matechs1.htm


As filed with the Securities and Exchange Commission on December 15, 2008
Registration No. 333-______

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 


MATECH CORP.
(Exact name of registrant as specified in its charter)

Delaware
 
3823
 
95-4622822
(State or other jurisdiction of
incorporation or organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(IRS Employer
Identification No.)

11661 San Vicente Boulevard, Suite 707
Los Angeles, CA  90049
(310) 208-5589
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

Robert M. Bernstein
11661 San Vicente Boulevard, Suite 707
Los Angeles, CA  90049
(310) 208-5589
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Approximate Date of Proposed Sale to the Public:
As promptly as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ý

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filed” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
ý

Calculation of Registration Fee

Title of Each Class of Securities to be Registered
 
Amount to be Registered
   
Proposed Maximum Offering Price Per Unit
   
Proposed Maximum Aggregate Offering Price1
   
Amount of Registration Fee
 
Class A Common Stock, $0.001 par value per share
    19,607,943     $ 2.10     $ 41,176,681     $ 1,619  
Warrants to Purchase Class A Common Stock
    18,050,200     $ 02     $ 0     $ 0  
Class A Common Stock issuable upon exercise of warrants
    18,050,200     $ 0.203     $ 3,610,040     $ 142  
Convertible Debentures
    1,000,000     $ 04     $ 0     $ 0  
Class A Common Stock issuable upon conversion of Convertible Debentures
    10,000,0005     $ 0.106     $ 1,000,000     $ 40  
Total
    66,708,343             $ 45,786,721     $ 1,801  

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this registration statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a) may determine.
 
The information in this prospectus is not complete and may be changed.  We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective.  This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.



1  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
2  Pursuant to Rule 457(g) under the Securities Act of 1933, no registration fee is payable for warrants that are registered for distribution in the same registration statement as the securities to be offered pursuant thereto.
3  Calculated based upon the exercise price of $0.20 per share pursuant to Rule 457(g) of the Securities Act of 1933.
4  Pursuant to Rule 457(i) under the Securities Act of 1933, no registration fee is payable for convertible securities that are registered for distribution in the same registration statement as the securities to be offered pursuant thereto.
5  Calculated based upon the conversion price of $0.10 per share of common stock rather than the conversion price of 50% of the average closing price of our common stock for the ten trading days immediately preceding the conversion date as that amount cannot currently be ascertained.  This amount may be expanded to include interest which is potentially convertible into shares but which amount cannot currently be ascertained.
6  Calculated based upon the conversion price of $0.10 per share of common stock pursuant to Rule 457(f) of the Securities Act of 1933.

 


PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, DATED DECEMBER 15, 2008

18,050,200 WARRANTS
1,000,000 CONVERTIBLE DEBENTURES
19,607,943 SHARES OF COMMON STOCK

MATECH CORP.

This prospectus covers the resale by selling securityholders of up to 18,050,200 warrants, 1,000,000 convertible debentures, and 19,607,943shares of our common stock.
 
These securities will be offered for sale from time to time by the selling securityholders identified in this prospectus in accordance with the terms described in the section of this prospectus entitled “Plan of Distribution.”  We will not receive any of the proceeds from the sale of the common stock by the selling securityholders.
 
Our securities are not listed on any national securities exchange.  Our common stock is currently quoted on the over-the-counter electronic Bulletin Board under the symbol “MTCH.OB.”  Our warrants and convertible debentures do not trade on any securities exchange or electronic trading system  The last reported per share price for our common stock was $2.10, as quoted on the over-the-counter electronic Bulletin Board on December 9, 2008.

Investing in our common stock involves risks.  See “Risk Factors” beginning on page 3 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.




The date of this Prospectus is December 15, 2008
 
 
 
 

 


TABLE OF CONTENTS

You should rely only on the information contained in this prospectus.  We have not authorized anyone to provide you with information different from that contained in this prospectus.  We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted.  The information contained in this prospectus is accurate only as to the date of this prospectus, regardless of the time of delivery of the prospectus or of any sale of the common stock. It is important for you to read and consider all information in this prospectus in making your investment decision.

 
 
  
 

Unless the context requires otherwise, in this prospectus the terms “we,” “us,” and “our” refer to Matech Corp., a Delaware corporation.
 
 
 
 
 
 
 
 
 

 
PROSPECTUS SUMMARY

This summary highlights selected information in this prospectus.  To better understand this offering, and for a more complete description of the offering, you should read this entire prospectus carefully, including the “Risk Factors” section and the financial statements and the notes to those statements, which are included elsewhere in this prospectus.

Our Company

We research and develop technologies that detect and measure metal fatigue.  We have developed two products.  Our two products are the Fatigue Fuse and Electrochemical Fatigue Sensor.  We generate very little revenue from the sale and licensing of our products, and thus we are a development stage company. 

