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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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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: September 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
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As of November 5, 2004, there were 19,005,507 shares of our common
stock, par value $0.0001 per share, outstanding.
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GLOBAL MATRECHS, INC.
FORM 10-Q
QUARTERLY REPORT
September 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.............................9
Item 3. Controls and Procedures.........................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................14
Item 2. Unregistered Sales of equity Securities and Use of Proceeds.....14
Item 3. Defaults Upon Senior Securities.................................14
Item 6. Exhibits........................................................14
SIGNATURES.................................................................15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GLOBAL MATRECHS, INC.
Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
September 30, December 31,
2004 2003
------------ -------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 74 $ 71,818
Note receivable, net 71,633 --
Accounts receivable, net -- 274,418
Prepaid expenses 41,250 27,257
----------- -------------
Total current assets 112,957 373,493
Furniture, fixtures and equipment held for sale -- 105,624
Investment in Tulix 51,949 --
Licensed Technology rights, net 723,230 871,164
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Total assets $ 888,136 $ 1,350,281
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,306,729 $ 2,807,924
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Total current liabilities 3,306,729 2,807,924
Notes payable 380,851 255,000
Convertible preferred stock 6,433,333 6,442,133
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Total liabilities 10,120,913 9,505,057
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value, 300,000,000
shares authorized, 11,018,529 shares issued
and outstanding at September 30, 2004 and
14,999,156 shares issued issued and
outstanding at December 31, 2003 1,103 1,500
Preferred stock, Series H, $.01 par value,
13,500 shares authorized, 13,500 shares issued
and outstanding at September 30, 2004 and
December 31, 2003, convertible, participating,
$13,500,000 liquidation value at September 30,
2004 and December 31, 2003 135 135
Preferred stock, Series I, $.01 par value, 490.5
shares authorized, 490.5 shares issued and
outstanding at September 30, 2004, convertible,
participating, $49,050 liquidation value at
September 30, 2004 5 --
Treasury stock, 5,028,695 shares at September 30,
2004 and 123,695 at December 31, 2003 (327,484) (8,659)
Additional paid-in capital 19,934,134 19,228,820
Accumulated deficit (28,840,670) (27,376,572)
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Total stockholder deficit (9,232,777) (8,154,776)
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Total liabilities and stockholder deficit $ 888,136 $ 1,350,281
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The accompanying notes are an integral part of these financial statements.
3
GLOBAL MATRECHS, INC.
Consolidated Statements of Operations
for the Nine Months ended September 30, 2004 and 2003
Three Months Ended Nine Months Ended
September 30, September 30,
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2004 2003 2004 2003
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(unaudited)
Revenues $ -- $ 445 $ 620 $ 8,246
Cost of revenues -- 1,990 558 8,698
------- ------ ------- ---------
Gross profit -- (1,545) 62 (452)
Operating expenses:
General and administrative 153,865 64,834 599,116 202,791
Depreciation and amortization 49,311 49,311 147,933 65,748
------- ------ ------ -------
Total operating expenses 203,176 114,145 747,049 268,539
------- ------- ------- --------
Operating loss (203,176) (115,690) (746,987) (268,991)
Other expenses (income)
Interest expense 202,947 238,499 692,387 239,732
Other income, net (2,170) (1,039) (5,298) (90,748)
------- ------- --------- --------
Loss from continuing operations
before income taxes (403,953) (353,150) (1,434,076) (417,975)
Income tax provision (benefit) -- -- -- --
------- ------- --------- --------
Loss from continuing operations (403,953) (103,926) (1,434,076) (417,975)
Income from discontinued
operations -- 17,571 94,363 173,051
Loss on disposal of business
segment -- -- (124,385) --
Cumulative effect of change in
accounting principle -- (802,730) -- (802,730)
------- --------- --------- --------
Net income (403,953) (1,138,309) (1,464,098) (1,047,654)
Deemed preferred stock dividend -- -- -- (336,361)
Loss applicable to common
shareholders $(403,953)$(1,138,309) $(1,464,098) $(1,384,015)
======== ========== ========== ===========
Income (loss) per share -
basic and diluted:
Continuing operations $ (0.027) $ (0.023) $ (0.130) $ (0.050)
Discontinued operations -- 0.001 (0.003) 0.012
Cumulative effect of a
change in accounting
principle -- (0.054) -- (0.054)
------- --------- --------- ---------
$ (0.027) $ (0.076) $ (0.133) $ (0.092)
======== ========== ========== ===========
Weighted number of shares
outstanding 14,926,337 14,999,157 14,926,337 14,999,157
The accompanying notes are an integral part of these financial statements.
