ITEM 1. BUSINESS
Cautionary Note About Forward-Looking Statements
Certain matters discussed herein may constitute forward-looking statements and as such may involve risks and uncertainties. In this Annual Report on Form 10-K, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify certain forward-looking statements. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. Our actual results, performance, or achievements may differ significantly from the results, performance or achievements expressed or implied in such forward-looking statements. For discussion of the factors that might cause such a difference, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation”. We undertake no obligation to update or revise such forward-looking statements. We urge readers to review carefully the risk factors described in this Annual Report found in Item 1A.
ITEM 1A. RISK FACTORS
Set forth below are certain risks and uncertainties relating to our business.
You should carefully consider the following information about risks described below, together with the other information contained in this Annual Report on Form 10-K and in our other filings with the SEC, before you decide to buy or maintain an investment in our common stock. We believe the risks described below are the risks that are material to us as of the filing date of this Annual Report on Form 10-K. If any of the following risks actually occur, our business financial condition, operating results and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
We do not believe we have, and we are unsure whether we will be able to generate, sufficient funds to sustain our operations through the next twelve months.
Our management believes that currently available funds will not be sufficient to sustain our operations at current levels through the next twelve months. The Company has incurred losses from continuing operations during the years ended December 31, 2006, 2005 and 2004 of approximately, $1.7 million, $5.3 million and $3.0 million resulting in an accumulated deficit balance of approximately $38.1 million as of December 31, 2006. At December 31, 2006, we had only $1,397 in cash and a working capital deficiency of $3.7 million. Our ability to continue to operate at current levels depends upon, among other things, our ability to generate sufficient revenue from the sale of our products and services and the receipt of continued funding from our existing short-term and long-term financing sources.
In the long-term, our ability to continue as a going concern is dependent on generating sufficient revenue from product sales and the sale of our services. Our ability to generate significant revenue from any of these or other sources is uncertain. Historically, our operations have not generated sufficient revenue to cover our costs. In the event that our operations do not generate sufficient cash, we could be required to reduce our level of operations while attempting to raise additional working capital. We can give no assurance that additional financing will be available to us on acceptable terms or at all. The failure to obtain any necessary additional financing would have a material adverse effect on us. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations and any intended expansion, to take advantage of business opportunities, to develop or enhance products or services or to otherwise respond to competitive pressures would be significantly limited, and we might need to significantly restrict or discontinue our operations.
We have a history of operating losses, and there is no assurance we will achieve profitability in the future. If we cannot obtain additional capital required to fund our operations and finance our growth, our business will suffer.
As described above, we have a history of operating losses. During the fiscal years ended December 31, 2006, and, 2005, we recorded net losses of $1.7 million and $6.1 million, respectively. As of December 31, 2006, we had an accumulated deficit of approximately $38.1 million. If we continue to experience operating losses, an investment in our common stock is at risk of being lost. We cannot predict when, or if, we will ever achieve profitability. The continued development of our current technologies or acquisitions of new technologies will require additional capital. If we are unable to generate additional capital through our operations, we will be required to resort to financing activities. We may be unable to obtain additional funds in a timely manner or on acceptable terms, if at all, which would render us unable to fund our operations or expand our business.
If we are unable to obtain capital when needed, we may have to restructure our business or delay or abandon our development and expansion plans. Although we have been successful in the past in obtaining financing for working capital and capital expenditures, we will have ongoing capital needs as we expand our business. Our inability to obtain adequate financing will result in the need to curtail business operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. If we raise additional funds through the sale of equity or convertible securities:
· the ownership percentage of our common stock will be reduced;
· the value of our stock may be diluted;
· we may issue securities that have rights, preferences and privileges senior to our common stock; and
· the terms of any additional indebtedness may include restrictive financial and operating covenants that would limit our ability to compete and expand, thereby increasing the price of our stock.
We have a going concern qualification in the report by our independent registered public accounting firm for our financial statements for the year ended December 31, 2006, which may make it difficult to raise capital and may require us to scale back or cease operations.
The report of our independent registered public accounting firm on our financial statements as of December 31, 2006 and for the year then ended contains an explanatory paragraph stating that there is substantial doubt as to our ability to continue as a going-concern, which indicates an absence of obvious or reasonably assured sources of future funding that will be required by us to maintain ongoing operations. Our ability to obtain additional funding will determine our ability to continue as a going concern. Accordingly, there is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. This uncertainty may affect our ability to raise additional capital and may also negatively impact our relationships with current and potential suppliers and customers.
The management of our finances and the quality and timeliness of our financial reporting may be adversely affected if we are unable to increase the size and capabilities of our internal administrative and finance function as our business grows.
We have engaged an outside consulting firm (other than our independent registered public accounting firm) to provide financial management and accounting services on a temporary basis. If we are unable to retain sufficient financial management and accounting services on a cost-effective basis, our ability to effectively manage our finances and the quality and timeliness of our financial reporting could be adversely affected.
We are currently dependent upon external financing, including our Private Equity Credit Agreement with Brittany Capital Management, to fund our operations and may not be able to access sufficient funds when needed. As a result, our business may suffer.
Currently, we are dependent upon external financing to fund our operations. Our financing needs are expected to be provided, in large part, by our Private Equity Credit Agreement dated September 14, 2006 with Brittany Capital Management. We have registered the resale of 7,800,000 shares of common stock we may issue under this agreement pursuant to our registration statement on Form SB-2, as amended (file No. 333-137833).
The number of shares we have to issue for a given draw down under the Private Equity Credit Agreement has an inverse relationship to our market price. Therefore, the lower our market price, the less we will be able to raise by issuing the 7,800,000 registered shares to Brittany. In the event we have additional financing needs after we have exhausted these shares, we will need to find alternative methods of financing our operations or registering additional shares to be issued under the Private Equity Credit Agreement.
In addition, our access to funds under the Private Equity Credit Agreement may be limited by the following factors:
· Maximum Put Amount. The maximum amount of each put is equal to the lesser of (a) $500,000, or (b) 500% percent of the weighted average volume for the 20 trading days immediately preceding the put date.
· 9.99% Cap. Our Private Equity Credit Agreement provides that in no event shall the number of shares issuable to Brittany cause it to own in excess of 9.99% of the then outstanding shares of our common stock. Because of this maximum advance restriction, we may not be able to access sufficient funds when needed.
· Authorized Shares of Common Stock. At the market price of our common stock as of September 30, 2008 ($0.0009 per share), it would require 16.7 billion shares to draw down the full $15,000,000 available under the agreement, and we had only 533.8 million shares of common stock available for issuance as of September 30, 2008. It may be necessary for our shareholders to approve an increase to the common stock available for issuance under our Certificate of Incorporation, whether by increasing the number of shares we are authorized to issue, effecting a reverse split of our common stock (thereby decreasing the number of shares outstanding), or both.
If we are unable to access sufficient funds when needed, our business may suffer.
We face intense competition, which could result in lower revenues and higher research and development expenditures and could adversely affect our results of operations.
If we do not develop or acquire new and enhanced products, or if we are not able to invest adequately in our research and development activities, our business, financial condition and results of operations could be negatively impacted. Many of our competitors have significantly more cash and resources than we have. Our competitors may introduce products that are competitively priced, have increased performance or functionality, or incorporate technological advances that we have not yet developed or implemented. To remain competitive, we must continue to develop, market and sell new and enhanced systems and products at competitive prices, which will require significant research and development expenditures.
If we cannot effectively manage our growth, our business may suffer.
Recently, we have expanded our operations to pursue existing and potential new market opportunities. This growth has placed, and is expected to continue to place, a strain on our personnel, management, financial and other resources. To manage our growth effectively, we must, among other things:
· successfully attract, train, motivate and manage a larger number of employees for sales and customer support activities;
· control working capital requirements; and
· improve the efficiency of our operating, administrative, financial and accounting systems, procedures and controls.
If we fail to manage our growth properly, we may incur unnecessary expenses and the efficiency of our operations may decline.
If we are unable to expand into new markets, we may be unable to achieve our growth strategy and our ultimate business objectives.
A significant element of our future growth strategy involves the expansion of our business into new geographic and product markets. Expansion of our operations depends, among other things, on the success of our marketing strategy in new markets, successfully establishing and operating new locations, hiring and retaining qualified management and other personnel and obtaining adequate financing for working capital purposes. If our efforts in expansion are unsuccessful, we may be unable to achieve our growth strategy and our ultimate business objectives, and as a result, may lose our competitive position.
We may be unable to hire and retain the skilled personnel we need to expand our operations.
To meet our growth objectives, we must attract and retain highly skilled technical, operational, managerial and sales and marketing personnel. If we fail to attract and retain the necessary personnel, we may be unable to achieve our business objectives and may lose our competitive position, which could lead to a significant decline in net sales. We face significant competition for these skilled professionals from other companies, research and academic institutions, government entities and other organizations.
Our success depends on the services of our executive officers and key employees, and the loss of such employees could have a serious negative impact on our business and operations.
We depend upon the continued services of our senior management for our continued success. We can provide no assurances that we will be able to retain our senior management or other key personnel. We have no employment agreements with or key-man insurance coverage on any members of our senior management. The loss of any member of senior management could have a serious negative impact upon our business and operating results.
Our business may suffer if we cannot protect our proprietary technology.
Our ability to compete depends significantly upon our trade secrets and our other proprietary technology. We have filed patents in connection with HNIPU and have a trade secret on NuCap™. We are also a licensee with respect to certain of Eurotech’s patents. These steps that we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. Existing trade secrets, copyright and trademark laws offer only limited protection. In addition, the laws of some foreign countries do not protect our proprietary technology to the same extent as the laws of the United States, which could increase the likelihood of misappropriation. Furthermore, other companies could independently develop similar or superior technology without violating our intellectual property rights. Any misappropriation of our technology or the development of competing technology, or our licenses from Eurotech, could seriously harm our competitive position, which could lead to a substantial reduction in net sales.
If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, distract the attention of management, and there can be no assurance that we would prevail.
Claims by others that we infringe their intellectual property rights could harm our business and financial condition.
Our industries are characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, or other intellectual property rights of others.
We do not conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies.
We may face claims by third parties that our products or technology infringe their patents or other intellectual property rights. Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. If any of our products are found to violate third-party proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer our products or obtain licenses on commercially reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially increase our costs and have a material adverse effect on our business, financial condition and results of operations.
RISKS RELATING TO CORPORATE GOVERNANCE
We are not subject to the same corporate governance standards as listed companies. This may affect market confidence and company performance. As a result, our business could be harmed and the price of our stock could decrease.
Registered stock exchanges have adopted enhanced corporate governance requirements that apply to issuers that list their securities on those markets. These standards deal with the rights and responsibilities of a company’s management, its board, shareholders and various stakeholders. How well companies are run may affect market confidence as well as company performance. Our common stock is quoted on the Pink OTC Markets, Inc, which does not have comparable requirements. As a result, our business and the price of our stock may be adversely affected.
New corporate governance requirements have made it more difficult to attract qualified directors. As a result, our business may be harmed and the price of our stock may be adversely affected.
New corporate governance requirements have increased the role and responsibilities of directors and executive officers of public companies. These new requirements will make it more difficult and more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur significantly higher costs to obtain coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve as members of our board of directors.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
We are required to establish and maintain appropriate internal controls over financial reporting. Our internal controls over financial reporting may have weaknesses and conditions that need to be addressed, the disclosure of which may have an adverse impact on the price of our common stock. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed, disclosure of management’s assessment of our internal controls over financial reporting or disclosure of our independent registered public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
Standards for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain, and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of this assessment by our independent registered public accountant. Unless the SEC delays the date on which this requirement becomes effective, we will first have to include management’s report of our internal control over financial reporting in our annual report for fiscal year ending December 31, 2008 and our auditor’s attestation of this assessment in our annual report for fiscal year ending December 31, 2009. The standards that must be met for management to assess the effectiveness of the internal control over financial reporting are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of its internal control over financial reporting. In addition, we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of its assessment by our independent registered public accountants. If management cannot assess our internal control over financial reporting as effective, or our independent auditors are unable to issue an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.
RISKS RELATED TO OUR COMMON STOCK
The market price of our common stock may be volatile.