We were formed as a Delaware corporation on March 4, 1997.  We are the successor to the business of Material Technology, Inc., a Delaware corporation, also doing business as Tensiodyne Scientific, Inc.  Material Technology, Inc. was the successor to the business of
 
 
 
 
 
 
 

1


Tensiodyne Corporation that began developing the Fatigue Fuse in 1983.  Our two predecessors, Tensiodyne Corporation and Material Technology, Inc. were engaged in developing and testing our Fatigue Fuse and, beginning in 1993, developing our Electrochemical Fatigue Sensor.

Our principal executive offices are located at 11661 San Vicente Blvd., Suite 707, Los Angeles, California, 90049, and our telephone number is (310) 208-5589.

The Offering

Securities Offered by Selling Securityholders
48,829,193 shares of our common stock1
   
Shares of Common Stock Outstanding
22,390,4102
   
Use of Proceeds
We will not receive any of the proceeds from the sale of the common stock by the selling securityholders.
   
Risk Factors
You should carefully consider all of the information contained in this prospectus, and in particular, you should evaluate the specific risks set forth under “Risk Factors.”
 
 
 
 
 
 

 


1  Includes 19,607,943 shares of common stock, 18,050,200 shares of common stock issuable upon exercise of warrants, and 10,000,000 shares of common stock issuable upon conversion of convertible debentures.
2  Does not include any shares of common stock issuable upon exercise of outstanding warrants or options or conversion of convertible securities.

2


Summary Financial Data

The following table sets forth our summary consolidated financial data for the nine months ended September 30, 2008 and September 30, 2007 and the fiscal years ended December 31, 2007 and December 31, 2006.  This information should be read in conjunction with the financial statements (including the related notes thereto) appearing elsewhere in this prospectus.

   
For the Nine Months Ended September 30, 2008
   
For the Nine Months Ended September 30, 2007
   
For the Year Ended December 31, 2007
   
For the Year Ended December 31, 2006
 
   
(unaudited)
   
(unaudited)
   
(audited)
   
(audited)
 
Statement of Operations Data
                       
Revenue
  $ 30,359     $ 146,745     $ 201,917     $ 39,446  
Research and development costs
    423,428       3,533,343       3,701,966       902,446  
General and administrative expenses
    26,619,102       82,608,673       98,557,941       138,892,926  
Operating loss
    (27,012,171 )     (85,995,271 )     (102,057,990 )     (139,755,926 )
Net loss
    (19,338,972 )     (84,336,192 )     (73,396,579 )     (177,884,101 )
Net loss per share (basic and diluted)
    (0.12 )     (0.83 )     (0.68 )     (40.10 )
Weighted average common shares outstanding (basic and diluted)
      156,873,303         101,671,169         107,708,004         4,435,708  
                                 
Balance Sheet Data
                               
Cash and cash equivalents
    441,076       987,284       809,710       129,296  
Total assets
    1,128,852       2,928,147       2,425,280       432,780  
Current liabilities
    965,775       524,057       691,380       542,802  
Long-term liabilities
    5,772,022       33,647,393       13,549,275       46,443,413  
Total stockholders’ deficit
    (5,609,770 )     (31,244,128 )     (11,816,200 )     (46,554,260 )

 

 
3


RISK FACTORS

Investing in our securities involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our securities. The risks and uncertainties described below are not the only ones facing us. Additional risk and uncertainties of which we are unaware, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition, or results of operations could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to Our Business and Industry

We have operated at a loss since inception; we expect future losses and we may not achieve or maintain profitability.

We have had only limited revenues to date, and have incurred only losses as we have funded the research and development of our technology and continue to fund the development and marketing of our products and services.  As of September 30, 2008, we have an accumulated deficit of approximately $332,547,374.  In view of this deficit, our business and prospects would be significantly impaired if we were to sustain any significant shortfall in projected revenues.

We intend to invest our financial and other resources heavily in building management, sales, and marketing, and in funding further research and development of our technology.  We do not expect to generate profits from operations for a significant period of time, if at all, and if we do not achieve and sustain profitability, our business will suffer.  In addition, even if we achieve profitability, our growth rates may not be sustainable.  Our future performance will depend upon a number of factors, including our ability to:

 
·
Execute our business and marketing strategy;
 
·
Develop a customer base;
 
·
Successfully market our products and services to customers at prices that will generate the significant revenue we will need to achieve and maintain profitability;
 
·
Continue to develop and upgrade our technology;
 
·
Respond to competitive demands;
 
·
Provide superior technical support; and
 
·
Attract, retain, and motivate qualified personnel.

We need financing to run our business

Our biggest challenge is funding the continued research and development and commercialization of our products until we can generate sufficient revenue to support our operations.  We will need to raise additional capital to finance future activities and no assurances can be made that current or anticipated future sources of funds will enable us to finance future operations.  In light of these circumstances, substantial doubt exists about our ability to continue as a going concern. 