4
GLOBAL MATRECHS, INC.
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2004 and 2003
Nine Months Ended
September 30,
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2004 2003
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(unaudited)
Cash flows from operating activities:
Net loss $(1,464,098) $(1,047,654)
Adjustments to reconcile net (loss)
to cash used in operating activities:
Cumulative effect of a change in
accounting principle -- 802,730
Amortization 198,655 --
Provision for bad debts 42,454 23,054
Loss on sale of division 124,385 --
Change in operating assets and liabilities:
Accounts receivable (27,669) (38,844)
Prepaid expenses (13,993) (21,671)
Convertible preferred stock (8,800)
Accounts payable and accrued expenses 738,344 54,756
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Net cash used in operating activities (410,722) (227,629)
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Cash flow from investing activities:
Investment in Tulix (51,949) --
Loan to Tulix (70,000) --
Purchase of furniture, fixtures, and
equipment -- (21,929)
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Net cash used in investing activities (121,949) (21,929)
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Cash flow from financing activities:
Issuance of common shares 27 --
Issuance of note payable 460,900 175,000
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Net cash provided by financing activities 460,927 175,000
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Net decrease in cash and cash equivalents (71,744) (74,558)
Cash and cash equivalents at beginning
of period 71,818 160,342
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Cash and cash equivalents at end of period $ 74 $ 85,784
========== ==========
Supplemental data:
Non-cash activities:
651,080 shares of common stock were issued
as payment to ECON Investor Relations, Inc.
on September 24, 2004
On September 13, 2004, 0.44 shares of Series
C Preferred Stock were converted into 273,292
shares of Common Stock
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 September 30, 2004 of approximately
$28.8 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 issued a 10 % secured promissory note in the
principal amount of $460,000 to McNab, LLC .The note matures on December 31,
2004. We were obligated to use the money for use solely in connection with the
technologies that we license from Eurotech. On July 1, 2004 we issued a 5%
Convertible Note with a face value of $542,950 and matures on July 1, 2006 in
satisfaction and replacement of the original note. McNab is entitled to convert
the note into our common stock at a rate the equal to the lessor of $0.05 or
80%. Of our current market price, as defined in the note. We have the right to
redeem the Note at 130% of the outstanding principal plus any accrued interest.
The note contains a beneficial conversion feature which we will recognize and
value at $325,770. This beneficial conversion feature is being amortized over
the two year life of the note.
6
On June 1, 2004, we issued to Brittany Capital Management, LTD a 5%
convertible note in the principal amount of $75,000 and matures on June 1, 2006.
As of September 30, 2004 , we borrowed $75,000 and had accrued $1,243 in
interest. Brittany is entitled to convert the note into our common stock at a
rate equal to the lesser of $0.05 or 80% of our current market price, as defined
in the note. We have the right to redeem the note by paying 130% of the
outstanding principal plus any accrued interest. Upon issuance of the note, we
recognized a beneficial conversion feature of $60,000, which is being amortized
over the two-year life of the note.
In September 2004 an aggregrate of .44 shares of our preferred stock
were converted into 273,292 shares of our common stock. In October 2004 an
aggregrate of 10.05 shares of our preferred stock were converted into 5,605,529
shares of our common stock. In November 2004 an aggregrate of .58 shares of our
preferred stock were converted into 477,319 shares of our common stock.
Additionally, 403,978 shares of Common Stock were issued for interest on
conversions which took place in September and October.
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 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 a warrant to purchase 1,00,000 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 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 holders of
our notes or warrants may not at any time have beneficial ownership of more than
4.999% of the total number of issued and outstanding shares of Common Stock.
3. SEGMENT INFORMATION
On May 31, 2004 we sold substantially all of our remaining assets of
our internet services segment. With the execution of the licensing agreement
with Eurotech on May 22, 2003, and the closing of this sale to Tulix Systems on
May 31, 2004, our licensed technologies division is now our 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 nine months ended September 30, 2004 and 2003, as it is antidilutive.
