UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: September 30, 2001 Commission file number: 33-23617 MATERIAL TECHNOLOGIES, INC. --------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4622822 ------------------------------ ------------------- (State or other jurisdiction of (IRS Employer (incorporation or organization) identification No.) 11661 San Vicente Boulevard Suite 707 Los Angeles, California 90049 ---------------------------------- (address of principal executive offices) (310) 208-5589 --------------------------------------------------- (Registrant's telephone number including area code) Securities Registered pursuant to Section 12(g) of the Act: Common ------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this form 10-K. [ ] The aggregate market value of the voting stock held by Non-affiliates of the registrant at October 18, 2001 was approximately $4,293,377. Documents incorporated by reference-None. 1 INDEX PAGE ---- Part 1. Financial Statements Balance Sheets 3-4 Statements of Operations - Third Quarter Ended September 30, 2000 and 2001 and from the Company's inception (October 21, 1983) through September 30, 2001 5 Statements of Cash Flows - Third Quarter Ended September 30, 2000 and 2001 and from the Company's inception (October 21, 1983) through September 30, 2001 6-7 Notes to Financial Statements 8 Management's Discussion and Analysis 9-10 Part 2. Other Information 11 2 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) BALANCE SHEETS ================================================================================== December 31, September 30, 2000 2001 ----------------- -------------------- (Unaudited) ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 1,954 $ 101,610 Receivable Due on Research Contract 33,932 186,183 Receivable from Officer 22,052 38,328 ----------------- -------------------- TOTAL CURRENT ASSETS 57,938 326,121 ----------------- -------------------- FIXED ASSETS Property and Equipment, Net of Accumulated Depreciation 2,990 2,272 ----------------- -------------------- OTHER ASSETS Intangible Assets, Net of Accumulated Amortization 12,712 16,821 Investments 33,000 33,000 Refundable Deposit 2,136 2,136 Deferred Offering Costs - 4,000 ----------------- -------------------- TOTAL OTHER ASSETS 47,848 55,957 ----------------- -------------------- TOTAL ASSETS $ 108,776 $ 384,350 ================= ==================== 3 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) BALANCE SHEETS ===================================================================================================== December 31, September 30, 2000 2001 -------------- --------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' (DEFICIT) CURRENT LIABILITIES Legal Fees Payable $ 209,306 $ 214,865 Fees Payable to R&D Subcontractor 20,474 133,572 Consulting Fees Payable 50,000 - Accounting Fees Payable 26,288 29,416 Other Accounts Payable 10,157 2,480 Accrued Expenses 24,982 42,121 Accrued Officer Wages 40,000 80,000 Notes Payable - Current Portion 25,688 25,688 Loans Payable - Others 54,160 56,594 -------------- --------------- TOTAL CURRENT LIABILITIES 461,055 584,736 Payable on Research and Development Sponsorship 358,181 406,535 -------------- --------------- TOTAL LIABILITIES 819,236 991,271 -------------- --------------- STOCKHOLDERS' (DEFICIT) Class A Common Stock, $.001 Par Value, Authorized 199,000,000 Shares, Outstanding 24,618,167 at December 31, 2000, and 37,239,214 shares at September 30, 2001 24,618 37,239 Class B Common Stock, $.001 Par Value, Authorized 100,000 Shares, Outstanding 100,000 Shares at December 31, 2000, and September 30, 2001 100 100 Class A Preferred, $.001 Par Value, Authorized 50,000,000 Shares Outstanding 337,471 Shares at December 31, 2000 and September 30, 2001 337 337 Additional Paid in Capital 5,909,782 6,744,372 Less Notes Receivable - Common Stock (2,133,251) (720,907) Deficit Accumulated During the Development Stage (4,512,046) (6,668,062) -------------- --------------- TOTAL STOCKHOLDERS' (DEFICIT) (710,460) (606,921) -------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) 108,776 384,350 ============== =============== 4 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) Statement of Operations From Inception (October 21, For the Three Months For the Nine Months 1983) Ended Ended Through September 30, September 30, September 2000 2001 2000 2001 2001 ------------ ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) REVENUES Sale of Fatigue Fuses $ - $ - $ - $ - $ 64,505 Sale of Royalty Interests - - - - 198,750 Research and Development Revenue 143,781 427,004 601,936 1,038,060 4,021,726 Test Services - - - - 10,870 ------------ ------------ ------------ ------------ ------------ TOTAL REVENUES 143,781 427,004 601,936 1,038,060 4,295,851 ------------ ------------ ------------ ------------ ------------ COSTS AND EXPENSES Research and Development 100,051 356,706 433,445 828,326 3,700,026 General and