4

 
Our prospective customers often take a long time to evaluate our products, with this lengthy and variable sales cycle making it difficult to predict our operating results.

It is difficult to forecast the timing and recognition of revenues from sales of our products because prospective customers often take significant time evaluating our products before purchasing them.  The period between initial customer contact and a purchase by a customer may be more than one year.  During the evaluation period, prospective customers may decide not to purchase or may scale down proposed orders of our products for various reasons, including:

·      Reduced need to upgrade existing systems;
·      Introduction of products by our competitors;
·      Lower prices offered by our competitors; and
·      Changes in budgets and purchasing priorities.

Our prospective customers routinely require education and training regarding the use and benefit of our products.  This may also lead to delays in receiving customers’ orders.

An investment in the securities is very speculative and may not offer the same diversity as an investment in a larger better capitalized company.

Because we are a small company that has only recently commenced product sales, our business objectives must be considered speculative, and we may never achieve our objectives.  Thus, investors may never realize a substantial or any return on investment whatsoever, and could lose their entire investment.  In addition, unlike larger companies, our business may not be adequately diversified regarding the products and services we offer or the customer base.  To the extent that our funds are invested predominately in a single product or service, or even a few products or services, there is increased exposure to us and to investors.

Our failure to raise additional capital could reduce our ability to complete and harm our business.

The expansion and development of our business will require us to raise additional capital.  We cannot assure investors that we will be able to raise additional capital on favorable terms, if at all.  We currently do not have any commitment with respect to any additional capital.  In addition, we currently have no loan commitment from, or lines of credit with, banks or other financial institutions.  If we are unable to raise capital in the future on acceptable terms, we may not be able to continue to operate our business and could be forced to discontinue business operations.
 
 

5


Our future operating results are difficult to forecast, may fluctuate and could fall below our expectations.

Since we have had only a limited operating history, and because of the rapidly evolving nature of this industry and market, we may have difficulty in accurately forecasting our revenue in any given period.  Moreover, our revenues and operating results may vary significantly from quarter to quarter because of a number of factors.  One factor will be the demand and market acceptance for our technology and products.  If our technology and products are accepted by the market, another factor will be the size and timing of customer orders for our products.  In any given quarter, sales of some of our products could involve large financial commitments from a relatively small number of customers, and cancellation or deferral of these large contracts would reduce our revenues.

Also, we may book a large amount of sales in the last month or weeks of a particular quarter and delays in the closing of sales near the end of a quarter could cause quarterly revenue to fall short of anticipated levels.  Finally, while a portion of our revenues each quarter may be recognized from previously deferred revenue, our quarterly performance will depend primarily upon entering into new contracts to generate revenues for that quarter.

Other factors that may impact our operating results include the following:

 
·
Increased expenses, whether related to sales and marketing, product development, or administration;
 
·
Delays in introducing new products;
 
·
The announcement or introduction of new products by our competitors;
 
·
The capital and expense budgeting decisions of our customers;
 
·
Market acceptance of our products and services;
 
·
Cost related to acquisitions of new technologies or businesses;
 
·
The amount and timing of expenditures related to expansion of our operations;
 
·
The ability of our products to perform favorably relative to competitive benchmarks;
 
·
Changes in the timing of product orders caused by unexpected delays in the introduction of products by our customer or by the life cycles of customers’ products ending earlier than we anticipated;
 
·
Competitive pressures resulting in lower average selling prices;
 
·
The rescheduling or cancellation of customer orders;
 
·
The unanticipated loss of any strategic relationship;
 
·
Seasonal fluctuations in governmental contracting and purchasing habits; and
 
·
Cost associated with protecting our intellectual property.
 
Any one or more of these factors could result in our failing to achieve future revenues and profitability.  Because most operating expenses are relatively fixed in the short term, we may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall, which could materially adversely affect quarterly results of operations.  Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied

6


upon as an indication of future performance.  In addition, the result of any quarterly period is not indicative of results to be expected for a full fiscal year.

If contract cancellations are larger than we allow for, our business may suffer.

We are exposed to the risk of contract cancellations from our customers.  Moreover, the risk of contract cancellations may increase if our industry adopts new platforms or standards or there are changes in government regulations.  We do not have and do not expect to establish reserves for contract cancellations.  If we experience many contract cancellations, it would significantly impact our business.

We are subject to liability claims and we may not have sufficient insurance coverage.

As of the date of this prospectus, we do not have liability coverage; however, we plan to obtain liability insurance that will be adequate for the size and type of business we are in.  We cannot ensure such insurance will be sufficient to cover potential claims or that adequate levels of coverage will be available in the future at a reasonable cost.  If we are partially or completely uninsured, successful claims against us will have a material adverse impact on our financial condition and reputation.

We cannot accurately predict whether our products will achieve market acceptance, the future growth rate of this market or its ultimate size.