Our stock price has been volatile. From January 1, 2004 to September 30, 2008, the trading price of our common stock ranged from $3.00 to $0.0005 per share. Many factors may cause the market price of our common stock to fluctuate, including:
· variations in our quarterly results of operations;
· the introduction of new products by us or our competitors;
· acquisitions or strategic alliances involving us or our competitors;
· future sales of shares of common stock in the public market; and
· market conditions in our industries and the economy as a whole.
In addition, the stock market has recently experienced extreme price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of a company’s stock drops significantly, stockholders at times institute securities class action litigation against that company. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources or otherwise harm our business.
We have never paid dividends on our capital stock, and we do not anticipate paying dividends in the foreseeable future.
We have not paid dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future. In addition, before we may pay any dividends with respect to our common stock, we must pay the holders of our preferred stock an equivalent dividend. If we determine that we are in the position to declare a dividend, the amount of the dividend we ultimately declare may be substantially reduced as the result of our obligations under the terms of our preferred stock.
Our charter, bylaws and Delaware law may deter takeovers.
Our certificate of incorporation, bylaws and Delaware law contain provisions that could have an anti-takeover effect and discourage, delay or prevent a change in control or an acquisition that many stockholders may find attractive. These provisions may also discourage proxy contests and make it more difficult for our stockholders to take some corporate actions, including the election of directors. These provisions relate to:
· the ability of our board of directors to issue preferred stock, and determine its terms, without a stockholder vote;
· the classification of our board of directors, which effectively prevents stockholders from electing a majority of the directors at any one annual meeting of stockholders;
· the limitation that directors may be removed only for cause by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote; and
· advance notice requirements for stockholder proposals and director nominations.
These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock.
We have been unable to file our SEC filings on time
We were unable to file this Annual Report on Form 10-K for the fiscal year ended December 31, 2006, our Annual Report for our fiscal year ended December 31, 2007, and the Quarterly Reports for our each of our fiscal periods ending March 31, 2007, June 30, 2007, September 30, 2007, March 31, 2008, June 30, 2008 and September 30, 2008 on a timely basis. The late filings of these documents may adversely affect our ability to raise capital and may have eroded investor confidence. Because we have failed to comply with our reporting obligations with the SEC, our shareholders have not had adequate information about us, and any trading markets currently existing for our securities may have decreased or continue to decrease, and our shareholders may be finding, or will find it difficult to sell their shares. We will continue to make every effort to bring all our SEC filings up-to-date.
Existing stockholders will experience significant dilution from our sale of shares under the Private Equity Credit Agreement, the conversion of notes and preferred stock, and the exercise of warrants.
To date, we have funded our operations through equity investments and issuances of debt. Stockholders will experience substantial dilution as a result of our agreements with our investors. The number of shares issuable under some of these arrangements is indeterminate. The issuance and sale of common stock to our investors will reduce the ownership interest of our existing stockholders in our company, and may depress the value of our common stock. In addition, the subsequent resale by the investors of those shares may further reduce our share price.
If an active and liquid market for our common stock does not develop, or is not sustained, it may be difficult for investors to resell their shares. As a result, they may not be able to sell their shares when they want.
Our common stock is not traded on a registered securities exchange and we do not meet the initial listing criteria for any registered securities exchange. It is quoted on the less-recognized Pink OTC Markets, Inc. This factor may impair an investor’s ability to sell his shares when he wants and/or could depress our stock price. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our company may be reduced. These factors could result in lower prices and larger spreads in the bids and ask prices for our shares. Due to the current price of our common stock, many brokerage firms may not be willing to effect transactions in our securities, particularly because of an SEC rule imposing additional sales requirements on broker-dealers who sell low-priced securities (generally those below $5.00 per share). These factors severely limit the liquidity of our common stock and likely have a material adverse effect on our market price and on our ability to raise additional capital. We cannot predict the extent to which investor interest in our stock, if any, will lead to an increase in our market price or the development of a more active trading market or how liquid that market might become.
If the price of our stock continues to decline and we cannot prepay or repay the notes we have issued, we will be in default and the holders of the notes will have the remedies available to creditors. Some or all of our assets could be liquidated, our operations may be disrupted and our business may suffer.
If the market price of our common stock falls below $0.03 per share for 10 consecutive trading days, holders of the notes may require us to prepay (within 60 days of the receipt of a notice of such election) the principal outstanding at the time of such prepayment plus a premium equal to 140% of the principal amount being prepaid. If we are unable to meet such obligation under the notes, we will be in default, and the holders of the notes will have the remedies available to creditors. All of our assets are subject to security agreements, and the holders of these notes, in the event of default, could foreclose and liquidate some or all of our assets. The claims of our creditors to our assets are senior to those of our stockholders.
These disclosure requirements may have the effect of reducing the trading activity in the secondary market for Global Matrechs common stock as it is subject to these penny stock rules. These rules severely limit the liquidity, if any, of our common stock, and would likely have a material adverse effect on its market price and on our ability to raise additional capital.
Our common stock is deemed to be a “penny stock,” which may make it more difficult for investors to sell these shares due to suitability and disclosure requirements.
Due to the current price of our common stock, $0.0005 on December 5, 2008, many brokerage firms may not be willing to effect transactions in its securities, particularly because low-priced securities are subject to SEC rules (referred to as the “penny stock rules”) imposing additional sales requirements on broker-dealers who sell low-priced securities (generally those below $5.00 per share). These disclosure requirements may have the effect of reducing the trading activity in the secondary market for Global Matrechs common stock as it is subject to these penny stock rules. These rules severely limit the liquidity, if any, of our common stock, and would likely have a material adverse effect on its market price and on our ability to raise additional capital.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the Commission, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of Securities’ laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type, size and format, as the SEC may require by rule or regulation.
In addition, the broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) monthly account statements showing the market value of each penny stock held in the customer’s account.
Finally, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These requirements may reduce the potential market for our common stock by reducing the number of potential investors, brokers and traders. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
We cannot predict the extent to which investor interest in our common stock or a business combination, if any, will lead to an increase in its market price or the development of an active trading market or how liquid that market, if any, might become.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
Since December 31, 2004, we have occupied approximately 550 square feet in one office building located at 90 Grove Street, Suite 201, Ridgefield, Connecticut 06877. Our lease term expired in September 2006. We are currently renting 180 square feet of space on a month-to-month basis and we currently pay rent of $1,500 per month. We also rent space for a satellite office at 520 81st Street, New York, NY 10028 on a month-to-month basis and we currently pay rent of $1,800 per month. We believe that our present facilities are adequate to meet our current needs. If new or additional space is required, we believe that adequate facilities are available at competitive prices in the respective areas.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS
On February 9, 2005, we filed suit in the Supreme Court of the State of New York, County of New York against Eurotech, Ltd. for its failure to fulfill its obligations under the license agreement between the parties dated May 22, 2003. The suit also sought the enforcement of the notes issued by Eurotech to Woodward, LLC, which were assumed by us in the exchange agreement between Woodward and us on January 31, 2005. The complaint sought damages totaling $672,677 plus interest and attorney’s fees. This litigation was settled in connection with the settlement of claims with Eurotech and Carey Naddell individually described below.
On April 13, 2005 Carey Naddell, CEO of Eurotech, Ltd., filed suit against us in the United States District Court - Southern District of New York for damages in the amount of at least $240,000 with interest attorney’s fees and disbursement based upon an alleged breach of a written service agreement.
On June 24, 2005, Eurotech, Ltd. filed a complaint against us in the Supreme Court of the State of New York, County of New York, (Index No. 108773/05) for an alleged failure to fulfill our obligations under our License and Exchange Agreement dated March 27, 2003 with Eurotech, Ltd. thereby depriving Eurotech, Ltd. of its contractual right to convert 700 shares of Series H Preferred Stock and selling 7 million shares of our common stock. Eurotech, Ltd. sought damages in an amount to be determined at trial but believed according to the defendant to exceed $100,000 plus interest and attorney’s fees.
On March 16, 2006, we, Naddell and Eurotech executed a full mutual release of claims, completing a settlement of each of the above-described actions.
In connection with the Eurotech matter, Eurotech will return 2,500 shares of Series H, convertible preferred stock to us in full settlement of claims relating to its failure to fulfill obligations under the license agreement, and Eurotech obligations to Woodward, which were assumed by us on January 31, 2005.
In connection with the Cary Naddell matter, a settlement was reached whereby this former consultant received $175,000 in full settlement of related claims for compensation of past services. The claim existed at December 31, 2005, yet was resolved prior to the release of the accompanying audit report. We also believe that the provisions of Statement of Financial Accounting Standards SFAS No. 5 “Accounting for Contingencies” (“SFAS 5”) as it pertains to contingencies is relevant literature for purposes of accruing a contingent loss.
At December 31, 2005, based on settlement date of March 15, 2006, we accrued a settlement liability and related settlement expense of $175,000. Under the terms of the settlement, $25,000 was due and paid at closing, and the balance of $150,000 was payable in seven (7) equal monthly installments of $21,428.57 commencing on April 15, 2006 with final installment payment due on or before October 15, 2006. On May 2, 2007 this settlement was completed with the issuance of 20,000,000 shares of common stock in lieu of $100,000 still owed to Mr. Naddell
On July 31, 2007, Foley Hoag, LLP (“Foley”) filed a lawsuit against the Company in Suffolk County Massachusetts Superior Court. Foley’s suit alleges the Company did not pay Foley $222,295 for services and related fees provided by Foley to the Company. On November 20, 2007, Foley filed a Motion to Assess Damages, amending the amount of their claim against the Company to $260,718, including interest. The Company has received no further communication regarding Foley’s claim nor is the Company contesting its claim.
We are not a party to any other material legal proceedings. From time to time, we are involved in various routine legal proceedings incidental to the conduct of our business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the fourth quarter of 2006.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has been quoted on the Pink OTC Markets, Inc. under the symbol “GBMR” (f/k/a GMTH and HCOM) since May, 2007. Prior to that, our common stock was quoted on the Over-the-Counter Bulletin Board from December 8, 2000. Prior to that date, it was quoted on the NASDAQ Small Cap Market. The following table shows for the periods indicated the range of high and low bid prices as quoted on the OTC Bulletin Board/Pink Sheets. The quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not represent actual transactions.
*Adjusted for effect of 1:20 reverse stock split effective May 26,
HOLDERS OF RECORD
We had approximately 150 holders of record of our Common Stock as of September 30, 2008.
DIVIDENDS
We have not paid any cash dividends on our capital stock to date and do not foresee that we will have earnings with which to pay dividends in the foreseeable future. Our board of directors would determine the amount of future dividends, if any, based upon our earnings, financial condition, capital requirements and other conditions.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The Company’s Employee Stock Option Plan (the “Stock Option Plan”) was adopted by the Company’s stockholders in September 1996 and amended in 2005. Shares of common stock may be sold or awarded to officers, key employees and consultants. On March 3, 1999 at a Special Meeting of Stockholders, the Company’s stockholders approved an amendment to the Stock Option Plan, which increased the number of shares reserved for issuance under the Stock Option Plan to 2,000,000, in 2005 to 15,000,000 shares and in 2006, post reverse split, the Board of Directors recommended increasing the number of shares reserved for issuance another 15,000,000 shares. Options granted under the Stock Option Plan may be either (i) options intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code or (ii) non-qualified stock options.
Prior to 2006, the options granted to purchase shares under the Stock Option Plan generally vested 25% per year over the first four years and expire ten years after the grant date. The exercise price of options granted was at or above the fair market value of the stock on the grant date. Options granted in 2006 were fully vested on the grant date.
The Company’s Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) was adopted by the Company’s stockholders in September 1996. Shares of common stock may be sold or awarded to directors who are not officers or employees of the Company (“Non-Employee Directors”). The Company has reserved 300,000 shares of common stock for issuance under the Directors’ Plan.
The Directors’ Plan provides for the automatic granting of an option to purchase 10,000 shares of common stock to each Non-Employee Director who is first appointed or elected to the Board of Directors. Also, each Non-Employee Director is automatically granted an option to purchase 5,000 shares of common stock on the date of each annual meeting of the Company’s stockholders. Furthermore, the Directors’ Plan allows the Board of Directors to make extraordinary grants of options to Non-Employee Directors.
The following table provides information as of December 31, 2006 regarding shares authorized for issuance under our equity compensation plans, including individual compensation arrangements. The equity compensation plans approved by our stockholders are our Stock Option Plan and Directors’ Plan. As of December 31, 2006:
Option activity under all of the stock option plans is summarized as follows:
The following table summarizes information about options outstanding at December 31, 2006.