Administrative 117,477 258,597 443,777 2,402,032 7,211,677 ------------ ------------ ------------ ------------ ------------ TOTAL COSTS AND EXPENSES 217,528 615,303 877,222 3,230,358 10,911,703 ------------ ------------ ------------ ------------ ------------ (LOSS) FROM OPERATIONS (73,747) (188,299) (275,286) (2,192,298) (6,615,852) ------------ ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Expense Reimbursed - - - - 4,510 Interest Income 39,128 11,487 61,606 89,933 235,468 Gain on Sale of Stock - - 251,798 - 207,497 Gain on Foreclosure - - - - 18,697 Miscellaneous Income - - - - 25,145 Modification of Royalty Agreement - - - - (7,332) Loss on Sale of Equipment - - - - (12,780) Interest Expense (15,158) (17,617) (45,537) (52,851) (298,370) Settlement of Teaming Agreement - - - - 50,000 Litigation Settlement - - - - 18,095 ------------ ------------ ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) 23,970 (6,130) 267,867 37,082 240,930 ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND PROVISION FOR INCOME TAXES (49,777) (194,429) (7,419) (2,155,216) (6,374,922) PROVISION FOR INCOME TAXES - - (2,575) (800) (10,200) ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (49,777) (194,429) (9,994) (2,156,016) (6,385,122) EXTRAORDINARY ITEMS Forgiveness of Debt - - - - (289,940) Utilization of Operating Loss Carry forward - - - - 7,000 ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ (49,777) $ (194,429) $ (9,994) $(2,156,016) $(6,668,062) ============ ============ ============ ============ ============ PER SHARE DATA Basic Income (Loss) Per Share Before Extraordinary Item (0.00) $ (0.01) (0.00) (0.07) Extraordinary Items - - - - ------------ ------------ ------------ ------------ NET INCOME (LOSS) (0.00) $ (0.01) (0.00) (0.07) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20,324,413 35,127,551 17,483,367 31,272,062 ============ ============ ============ ============ See accompanying Notes 5 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS From Inception (October 21, For the Three Months Ended For the Nine Months Ended 1983) Through September 30, September 30, September 30, 2000 2001 2000 2001 2001 ------------ ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) $ (49,777) $ (194,429) $ (9,994) $(2,156,016) $(6,668,062) ------------ ------------ ------------ ------------ ------------ Adjustments to Reconcile Net (Loss) to Net Cash Provided (Used) by Operating Activities Depreciation and Amortization 737 738 2,211 2,211 176,784 Interest Income on Stock Subscriptions Receivable (39,790) (11,488) (57,459) (89,932) (189,921) Officer's Compensation on Stock Subscription Modification - - - 1,500,000 1,500,000 Bad Debt - - - - 50,000 Gain on Sale of Marketable Securities - - - - (196,596) Gain on Real Estate Foreclosure - - - - (18,697) Charge off of Deferred Offering Costs - - - - 36,480 Charge off of Long-lived Assets Due Impairment - - - 92,919 Charge off of Deferred Offering Costs - - - - 12,780 Loss on Sale of Equipment - - - - 7,332 Issuance of Common Stock for Services 16,000 120,250 61,950 596,500 1,217,897 Issuance of Stock for Agreement Modification - - - - 152 Forgiveness of Indebtedness - - - - 165,000 (Increase) Decrease in Accounts Receivable 136,791 81,108 141,168 (152,251) (233,183) (Increase) Decrease in Prepaid Expenses (50,000) - (50,000) - 53 Increase (Decrease) in Accounts - - - Payable and Accrued Expenses (123,788) (85,145) (109,863) 184,928 1,104,800 Interest Accrued on Note Payable 703 811 2,388 2,434 207,471 Increase in Research and Development Sponsorship Payable 13,659 16,118 40,978 48,354 266,354 (Increase) in Note for Litigation Settlement - - - - (25,753) (Increase) in Deposits - - - - (2,189) ------------ ------------ ------------ ------------ ----------- TOTAL ADJUSTMENTS (45,688) 122,392 31,373 2,092,244 4,171,683 ------------ ------------ ------------ ------------ ------------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (95,465) (72,037) 21,379 (63,772) (2,496,379) ------------ ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds From Sale of Equipment - - - - 10,250 Proceeds from Sale of Marketable Securities - - - - 283,596 Purchase of Marketable Securities - - - - (90,000) Investment in Joint Venture - - (15,000) - (102,069) Purchase of Property and Equipment - (5,600) - (5,600) (236,503) Net Proceeds from Sale of Real Estate - - - - 44,450 Payment for License Agreement - - - - (6,250) ------------ ------------ ------------ ------------ ------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES - (5,600) (15,000) (5,600) (96,526) ------------ ------------ ------------ ------------ ------------ See accompanying Notes 6 MATERIAL TECHNOLOGIES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS From Inception For the Three Months Ended For the Nine Months Ended (October 21, 1983) September 30, September 30, Through 2000 2001 2000 2001 September 30, 2001 ------------ ------------ ------------ ------------ -------------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Common Stock $ - $ 230,309 $ 5,000 $ 230,309 $ 1,611,916 Costs incurred in Offering - (47,281) - (47,281) (78,761) Sale of Common Stock Warrants - - - - 18,250 Payment on Proposed Reorganization - - - - (5,000) Sale of Preferred Stock - - - - 258,500 Sale of Redeemable Preferred Stock - - - - 150,000 Capital Contributions - - - - 301,068 Loans From Officers - 500 3,000 14,800 750,805 Repayments to Officer (11,000) (10,000) (22,500) (28,800) (484,332) Increase in Loans - Other - - - - 172,069 ------------ ------------ ------------ ------------ -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: (11,000) 173,528 (14,500) 169,028 2,694,515 ------------ ------------ ------------ ------------ -------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (106,465) 95,891 (8,121) 99,656 101,610 BEGINNING BALANCE CASH AND CASH EQUIVALENTS 161,248 5,719 62,904 1,954 - ------------ ------------ ------------ ------------ -------------------- ENDING BALANCE CASH AND CASH EQUIVALENTS $ 54,783 $ 101,610 $ 54,783 $ 101,610 $ 101,610 ============ ============ ============ ============ ==================== See accompanying Notes 7 MATERIAL TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS NOTE 1. In the opinion of the Company's management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company as of September 30, 2000 and 2001 and the results of operations and cash flows for the three-month and nine-month periods then ended. The operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. 8 MATERIAL TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS ----------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001 During the nine month period ended September 30, 2000, the Company generated approximately $915,340 in revenue, which consisted of $601,936 under its research and development contracts, $251,798 from the sale of marketable securities, and $61,606 in interest. Of the $61,606 in interest earned, $55,572 relates to interest accrued on non-recourse stock subscription receivables due from the Company's President and a Director. During the nine month period ended September 30, 2001, the Company generated approximately $1,127,993 in revenue, which consisted of $1,038,060 under its research, and development contracts, and $89,933 in interest. Of the total interest earned, $85,536 relates to interest accrued on non-recourse stock subscription receivables due from the Company's President and a Director. During the nine month periods ended September 30, 2000 and 2001, the Company incurred approximately $433,445, and $828,326, respectively, in development costs all of which related to the above indicated contracts. General and administration costs were $443,777, and $2,402,032, respectively, for the nine-month periods ended September 30, 2000, and 2001. The major expenses incurred during the nine-month period ended September 30, 2000, consisted of $84,101 in consulting fees, $90,000 in officer's salary, $109,315 in professional fees, $18,855 in rent, $14,577 in telephone expense, $28,187 in salaries, office expense of $21,761, and $22,491 in travel costs. The major expenses incurred during the nine-month period ended September 30, 2001, consisted of $1,500,000 relating to the modification of the amount owed to the Company by its President and a Director on non-recourse stock subscriptions, $420,000 of prior years' compensation due its President that was paid in stock in 2001, $147,569 in consulting fees, $90,000 in officer's salary, $97,695 in professional fees, $16,454 in rent, $11,706 in telephone expense, $26,200 in office salaries, office expense of $16,454, and $25,643 in travel costs FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001 During the three-month period ended September 30, 2000, the Company generated approximately $182,909 in revenue, which consisted of $143,781 under its research and development contracts, and interest earned of $39,128 the majority of which relates to interest accrued on non-recourse stock subscription receivables due from the Company's President and a Director. 9 During the three-month period ended September 30, 2001, the Company generated approximately $438,491 in revenue, which consisted of $427,004 under its research and development contracts, and interest earned of $11,487, the majority of which relates to interest accrued on non-recourse stock subscription receivables due from the Company's President and a Director. During the three-month periods ended September 30, 2000 and 2001, the Company incurred approximately $100,051, and $356,706, respectively, in development costs all of which related to the above-indicated contracts. General and administration costs were $117,477 and $258,597, respectively, for the three-month periods ended September 30, 2000 and 2001. The major expenses incurred in 2000, consisted of officer's salaries of $30,000, office salaries of $8,928, consulting fees of $8,591, professional services of $34,498, rent of $6,411, office expense of $6,246, telephone expense of $5,236, and travel expense of $3,672. The major expenses incurred in 2001, consisted of officer's salaries of $30,000, office salaries of $10,617, consulting fees of $113,066, professional services of $46,486, rent of $6,833, office expense of $13,129, telephone expense of $6,875, and travel expense of $16,674. LIQUIDITY AND CAPITAL RESOURCES ---------------------------------- Cash and cash equivalents as of September 30, 2000 and 2001 were $54,783, and $101,610, respectively. During 2000, the Company received $841,647 through its research contracts, $3,000 through advances from its President, $5,000 through the issuance of Company's common stock, $251,798 through the sale of stock held for investment, $3,990 from interest earned on savings, and other receipts totaling $3,053. Of the $1,108,488 received, $1,070,988 was used in operations, $15,000 was invested in a joint Venture, and $22,500 was repaid to its President. During 2001, the Company received $885,808 through its research contracts, $14,800 through advances from its President, and $230,309 through the issuance of Company's common stock. Of the $1,130,917 received, $949,580 was used in operations, $5,600 was used in the development of the Company's website, $47,281 was used in the selling of the stock and $28,800 was advanced to its President. 10 PART 2. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES On October 12, 2001, the Company's Board of Directors approved an increase in the number of the Company's authorized common shares to 200,000,000 and approved an increase in the Company's authorized preferred shares to 50,000,000. The financial statements have been retroactively restated to reflect the increased number of authorized shares. In the third quarter 2001, the Company issued a total of 4,396,047 shares of its common stock of which, 3,193,547 shares were issued for cash totaling $187,028 (net of offering costs of $43,281), and 1,202,500 shares were issued to various individual for legal and consulting services valued at $120,250. In October 2001, the Company issued a total of 5,829,307 shares of its common stock of which, 1,461,307 shares were issued for $102,105, 300,000 shares were issued to a Director, 20,000 shares were issued to an employee, 350,000 shares were issued to consultants, 3,000,000 shares were issued pursuant to the terms of the Commitment Letter in connection with a $12,500,000 Straight Documentary Credit from Allied Boston Group, and 698,000 shares were issued for the assistance in raising the funds through the Company's Regulation S offering. Under the terms of the agreement with the University of Pennsylvania, the University was issued 5% of the Company's outstanding stock. According to the agreement, the shares issued are anti-dilutive. Currently, the Company is required to issue 864,089 additional shares to the University. These additional shares have not been issued. ITEM 5. OTHER INFORMATION On October 10, 2001, the Company entered into an arrangement whereby Allied Boston Group will provide the Company with a Straight Documentary Credit for $12,500,000. Under the terms of the commitment, the Company will pledge sufficient shares of its common stock to equal 125% of the Straight Documentary Credit. Under the initial terms, the shares are valued at $.27 per share, therefore the Company will pledge approximately 58 million shares of its common stock against this instrument. If the Company's stock price goes lower, then additional shares will be pledged. If the stock price goes to a $1.00 per share, then Allied Boston is required to liquidate a sufficient number of shares to pay off the amount funded through this Straight Documentary Credit. After the amount is paid off, Allied Boston will retain 25 million shares of the Company's common stock. Any remaining shares will be returned to the Company; On October 18, 2001, the Company issued 3,000,000 shares of its common stock to Allied Boston as an issuance fee valued at $812,500. Upon funding through the Straight Documentary Credit, the Company is required to pay a Success Fee to Allied Boston in the amount of 8% of the amount funded of 11 which 50% will be paid in cash and the remainder of the fee will be paid through the issuance of the Company's common stock to be valued currently at $.27 per share. As long as the Documentary Credit is in force, Allied Boston will have 2 voting seats on the Company's Board. All out-of-pocket expenses pertaining to the issuance of the instrument will be borne by the Company. PURSUANT TO THE REQUIREMENTS OF SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. MATERIAL TECHNOLOGIES, INC. --------------------------- REGISTRANT /s/ Robert M. Bernstein ----------------------------------------- ROBERT M. BERNSTEIN, PRESIDENT AND CHIEF FINANCIAL OFFICER DATE: OCTOBER 19, 2001 12