Our products are new and are meant to provide a relatively low-cost, accurate solution for private and public entities to determine the integrity of infrastructure.  Because we have only recently begun to sell products, we believe that most potential customers are unaware of our products and their capabilities and may thus be slow in accepting and deploying our solutions.  This makes our prospects difficult to forecast.  While we intend to devote significant resources to promoting awareness of our products and technology and the solution these products provide, these efforts may not be sufficient to build market awareness of the need for our products.  In addition, because the market for our products and services is relatively new and rapidly evolving, we have limited insight into trends that may emerge and affect our business.  We may make errors in predicting and reacting to relevant business trends, which could harm our business.  If a significant market for our products and technology fails to develop, or if our products and technology fail to achieve broad market acceptance, our business would be seriously harmed.

The market for our products and technology may not grow as quickly as we anticipate, which would cause our revenues to fall below expectations

 The market for our products and services is relatively new and evolving.  Our ability to achieve sustained revenue growth and profitability in the future will depend to a large extent upon the demand for infrastructure testing methods.  We cannot assure investors that the market for our products and services will develop or grow at a rate sufficient to support our business.  If the market for such products fails to develop, or develops more slowly than we expect, or if our technology and products do not achieve market acceptance, even if such market does develop, our business would be significantly harmed.  Demand for our products is also dependent upon

7


our customers’ success in effectively implementing and utilizing our technology, as well as the willingness of such customers to pay for infrastructure testing.

Many of our potential customers have made significant investments in existing technology and might incur significant costs in switching to other products, which could substantially inhibit the growth of the market for our products and services.  If this market fails to grow, or grows more slowly than we expect, our sales will be adversely affected.

Because we expect to incur significant increases in our operating expenses in the foreseeable future, we may not be able to achieve or sustain profitability.

We intend to substantially increase our operating expenses for the foreseeable future as we:

 
·
Increase our domestic and international sales and marketing activities;
 
·
Increase our research and development activities to advance our existing technology, products, and services, and to develop new technology, products, and services;
 
·
Hire additional personnel, including engineers, technical staff, and sales force; and
 
·
Upgrade our operational and financial systems, procedures, and controls.
 
We will have to increase our revenues significantly in order to achieve profitability in the face of such increased expenditures.  These expenses may be incurred before we can generate any revenues from the increased spending.  If we do not significantly increase revenues from these efforts, our business and operating results would be negatively impacted.

Our growth is expected to place a significant strain on our management systems and resources.  Failure to manage our growth may harm our ability to market and sell our products and develop new products.

We will have to plan and manage our growth effectively in order to offer our products and services and achieve revenue growth in a rapidly evolving market.  We expect that anticipated future growth will place a significant strain on our management, financial controls, operations, personnel, and other resources, and we may not be able to effectively manage our growth in the future.  As we continue to increase the scope of our operations, we will have to add more members of our management team and additional employees.  For us to effectively manage our growth, we will have to do the following:

 
·
Identify and implement adequate operations support systems on a timely basis, and expand and upgrade these systems as our business grows;
 
·
Improve our reporting systems and procedures;
 
·
Install new management and information control systems; and
 
·
Expand, train, and motivate our workforce.
 
If we are unable to manage the expansion of our business effectively, our financial performance will be harmed.
 

8

 
We have limited management staff, and if we lose our key personnel or are unable to attract and retain additional personnel, our business and ability to compete will be harmed.
 
Our success substantially depends upon the continued availability and contributions of our management team.  Due to the complexity of our proposed products and services, heavy reliance will also be placed on the skills and talents of engineering and technical personnel.  Important factors that could cause the loss of key personnel include:

 
·
We do not have employment agreements with a majority of our key engineering and technical personnel; and
 
·
We do not maintain key-person life insurance on any of our employees: the death, incapacity, or other loss of key personnel, or an inability to attract qualified personnel in a timely manner, could cause an adverse impact on our technology and product development and harm our ability to execute our business plan in a timely manner.

We proposed to recruit a significant number of additional executives and personnel to support our various departments such as, sales, marketing, administrative, customer support, and research and development over the next 12 months, including a vice president of marketing.  The recruitment of qualified executives and personnel for various departments is highly competitive in our industry.  This has been demonstrated by a recent significant shortage of persons possessing the requisite managerial or technical background to manage and/or support a similar company, or to sell, support, and develop similar products effectively.  If we cannot attract sufficient number of qualified personnel, our business will not be able to grow.  Competition for skilled personnel is intense, and we may not be able to attract, assimilate, or retain highly qualified personnel in the future.  These problems may be intensified in the foreign markets in which we intend to operate, and the absence of a pool of qualified and talented persons in any of these foreign markets could significantly hamper our foreign operations, which is expected to comprise a significant segment of business.

If we fail to protect our intellectual property rights adequately, we could lose these rights and our business may be seriously harmed.

Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and intellectual property rights.  We rely on a combination of patent, trademark, trade secret, copyright law, and contractual restrictions to protect the proprietary aspects of our technology and to distinguish our products from those of our competitors.  The use by others of our proprietary rights could materially harm our business.  Any future applications may not result in the issuance of any patent or trademarks.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.  Patent, trademark, copyright and trade secret laws, and confidentiality and other contractual provisions afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage.  We will face numerous risks in protecting our intellectual property rights, including the following:

9

 
 
·
Any patents that we are granted may be challenged or invalidated by our competitors;
 
·
Any pending applications we may have for intellectual property protection may not issue, or if issued, may not provide meaningful protection for related products or proprietary rights;
 
·
We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees, consultants, and advisors;
 
·
The laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States, and mechanisms for enforcement of intellectual property rights may be inadequate in foreign countries;
 
·
Our competitors may produce competitive products or services that do not unlawfully infringe upon our intellectual property rights; and
 
·
We may be unable to successfully identify or prosecute unauthorized uses of our technology.

Our means of protecting our proprietary rights may prove to be inadequate and competitors may independently develop similar or superior technology.  Policing unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology.  We may have to file law suits in the future in order to attempt to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others.  Any such litigation would be expensive to prosecute and resolve and would require a significant investment of our management’s time, as well as financial resources.  Furthermore, we intend to sell our products and services internationally.  The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States.  In addition, we may decide not to seek patent and other intellectual property protections in certain foreign countries.  In countries where we do not seek such protection, products incorporating our technology may be lawfully produced and sold without a license.

We may be sued by third parties for allegedly infringing on their proprietary rights.

Our success and ability to compete also depends on our ability to operate without infringing upon the proprietary rights of others, and third parties may claim infringement by us of their intellectual property rights.  Companies that participate in the various segments of the non-destructive testing industry in which we will compete hold a large number of patents, trademarks, and copyrights, and are frequently involved in litigation based on allegations of patent infringement or other violations of intellectual property rights.  Currently, we cannot assure investors that our products do not infringe issued patents or other intellectual property rights of others, and we may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the patents, trademarks, and other intellectual property rights of others by us or our licensees in connection with their use of our products.  Because a patent application in the United States is not publicly disclosed unless and until a patent is issued, there may be applications that we do not know about that may have been filed and that relate to our products.  In addition, we expect that product developers will be increasingly subject to infringement claims as the number of products and

10


competitors in our industry segment grows and the functionality of products in different industry segments begins to overlap.

Intellectual property disputes frequently involve highly complex and costly scientific matters, and each party generally has the right to seek a trial by jury, which adds additional costs and uncertainties.  Accordingly, intellectual property contests, with or without merit, could be costly and time consuming to litigate or settle, and could divert management’s attention away from executing our business plan.  In addition, our technology and products may not be able to withstand any third-party claims or rights against their use.  If we were unable to obtain any necessary license following a determination of infringement or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign or reengineer our products to avoid infringing a third party’s patent rights and could be required to temporarily or permanently discontinue licensing our products.  If we failed to redesign or reengineer our products successfully or in a timely fashion, or otherwise fail to address any infringement issues successfully, we will be forced to incur significant costs and could be prevented from selling or licensing our products.  As a result, our business would be harmed.

We must expand our sales force and our network of distribution partners in order to successfully sell our products and services.

In order to sell our products and services, we will rely on our team of internally trained direct sales force.  We have not yet begun to hire and train direct sales personnel, and to the extent we have begun to develop direct sales channels to date, we have relied upon our existing management.  We will need to obtain additional financing in order to invest significant resources to create and expand our direct sales force.  There are no assurances that we will be successful in expanding our direct sales force nor are there any assurances that our revenues will increase correspondingly with the expansion of our direct sales force.  If we fail to raise additional financing, we will not be able to establish and maintain a direct sales force and our revenues will suffer.

As a significant portion of our business strategy, we are counting on our ability to develop relationships with government lobbyists, purchasing agents and contractors.  Accordingly, we will be dependent upon these entities to assist in promoting acceptance of our products.  If we fail to establish relationships with government representatives, we will have to devote substantially more of our own resources to the sales and marketing, implementation, and support of our products than we would otherwise.  In many cases, these parties have extensive relationships with potential customers and will be able to influence the decisions of these customers.  We will have to rely upon these entities for recommendations of our products during the evaluation stage of the purchasing process, as well as for implementation and training services.  A number of our actual and potential competitors operate more mature businesses than we do, and thus have strong and long-standing relationships with lobbyists, purchasing agents and contractors.  As a result, these entities may be more likely to recommend such competitors’ products and services.  In addition, such competitors all have relationships with a greater number of lobbyists, purchasing agents and contractors than we currently have (or expect to have in the foreseeable future) and thus have access to a broader base of customers.

11


Our failure to establish or maintain these relationships would significantly harm our ability successfully to sell our products.  In addition, we will need to rely on the industry expertise and reach of these firms.  Therefore, this failure would also harm our ability to develop industry-specific products.  We plan to invest significant resources to develop these relationships.  Our operating results could be adversely affected if these efforts do not generate revenues necessary to offset this investment.