The pro forma impact on the Company’s net loss per share had compensation cost for all of the Company’s stock-based compensation plans been recorded at the date of grant based on the method prescribed by SFAS No. 123 is shown below:
RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS FROM REGITERED SECURITIES
For the year ended December 31, 2006, we issued and sold an aggregate 10,088,851 shares pursuant to private equity line agreements. We received gross cash proceeds of $638,238 in consideration for sold shares. The shares were sold to the purchaser at a discount of 8% to the market per share. We are required to pay a placement fee equal to 1% of any proceeds received under the private equity line credit agreements. The issuance of the shares was exempt from registration under Section 4(2) of the Securities Act as a sale to an accredited investor not involving any public offering. The resale of the shares is registered under the Securities Act pursuant to our registration statements on Form SB-2 (File nos. 333-126526, 333-131106 and 333-137833). We have used or intend to use the proceeds from these issuances for general corporate purposes. On January 13, 2006, the holder of a warrant for conversion of 575,000 shares (pre reverse split) of common stock converted their warrant for $5,750.
Please refer to Note 18-Subsequent Events in the accompanying financial statements and related notes for disclosure relating to the Company’s financings subsequent to December 31, 2006.
ISSUER PURCHASES OF EQUITY SECURITIES.
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presented for Global Matrechs and its Subsidiaries on a consolidated basis should be read in conjunction with the Financial Statements, including the related notes, and Item 7
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Exchange Rate, Interest Rate and Supply Risks
The Company has no exchange rate risks as we conduct 100% of our operations in the United States of America, and we conduct our transactions in US dollars. The Company is exposed to extensive market risk in the areas of financing and interest cost. Please refer to Item 1A. Risk Factors for additional disclosure about risk. Increases in our borrowing rates, as small as 100 basis points, could significantly increase our losses and hinder our ability to generate sufficient working capital. The slightest disruption in our supply chain could also significantly increase our losses and hinder our ability to purchase our products for resale and application. The Company has no protection against interest rate risk or supply disruptions. While the Company does not engage in any other sort of hedging activity it does hold investment securities at September 30, 2008.
Item 8.
Item 8. Financial Statements and Supplementary Data
Our financial statements and the related notes thereto called for by this item appear under the caption “Financial Statements” beginning on page attached hereto of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Dismissal of Sherb & Company, LLP as Certifying Accountant
On April 28, 2006, at the recommendation of our board of directors, we dismissed our independent registered public accounting firm, Sherb & Company, LLP (“Sherb”) of Boca Raton, Florida. During the fiscal years ended December 31, 2004 and 2005, and during the interim period ended April 28, 2006, there were no disagreements with Sherb on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, that, if not resolved to the satisfaction of Sherb, would have caused it to make reference thereto in its reports regarding our financial statements for such years.
The reports of Sherb contained in our audited financial statements for the fiscal years ended December 31, 2004 and December 31, 2005 each contained a going-concern qualification, which indicates an absence of obvious or reasonably assured sources of future funding that will be required by us to maintain ongoing operations. The aforementioned reports did not contain any other adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
Appointment of Mantyla McReynolds, LLC as Certifying Accountant
On April 28, 2006, we appointed Mantyla McReynolds, LLC (“Mantyla”) of Salt Lake City, Utah, as our independent registered public accounting firm. During the fiscal years ended December 31, 2004 and December 31, 2005 and the subsequent interim period through April 28, 2006, we did not consult with Mantyla regarding the application of accounting principles to any specified transaction, the type of audit opinion that might be rendered on our financial statements, or any matter that was the subject of a disagreement with Sherb & Company, LLP or a reportable event as defined in applicable SEC rules.
Resignation of Mantyla as Certifying Accountant
On February 7, 2008, the Company was advised that its independent accountant, Mantyla had resigned as the principal independent accountant for the Company.
Mantyla never issued an audit report or gave an audit opinion.
The Company's board of directors, acting as the Audit Committee, unanimously recommended and approved the decision to accept the resignation of Mantyla as the Company’s independent registered public accounting firm.
Through February 7, 2008, there were no disagreements with Mantyla on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Mantyla, would have caused it to make reference to the subject matter of such disagreements in connection with its audit report. There were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
The Company has given permission to Mantyla to respond fully to the inquiries of the successor auditor, including those concerning the subject matter of this reportable event.
Appointment of Li & Company, PC as Certifying Accountant
The Company engaged Li & Company, PC (“Li”) as its new independent registered public accounting firm as of February 26, 2008.
During the years ended December 31, 2005 and December 31, 2004, and through February 26, 2008, the Company did not consult with Li with regard to any of the matters or events as set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
However, during the course of this evaluation, our chief executive officer and chief financial officer made the following observations:
•
Due to the significant commitment of Company time and resources required in connection with the review of the Company’s financial statements and the auditing of the Company’s 2004 financial statements, the Company did not timely file its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 or its Quarterly Reports on Form 10-QSB for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. In addition, the Company was unable to timely file its Annual Reports on Form 10-K for the years ended December 31, 2006 and 2007 and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and 2008, June 30, 2007 and 2008 and September 30, 2007 and 2008.
Management concluded that the problems set forth above necessitated a conclusion that our disclosure controls and procedures were ineffective as of December 31, 2006. Our management has concluded that the problems set forth above were largely the result of inadequate staffing, competence and segregation of duties in our accounting and financial reporting functions and insufficient analysis, documentation and review of the selection and application of generally accepted accounting principles to significant non-routine transactions, which we have since addressed by retaining an outside consultant to assist with some of the highly technical issues relating to the company’s capital structure. While we were able to timely file our quarterly report on Form 10-QSB for the quarter ended September 30, 2005, we were unable to file this Annual Report on Form 10-K, indicating that the issues relating to the timeliness of our reporting have not been successfully resolved.
Management believes that additional progress in strengthening our controls and procedures will continue throughout fiscal years 2007 and 2008. To further ensure that our disclosure controls and procedures continue to be effective, we intend to hire an accounting professional to increase our capabilities related to interpretive research into complex accounting issues promptly after we raise sufficient financing to permit us to do so.
Management continues to consider methods to improve the quality and timeliness of reporting and will continue to evaluate and address any issues it identifies relating to the processes and resources necessary for effective disclosure controls and procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Please refer to ITEM 1. Business-History of this Annual Report on Form 10-K for disclosures relating to promissory notes issued by the Company in the fourth quarter of 2006 for which the Company did not file the required Form 8-K’s.
GLOBAL MATRECHS, INC.
December 31, 2006, 2005 and 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Global Matrechs, Inc.
Ridgefield, Connecticut
We have audited the accompanying balance sheet of Global Matrechs, Inc. as of December 31, 2006 and the related statements of operations, stockholders’ deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Global Matrechs, Inc. as of December 31, 2006 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Global Matrechs, Inc. will continue as a going concern. As discussed in Note 3 to the financial statements, the Company had an accumulated deficit and a working capital deficiency at December 31, 2006 and had a net loss and cash used in operations for the year ended December 31, 2006, respectively. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Li & Company, PC
Li & Company, PC
Skillman, New Jersey
January 15, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
GLOBAL MATRECHS, INC.
BALANCE SHEET
See accompanying notes to the financial statements
GLOBAL MATRECHS, INC.
STATEMENTS OF OPERATIONS
See accompanying notes to the financial statements
GLOBAL MATRECHS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
See accompanying notes to the financial statements
GLOBAL MATRECHS, INC.
STATEMENTS OF CASH FLOWS
See accompanying notes to the financial statements
GLOBAL MATRECHS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
See accompanying notes to the financial statements
Note 1 - Nature of Operations
Global Matrechs, Inc. f/k/a Homecom Communications, Inc. (“Global” or the “Company”) markets and sells technologies, licensed from Eurotech, Ltd. (“Eurotech”), to manufacturers and other parties. The Company was organized in 1994 and is currently incorporated in Delaware. Upon its organization, the Company provided complex, web-based software applications and integration services to businesses seeking to take advantage of the Internet. Over time, Global has been the successor to many businesses since and has undergone material changes to its business and financial structure. In 2008, the Company formed Fairfield Consumer Group, Inc. (“Fairfield”), a wholly owned subsidiary. Fairfield is currently inactive.
Prior to May 31, 2004, Global derived revenue from professional web development services, software licensing, application development, insurance and securities sales commissions, hosting fees and transactions fees. On May 31, 2004, The Company sold substantially all of its assets used in the operation of its hosting and web site maintenance business and retained a 15% interest in the surviving entity. As a result of this sale, Global’s business consisted exclusively of the marketing of technologies licensed from Eurotech under a licensing agreement dated May 22, 2003.
On December 31, 2004, Global completed the acquisition of True To Form, Ltd. (“True To Form” or “TTF”), a maker of specialized lighting products for a range of markets. As a result of this transaction, TTF became a wholly-owned subsidiary. The acquisition was a result of arm’s length negotiations and was unanimously approved by the disinterested members of our Board of Directors.
On December 29, 2005, Global completed the sale of TTF back to its original owner. During 2005, the accompanying financial statements account for the disposal of TTF as a component of discontinued operations.
Note 2 - Going Concern and Management’s Plans
The accompanying financial statements have been prepared in conformity with United States generally accepted accounting principles, which contemplate continuation of the Company as a going concern and assume realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses from continuing operations during the years ended December 31, 2006, 2005 and 2004 of approximately, $1.7 million, $5.3 million and $3.0 million resulting in an accumulated deficit balance of approximately $38.1 million as of December 31, 2006. Net cash used in operations during the years ended December 31, 2006, 2005 and 2004 was approximately $1.4 million, $1.8 million and $0.5 million, respectively. At December 31, 2006, the Company has a working capital deficiency of $3.7 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of the liabilities that may be necessary should the Company be unable to continue as a going concern.
The Company continues to experience negative cash flows from operations and is dependent on continued financing from investors to sustain its activities. Management is planning to grow its current business and to obtain additional capital principally through the sale of debt and equity securities. The realization of assets and satisfaction of liabilities in the normal course of business is dependent upon the Company obtaining additional equity capital and ultimately obtaining profitable operations. However, no assurances can be given that the Company will be successful in these activities. Should any of these events not occur, the accompanying financial statements will be materially affected. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company will require some combination of new financing, restructuring of existing financing and improved operating results in order to maintain adequate liquidity. The Company must also bring current each of its Securities and Exchange Commission (“SEC”) filings as part of a plan to raise additional capital. In addition to the filing of this Annual Report on Form 10-K for the year ended December 31, 2006, the Company must also complete and file its Quarterly Report on Form 10-Q for the quarters ended March 31, 2007, June 30, 2007, September 30, 2007, March 31, 2008, June 30, 2008 and September 30, 2008 and its Annual Report on Form 10-K for the year ended December 31, 2007.
There can be no assurance that the financing or the cost saving measures as identified above will be satisfactory in addressing the short-term liquidity needs of the Company. In the event that these plans cannot be effectively realized, there can be no assurance that the Company will be able to continue as a going concern.
Note 3 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period.
Significant estimates during 2006 and 2005 include valuation of available for sale marketable securities pursuant to SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), the valuation of stock options/warrants granted for services, the value of warrants issued in connection with debt and equity related financings, valuation of all components of derivative liabilities, valuation and related amortization of intangible assets and the valuation allowance for deferred tax assets since the Company had continuing operating losses.
Cash equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Concentrations of Credit Risk
Cash: The Company maintains its cash with various financial institutions. No cash deposits were in excess of the federally insured limits at December 31, 2006 or 2005.
Marketable Securities
The Company classifies its investments as “available-for-sale” in accordance with the provisions of SFAS 115. Investments intended to be held for more than one year are classified as long-term investments.
Available-for-sale securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income. Unrealized losses considered to be “other-than-temporary” are recognized currently in earnings. The cost of securities sold is based on the specific identifications method. The fair value of most investment securities is determined by currently available market prices. Where quoted market prices are not available, the market price of similar types of securities that are traded in the market is used to estimate fair value.
At December 31, 2006, the Company maintained a portfolio consisting of the common stock of one publicly traded entity.
The Company periodically reviews its investments in marketable securities and impairs any securities whose value is considered non-recoverable. There was no impairment during the years ended December 31, 2006 and 2005.