7
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 September 30,
---------------------
2004 2003
------- -------
Loss applicable to common shareholders:
As reported (403,953) (1,138,309)
Pro forma (407,678) (1,226,438)
Basic and diluted loss per share:
As reported (0.027) (0.076)
Pro forma (0.027) (0.082)
6. TAXES
There was no provision for cash payment of income taxes for the three
months ended September 30, 2004, as the Company anticipates a net taxable loss
for the year ended December 31, 2004.
7. CONVERTIBLE 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 shares 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 September 30, 2004, the Company had borrowed $75,000.
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 period of time, 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. Since the Company
failed to file and have declared effective a registration statement, penalty
interest was accruing. Penalties accrued at a percentage of the purchase price
of the unregistered securities per 30 day period until August 15, 2004. On
August 15, 2004, the holders of the shares of preferred stock agreed to suspend
the accrual of any additional penalty interest. The Company accrued penalties of
$79,799 as interest expense during the quarter ending September 30, 2004. As of
August 15, 2004, when interest charges ceased, $2,564,551 had been accrued into
accounts payable and accrued expenses for such penalties.
8
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 the
Series B preferred stock, 6% for the Series C and Series D preferred stock, and
8% for the Series E preferred stock. This increase in the stated value of the
preferred shares has been recorded as interest expense in the amount of $66,241
for the quarter ending September 30, 2004. As of September 30, 2004, $365,154
has been accrued into accounts payable and accrued expenses for such increases.
In September 2004, a total of ,44 shares of preferred stock were
converted into 273,292 shares of common stock. In October 2004, a total of 10.05
shares of preferred stock were converted into 5,605,529 shares of common stock.
As of November 15th 2004, a total of .58 shares of preferred stock were
converted into 477,319 shares of common stock.
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
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(TM) to customers in Europe. We intend to market
EKOR(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.
9
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
manufacturing facilities in Estonia and Israel 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 by the first quarter
2005. Our first manufacturing trial run was completed in the third quarter and
was successful. As Europe tends to be the leader on these 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
marketing effort, it hopes to start delivering its first orders received late in
the fourth quarter 2004 or early 2005.
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 September 30, 2004 and 2003
Net Sales. Net sales decreased 100% from $445 in the quarter ended
September 30, 2003 to $0 in the quarter ended September 30, 2004. Revenues in
the quarter ended September 30, 2003 consisted of $445 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 $1,990, or 447.2% of revenues, in the quarter ended September 30, 2003 to
$0 in the quarter ended September 30, 2004.
Gross Profit. Gross profit decreased 100% from a loss of $1,545 in the
quarter ended September 30, 2003 to $0 in the quarter ended September 30, 2004.
This reflects the absence of sales in the quarter ended September 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 $64,834 in the
quarter ended September 30, 2003 to $153,865 in the quarter ended September 30,
2004. This represents an increase of 137.3%. This increase is primarily due to
increased fees being paid to consultants and attorneys to put the Company's long
term financing in place and a charge of $18,973 taken as a bad debt reserve for
receivables from Eurotech.
10
Depreciation and Amortization. Amortization expense of $49,311, which
represents three months of amortization of the intangible licensed technologies,
was recognized in the quarter ended September30, 2003. Amortization expense of
$49,311, which represents three months of amortization of the intangible
licensed technologies, was recognized in the quarter ended September 30, 2004.
Other Income. Other income in the quarter ended June 30, 2004 consisted
of $2,170 in interest charged to Tulix and Haines Avenue for interest on their
respective notes. Other income in the quarter ended September 30, 2003 consisted
of $1,039 in interest earned on money market accounts. This represents an
increase of 108.9%.
Interest Expense. Interest expense for the quarter ended September 30,
2004 was of $202,947. It consisted of $66,241 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 $79,799 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
September 30, 2004, we also accrued $8,686 in interest expense on the notes
related to our licensed technologies division and amortized $48,221 of the
beneficial conversion feature of the convertible note issued to Brittany and
McNab. Interest expense for the quarter ended September 30, 2003 was $238,499
which consisted primarily of $159,597 in penalty interest on B, C, D, and E
preferred stock and $75,137 in interest representing the guaranteed return on
the preferred stock. This decrease of $35,552, or 14.9%, is primarily
attributable the discontinuation of penalty interest charges.