We will rely exclusively on third party manufacturers and suppliers, and losing any of these could harm our business.

We depend on the performance of certain selected third parties for product manufacturing and supplies to complement our services.  We currently do not have any written agreements with any of these third party contract manufacturers or suppliers.  As such, unless we enter into such contracts with these third party vendors in the future, they could terminate their relationships with us at any time and it would take several months to find suitable substitutes or replacements.  If we were to lose any of our contract manufacturers or suppliers, or if any disruption were to occur to the operations of any of their facilities, whether because of labor difficulties, destruction of or damage to property, severe weather conditions, or other reasons, our business would be harmed.  We typically do not maintain sufficient inventory to allow it to fill customer orders without interruption during the time that would be required to obtain an alternate supplier, and we do not maintain business interruption insurance to cover the occurrence of such events.

We will depend on the ability of our manufacturers to adhere to our product, price and quality specifications and scheduling requirements.  Contract manufacturers frequently experience shortages of supply and could reduce capacity allocated to us on a relatively short notice.  Any delay by a manufacturer in supplying finished products to us would significantly hurt our ability to deliver products in a timely and competitive manner.  In addition, our ability to introduce new products into the market will depend significantly upon the ability of our manufacturers to incorporate any design changes we wish to introduce.  In addition, if any of these third party manufacturers or suppliers requires any design changes to our products, we could experience manufacturing delays and lower customer acceptance of our products.

Our market is highly competitive and we may not be able to compete effectively.

Our market is intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants.  In our market, we will compete against different companies in several market segments, all of which are intensely competitive.  We are in the non-destructive testing (NDT) industry and provide products and services primarily to local, state and federal government agencies, but can also sell our products and services to other companies.

We face competition from a number of traditional non-destructive testing companies, all of whom have developed or are developing technologies, products, and services that will compete with ours.  All of our potential competitors are better capitalized than we are and currently enjoy substantial competitive advantages, including:

12

 
  · Greater name recognition;
  · Longer operating history;
 
·
More developed distribution channels;
  · A more extensive customer base;
  · Greater knowledge of our target market;
  · Broader product and service offerings;
  · Greater resources for competitive activities, such as research and development, strategic acquisitions, alliances, joint ventures, sales and marketing, and lobbying industry, and government standards;
  · Greater manufacturing resources; and
  · More sales people, technicians and engineers.
 
As a result, our competitors may be able to respond more quickly to evolving industry standards and changes in customer requirements, or to devote greater resources to the development, promotion, and sale of their products than we can.

Although we believe that our products will compete favorably on these factors, our market is relatively new and is developing rapidly.  We may not be able to maintain any competitive position against current and potential competitors, especially those with significantly greater financial, marketing, services, technical, and other resources.  We cannot assure you that we will be able to compete successfully in the market.

We may not be able to improve our technology, products, and services or develop new technology, products, and services that are acceptable to our customers or the changing market.

All of our future plans contemplate our remaining in the non-destructive testing industry and focusing substantially all of our efforts on developing non-destructive testing products for infrastructures.  This market is characterized by:

 
·
Rapid technological change;
 
·
Frequent new product introductions and enhancements;
 
·
Changing financial resources of customers;
 
·
Evolving industry standards; and
 
·
Product obsolescence.

To the extent that the U.S. economy undergoes dramatic changes or that other factors have a severe impact on the industry as a whole, it is likely that such events would have an even greater impact proportionately on us.  In addition, the technological life cycles of our products are difficult to estimate and may vary across customer market segments.

Our existing products will be rendered obsolete if we do not introduce new products or product enhancements that meet new customer demands, support new standards, or integrate with new or upgraded versions of packaged applications.  Our future success will depend on our ability to enhance our existing technology, products, and services and to develop acceptable new

13


technology, products, and services on a timely basis.  The development of enhanced and new technology, products, and services is a complex and uncertain process requiring high levels of innovation, highly-skilled engineering, and development personnel and the accurate anticipation of technological and market trends.  We may not be able to identify, develop, market, or support new or enhanced technology, products, or services on a timely basis, if at all.  Furthermore, any new technology, products, and services may never gain market acceptance, and we may not be able to respond effectively to evolving customer demands, technological changes, product announcements by competitors, or emerging industry standards.  Any failure to respond to these changes or concerns would likely prevent our technology, products, and services from gaining market acceptance or maintaining market share.

Risks Related to this Offering
 
Compliance with Sarbanes-Oxley and other new corporate governance and accounting requirements will require us to incur increased material costs, and the failure to comply with such requirements will expose us to investigations and sanctions by regulatory authorities.
 
We face recently adopted corporate governance requirements under the Sarbanes-Oxley Act of 2002 (“SOX”), including new rules and regulations subsequently adopted by the Securities and Exchange Commission and the Public Company Accounting Oversight Board.  These laws, rules and regulations continue to evolve and may become more stringent in the future.
 