Non-Marketable Securities
Certain securities that the Company may invest in can be determined to be non-marketable. Non-marketable securities where the Company owns less than 20% of the investee are accounted for at cost pursuant to the Accounting Principles Board APB No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”). The Company is currently carrying one such investment as a non-current asset due to the likelihood and expectation of not liquidating the investment within the next twelve months.
The Company periodically reviews its investments in non-marketable securities and impairs any securities whose value is considered non-recoverable. There was a $1,949 impairment loss charged to operations during the year ended December 31, 2006 and no such loss during the year ended December 31, 2005.
Trade accounts receivable
Trade accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in general and administrative expenses, if any.
Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure to its customers.
Inventories
The Company values inventories, consisting of purchased products, at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company regularly reviews materials and supplies and, when necessary, records a provision for excess or obsolete inventories based primarily on current purchase price, if any.
Intangibles and Other Long-Lived Assets
The Company reviews the carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value. Goodwill represents the excess of the cost of the Company’s acquired subsidiaries or assets over the fair value of their net assets at the date of acquisition. Under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) goodwill is no longer subject to amortization over its estimated useful life; rather, goodwill is subject to at least an annual assessment for impairment applying a fair-value based test.
The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell the asset.
During the year ended December 31, 2005, the Company recognized and charged to operations an impairment charge of $525,986 in connection with non-recoverable license technology. There was no such charge during the year ended December 31, 2006.
In connection with the disposition of TTF, during the year ended December 31, 2005, the Company disposed of $1,469,108 of goodwill that was recorded as part of the acquisition (See note 15).
Derivatives
The Company accounts for derivatives in accordance with SFAS No. 133 and the related interpretations. SFAS No. 133, as amended, requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation. At December 31, 2006, the Company had not entered into any transactions that were considered hedges under SFAS No. 133.
Financial instruments
The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under SFAS No. 133 and related interpretations including Emerging Issues Task Force (“EITF”) Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock” (“EITF Issue No. 00-19”). The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification under SFAS 133 are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The fair value model utilized to value the various compound embedded derivatives in the secured convertible notes comprises multiple probability-weighted scenarios under various assumptions reflecting the economics of the secured convertible notes, such as the risk-free interest rate, expected Company stock price and volatility, likelihood of conversion and or redemption, and likelihood of default status and timely registration. At inception, the fair value of the single compound embedded derivative was bifurcated from the host debt contract and recorded as a derivative liability, which resulted in a reduction of the initial notional carrying amount of the secured convertible notes (as unamortized discount which will be amortized over the term of the notes under the effective interest method).
Revenue recognition
The Company follows the guidance of the United States Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition” (“SAB No. 101”), as amended by SAB No. 104 (“SAB No. 104”) for revenue recognition. The Company records revenue when persuasive evidence of an arrangement exists, product delivery has occurred and the title and risk of loss transfer to the buyer, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The Company derives the majority of its revenue from sales contracts with customers with revenues being generated upon the shipment of goods. Persuasive evidence of an arrangement is demonstrated via invoice, product delivery is evidenced by warehouse shipping log as well as a signed bill of lading from the trucking or rail company and title transfers when the goods arrive at their destination, based on free on board (“FOB”) destination; the sales price to the customer is fixed upon acceptance of the purchase order and there is no separate sales rebate, discount, or volume incentive. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.
Stock Based Compensation
Prior to January 1, 2006, the Company accounted for its stock options issued to employees pursuant to APB 25, ”Accounting for Stock Issued to Employees”. Accordingly, the Company would recognize employee stock-based compensation expense only if it granted options at a price lower than the closing price of the Company’s common stock on the date of grant. Any resulting compensation expense would then have been recognized ratably over the associated service period. The Company provided proforma disclosure amounts in accordance with SFAS No. 148, ”Accounting for Stock-Based Compensation-Transition and Disclosure“, as if the fair value method defined by SFAS 123 had been applied to its stock-based compensation.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method and therefore, has not restated prior periods' results. Under this transition method, employee stock-based compensation expense for the year ended December 31, 2006 has included compensation expense for all stock-based compensation awards granted, but not yet fully vested, prior to January 1, 2006, utilizing the fair value of the options as determined at the original grant date in accordance with the provisions of SFAS 123. Stock-based compensation expense for all share-based payment awards granted on or after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.
The Company recognizes these compensation costs over the requisite service period of the award, which is generally the vesting term of the options.
Stock-based employee compensation expense relating to the Company’s stock option plans (See Note 8) reflected in net loss for the years ended December 31, 2006, 2005 and 2004 was $76,701, $15,799, and zero, respectively. Of the December 31, 2006 expense, $49,193 related to unvested options outstanding prior to January 1, 2006, the incremental impact to the consolidated financial statements as a result of adopting SFAS 123R.
Advertising
In accordance with Accounting Standards Executive Committee Statement of Position 93-7, (“SOP 93-7”) costs incurred for producing and communicating advertising of the Company, are charged to operations as incurred. Advertising expense for the years ended December 31, 2006 and 2005 was zero and $600, respectively.
Income Taxes
The Company provides for income taxes based on the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements and tax returns in different years. Under this method, deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided against deferred tax assets to the extent that it is more likely than not that the deferred tax assets will not be realized.
Deferred tax assets pertaining to windfall tax benefits on exercise of non-qualified stock options and the corresponding credit to additional paid-in capital are recorded if the related tax amount either reduces income taxes payable or results in an income tax refund. The Company has elected the “with and without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce income taxes payable or resulted in an income tax refund in the current year. Under this approach, the windfall tax benefits would be recognized in additional paid-in capital only if an incremental income tax benefit is realized after considering all other income tax benefits presently available to the Company.
The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carry forwards in certain situations where disqualifying changes occur in the stock ownership of a company. In the event the Company experiences a disqualifying change in ownership, utilization of the carry forwards could be restricted.
Earnings per Share
In accordance with SFAS No. 128, “Earnings per Share” (“SFAS 128”), basic earnings per share (“EPS”) is computed by dividing the net income (loss) less preferred dividends for the period by the weighted average number of shares outstanding. Diluted EPS is computed by dividing net income (loss) less preferred dividends by the weighted average number of shares outstanding including the effect of share equivalents. Common share equivalents consist of shares issuable upon the exercise of certain common stock purchase warrants, stock options, and convertible preferred stock. At December 31, 2006 and 2005, the Company had 76,000,000, and 48,700,000 potential common share equivalents. The Company has excluded these common share equivalents from its computation of earnings per share due to their antidilutive effect as the Company has reflected a net loss at December 31, 2006 and 2005, respectively. Accordingly, the basic and diluted EPS are the same.
Comprehensive Income (Loss)
The Company computes comprehensive income (loss) in accordance with SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”). Comprehensive income arises out of the Company’s accounting policy for available-for-sale securities. For the year ended December 31, 2006, the Company reported a comprehensive loss of $73,061.
Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” (“SFAS 107”) requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate the value. For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company’s short-term financial instruments, including inventory, certain notes receivable, investments in available for sale marketable securities, accounts payable and accrued expenses, loans payable and notes payable approximate fair value due to the relatively short period to maturity for these instruments.
Segments
In connection with the sale of TTF on December 29, 2005, the Company only has one reportable and identifiable segment. Therefore, the presentation of segment analysis pursuant to SFAS No. 131 “Disclosures About Segments of an Enterprise and Related Information” (“SFAS 131”) is not required.
Recent Accounting Pronouncements
On June 5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), as amended by SEC Release No. 33-8934 on June 26, 2008. Commencing with its annual report for the fiscal year ending December 31, 2009, the Company will be required to include a report of management on its internal control over financial reporting. The internal control report must include a statement:
Of management’s responsibility for establishing and maintaining adequate internal control over its financial reporting;
Of management’s assessment of the effectiveness of its internal control over financial reporting as of year end; and
Of the framework used by management to evaluate the effectiveness of the Company’s internal control over financial reporting.
Furthermore, it is required to file the auditor’s attestation report separately on the Company’s internal control over financial reporting on whether it believes that the Company has maintained, in all material respects, effective internal control over financial reporting.
In December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) “Business Combinations” (“SFAS No. 141(R)”), which requires the Company to record fair value estimates of contingent consideration and certain other potential liabilities during the original purchase price allocation, expense acquisition costs as incurred and does not permit certain restructuring activities previously allowed under Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of purchase accounting. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company has not determined the effect that the adoption of SFAS No. 141(R) will have on the financial results of the Company.
In December 2007, the FASB issued FASB Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No. 160”), which causes noncontrolling interests in subsidiaries to be included in the equity section of the balance sheet. SFAS No. 160 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company has not determined the effect that the adoption of SFAS No. 160 will have on the financial results of the Company.
In March 2008, the FASB issued FASB Statement No. 161 “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133” (“SFAS No. 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Pursuant to SFAS No.161, entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. SFAS No. 161 encourages but does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In years after initial adoption, this Statement requires comparative disclosures only for periods subsequent to initial adoption. The Company does not expect the adoption of SFAS No. 161 to have a material impact on the financial results of the Company.
In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles”. The new standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Adoption of SFAS No. 162, upon its effectiveness, is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
Reclassifications
Certain reclassifications have been made to prior year’s financial statements in order to conform to the current year presentation.
Note 4 - Investment - Marketable and Non-Marketable Securities
Marketable Securities
The composition of marketable securities is as follows:
There was minimal investment income for the year ended December 31, 2006 and 2005.
Non-Marketable Securities
Prior to 2006, the Company obtained an interest in a private company in exchange for $51,949. The value of this investment at December 31, 2006 and 2005 was $50,000 and $51,949, respectively. The Company sold this investment in 2007 (See Note 17).
Note 5 - Inventories
Inventories consist of finished goods of NuCap™ products and are stated at the lower of cost or market utilizing the first-in, first-out method. At December 31, 2006 and 2005, the Company had $7,407 and $28,590 of purchased products, respectively. During 2006 and 2005, there were inventory write-downs of $6,483 and zero, respectively.
Note 6 - Notes Receivable
In December 2005, the Company advanced working capital to an unrelated third party for $50,000 and recorded a note receivable. Pursuant to the terms of the note, the instrument had a stated interest of $12,500, was unsecured and due April 30, 2007. The note has been non-performing and as such, in the year ended December 31, 2006, the Company established a 100% reserve against the note.
On December 29, 2005, in connection with the sale of TTF, the Company recorded as partial consideration a note receivable totaling $250,000. The note has been non-performing and as such, in the year ended December 31, 2006, the Company established a 100% reserve against the note.
Note 7 - Notes Payable
Promissory Notes Sold to Aberdeen
On July 13, 2006, the Company executed a promissory note agreement with Aberdeen, one of our existing investors, pursuant to which we received gross proceeds of $150,000. The principal value of the note is $180,000 which is payable in full on or before November 30, 2006. If the Company fails to pay the principal amount in full on or before the maturity date, then the principal amount increases to $200,000. The note does not otherwise incur interest. The note contains usual and customary events of default. The Company is currently seeking to renegotiate the terms of this note.
On September 13, 2006, the Company executed an additional promissory note agreement with Aberdeen pursuant to which it received gross proceeds of $50,000. The principal value of the note is $60,000 which is payable in full on or before November 30, 2006. If the Company fails to pay the principal amount in full on or before the maturity date, then the principal amount increases to $75,000. The note does not otherwise incur interest. The note contains usual and customary events of default. The Company is currently seeking to renegotiate the terms of this note.
Promissory Notes Sold to Southridge
During 2006, the Company borrowed $175,000 from Southridge Partners, LP (“Southridge”) under note arrangements with varying maturities. On December 7, 2005, the Company borrowed $200,000 from Southridge, maturing on February 10, 2006, bearing interest at an annual rate of 8%. The above notes have either not reached maturity or have otherwise been extended.
Note 8 - Derivative Liabilities and Convertible Notes Payable
On various dates during 2006, the Company borrowed an aggregate of $195,000 from Southridge pursuant to the terms of a convertible promissory note. Under the terms of this agreement, the convertible notes bore interest at 2% per annum, were unsecured and mature twenty-four months from the date of issuance.
