10-Q 1 matech10q033104.txt MATERIAL TECHNOLOGIES 10Q, 03.31.04 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------- (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 --------------------------------------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to ---------------- ---------------- 33-23617 -------- (Commission file number) Material Technologies, Inc. --------------------------- (Exact name of small business issuer as specified in its charter) Delaware -------- (State or other jurisdiction of incorporation or organization) 95-4622822 ---------- (IRS Employer Identification No.) 11661 San Vicente Boulevard Suite 707 Los Angeles, California 90049 ----------------------------- (Address of principal executive offices) (310) 208-5589 -------------- (Issuer's telephone number) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) [X] Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of each of the issuer's classes of common equity; as of March 31, 2003 Class A Common Stock - 67,588,975 shares outstanding, 842 shares held in reserve Class B Common Stock - 600,000 shares outstanding Class A Preferred - 337 shares outstanding Class B Preferred - 167 shares outstanding Class C Preferred - 4,050 shares outstanding Class D Preferred - 4,990,000 shares outstanding 1 INDEX ----- Page -------- Part 1. Financial Information Item 1. Financial Statements Consolidated Balance Sheets 3 - 4 Consolidated Statements of Operations - First Quarter Ended March 31, 2003 and 2004 and from the Company's inception (October 21, 1983) through March 31, 2004 5 Consolidated Statements of Cash Flows First Quarter Ended March 31, 2003 and 2004 and from the Company's inception (October 21, 1983) through March 31, 2004 6 - 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 Part 2. Other Information 12 2 Part 1. Financial Information ------------------------------- Item 1. Financial Statements ------------------------------

MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS ========================================================================================================================== December 31, March 31, 2003 2004 ---------------- ---------------- (Unaudited) ASSETS CURRENT ASSETS Cash $ 47,664 $ 28,133 Receivable due in research contracts 28,004 34,307 Receivable from officer 83,940 86,033 Employee receivable 1,350 1,350 Receivable from tax authorities 161 152 Prepaid expenses 4,179 3,000 ---------------- ---------------- TOTAL CURRENT ASSETS 165,298 152,975 ---------------- ---------------- FIXED ASSETS Property and equipment, net of accumulated depreciation 20,626 19,048 ---------------- ---------------- OTHER ASSETS Intangible assets, net of accumulated amortization 10,004 9,475 Refundable deposit 2,348 2,348 ---------------- ---------------- TOTAL OTHER ASSETS 12,352 11,823 ---------------- ---------------- TOTAL ASSETS $ 198,276 $ 183,846 ================ ================ See accompanying notes 3

MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS ========================================================================================================================== December 31, March 31, 2003 2004 ---------------- ---------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' (DEFICIT) CURRENT LIABILITIES Legal fees payable $ 219,154 $ 204,270 Fees payable to R&D subcontractors 25,000 - Accounting fees payable 37,984 23,336 Other accounts payable 78,671 26,525 Accrued expenses 17,920 17,095 Accrued officer wages 142,446 160,446 Notes payable - current portion 25,688 25,688 Payable on research and development sponsorship 638,003 666,713 Loans payable - others 60,438 60,844 ---------------- ---------------- TOTAL CURRENT LIABILITIES 1,245,304 1,184,917 LONG-TERM DEBT 345,333 736,183 ---------------- ---------------- TOTAL LIABILITIES 1,590,637 1,921,100 ---------------- ---------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 38,422 38,422 ---------------- ---------------- STOCKHOLDERS' (DEFICIT) Class A preferred stock, $.001 par value, authorized 350,000 Shares, issued and outstanding 337 shares at December 31, 2003 and March 31, 2004 - - Class B preferred stock, $.001 par value, authorized 200,000 Shares, issued and outstanding 167 shares at December 31, 2003 and March 31, 2004 - - Class C preferred stock, $.001 par value, authorized 25,000,000 shares, issued and outstanding 4,050 at December 31, 2003 and March 31, 2004 4 4 Class D preferred stock, $.001 par value, authorized 20,000,000 Shares, issued and outstanding 5,440,000 shares at December 31, 2003 and 4,990,000 shares at March 31, 2004 5,440 4,990 Class A Common Stock, $.001 par value, authorized 549,400,000 shares, issued and outstanding 66,488,975 at December 31, 2003 and 67,588,975 shares at March 31, 2004, Shares held in reserve 843 shares at December 31, 2003 and March 31, 2004 66,488 67,588 Class B Common Stock, $.001 par value, authorized 600,000 Shares, issued and outstanding 600,000 shares at December 31, 2003, and March 31, 2004 600 600 Additional paid in capital 13,086,976 13,664,528 Less notes receivable - common stock (51,096) (52,093) Deficit accumulated during the development stage (14,539,195) (15,461,293) ---------------- ---------------- TOTAL STOCKHOLDERS' (DEFICIT) (1,430,783) (1,775,676) ================ ================ TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 198,276 $ 183,846 ================ ================

