well as expenses associated with maintaining our records and SEC
reporting. General and administrative expenses increased from $106,867 in the
quarter ended June 30, 2003 to $182,685 in the quarter ended June 30, 2004. This
increase is primarily due to the costs associated with printing, distributing
and compiling our proxy statement. Additionally, the figures for the amounts for
quarter ended June 30, 2004 represent a full three months of overhead expense,
whereas the figures for the quarter ended June 30, 2003 only represent one month
because we did not acquire the licensed technologies until May 2003.
Depreciation and Amortization. Amortization expense of $16,437, which
represents one month of amortization of the intangible licensed technologies,
was recognized in the quarter ended June 30, 2003. Amortization expense of
$49,311, which represents three months of amortization of the intangible
licensed technologies, was recognized in the quarter ended June 30, 2004. The
difference is due to our intangible assets being amortized for the entire
quarter that ended June 30, 2004 as opposed to only one month in the quarter
ended June 30, 2003.
Other Income. Other income in the quarter ended June 30, 2004 consisted
of $3,128 in interest charged to Eurotech for late payment of their invoices.
Other income in the quarter ended June 30, 2003 consisted of $1,130 in interest
earned on money market accounts and $18,388 in the reversal of accruals related
to defaults on the lease for our Atlanta offices during the quarter ended
September 30, 2001 and other accruals, which were resolved at a lower than we
had estimated.
10
Interest Expense. Interest expense for the quarter ended June 30, 2004
was of $245,224. It consisted of $74,320 in interest charges on the Series B, C,
D and E preferred stock, which represents the accrual of the guaranteed return
on these series of preferred stock and $159,597 in penalty interest on the
Series B, C, D and E preferred stock for our failure to convert these shares of
our preferred stock into shares of our common stock. During the quarter ended
June 30, 2004, we also accrued $11,307 in interest expense on the notes related
to our licensed technologies division and amortized $2,500 of the beneficial
conversion feature of the convertible note issued to Brittany. Interest expense
for the quarter ended June 30, 2003 consisted of $1,233 on the notes related to
our licensed technologies division. This increase of $243,991 is attributable to
our reclassification of our preferred stock and the subsequent treatment of
accrued interest.
Six Months Ended June 30, 2004 and 2003
Net Sales. Net sales decreased 92.1% from $7,801 in the six months
ended June 30, 2003 to $620 in the six months ended June 30, 2004, which
consisted of the sale of samples of EKOR and HNIPU and are recognized at the
time that products are shipped or services are provided.
Cost of Sales. Cost of sales includes the cost of materials, handling,
shipping, and any associated customs clearance costs. Cost of sales decreased
from $6,708, or 86% of revenues, in the six months ended June 30, 2003 to $558,
or 90.0% of revenues, in the six months ended June 30, 2004.
Gross Profit. Gross profit decreased by $1,031 from $1,093 in the first
six months of 2003 to $62 in the first six months ended June 30, 2004. Gross
profit margins decreased from 14.0% during the six months ended June 30, 2003 to
10.0% during the six months ended June 30, 2004.
General and Administrative. General and administrative expense includes
salaries for administrative personnel, insurance and expenses associated with
maintaining our status as a public corporation. General and administrative
expense increased from $137,957 in the six months ended June 30, 2003 to
$445,251 in the six months ended June 30, 2004. This increase is primarily due
to the costs of preparing, printing, distributing, and tallying our annual proxy
statement, and our legal and consulting fees. Additionally, we incurred costs
during the entire six months ended June 30, 2004 whereas we only incurred costs
for one month during the six months ended June 30, 2003 as we did not acquire
the licenses technologies until May 2003.
Depreciation and Amortization. During the six months ended June 30,
2004, we recognized amortization expense of $98,622, which represents six months
of amortization of our intangible licensed technologies. During the six months
ended June 30, 2003, we recognized amortization expense of $16,437, which
represents one month of amortization of the intangible licensed technologies.
The increase is due to our intangible assets being amortized for a full six
months during the six months ended June 30, 2004 as opposed to only one month
during the six months ended June 30, 2003.