In connection with the above convertible debt issuances, the convertible debt was classified as conventional convertible debt pursuant to EITF 00-19. EITF 00-19 does not apply if the hybrid contract is a conventional convertible debt instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash (at the discretion of the issuer). Since the time that Issue No. 00-19 was issued, complex structures have arisen such that the term “conventional convertible debt instrument” is no longer adequately defined.
In Issue No. 05-2, “The Meaning of “Conventional Convertible Debt Instrument’ in EITF 00-19,” the EITF concluded that an instrument with the following characteristics should be considered “conventional ” for purposes of applying Issue No. 00-19:
·
The holder has an option to convert the instrument into a fixed number of shares (or a corresponding amount of cash at the issuer’s discretion); and
·
The holder’s ability to exercise the option is based on either the passage of time or a contingent event.
As a result of applying the definitions of EITF 00-19 and EITF 05-2, the Company has accounted for the convertible debt financings pursuant to the provisions of APB No. 14, EITF No. 98-5 and EITF No. 00-27. The Company computed a debt discount on the aggregate $195,000 in convertible debt financing in 2006. The allocation was based on the allocable proceeds of the debt financings between the fair values of the beneficial conversion option of the related convertible debt instruments. The Company began amortizing all debt discounts to interest expense over the related term of the convertible debt.
On January 31, 2005, the Company entered into an Exchange Agreement with Woodward, LLC (“Woodward”) pursuant to which Global acquired convertible promissory notes, and have accordingly assumed all rights pertaining thereto, issued by Eurotech. The notes are currently in default and have an aggregate outstanding principal amount of $290,000. The notes carry a default annual interest rate of 18% and are past due in their entirety. In exchange for these notes, we issued to Woodward a promissory note in the principal amount of $250,000, which is convertible at the election of Woodward into shares of our common stock at the conversion price equal to 80% of the average of the seven (7) lowest closing bid prices for the ten (10) trading days immediately preceding the date we receive written notice from Woodward of its election to effect such a conversion. Accordingly, no gain or loss was recognized in connection with the exchange agreement. See Note 14.
Under the terms of the exchange agreement, the Company issued a two (2)-year convertible promissory note to Woodward for $250,000. The promissory note provides for conversion into shares of common stock at a conversion price of $0.02. The Company allocated $250,000 to the beneficial conversion feature to be amortized over two years; the term of the promissory note. During 2005, the Company amortized $114,384 of the beneficial conversion feature to interest expense. In addition, should the 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 Global common stock. As of December 31, 2005, the stock price was below $0.03 where it has remained since October 2005. Accordingly, $100,000 is included in accounts payable and accrued expenses as a contingent liability in the event that the note holders assert this prepayment penalty.
The aggregate contingent liability for penalties relating to 140% forced repayment provisions included in all convertible promissory notes was $718,000 at December 31, 2005. In May 2006, all notes where extended and the liability was therefore removed.
Brittany
On June 1, 2004, as part of the agreement to issue Preferred Series I (See Note 8), the Company borrowed $75,000 from Brittany. Under the terms of the convertible promissory note, Brittany, at its option, can convert the note into 1,500,000 shares of common stock at a price equal to the greater/lesser of $.05 per share or 80% of fair market value, at the time of conversion. The Company allocated $60,000 to the beneficial conversion feature, to be amortized over a period of twenty-four months; the period in which the holder can convert. During 2005, the Company amortized $30,000 of the beneficial conversion feature to interest expense. During 2005, Brittany assigned this note to MacNab, LLC (“MacNab”).
MacNab
During July 2004, the Company restructured its borrowings from MacNab into a convertible promissory note of $542,950. Under the terms of the convertible promissory note, McNab, at its option, can convert the note into shares of common stock at a price of $.05 per share or 80% of fair market value, at the time of conversion. The Company allocated $325,770 to the beneficial conversion feature, to be amortized over a period of twenty-four months; the term of the promissory note. Also during July 2004, the Company borrowed an additional $82,950 from McNab under substantially the same terms. During 2005, the Company amortized $196,064 of the beneficial conversion feature to interest expense. On October 19, 2005, McNab converted $16,000 of these promissory notes into 828,966 shares of common stock.
The value of the warrants on these 2005 borrowings exceeded the proceeds received. Accordingly, the notes have been discounted in full and the excess of $248,423 has been charged to interest expense during the period. In addition, the beneficial conversion feature of these notes was valued at $906,400. Since the conversion is at the option of the holder, and the note has already been discounted in full due to the cashless warrant feature, the value of the beneficial conversion feature was amortized to interest expense in full during 2005.
Southridge
On October 19, 2004, we entered into a securities purchase agreement with Southridge. 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 January 31, 2005, we entered into a Second Securities Purchase Agreement with Southridge whereby we agreed to sell a convertible promissory note in the principal amount of $250,000 and warrant to purchase up to 10,000,000 shares of our common stock to Southridge in exchange for its $250,000 investment.
Under the terms of the purchase agreement, Southridge had the option, and at any time prior to July 1, 2005, to purchase an additional note in the principal amount of up to $1,500,000, on substantially the same terms as the note issued on January 31, 2005. During the year ended December, 2005, Southridge exercised this option on March 2, April 11, and May 2, 2005, purchasing notes in the aggregate principal amount of $425,000 and warrants to purchase up to 17,000,000 shares of our common stock. On July 8, 2005, Southridge and Global terminated its option to purchase additional notes.
The value of the warrants on these borrowings exceeded the proceeds received. Accordingly, the notes have been discounted in full and the excess of $967,636 has been charged to interest expense during 2005. In addition, the beneficial conversion feature of these notes was valued at $1,702,500. Since the conversion is at the option of the holder, and the note has already been discounted in full due to the cashless warrant feature, the value of the beneficial conversion feature was amortized to interest expense in full during 2005.
DeNuccio, Colonial and Deer Creek
On October 21, 2004, the Company 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 Global issued to Mr. DeNuccio a warrant to purchase 1,000,000 shares of its common stock.
On November 5, 2004, the Company entered into a securities purchase agreement with Colonial Fund, LLC (“Colonial”). Colonial purchased a nonnegotiable 2% secured convertible promissory note in the principal amount of $50,000 and Global issued it a warrant to purchase 2,000,000 shares of its common stock (see below for further discussion of the terms and conditions). On October 26, 2005, Colonial converted this note into 2,549,444 shares of the Company’s common stock.
On December 3, 2004, the Company and Deer Creek Fund, LLC (“Deer Creek”) entered into a securities purchase agreement relating to the private placement of a 2% secured convertible promissory note in the aggregate principal amount of $50,000 and a warrant to purchase 2,000,000 shares of its common (see below for further discussion of the terms and conditions). On October 26, 2005, Deer Creek converted this note into 2,549,444 shares of our common stock.
The value of the warrants on these borrowings exceeded the proceeds received. Accordingly, the notes have been discounted in full and the excess of $70,326 was charged to interest expense during 2004. In addition, the beneficial conversion feature of these notes was valued at $287,500. Since the conversion is at the option of the holder, and the note has already been discounted in full due to the cashless warrant feature, the value of the beneficial conversion feature was amortized to interest expense in full during 2004. During 2006, these notes were fully converted.
Woodward, LLC
Convertible Promissory Note
During 2004, Global entered into a securities purchase agreement with certain unrelated third parties. Total gross proceeds raised were $125,000. The notes bore interest at 2% and were secured by all assets of the Company. In connection with the issuance of these convertible promissory notes, the Company granted 5,000,000 warrants to purchase common stock. On October 26, 2005, these investors converted an aggregate $226,978 of note principal and accrued interest representing their entire outstanding debt in exchange for 5,098,888 shares of common stock.
Convertible Preferred Stock
In connection with the issuance of various series of Preferred Stock, the Company re-measured its convertible preferred stock conversion option at fair value, which aggregated $666,499 at December 31, 2005. See Note 10.
Note 9 - Stockholders’ Deficit
Preferred Stock Conversions
For the period January 1, 2005 through December 31, 2005, 12.4525 shares of Series B preferred stock, 59.13 shares of Series C preferred stock, and 908 shares of Series H preferred stock were converted into 55,209,230 shares of common stock of the Company. See Notes 3 and 4. For the year ended December 31, 2006, 2,280 shares of Series H preferred stock were converted into 1,140,000 shares of our common stock. In addition, 1,500 shares of Series H preferred stock were canceled during the year ended December 31, 2006.
COMMON STOCK, WARRANTS AND OPTIONS ISSUED FOR SERVICES
Reverse stock Split
On May 26, 2006, the Company filed an Amendment to the Certificate of Incorporation with the Delaware Secretary of State, pursuant to which the Company effectuated a 20-to-1 reverse stock split, thereby decreasing the number of issued and outstanding shares. The accompanying financial statements and footnotes have been retroactively stated to reflect the reverse stock split.
Since January 1, 2006, the Company has issued 601,136 shares of common stock in exchange for $38,629 of services rendered to unrelated consultants. The common stock was valued at the per share market price of our common stock on the date of issuance, the fair value at the date of issuance.
Common Stock Issued Under Equity Line of Credit
During 2006, in connection with our agreement with Brittany, we issued 10,088,851 shares of common stock for $638,238.
Treasury Stock
During 2006, the Company had no treasury stock activity. During 2005, the Company formally cancelled and retired treasury stock aggregating $327,484.
Note 10 - Issuance of Series B, C, and E Preferred Stock
Series B Preferred Stock
The Company issued Series B Preferred Stock totaling $2,500,000 on March 25, 1999 (the “Issuance Date”). The Series B Preferred Stock investors were issued 125 shares of preferred stock, having a stated value of $20,000 per share, and 225,000 warrants to purchase common stock at $5.70 per share. The Company paid offering costs of $216,250, resulting in net proceeds to the Company of $2,283,750 for the preferred shares and warrants.
The Series B Preferred Stock bears no dividends and is convertible at the option of the holder at the earlier of 90 days after issuance or the effective date of a registration statement covering the shares. The warrants are exercisable at any time and expire five years from the date of issuance, and accordingly expired on March 25, 2004.
During 2005, 12.4525 shares of Series B Preferred Stock were converted into 6,510,010 shares of Common Stock. As of December 31, 2005 all shares Series B Preferred Stock were converted into common stock.
Series C Preferred Stock
On July 28, 1999, the Company completed a private placement of $3,500,000 principal amount of the Company’s Series C Convertible Preferred Stock, par value $.01 per share (the “Series C Preferred Stock”) and warrants to acquire up to 59,574 shares of Common Stock (the “Series C Preferred Warrants”). The Warrants expired on July 27, 2004. The Series C Preferred Stock has an initial stated value of $20,000 per share, which stated value increases at the rate of 6% per year from issuance through August 14, 2004 at which time all stated increases ceased (such stated value, as increased from time to time, is referred to as the “Series C Stated Value”). Each Series C Preferred Share is convertible, from and after 120 days following the date of issuance, at the option of the holder, into such number of shares of Common Stock as is determined by dividing the Series C Stated Value by the lesser of (a) $5.875, and (b) 82.5% of the average of the closing bid prices for the five trading days preceding the date of conversion.
During 2005, 59.13 shares of Series C Preferred Stock were converted into 39,619,220 shares of common stock. During 2006, 10.99 shares were converted into 24,551,556 shares of common stock. As of December 31, 2006, all shares of Series C Preferred stock were converted into common stock
Series E Preferred Stock
On April 14, 2000, the Company completed a private placement of $2,127,000 principal amount of the Company’s Series E Convertible Preferred Stock, par value $.01 per share (the “Series E Preferred Stock”) and warrants to acquire 66,667 shares of common stock (the “Series E Preferred Warrants”). The warrants expired on April 14, 2005. The Series E Preferred Stock has an initial stated value of $20,000 per share, which stated value increases at the rate of 8% per year through August 14, 2004 at which time all stated increases ceased. Each Series E Preferred Share is convertible 120 days following the date of issuance, at the option of the holder, into such number of shares of common stock as is determined by dividing the Series E Stated Value by the lesser of (a) $3.53, or (b) 82.5% of the average of the closing bid prices for the five trading days preceding the date of conversion. As of December 31, 2006 all shares of Series E Preferred stock were converted into 15,582,175 shares of common stock.
Note 11 - Eurotech Transaction and Issuance of Series F, G and H Preferred Stock
On May 22, 2003, the Company entered into a License and Exchange Agreement with Eurotech. Under the provisions of that agreement the Company issued two series of preferred stock in consideration for the licensing arrangement.