See accompanying notes 4

MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS ============================================================================================================ From Inception For the Three Months Ended (October 21, 1983) March 31, Through 2003 2004 March 31, 2004 ---------------- ---------------- ---------------- (Unaudited) (Unaudited) (Unaudited) REVENUES Sale of fatigue fuses $ - $ - $ 64,505 Sale of royalty interests - - 198,750 Research and development revenue - 67,270 5,133,631 Test services - - 10,870 ---------------- ---------------- ---------------- TOTAL REVENUES - 67,270 5,407,756 ---------------- ---------------- ---------------- COSTS AND EXPENSES Research and development 31,236 161,586 5,421,666 General and administrative 338,438 784,419 14,770,298 ---------------- ---------------- ---------------- TOTAL COSTS AND EXPENSES 369,674 946,005 20,191,964 ---------------- ---------------- ---------------- (LOSS) FROM OPERATIONS (369,674) (878,735) (14,784,208) ---------------- ---------------- ---------------- OTHER INCOME (EXPENSE) Interest income 13,186 3,090 345,331 Interest expense (46,261) (45,653) (686,876) Forgiveness of indebtedness (289,940) Loss on abandonment of joint venture - - (33,000) ---------------- ---------------- ---------------- TOTAL OTHER INCOME (EXPENSE) (33,075) (42,563) (664,485) ---------------- ---------------- ---------------- NET (LOSS) BEFORE EXTRAORDINARY ITEMS AND PROVISION FOR INCOME TAXES (402,749) (921,298) (15,448,693) PROVISION FOR INCOME TAXES (800) (800) (12,600) ---------------- ---------------- ---------------- NET (LOSS) $ (403,549) $ (922,098) $ (15,461,293) ================ ================ ================ PER SHARE DATA Basic income (loss) before extraordinary item BASIC NET (LOSS) PER SHARE $ (3.49) $ (0.01) ================ ================ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 115,637 67,006,008 ================ ================

See accompanying notes 5

MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS ==================================================================================================================== From Inception For the Three Months Ended (October 21, 1983) March 31, Through 2003 2004 March 31, 2004 ---------------- ---------------- ---------------- (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (403,549) $ (922,098) $ (15,461,293) ---------------- ---------------- ---------------- Adjustments to reconcile net income (loss) to net cash provided (used) in operating activities Depreciation and amortization 2,285 2,107 196,858 Accrued interest income (12,007) (3,090) (290,259) Gain on sale of securities - - (196,596) Charge off of investment in joint venture - - 33,000 Officers' and directors compensation on stock subscription modification - - 1,500,000 Issuance of common stock to officer for past services - - 1,727,617 Charge off of deferred offering costs - - 36,480 Charge off of long-lived assets due to impairment - - 92,919 Modification of royalty agreement - - 7,332 Gain on foreclosure - - (18,697) (Increase) decrease in accounts receivable - (6,303) (84,635) (Increase) decrease in employee advances 1,433 - (1,511) (Increase) decrease in prepaid expense - 1,188 (3,150) Loss on sale of equipment - - 12,780 Issuance of common stock for services 132,250 553,200 4,526,192 Issuance of stock for agreement modification - - 152 Forgiveness of Indebtedness - - 215,000 Increase (decrease) in accounts - payable and accrued expenses 10,098 (64,501) 1,005,336 Increase in legal fees secured by note payable 22,725 - 1,481,895 Interest accrued on note payables 22,849 44,966 632,669 Increase in research and development sponsorship payable - - 218,000 (Increase) in note for litigation settlement - - (25,753) (Increase) in Deposits - - (2,189) ---------------- ---------------- ---------------- TOTAL ADJUSTMENTS 179,633 527,567 11,063,440 ---------------- ---------------- ---------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (223,916) (394,531) (4,397,853) ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds From sale of equipment - - 10,250 Purchase of property and equipment - - (266,472) Proceeds from sale of securities - - 283,596 Purchase of securities - - (90,000) Proceeds from foreclosure - - 44,450 Investment in joint ventures - - (102,069) Payment for license agreement - - (6,250) ---------------- ---------------- ---------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES - - (126,495) ---------------- ---------------- ---------------- See accompanying notes 6

MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS ==================================================================================================================== From Inception For the Three Months Ended (October 21, 1983) March 31, Through 2003 2004 March 31, 2004 ---------------- ---------------- ---------------- (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock $ 112,853 $ - $ 3,110,583 Costs incurred in offerings (19,045) - (454,488) Purchase of Company's common stock for cancellation (15,720) - (24,432) Sale of common stock warrants - - 18,250 Sale of preferred stock 24,100 - 323,005 Sale of redeemable preferred stock - - 150,000 Capital contributions - - 301,068 Payment on proposed reorganization - - (5,000) Loans From officer - - 778,805 Repayments to officer - - (542,379) Increase in loan payable-others - 375,000 897,069 ---------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: 102,188 375,000 4,552,481 ---------------- ---------------- ---------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (121,728) (19,531) 28,133 BEGINNING BALANCE CASH AND CASH EQUIVALENTS 251,782 47,664 - ---------------- ---------------- ---------------- ENDING BALANCE CASH AND CASH EQUIVALENTS $ 130,054 $ 28,133 $ 28,133 ================ ================ ================

See acompanying notes 7 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) Notes to Financial Statements ----------------------------- Note 1. In the opinion of the Company's management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company as of March 31, 2004, and the results of its operations and cash flows for the three-month periods ended March 31, 2004 and 2003. The operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. On September 23, 2003, the Company's Board of Directors affected a 1,000 for 1 reverse stock split of its Class A Common Stock and all classes of its Preferred Stock. The financial statements presented herein have been restated as if the reverse stock split occurred at the beginning of each period presented. Note 2. Summary of Significant Accounting Policies a. Principles of consolidation The accompanying financial statements include the accounts and transactions of Material Technologies, Inc.and its wholly owned subsidiaries, Matech International, Inc and Matech Aerospace, Inc. Intercompany transactions and balances have been eliminated in consolidation. b. Accounts Receivable Accounts receivable are reported at the customers' outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. c. Allowance for Doubtful Accounts The allowance for doubtful accounts on accounts receivable is charged to income in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers. d. Property and Equipment Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable 8 amounts. Gains or losses from retirements or sales are credited or charged to income. Material Technologies, Inc. depreciates its property and equipment as follows: Financial statement reporting - straight line method as follows: Machinery 5 years Computer equipment 3-5 years Office equipment 5 years Long-Lived Assets As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value. e. Net Loss Per Share The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS") that established standards for the computation, presentation and disclosure of earnings per share, replacing the presentation of Primary EPS with a presentation of Basic and diluted EPS. Basic and diluted EPS is calculated by dividing net loss by the weighted average shares number of shares outstanding during the year. f. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. g. Fair Value of Financial Instruments The Company estimates the fair value of its financial instruments at their current carrying amounts since the assets and liabilities approximate their respective fair values. h. Stock Based Compensation For 1998 and subsequent years, the Company has adopted FASB Statement 123 which establishes a fair value method of accounting for its stock-based compensation plans. Prior to 1998, the Company used APB Opinion 25. 9 i. Revenue Recognition Significantly all of the Company's revenue is derived from the Company's contracts relating to the further development of the Electrochemical Fatigue Sensor (EFS). Revenue on the contracts is recognized at the time services are rendered. All other revenue is reported in the period that the income was earned. j. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers cash and cash equivalents to include all stable, highly liquid investments with maturities of three months or less. k. Income Taxes The Company accounts for its income taxes under the provisions of Statement of Financial Accounting Standards 109 ("SFAS 109"). The method of accounting for income taxes under SFAS 109 is an asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities. Note 4. Stock Activity During the quarter ended March 31, 2004,.the Company issued 1,100,000 shares of its common of which 450,000 shares were issued through the conversion of 450,000 shares of the Company's Class D Preferred, 25,000 shares were issued to the Company's accountant for $25,000 for past amounts due, and 625,000 shares were issued for consulting services valued at $553,200. The 25,000 shares issued to the Company's accountant and the 625,000 issued to the five consultants are subject to three-year lockup agreements whereby these shares cannot be transferred or sold for three years. During the quarter ended March 31, 2003, the Company received $93,808 net of offering costs in exchange for the issuance of 10,799 shares of its Class A common stock. The Company also received $24,100 in exchange for the issuance of 24 shares of its preferred stock. The preferred stock is convertible into 48 shares of Class A common. In addition, during the quarter the Company issued 6,000 shares of its Class A common stock for legal services valued at $105,000, 1,362 shares of Class A common were issued for consulting services valued at $27,250, and 2,550 shares of Class A common were issued in connection with its Regulation S offering valued at $25,496. The shares issued for non-cash consideration were valued at their respective quoted market price at date of issuance. Also during the quarter ended March 31, 2003, the Company purchased 812 shares of its common stock from various shareholders on the open market for $15,720. These shares are held in the Company's treasury waiting for cancellation. 