SOX in particular has required changes in the corporate governance, securities disclosure, auditing and compliance practices of public companies.  Compliance with these numerous new rules and listing standards related to SOX is likely to increase our general and administrative costs, and such expenses may increase in the future.  In particular, we will be required to include the management and auditor reports on internal controls as part of our annual report for our year ending December 31, 2007 under Section 404 of SOX.  We are in the process of evaluating our internal control systems in order to report and attest as required by SOX and to provide reasonable assurance that our public disclosure will be accurate and complete.  We cannot be certain as to the timing of the completion of our evaluation, testing and remediation actions or the impact these may have on our operations.  Moreover, there is no available precedent by which to measure adequacy of SOX compliance.  If we are unable to properly implement the requirements relating to internal controls, financial reporting or other SOX provisions, we could become subject to sanctions or investigation by regulatory authorities including the Securities and Exchange Commission.  Any such action could materially harm our reputation, financial condition and the value and liquidity of our securities.  We anticipate that SOX and rules and regulations related to SOX will increase legal and financial compliance costs and make our corporate governance activities more difficult, time-consuming and costly.
 
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which could result in current and potential shareholders losing confidence in our financial reporting, which would harm our business and the trading price of our securities.
 

14


Effective internal controls are necessary for us to provide reliable and timely financial reports and detect and effectively prevent fraud.  If we are unable to provide reliable financial reporting or we fail to prevent fraud, our business reputation and results of operations would suffer substantial harm.  Lack of effective internal controls could also cause investors and stock analysts to lose confidence in our reported financial information, which would have a negative effect on the trading prices of our securities.  We have already identified the following weaknesses in our internal control over financial reporting which we must spend time and money to remediate:
 
1.         We do not yet have written documentation of our internal control policies and procedures.  Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act and will be applicable to us for the year ending December 31, 2008.  Our President and Chief Financial Officer evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and have concluded that the control deficiency that resulted represented a material weakness.

2.         We do not have sufficient segregation of duties within accounting functions, which is a basic internal control.  Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.  Our President and Chief Financial Officer evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and have concluded that the control deficiency that resulted represented a material weakness.

3.         We had a significant number of audit adjustments last fiscal year.  Audit adjustments are the result of a failure of the internal controls to prevent or detect misstatements of accounting information.  The failure could be due to inadequate design of the internal controls or to a misapplication or override of controls.  Our President and Chief Financial Officer evaluated the impact of our significant number of audit adjustments last year and have concluded that the control deficiency that resulted represented a material weakness.

On November 27, 2007, our President and Chief Financial Officer concluded that in valuing previous periods’ non-cash security transactions, we utilized discounts to the respective share’s trading prices as well as its derivative liabilities which they have determined are without foundation.

As a result of this evaluation and conclusion, our President and Chief Financial Officer in conjunction with our Board of Directors, concluded that previously issued consolidated financial statements included in our Annual Reports on Form 10-KSB for the fiscal years ended December 31, 2005 and December 31, 2006, as well as all of our quarterly reports on Form 10-QSB during the 2005 and 2006 fiscal years, could no longer be relied upon.  We amended and restated our financial statements to eliminate all discounts and refiled our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006 and its Form 10-QSB for the quarters ended March

15


31, 2007 and June 30, 2007.  The net effect of the restatements was an increase of our accumulated deficit at June 30, 2007 from $100,909,477 to $292,944,478.
 
Our President and Chief Financial Officer have discussed this matter with our current independent registered public accounting firm.
 
To remediate the material weaknesses in our disclosure controls and procedures identified above, in addition to working with our independent auditors, we must continue to refine our internal procedures to begin to implement segregation of duties and to reduce the number of audit adjustments.
 
The public market for our common stock has been very limited and subject to significant fluctuations and low trading volume, and accordingly the price of our securities could be volatile and decline materially, resulting in a substantial loss of your investment in us.
 
The over-the-counter trading market for our common stock has been limited and subject to frequent fluctuations.  There is no assurance an active trading market for any of our securities will emerge or be sustained, which could affect your ability to sell your securities and could depress the market prices of your securities.  The stock market in general, and the market for securities of early-stage companies in particular, has been extremely volatile.  Accordingly, the market price of our securities is likely to be volatile, and investors in our securities may experience a decrease in their value including a decline unrelated to our operating performance or prospects.
 
The price of our securities is subject to wide fluctuations in response to a number of factors including those listed in this “Risk Factors” section.  Low volume or lack of demand for our securities will make it more difficult for you to sell common stock at favorable prices relative to those you paid for our securities.  You may never be able to resell our common stock at a favorable price or at a favorable time.
 
Any substantial issuance of our shares of common stock pursuant to our outstanding stock options, warrants and convertible preferred stock or notes will result in dilution to existing shareholders and could cause the market price of our securities to decline.
 