On May 22, 2003, the Company issued 13,500 shares of the Company’s Series F Convertible Preferred Stock, par value $.01 per share. Each Series F Share was convertible into 10,000 shares of common stock and has a stated value of $1,000 per share. The holders of the outstanding shares of Series F Preferred Stock have cancelled and surrendered their Series F Shares and have been subsequently issued shares of Series H Preferred Stock.
On May 22, 2003, the Company issued 1,069 shares of the Company’s Series G Convertible Preferred Stock, par value $.01 per share. The Series G shares have a stated value of $1,000 per share. Each Series G Preferred Share is convertible, from and after 120 days following the date of issuance, at the option of the holder, into such number of shares of Common Stock as is determined by dividing $1,000 per share by a number equal to 82.5% of the average of the closing bid prices for the five trading days preceding the date of conversion. No holder of Series G Shares may convert Series G Shares into shares of common stock if the aggregate shares of Common Stock beneficially owned by such holder and its affiliates would exceed 9.9% of the outstanding shares of Common Stock following such conversion (excluding, for purposes of the calculation, the unconverted Series G Shares). The Series G Preferred Stock has no mandatory conversion date. In determining the accounting for the beneficial conversion feature, the Company allocated $986,223 to the preferred stock based on its relative fair value at the Issuance Date. The Company then allocated $153,413 of the Series G value to additional paid in capital for the beneficial conversion feature. The beneficial conversion feature will be recognized as a deemed dividend to the preferred shareholders over the minimum period in which the preferred shareholders can realize that return beginning on the date when the shares are first convertible. During 2006, 265.3 shares were converted into 45,465,512 shares of common stock. As of December 31, 2006, 803.7 shares remain outstanding.
On September 30, 2003, the Company issued 13,500 shares of the Company’s Series H Convertible Preferred Stock, par value $.01 per share. Each Series H Share is convertible into 500 shares, provided, however, that no holder of Series H shares may convert Series H shares into shares of common stock if the aggregate shares of common stock beneficially owned by such holder and its affiliates would exceed 9.9% of the outstanding shares of common stock following such conversion (excluding, for purposes of the calculation, the unconverted Series H Shares). During 2006 and prior, 2280 shares of Series H Preferred Stock were converted into 1,140,000 shares of common stock. As of December 31, 2006, 8,662 shares remain outstanding.
See Note 14 for disclosure relating to additional matters.
Note 12 - Issuance of Series I Preferred Stock
In June 2004, the Company entered into a second exchange agreement with Brittany to acquire 5,640,000 shares of the Company’s common stock at $0.10 per share. On September 24, 2004, Brittany received 490.5 shares of Series I convertible preferred stock, $0.01 par value per share, of the Company in exchange for 4,905,000 shares of common stock of the Company. Each share of Series I preferred stock has a stated value of $100 and is convertible into 10,000 shares of common stock; provided, however, that a holder of Series I preferred stock may not convert their shares if the aggregate number of shares of common stock beneficially owned by the holder and its affiliates would exceed 9.9% of the outstanding shares of common stock following such conversion (excluding, for purposes of this calculation, the unconverted shares of Series I preferred stock). In addition, Brittany agreed to loan the Company up to $100,000. As of December 31, 2006, the Company had borrowed $75,000. See Note 6. As of December 31, 2006, 490.5 shares of series Preferred I stock remain outstanding.
Note 13 - Stock Option Plans
The Company’s Employee Stock Option Plan (the “Stock Option Plan”) was adopted by the Company’s stockholders in September 1996 and amended in 2005. Shares of common stock may be sold or awarded to officers, key employees and consultants. On March 3, 1999 at a Special Meeting of Stockholders, the Company’s stockholders approved an amendment to the Stock Option Plan, which increased the number of shares reserved for issuance under the Stock Option Plan to 2,000,000, in 2005 to 15,000,000 shares and in 2006, post reverse split, the Board of Directors recommended increasing the number of shares reserved for issuance by another 15,000,000 shares. Options granted under the Stock Option Plan may be either (i) options intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code or (ii) non-qualified stock options.
Prior to 2006, the options granted to purchase shares under the Stock Option Plan generally vested 25% per year over the first four years and expire ten years after the grant date. The exercise price of the options was at or above the fair market value of the stock on the grant date. Options granted in 2006 were fully vested on the grant date.
The Company’s Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) was adopted by the Company’s stockholders in September 1996. Shares of common stock may be sold or awarded to directors who are not officers or employees of the Company (“Non-Employee Directors”). The Company has reserved 300,000 shares of common stock for issuance under the Directors’ Plan.
The Directors’ Plan provides for the automatic granting of an option to purchase 10,000 shares of common stock to each Non-Employee Director who is first appointed or elected to the Board of Directors. Also, each Non-Employee Director is automatically granted an option to purchase 5,000 shares of common stock on the date of each annual meeting of the Company’s stockholders. Furthermore, the Directors’ Plan allows the Board of Directors to make extraordinary grants of options to Non-Employee Directors.
Option activity under all of the stock option plans is summarized as follows:
The following table summarizes information about fixed options outstanding at December 31, 2006.
The pro forma impact on the Company’s net loss per share had compensation cost for all of the Company’s stock-based compensation plans been recorded at the date of grant based on the method prescribed by SFAS No. 123 is shown below:
Note 14 - Commitments and Contingencies
Legal Settlement and Related Loss Contingency Accruals
On February 9, 2005, Global filed suit in the Supreme Court of the State of New York, County of New York against Eurotech, Ltd. for its failure to fulfill its obligations under the license agreement between the parties dated May 22, 2003. The suit also sought the enforcement of the notes issued by Eurotech to Woodward, LLC that were assumed by Global in the exchange agreement between Woodward and the Company on January 31, 2005. The complaint sought damages totaling $672,677 plus interest and attorney’s fees. This litigation was settled in connection with the settlement of claims with Eurotech and Carey Naddell individually described below.
On April 13, 2005 Carey Naddell, CEO of Eurotech, Ltd., filed suit against the Company in the United States District Court - Southern District of New York for damages in the amount of at least $240,000 with interest attorney’s fees and disbursement based upon an alleged breach of a written service agreement.
On June 24, 2005, Eurotech, Ltd. filed a complaint against the Company in the Supreme Court of the State of New York, County of New York, (Index No. 108773/05) for an alleged failure to fulfill Company obligations under the License and Exchange Agreement dated March 27, 2003 with Eurotech, Ltd. thereby depriving Eurotech, Ltd. of its contractual right to convert 700 Series H Preferred Stock and selling 7 million shares of Global common stock. Eurotech, Ltd. sought damages in an amount to be determined at trial but believed according to the defendant to exceed $100,000 plus interest and attorney’s fees.
On March 16, 2006, Global, Naddell and Eurotech executed a full mutual release of claims, completing a settlement of each of the above-described actions.
In connection with the Eurotech matter, Eurotech will return 2,500 shares of Series H, convertible Preferred Stock to Global in full settlement of claims relating to its failure to fulfill obligations under the license agreement, and Eurotech obligations to Woodward, which were assumed by Global on January 31, 2005. See Note 18-Subsequent Events for additional disclosure relating to the settlement of this matter.
In connection with the Cary Naddell matter, a settlement was reached whereby this former consultant received $175,000 in full settlement of related claims for compensation of past services. The claim existed at December 31, 2005, yet was resolved prior to the release of the accompanying audit report.
At December 31, 2005, based on settlement date of March 15, 2006, Global accrued a settlement liability and related settlement expense of $175,000. Under the terms of the settlement, $25,000 was due and paid at closing, and the balance of $150,000 was payable in seven (7) equal monthly installments of $21,428.57 commencing on April 15, 2006 with final installment payment due on or before October 15, 2006. On May 2, 2007 this settlement was completed with the issuance of 20,000,000 shares of common stock in lieu of $100,000 still owed to Mr. Naddell.
The Company is not a party to any other material legal proceedings. From time to time, we are involved in various routine legal proceedings incidental to the conduct of our business.
Other Matters
From time-to-time, the Company is a party to claims and legal proceedings arising in the ordinary course of business. The Company’s management evaluates the exposure to these claims and proceedings individually and in the aggregate and allocates additional monies for potential losses on such litigation if it is possible to estimate the amount of loss and determine if the loss is probable.
Note 15 - Acquisitions, Divestitures and Discontinued Operations
On December 31, 2004 Global acquired True To Form, Ltd. for total consideration of $1.1 million, consisting of $500,000 in notes to be held by True To Form and guaranteed by its assets and 10,000,000 shares of the Company’s common stock. The acquisition was accounted for as a purchase transaction. The value of the shares was determined by using the average closing stock price of the two days before and after the public announcement of the transaction. The note was due in two payments with $100,000 due in 2005 and $400,000 due in 2010. The note accrued interest at the rate of 8% per annum.
On December 29, 2005 Global completed the transfer of all of the issued and outstanding capital stock of True To Form Ltd., Inc. back to Mr. Allen pursuant to the terms of a Stock Purchase Agreement between him, True To Form, and Global. As a result of this sale, Global no longer holds any equity interest in True To Form. The consideration was determined on the basis of these negotiations. The consideration for the sale of True To Form consists of:
· the issuance by True To Form to Global of a promissory note described below in the initial principal amount of $250,000, which note accrues interest at an annual rate of one percent plus the prime rate as reported by a nationally recognized commercial bank and has a maturity date of January 1, 2011;
· the cancellation of Global’s guaranty of the amounts owed under a promissory note issued by True To Form to Mr. Allen in connection with Global’s acquisition of True To Form;
· the surrender by Mr. Allen of the 10,000,000 shares of Global common stock that were issued to him as partial consideration for our purchase of True To Form on December 31, 2004 and the cancellation of all other equity interest in Global Matrechs held by Mr. Allen. The shares were valued at $71,000 based on the quoted closing trading price of the Company’s common stock on December 29, 2005.
In addition, Global agreed to the cancellation of amounts owed under a note issued by Global to True To Form for working capital purposes in the aggregate amount of $280,000.
In connection with this transaction, Mr. Allen resigned from his positions as Executive Vice President and Director of Global Matrechs. This action was not, to the knowledge of any executive officer of the Company, because of a disagreement on any matter relating to the Company’s operations, policies or practices.
During the year ended December 31, 2005, Global reported a loss on discontinued operations of $425,856, and a loss on disposition of $383,524 in connection with the disposition of True To Form.
Note 16 - Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows, as of:
At December 31, 2006, the Company had net operating loss carry forwards for income tax purposes of approximately $8.0 million, which expire at various times through 2026. Realization of these assets is contingent on having future taxable earnings. In addition, certain stock transactions from 1997 through 2006 have resulted in ownership changes as defined in Internal Revenue Code Section 382. As a consequence of these ownership changes, the utilization of the Company’s net operating loss carry forwards is significantly limited. Based on the cumulative losses in recent years and the limitation on the use of the Company’s net operating losses, management believes that a full valuation allowance should be recorded against the deferred tax asset.
The difference between the expected income tax benefit and the actual tax benefit computed by using the Federal statutory rate of 35% is as follows:
Note 17 - Selected Quarterly Financial Data (Unaudited and Restated)
The following tables set forth our unaudited consolidated financial results for the last eight fiscal quarters ended December 31, 2006:
(N.A. - not applicable)
In the table above, earnings (loss) per share for each quarter were computed independently using the weighted-average number of shares outstanding during the quarter. However, earnings (loss) per share for the year were computed using the weighted-average number of shares outstanding during the year. As a result, the sum of the earnings per share for the four quarters may not equal the full-year earnings (loss) per share.
In the table above, earnings (loss) per share for each quarter were computed independently using the weighted-average number of shares outstanding during the quarter. However, earnings (loss) per share for the year were computed using the weighted-average number of shares outstanding during the year. As a result, the sum of the earnings per share for the four quarters may not equal the full-year earnings (loss) per share.
Note 18 - Subsequent Events
Investing and Financing Transactions
The Company has issued convertible debt as follows:
The 2% Convertible Promissory Notes are convertible, at the option of the holder, at any time to convert all or a portion of the outstanding principal and interest on the promissory note into a number of shares of common stock equal to a fraction, the numerator of which will be the amount of principal and interest being converted and the denominator of which will be equal to the conversion price. Under the promissory note, the conversion price is equal to eighty percent (80%) of the average of the five lowest closing bid prices for the ten trading days immediately preceding the date of conversion.