Other Income. Other income in the six months ended June 30, 2004
consisted of $3,128 in interest charged to Eurotech for late payment of their
invoices. Other income in the six months ended June 30, 2003 consisted of $2,481
in interest earned on money market accounts, $18,388 in the reversal of accruals
related to defaults on the lease of our Atlanta offices during the quarter ended
September 30, 2001, and $68,840 in the reversal of accruals related to defaults
on leases of capital equipment during the quarter ended September 30, 2001,
which were resolved at a cost lower than we had estimated.
Interest Expense. Interest expense for the six months ended June 30,
2004 was $486,940. It consisted of $148,640 in interest charges on the Series B,
C, D and E preferred stock, which represents the accrual of the guaranteed
return on these series of preferred stock, $319,193 in penalty interest on the
Series B, C, D and E preferred stock for our failure to convert these shares of
11
our preferred stock to shares of our common stock and $19,107 in interest
expense on the notes related to our licensed technologies division and amortized
$2,500 of the beneficial conversion feature of the convertible note issued to
Brittany. Interest expense for the six months ended June 30, 2003 consisted of
$1,233 on the notes related to our licensed technologies division. This increase
of $485,707 is attributable to our reclassification of our preferred stock and
the subsequent treatment of accrued interest.
Liquidity and Capital Resources
Our sources of capital are extremely limited. We have incurred
operating losses since inception and as of June 30, 2004, we had an accumulated
deficit of $28,436,717 and a working capital deficit of $3,060,046.
On September 30, 2003, we entered into a private equity credit
agreement with Brittany Capital Management LLC. We have agreed to issue and sell
to Brittany up to $10,000,000 of our common stock over the next three years. We
may sell these shares to Brittany Capital Management, in our discretion, subject
to certain minimum and maximum limitations. Prior to any sales, however, we are
required to file a registration statement with, and have such registration
statement declared effective by, the Securities and Exchange Commission covering
the shares to be issued. The number of shares of common stock to be purchased by
Brittany Capital Management at any time will be determined by dividing (i) the
dollar amount requested by us by (ii) the market price of our common stock, less
a discount of 9% of the market price. We are required to sell at least
$1,000,000 worth of common stock to Brittany. If we do not, we will pay
penalties to Brittany. The amount of the penalties will equal to 91% of the
difference between $1,000,000 (the minimum amount of our common stock that we
are required to sell to Brittany Capital Management) and the amount of common
stock actually sold to Brittany Capital Management. We have agreed that, no
later than December 31, 2005, we will reserve, and keep available for issuance,
a number of shares of our common stock sufficient to enable us to fulfill our
obligations to Brittany Capital Management. The number of shares to be purchased
by Brittany Capital Management, in any particular sale, shall not exceed a
number of shares that would cause Brittany Capital Management to own more than
9.9% of the then-outstanding shares of our common stock. Also, we have entered
into a registration rights agreement with Brittany Capital Management pursuant
to which we have agreed to register, within 150 days after we amend our
certificate of incorporation to increase the number of authorized shares of our
common stock to at least 150,000,000 shares, at least 20,000,000 shares of our
common stock. If, by December 31, 2005, the registration statement has not been
declared effective, then the private equity credit agreement and the
registration rights agreement will terminate and we will be required to pay
Brittany Capital Management the penalties described above.
In June 2004 we entered into a Second Exchange Agreement with Brittany to
acquire their holdings of 5,640,000 shares of our common stock for a price of
$0.10 per share. In consideration Brittany shall receive shares of the newly
issued Series I Convertible Preferred Stock. On the Closing Date, as defined in
the agreement, we will issue 490.5 shares of Series I in exchange for Brittany
surrendering 4.905 million shares of the Securities. In consideration for this
Exchange Agreement Brittany agreed to loan the Company $100,000 under a
convertible note. As of June 30, 2004 we had borrowed $75,000 under this
agreement (see note 2 to the financial statements).
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the
participation of our president and chief executive officer and acting chief
financial officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this report. Based upon that evaluation,
our president and chief executive officer and acting chief financial officer
concluded that our disclosure controls and procedures were effective to provide
reasonable assurance that we record, process, summarize and report the
information we must disclose in reports that we file or submit under the
Securities Exchange Act of 1934, as amended, within the time periods specified
in the SEC's rules and forms.