Nine Months Ended September 30, 2004 and 2003
Net Sales. Net sales decreased 92.5% from $8,246 in the nine months
ended September 30, 2003 to $620 in the nine months ended September 30, 2004.
Sales consisted 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
93.6% from $8,698, or 105.5% of revenues, in the nine months ended September 30,
2003 to $558, or 90.0% of revenues, in the nine months ended September 30, 2004.
Gross Profit. Gross profit increased by $514 from a loss of $452 in the
nine months ended September 30, 2003 to a profit of $62 in the nine months ended
September 30, 2004. Gross profit margins increased from -5.5% during the nine
months ended September 30, 2003 to 10.0% during the nine months ended September
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 195.4%, from $202,791 in the nine months ended September 30,
2003 to $599,116 in the nine months ended September 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 nine months ended September 30, 2004 whereas we
only incurred costs for four months during the nine months ended September 30,
2003 as we did not acquire the licenses technologies until May 2003.
Depreciation and Amortization. During the nine months ended September
30, 2004, we recognized amortization expense of $147,933, which represents nine
months of amortization of our intangible licensed technologies. During the nine
months ended September 30, 2003, we recognized amortization expense of $65,748,
which represents four months of amortization of the intangible licensed
technologies. The increase of 125.0% is due to our intangible assets being
amortized for a full nine months during the nine months ended September 30, 2004
as opposed to only four months during the nine months ended September 30, 2003.
11
Other Income. Other income in the nine months ended September 30, 2004
consisted of $3,128 in interest charged to Eurotech for late payment of their
invoices and $2,170 in interest charged to Tulix and Haines Avenue for interest
on their respective notes. Other income in the nine months ended September 30,
2003 consisted of $3,520 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. This represents a decrease of 94.1%.
Interest Expense. Interest expense for the nine months ended September
30, 2004 was $692,387. It consisted of $214,881 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, $398,992 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 and $27,793
in interest expense on the notes related to our licensed technologies division
and amortization expense of $50,721 for the beneficial conversion features of
the convertible notes issued to Brittany and McNab. Interest expense for the
nine months ended September 30, 2003 consisted of $4,998 in interest charges on
the notes related to our licensed technologies division, $75,137 in interest
charges on the Series B, C, D, and E preferred stock and $159,597 in penalty
interest. This increase of $452,655, or 188.8%, is primarily 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 September 30, 2004, we had an
accumulated deficit of $28,840,670 and a working capital deficit of $3,235,022.
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 SEC covering the shares to be issued. On
September 15, 2004, 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 has not been declared effective by the SEC. 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. 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.
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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 September 30, 2004 we had borrowed $75,000 under
this agreement (see note 2 to the financial statements).
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.
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.
Item 3. 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.
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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 September 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. Unregistered sales of Equity Securities and Use of Proceeds
On November 11, 2004, we entered into a securities purchase agreement
with Deer Creek. Deer Creek 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. The promissory note is
convertible into shares of our common stock at a conversion price of $0.02 and
the warrant is exercisable for $0.025 per share of our common stock. The
promissory note matures in two years and the warrant expire in five years.
Should our common stock fall below $0.03 cents for ten consecutive trading days,
Deer Creek may force prepayment at 140% of the principle amount plus interest.
Conversion and exercise rights are restricted in that Deer Creek may not at any
time have beneficial ownership of more than 4.999% of the total number of issued
and outstanding shares of common stock.
Item 3. Defaults Upon Senior Securities
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. , Penalties accrued
at a percentage of the purchase price of the unregistered securities per 30 day
period until August 15, 2004. On August 15, 2004, the holders of the shares of
our preferred stock agreed to suspend the accrual of any additional penalty
interest. The Company accrued penalties of $79,799 as interest expense during
the quarter ending September 30, 2004. As of August 15, 2004, when interest
charges ceased, $2,564,551 had been accrued into accounts payable and accrued
expenses for such penalties.
Item 6. Exhibits
(a) Exhibits
Exhibit No. Description
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
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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: November 15, 2004
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EXHIBIT INDEX
Exhibit No. Description
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
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