10 Item 2. Management's discussion and analysis of financial conditions and -------------------------------------------------------------------------------- results of operations --------------------- Results of Operations for the Three Months Ended March 31, 2004 and 2003 ------------------------------------------------------------------------ Revenue generated by the Company during the quarter ended March 31, 2004 came from its research contracts with Northrop Gruman amounting to $25,715 and URS Corporation amounting to $41,555. In addition, the Company accrued interest income during the same quarter on amounts due it from its President in the amount of $3,090. During the three-month period ended March 31, 2003, the Company did not generate any revenue from its research and development contracts and earned $13,186 in interest income, the majority of which was accrued on officer loans and notes due the Company. During the three-month periods ended March 31, 2004 and 2003, the Company incurred development costs of approximately $161,586 and $31,236, respectively. Of the $31,236 incurred in 2003, $5,000 was paid through the issuance of 250 shares of the Company's common stock. General and administration costs were $784,419 and $338,438, respectively, for the three-month periods ended March 31, 2004 and 2003. The major expenses incurred during 2004 consisted of consulting in the amount of $591,419, officer's salary of $48,000, secretarial salary of $11,658, professional fees of $81,863, travel expenses of $9,913, and telephone expense of $3,736. Of the $591,419 incurred for consulting expense, $553,200 was paid through the issuance of 675,000 shares of the Company's common stock. Included in the 675,000 shares is 550,000 shares issued to two consultants for services rendered in connection with Matech Aerospace and for the overseeing the design, utilization, and marketing of the Company's Videoscope. The shares are subject to a three-year lock up agreement and were valued at $486,750, which is based on 30% of the quoted market value of the shares on the date of issuance. The major expenses incurred during 2003 consisted of consulting in the amount of $67,155, officer's salary of $31,000, secretarial salary of $13,015, professional fees of $161,772, travel expenses of $6,575, and telephone expense of $4,317. Of the $67,155 incurred for consulting expense, $22,250 was through the issuance of 1,112 shares of the Company's common stock. Of the $161,155 incurred for professional fees, $105,000 was through the issuance of 6,000 shares of the Company's common stock. Interest charged to operations for the quarters ended March 31, 2004 and 2003, primarily relate to accrued interest due on the Company's various obligations. 11 Liquidity and Capital Resources ------------------------------- Cash and cash equivalents as of March 31, 2004 and 2003 were $28,133 and $130,054, respectively. During the quarter ended March 31, 2004, the Company received a total of $435,967, $60,967 was received on services rendered on its two research contracts and $375,000 was advanced on its Class A Senior Convertible Debenture. During the quarter, the Company spent $455,498 in its operations. During the first quarter of 2003, the Company received a total of $138,133, which consisted of $112,853 through the sale of 10,799 shares of its common stock, $24,100 through the sale of 24 of its convertible preferred shares, and $1,180 in interest income. During the quarter, the Company used $225,096 in its operations, $19,045 was incurred in the offering of the shares of common stock, and $15,720 was used to purchase 812 shares of its common stock from various shareholders. For the quarter ended March 31, 2004, operating expenses exceeded operating revenue by $394,531 ($60,967 less $455,498) leaving a cash balance at March 31, 2004 of only $28,133. The Company is currently financing its operations from its two research contracts, and its Senior Class A Debenture. The two research contracts do not generate enough revenues to cover the costs of Company's current research projects and the remaining expected funds from its debenture agreement is only $785,000. Based upon the Company's current level of spending, the remaining amounts expected from the debenture and the remaining amounts expected from the research contracts should allow the Company to fund its operations through May 2004. Although Management has continued to lower the Company's overhead, there is no assurance that the Company can continue operating without additional funding. Management continues in its attempt to raise capital, but there is no assurance that additional capital will be found, and if found, the amounts raised will be sufficient to fund continued operations until such time as the Company's products are brought to market. Even if the necessary funds are obtained, there is no assurance that Company's products will be fully developed and go to market, or that that the Company will generate enough sales to ever be profitable. Item 3. Quantitative and Qualitative Disclosures about Market Risk -------------------------------------------------------------------- n/a. Part II. Other Information --------------------------- Item 2. Changes in Securities ------------------------------- During the quarter ended March 31, 2004, the Company issued 1,100,000 shares of its common of which 450,000 shares were issued through the conversion of 450,000 shares of the Company's Class D Preferred, 25,000 shares were issued to the Company's accountant for $25,000 for past amounts 12 due, and 625,000 shares were issued for consulting services valued at $553,200. The 25,000 shares issued to the Company's accountant and the 625,000 issued to the five consultants are subject to three-year lockup agreements whereby these shares cannot be transferred or sold three years. Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Material Technologies, Inc. --------------------------- Registrant /s/ Robert M. Bernstein -------------------------------------------- Robert M. Bernstein, President and Chief Financial Officer 13