The effectiveness of a system of disclosure controls and procedures is
subject to various inherent limitations, including cost limitations, judgments
used in decision making, assumptions about the likelihood of future events, the
soundness of internal controls, and the risk of fraud. Because of these
limitations, there can be no assurance that any system of disclosure controls
and procedures will be successful in preventing all errors or fraud or in making
all material information known in a timely manner to the appropriate levels of
management.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2004, there were no changes in
our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material legal proceedings. From time to
time, we are involved in various routine legal proceedings incidental to the
conduct of our business.
Item 2. Changes in Securities and Use of Proceeds
In June 2004, we authorized, but did not issue, 490.5 shares of Series
I convertible preferred stock. We entered into a second exchange agreement with
Brittany Capital Management to acquire 4,905,000of their 5,640,000 shares of our
common stock for a price of $0.10 per share and 490.5 shares of our Series I
convertible preferred stock. Each share of Series I convertible preferred stock
converts into 10,000 shares of our common stock. The Series I terms prohibit any
person from beneficially owning more than 9.9% of the then outstanding shares of
our common stock following a conversion. The issuance of these securities was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, as a sale not involving a public offering.
In June 2004, we issued a convertible note to Brittany Capital
Management in the amount of $75,000. The note converts into shares of our common
stock based on a conversion price equal to the lower of $0.05 per share or 80%
of the average of our closing bid prices for the five days preceding the
conversion date. The terms of the convertible note prohibit any person from
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beneficially owning more than 9.9% of the then outstanding shares of our common
stock following a conversion. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
sale not involving a public offering.
Item 3. Defaults Upon Senior Securities
As a requirement of the private placements of our Series B, C, D and E
convertible preferred stock, we were obligated to file, and have declared
effective, within a specified time period, a registration statement with respect
to a minimum number of shares of our common stock issuable upon conversion of
the Series B, C, D and E convertible preferred stock. As of June 30, 2004, such
registration statement has not been declared effective and penalties are owed to
the holders of our Series B, C, D and E convertible preferred stock. Penalties
accrue at a percentage of the purchase price of the unregistered securities per
30 day period. During the quarter ending June 30, 2004, we accrued penalties of
$159,597 as interest expense. As of June 30, 2004, an aggregate of $2,484,752
has been accrued into accounts payable and accrued expenses for such penalties.
The holder of our Series C, D and E preferred stock have agreed to accept
payment for these penalties in shares of our common stock instead of cash.
Our Series B, C, D, and E convertible preferred stock provides for a
guaranteed return on the unconverted shares of 5% for Series B, 6% for Series C
and D, and 8% for Series E. This increase in the stated value of the preferred
shares has been recorded as interest expense in the amount of $74,320 for the
quarter ending June 30, 2004. As of June 30, 2004, $298,913 has been accrued
into accounts payable and accrued expenses for such increases.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- ------------
3.1 Certificate of designations, preferences and rights
of Series I Convertible Preferred Stock
10.1 Second Exchange Agreement with Brittany Capital
Management Ltd. dated June , 2004
10.2 Convertible Note issued to Brittany Capital
Management, Ltd. dated June 1, 2004
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On June 15, 2004, we filed a current report on Form 8-K, pursuant to
Items 2,5 and 7, which reported (i) the sale of the assets of the
internet services division to Tulix Systems, Inc., (ii) the change of
14
our name to Global Matrechs, Inc., (iii) the increase the number of
authorized shares of our common stock from 15,000,000 to 300,000,000,
(iv) the change to our certificate of incorporation to permit
stockholder action to be taken without a meeting, and amend the
Certificates(v) the amendments to our certificates of designations,
preferences and rights of our Series B, C, D and E preferred stock to
delete the mandatory conversion provisions.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL MATRECHS, INC.
By: /s/ Michael Sheppard
----------------------------------
Name: Michael Sheppard
Title: President, Chief Executive Officer,
and Acting Chief Financial Officer
Date: September 3, 2004
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of designations, preferences and rights
of Series I Convertible Preferred Stock
10.1 Second Exchange Agreement with Brittany Capital
Management Ltd. dated June , 2004
10.2 Convertible Note issued to Brittany Capital
Management, Ltd. dated June 1, 2004
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
17