In addition, under each of the promissory notes, the Company has the right to redeem a promissory note at any time by making a cash payment to the holder of the outstanding principal amount of that particular promissory note multiplied by 120%, plus all accrued interest. Further, an event of default is defined the same under each of the promissory notes. An event of default will occur: (i) if the Company defaults on the payment of principal or interest on the promissory note which continues for a period of twenty days; (ii) if the Company makes an assignment for the benefit of creditors or commences proceedings for its dissolution or applies for or consents to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business; (iii) if a trustee, liquidator or receiver is appointed without the Company’s consent and is not discharged within sixty days after such appointment; (iv) any governmental agency or any court assumes custody or control of the properties or assets of the Company and is not dismissed within sixty days; (v) except for any judgments, settlements or related litigations or actions disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, any judgment or similar process in excess of $150,000 in the aggregate is entered or filed against the Company or any of its properties or other assets and remains unpaid, unvacated, unbonded or unstayed for a period of sixty days; or (vi) certain bankruptcy proceedings. Upon the occurrence of an event of default, the interest rate on that particular promissory note will be 18%.
The Company is in the process of renegotiating the maturity date of the Southridge Partners note that matured July 31, 2007.
Litigation
On May 2, 2007, the Company reached a revised settlement plan with a settlement in connection with the Cary Naddell matter. Such settlement called for the Company to issue 20,000,000 shares in lieu of $100,000 and Naddell and the Company have settled all issues. The Company also agreed to register these shares in its next registration statement.
On July 31, 2007, Foley Hoag, LLP (“Foley”) filed a lawsuit against the Company in Suffolk County Massachusetts Superior Court. Foley’s suit alleges the Company did not pay Foley $222,295 for services and related fees provided by Foley to the Company. On November 20, 2007, Foley filed a Motion to Assess Damages, amending the amount of their claim against the Company to $260,718, including interest. The Company has received no further communication regarding Foley’s claim nor is the Company contesting its claim.
Formation of new subsidiary-Fairfield Consumer Group
On February 19, 2008, the Company announced it established a separate subsidiary focused on providing specialized finance, consulting, and strategic advisory services to small and medium sized businesses in the retail sector that require customized finance and sophisticated assistance. The subsidiary plans to offer capital in a variety of forms to its clients, including senior asset-based loans, senior cash flow loans, mortgage loans and mezzanine loans, equity and equity derivatives. It is anticipated that capital to client companies will generally range from $250,000 to $3.0 million, with an average investment size of approximately $1.0 million. The companies are anticipated to remain as clients of the new subsidiary for between one and two years.
The Company announced that Donald Jones, a veteran retail executive, will oversee the new, subsidiary, to be called Fairfield Consumer Group, as its Managing Director. Mr. Jones is currently Founder, Chairman, and CEO of Pogan Retail, LLC, a consulting firm that assists companies with operational efficiencies, brand development, and retail management, specifically providing strategic support to emerging and early stage retail and consumer product companies. Pogan Retail has a team of consultants and alliances with other advisory firms in other categories, and a national network of industry professionals. It has provided services to such client companies as Liz Claiborne, Utrecht Art Supplies, Buckler Menswear, and D.O.C. Optics, New York & Company, Tabitha Geary, Total Luxury Group, Petals Decorative Accents, and 21 Woods. Mr. Jones has held senior executive positions in retailers such as IKEA, Macy's, Target Corp, and GAP, Inc.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
Executive Officers. Our executive officers are appointed by, and serve at the discretion of, our board of directors.
Board Composition. Our board of directors is divided into three classes, each of which serves a three-year term. The term of one class of directors expires each year at the annual meeting of stockholders. Each director also continues to serve as a director until his or her successor is duly elected and qualified. Thomas L. Folsom is a Class I director and Michael Sheppard is a Class III director. Mr. Sheppard was elected at a special meeting of our stockholders held on March 22, 2004. Mr. Folsom was appointed to fill a vacancy left by the resignations of previous directors. Ordinarily, the three classes of directors serve for staggered terms of three years each. However, because we have not had an annual meeting since April 26, 2006, our current directors will serve until our next annual meeting of stockholders and thereafter until a successor is duly elected and qualified. In the event we have a 2007 annual meeting, the term of our Class I director would next expire at our 2008 annual meeting of stockholders, the term of our Class II director would next expire at our 2008 annual meeting of stockholders, and the term of our Class III director would next expire at our 2010 annual meeting of stockholders.
Executive Directors and Officers
As of September 30, 2008, our directors and executive officer are as follows:
Name
Age
Position
Michael Sheppard
Chief Executive Officer, President, Acting Chief Financial Officer, Chief Operating Officer, and Chairman of the Board
Thomas L. Folsom
Director
Michael Sheppard has served as our president, chief operating officer and chief financial officer since July 2004. He has served as our acting chairman of our board of directors since November 2001. From May 2003 to July 2004, he served as our vice president and chief operating officer of our licensed technology division. From December 2002 to May 2003, he served as a consultant to our company. From 1997 to December 2002, he served as the president and chief operating officer of Technest Holdings, Inc. (f/k/a Financial Intranet, Inc.). From 1995 to 1997, Mr. Sheppard served as the chief operating officer of Freelinq Communications, a provider of real time video-on-demand via ATM/XDSL technology. From 1992 to 1995, he served as the chief executive officer of MLS Lighting, Ltd., a company in the entertainment sector. From 1980 to 1992, Mr. Sheppard served as the president of Lee America, a Westward Communications Company. Mr. Sheppard received a BA and an MFA from New York University.
Thomas L. Folsom has served on our Board of Directors since January 11, 2006. He is currently a principal at TRIP, Inc., a California-based company that manages and assists in the development of professional lighting products. Prior to that, from 1995 to 1999, he was a Vice President at Strand Lighting, Inc. where he was responsible for Sales, Purchasing Engineering and Documentation. He holds an MA in technical theatre from the University of Nebraska and a BFA from Westminster College in the field of theatre lighting and sound.
Recent Events - Resignations
Randolph A. Graves resigned as a director of the Company on May 16, 2005. Mark Allen resigned as a director of the Company on December 29, 2005. K. Ivan F. Gothner resigned as a director of the Company on February 29, 2008. Each of these former directors resigned to pursue other business interests.
Family and Other Relationships
There are no family relationships between any of the present directors or executive officer of the Company.
Involvement in Certain Legal Proceedings
To the knowledge of management, no director, executive officer or affiliate of the Company or owner of record or beneficially of more than 5% of the Company's common stock is a party adverse to the Company or has a material interest adverse to the Company in any proceeding.
To the knowledge of management, during the past five years, no present director, executive officer or person nominated to become a director or an executive officer of the Company:
(1)
Filed a petition under the federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he or she was a general partner at or within two years before the time of such filing, or any corporation or business association of which he or she was an executive officer at or within two years before the time of such filing;
(2)
Was convicted in a criminal proceeding or named the subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3)
Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from or otherwise limiting his or her involvement in any type of business, commodities, securities or banking activities;
(4)
Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting him or her for more than 60 days from engaging in, or being associated with any person engaging in, any type of business, commodities, securities or banking activities;
(5)
Was found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission (“CFTC”) to have violated any federal or state securities law or Federal commodities law, and the judgment in such civil action or finding by the SEC or CFTC has not been subsequently reversed, suspended or vacated.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
Section 16(a) of the Securities and Exchange Act of 1934 requires the Company's Officers and Directors and persons who own more than ten percent (10%) of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Such Officers, Directors, and stockholders are required by SEC regulations to furnish the Company with copies of all such reports that they file.
Based solely on a review of the Forms 3, 4 and 5, and amendment thereto and written representations provided to us, we believe that during and prior to the fiscal year ended December 31, 2006, Michael Sheppard, our president, chief executive officer, acting chief financial officer and director, did not timely file an initial statement of ownership on Form 3. In addition, during 2004, Michael Sheppard was awarded three options to purchase an aggregate 1,200,000 shares of our common stock, none of which was not timely reported on Form 4.
CODE OF ETHICS
While the Company recognizes the need for a formal code of ethics policy, one has not been adopted, and as of the date of this Annual Report, a formal code of ethics policy is under consideration.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
We do not have a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The full Board of Directors serves as the Audit Committee. The Board of Directors has determined that Mr. Folsom is independent as defined by Section 10A(m)(3) of the Exchange Act, and that he is also an “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K under the Exchange Act. The Company has not adopted an Audit Committee Charter although one is under consideration as of the date of this Annual Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The objectives of our compensation programs are twofold: (i) to attract and retain qualified and talented professional individuals to perform the duties of our executive offices and (ii) to fairly reward our executive officers for their overall performance in long term management of the affairs of our Company.
Our full Board of Directors serves as the Compensation Committee's and the Committee’s goal is to develop executive compensation policies that offer competitive compensation opportunities for all executives which are based on personal performances, individual initiative and achievement, as well as assisting us in attracting and retaining qualified executives. The Compensation Committee also endorses the position that stock ownership by management and stock-based compensation arrangements are beneficial in aligning management’s and stockholders’ interests in the enhancement of stockholder value.
Compensation that we pay to our executive officers generally consists of the following elements: base salary, annual bonus and long-term compensation in the form of stock options and, when applicable, matching contributions under our 401(k) Savings Plan. Compensation levels for executive officers for each fiscal year is determined by a consideration of each officer's initiative and contribution to overall corporate performance and the officer's managerial abilities and performance in any special projects that the officer may have undertaken. Competitive base salaries that reflect the individual's level of responsibility are important elements of the Compensation Committee's executive compensation philosophy. Subjective considerations of individual performance are considered in establishing annual bonuses and other incentive compensation. In addition, the Compensation Committee considers our financial position and cash flow in making compensation decisions.
In addition, we have certain broad-based employee benefit plans in which all of our employees, including the named executives, are permitted to participate on the same terms and conditions relating to eligibility and subject to the same limitations on amounts that may be contributed. While we have a 401(k) Savings Plan which provides for matching contributions at managements discretion, no such matching contributions have been made since the inception of the plan.
We choose to pay each element of compensation described above in order to best meet our goal of attracting and retaining qualified and talented professional individuals. We consider the salary component of our compensation program as important and we try to be competitive with what we believe to be the compensation of other companies of similar size and scope of operations. To date, we have not engaged the services of a compensation review consultant or service in view of the cost of such services compared to our size and revenues. We include the stock option element of compensation in order to provide additional compensation in the long term commensurate with the Company’s growth and increased share value that may result from the executive-recipient’s performance. The award of a bonus upon review of the Company’s performance provides an additional incentive for increased performance. The lack of other compensation benefits such as other insurance, retirement or retirement savings plans compels the importance of the salary and stock option elements of our compensation program.
We determine the amount for each element to pay by reviewing annually the existing compensation levels of our executive officers and the Company’s performance since the last annual review, and consider whether an increase or decrease in the compensation level may be appropriate during the upcoming annual period using the factors described above. The Company has no existing formula for determination of the salary, stock options or bonus elements of compensation.
Each compensation element and our decisions regarding that element fit into our overall compensation objectives and affect our decisions regarding other elements in the following manner: As stated above, we consider the salary and stock option elements to be the significant elements of overall compensation and are intended to serve primarily as current and long-term compensation, respectively. Our review of salary levels and consideration of bonus awards on an annual basis and vesting of options over a forward period enable us to attempt to meet our objectives of attracting and maintaining qualified and talented professional individuals in service as our executive officers.
COMPENSATION COMMITTEE REPORT
The Report of the Compensation Committee (the “Compensation Report”) does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Compensation Report by reference therein.
Recommendations of the Compensation Committee. We have reviewed and discussed the Compensation Discussion & Analysis (“CD&A”) with the Company’s management. Based on this review and these discussions, we recommended to the Board of Directors that the CD&A be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
This report has been furnished by the Compensation Committee of the Board of Directors.
Thomas L. Folsom, Chairman
Michael Sheppard
December 15, 2008
Summary Compensation Table
The following table sets forth certain summary information with respect to the compensation paid to the Company's former Chief Executive Officer, current Acting Chief Executive Officer, Chief Operating Officer and Chief Financial Officer for services rendered in all capacities to the Company for the fiscal years ended December 31, 2006, 2005 and 2004. Other than as listed below, the Company had no executive officers whose total annual salary and bonus exceeded $100,000 for that fiscal year:
Summary Compensation Table
Notes:
(1)
Each of the Company’s executive officers also is eligible to receive cash bonuses to be awarded at the discretion of the Compensation Committee of the Board of Directors.
(2)
Michael Sheppard served as our vice president of our licensed technologies division until July 2004 when he was appointed by the board of directors to serve as our president, acting chief financial officer and chief operating officer.
Grants of Plan-Based Awards
(1)
Each of these options were fully vested as of the grant date, were issued pursuant to the Company’s Employee Stock Option Plan and expire ten years from the grant date.
Outstanding equity awards at fiscal year-end table
Option exercises and stock vested table
There were no options exercised or vested during the fiscal year ending December 31, 2006 other than those noted as issued above.
Pension benefits
There were no pension plans in-place during year 2006 for the Company’s Chief Executive Officer, Chief Financial Officer or any of the Company’s most highly compensated executive officers whose compensation exceeded $100,000 for 2006.
Nonqualified defined contribution and other nonqualified deferred compensation plans.
There were no nonqualified defined contribution and other nonqualified deferred compensation plans in place during year 2006 for the Company’s Chief Executive Officer, Chief Financial Officer or any of the Company’s most highly compensated executive officers whose compensation exceeded $100,000 for 2006.
Director Compensation
Directors who are employed as executive officers receive no additional compensation for service on the board. All directors are reimbursed for travel and other expenses relating to attendance at board and committee meetings. Directors who are not employees of the Company are eligible to receive $1,000 per Board meeting attended. However, we have never made payments to our directors for attending meetings. Directors are eligible to receive automatic grants of stock options under the Company’s Non-Employee Directors Stock Option Plan and may receive additional grants of options under such plan at the discretion of the Compensation Committee of the Board of Directors. None of our directors received any compensation for services as directors in 2005. Tom Folsom and K.I.F Gothner received compensation in 2006.
.
(1) Thomas L. Folsom received four ten-year option grants in 2006, including 5,000 on February 9, 2006, at an exercise price of $0.0090; 100,000 on July 12, 2006 at an exercise price of $0.05; 250,000 on September 29, 2006 at an exercise price of $0.018 and 250,000 on December 29, 2006 at an exercise price of $0.006. At December 31, 2006, Mr. Folsom held options totaling 605,000 shares of the Company’s common stock.
(2) K. Ivan F. Gothner received three ten-year option grants in 2006, including 250,000 on July 12, 2006 at an exercise price of $0.05; 250,000 on September 29, 2006 at an exercise price of $0.018 and 250,000 on December 29, 2006 at an exercise price of $0.006. At December 31, 2006, Mr. Gothner held options totaling 767,500 shares of the Company’s common stock.
Employment Arrangements
Employment Agreement with Mr. Allen. On December 31, 2004, we agreed to employ Allen and Mr. Allen agreed to render services for our company as our Executive Vice President and President of our whole owned subsidiary, True To Form for a period of two years, commencing on January 1, 2005. Under this agreement, we agreed to pay Mr. Allen a base salary equal to one hundred fifty thousand dollars annually in equal semi-monthly installments in arrears or otherwise in accordance with our standard procedures and policies. We also agreed to pay bonuses in cash or, at Mr. Allen’s option, in our common stock, based on True To Form’s 12-month trailing net sales figures, as follows:
·
$25,000 if net sales exceeded $1,000,000;
·
$25,000 if net sales exceeded $2,000,000; and
·
$100,000 if net sales exceeded $4,000,000.
Pursuant to this provision, in 2005 we issued options to purchase an aggregate 900,000 shares of our common stock to Mr. Allen. The agreement further provided that within 30 days after December 31, 2005, we are required to issue a second non-statutory stock option to purchase a number of shares of common stock equal to the difference of (a) 1% of the common stock issued and outstanding as of December 31, 2005 minus (b) 600,000. All options issuable under the agreement were to be fully vested on the grant date. This agreement, and any equity interests Mr. Allen had in Global Matrechs (including options already granted), was terminated in connection with our sale of True to Form to him on December 29, 2005. The employment agreement itself was also terminated in connection with the sale of True to Form.
Compensation Committee Interlocking and Insider Participation
No interlocking relationship exists between any member of the Company's Board of Directors serving as the Compensation Committee and any member of the compensation committee of any other company, nor has any such interlocking relationship existed in the past.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At the close of business on May 10, 2007, there were issued and outstanding 194,012,129 shares of our common stock. The following table provides information regarding beneficial ownership of our common stock as of May 10, 2007 by:
·
each person known by us to be the beneficial owner of more than five percent of our common stock;
·
each of our directors;
·
each executive officer named in the summary compensation table; and
·
all of our current directors and executive officers as a group.
The persons named in this table have sole voting and investment power with respect to the shares listed, except as otherwise indicated. The inclusion of shares listed as beneficially owned does not constitute an admission of beneficial ownership. Shares included in the “Right to Acquire” column consist of shares that may be purchased through the exercise of options that vest within 60 days of May 10, 2007.
______________________
*
Represents beneficial ownership of less than 1.0%.
EQUITY COMPENSATION PLAN DISCLOSURE
The information with respect to our equity compensation plan is incorporated herein by reference to Item 5 of Part II of this Report.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
We sold substantially all of our assets used in our hosting and web site maintenance business to Tulix Systems, Inc. Timothy R. Robinson, George Bokuchava and Nino Doijashvili are the officers and directors of Tulix and own all of its outstanding stock. Until, May 31, 2004, they were also our officers and directors, with the exception of Mr. Robinson who resigned as a director on July 1, 2004. As consideration for these assets, Tulix issued to us shares of its common stock that represents 15% of its outstanding shares; issued to us a secured promissory note for a principal amount of $70,000; and, assumed certain of our obligations. The promissory note was paid back in May 2006 and the 15% interest in Tulix was sold back to the current management of Tulix for $50,000 on May 18, 2007.
In May 2003, we entered into a licensing agreement with Eurotech, Ltd. Dr. Graves, who was then a member of our board of directors and a vice president (resigned May 16, 2005), was also the chief financial officer and a member of the board of directors of Eurotech. In exchange for the licenses, we issued to Eurotech 11,250 shares of our Series F preferred stock and 1,069 shares of our Series G preferred stock, and agreed to pay Eurotech a royalty of seven percent (7%) on net sales generated by the licensed technologies and a royalty of four percent (4%) on net sales generated by products and services that are improvements on the licensed technologies. As of the date of this Annual Report, nothing is due from the Company to Eurotech under the license agreement. The holders of the outstanding shares of our Series F preferred stock cancelled their outstanding shares of our Series F preferred stock in exchange for shares of our Series H preferred stock.
On May 31, 2004, we completed the sale of our internet hosting and website maintenance business to Tulix Systems, Inc., a company in which Gia Bokuchava, Nino Doijashvili and Timothy R. Robinson, who were officers and directors of our Company, are officers, directors and founding shareholders. We 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.
In July 2003, we executed a secured promissory note in favor of McNab, LLC that allows us to borrow up to $542,950. McNab, LLC owns the outstanding shares of our Series C, Series D, and Series E preferred stock. In addition, McNab, LLC agreed to accept shares of our common stock as payment for approximately $2,000,000 of penalties that may be owed for our failure to register for resale shares of our common stock issuable upon conversion of its outstanding preferred stock.
On December 31, 2004 we entered into an agreement and plan of Merger (the “Merger Agreement”) to acquire True to Form, a private company wholly and controlled by one of our directors Mark Allen.
· Our subsidiary True To Form issued to Mark Allen a secured note in principal amount of $500,000, payable over five years at an annual interest rate of 8%, with $100,000 due after one year and the remaining principal amount due on December 31, 2009; and
· We issued to Mark Allen 10,000,000 shares of our common stock.
· The note was secured by all of the assets of True To Form under the terms of a Security Agreement by and between True To Form and Mr. Allen, entered into on December 31, 2004. In addition, we guaranteed the note in full pursuant to the terms of a guaranty issued to Mr. Allen entered into on December 31, 2004, and pledged as collateral to the note all of the common stock of True To Form in favor of Mr. Allen pursuant to the terms of a collateral pledge agreement entered into on December 31, 2004.
The sale of these securities was exempt from registration pursuant to Section 4(2) of the Securities Act.
Since January 1, 2005 we have issued options to purchase 2,650,000 shares of common stock to directors and executive officers.
On December 29, 2005 we completed the transfer of all of the issued and outstanding capital stock of True To Form Limited, Inc. back to Mr. Allen pursuant to the terms of a Stock Purchase Agreement between him, True to Form, and us. As a result of this sale, we no longer hold any equity interest in True To Form. The consideration was determined on the basis of these negotiations. The consideration for the sale of True to Form consists of:
· the issuance by True To Form to us of a promissory note described below in the initial principal amount of $250,000, which note accrues interest at an annual rate of one percent plus the prime rate as reported by a nationally recognized commercial bank and has a maturity date of January 1, 2011;
· the cancellation of our guaranty of the amounts owed under a promissory note issued by True to Form to Mr. Allen in connection with our acquisition of True to Form; and
· the surrender by Mr. Allen of the 10,000,000 shares of our common stock that were issued to him as partial consideration for our purchase of True to Form on December 31, 2004 and the cancellation of all other equity interest in Global Matrechs held by Mr. Allen.
In addition, we agreed to the cancellation of amounts owed under a note issued by us to True to Form for working capital purposes in the aggregate amount of $280,000.
In connection with this transaction, Mr. Allen resigned from his positions as Executive Vice President and Director of Global Matrechs. This action was not, to the knowledge of any executive officer of the Company, because of a disagreement on any matter relating to the Company’s operations, policies or practices.
Director Independence
The Over-the-Counter Bulletin Board does not have rules regarding director independence. Our determination of independence of directors is made using the definition of “independent director” contained in the Marketplace Rules of the NASDAQ Stock Market (“NASDAQ”), even though such definitions do not currently apply to us because we are not listed on NASDAQ. We have determined that Mr. Folsom is “independent” within the meaning of such rules. Michael Sheppard is not “independent” under these rules, due to his position as an executive officer of our Company.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth fees billed to us by our auditors during the fiscal years ended December 31, 2006 and December 31, 2005 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered.
AUDIT FEES. Consists of fees billed for professional services rendered for the audit of Homecom Communications, Inc.’s (the former name of the Company) financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by Sherb & Company, LLC in connection with statutory and regulatory filings or engagements. Audit and tax services for the year ended December 31, 2006 were provide by Li & Co, PC.
AUDIT-RELATED FEES. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of Homecom Communications, Inc.’s financial statements and are not reported under “Audit Fees.”
TAX FEES. Consists of fees billed for professional services for tax compliance, tax advice and tax planning.
ALL OTHER FEES. Consists of fees for products and services other than the services reported above. There were no management consulting services provided in fiscal 2006 or 2005.
PRE-APPROVAL POLICIES AND PROCEDURES. The Company does not have an audit committee. The Board of Directors has approved Future Now Group to serve as the Company’s outside accounting firm. It is the policy of the Company that all services provided by Mantyla & McReynolds, LP, shall be pre-approved by the Board of Directors. Mantyla & McReynolds, LP will provide the Board of Directors with an engagement letter outlining the scope of the audit services proposed to be performed during the fiscal year and the estimated fees for such services. Pre-approval of audit and permitted non-audit services may be given by the Board of Directors at any time up to one year before the commencement of such services by Mantyla & McReynolds, LP. Pre-approval must be detailed as to the particular services to be provided. Pre-approval may be given for a category of services, provided that (i) the category is narrow enough and detailed enough that management of the Company will not be called upon to make a judgment as to whether a particular proposed service by Mantyla & McReynolds, LP fits within such pre-approved category of services and (ii) the Board of Directors also establishes a limit on the fees for such pre-approved category of services.
ITEM 15.
ITEM 15. EXHIBITS.
SIGNATURES
In accordance with Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: January 15, 2009
By:
/s/ Michael Sheppard
Michael Sheppard
Title: President, Chief Executive Officer,
Chief Operating Officer and acting Chief
Financial Officer (principal executive
officer; principal financial and accounting officer)
Date: Janaury 15, 2009
By:
/s/ Thomas L. Folsom
Thomas L. Folsom
Title: Director