We have reserved 101,802,382 shares of our common stock available for issuance incident to any exercises or conversions of our currently outstanding stock options, warrants, and convertible preferred stock and notes, including 28,050,200 shares of common stock which are being registered pursuant to this prospectus.  Future material issuances of these shares may reduce our earnings per share and dilute the percentage ownership of existing shareholders, which could harm the market price and value of our securities.
 
We will continue to be controlled by our current shareholders, who may have material interests different than those of our new shareholders from this Offering.
 
Our current management and principal shareholders beneficially own approximately 99% of our outstanding common stock.  To the extent our current shareholders vote similarly, they will for
 

16


the foreseeable future be able to exercise control over many substantial matters requiring approval by our board of directors or shareholders, including election of all members of our board of directors, control of our management and corporate policies, and the outcome of business combinations or other significant corporate transactions including prevention of a change of control that may be beneficial to other shareholders.  This ownership also gives our current management and principal shareholders the ability to control any significant corporate transaction if they vote together as a group.
 
Substantial sales of our securities after this Offering could cause the prices of our securities to decline materially.
 
We cannot predict the effect, if any, that future sales of our outstanding common stock, or even the availability of our common stock for sale, will have on the market prices of our securities prevailing from time to time.  Sales of substantial amounts of our common stock in the public market following this Offering, or the perception that such sales may occur, could harm prevailing market prices of our securities and impair our ability to raise additional equity capital.
 
Our common stock is deemed to be a “penny stock” and it is more difficult for investors to resell our common stock.
 
Our common stock is a “penny stock” as defined under the Securities Exchange Act of 1934.  Trading of our common stock is subject to penny stock regulations of the SEC that may limit a stockholder’s ability to buy and sell our common stock.
 
The penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers or “accredited investors” who generally include persons with high net worth or high incomes.  Prior to conducting a transaction in a penny stock, the broker-dealer must deliver a risk disclosure document in a form prescribed by the SEC that provides information on penny stocks and the nature and risks involved in the penny stock market.  The broker-dealer also must provide other relevant information to the customer as well as making a specific written determination that the penny stock is a suitable investment for the customer and receiving the customer’s written agreement to the transaction.
 
These penny stock requirements could reduce the number of potential investors and level of trading activity for our securities, which could adversely affect investor interest in our securities, limit the marketability of our common stock, and impair the ability of broker-dealers to trade our securities effectively.
 
Limited Access to the Over-the-Counter Bulletin Board Service could disrupt your ability to trade our securities.

Our common stock is quoted on the over-the-counter electronic Bulletin Board.  Because there are no automated systems for negotiating trades on the Bulletin Board service, they are conducted via telephone.  In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders.  Therefore, when investors place market orders – an order to buy or sell a specific number of shares at the current

17


market price – it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and its execution.

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this prospectus and in the documents we incorporate by reference that are not purely historical statements discuss future expectations, contain projections of results of operations or financial condition or state other forward-looking information.  Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements.  The “forward-looking” information is based on various factors and was derived using numerous assumptions.  In some cases, you can identify these so-called forward-looking statements by words like “may,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” or “potential” or the negative of those words and other comparable words.  You should be aware that those statements only reflect our predictions.  Actual events or results may differ substantially.  Important factors that could cause our actual results to be materially different from the forward-looking statements are disclosed under the heading “Risk Factors” in this prospectus.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results.

All forward-looking statements, express or implied, included in this prospectus and the documents we incorporate by reference and attributable to us are expressly qualified in their entirety by this cautionary statement.  This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or any persons acting on our behalf may issue.

Forward-looking statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
 
 
 
 

18


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions.  The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under “Risk Factors” beginning on page 3 and elsewhere in this prospectus.

Overview

We research and develop technologies that detect and measure metal fatigue.  We have developed two products: (1) the Fatigue Fuse; and (2) the Electrochemical Fatigue Sensor.  We generate very little revenue from the sale and licensing of our products, and thus we are a development stage company. 

Our biggest challenge is funding the commercialization of our products until we can generate sufficient revenue to support our operations.  We try to keep our overhead low and utilize outside consultants as much as possible in order to reduce expenses, and thus far we have been successful in raising enough capital through loans and financing to fund operations.  For the foreseeable future, we plan to continue to raise capital in this manner.

Our consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.  We have sustained operating losses since our inception (October 21, 1983).  In addition, we have used substantial amounts of working capital in our operations.  Further, at September 30, 2008, the deficit accumulated during the development stage amounted to approximately $332,547,374. 

In view of these matters, realization of a major portion of the assets in the accompanying consolidated balance sheet is dependent upon our ability to meet our financing requirements and the success of our future operations.  During 2007, we received approximately $4,000,000 in private financing, primarily from the sale of equity and debt securities.  Thus far in 2008, we have received approximately $1,090,000 in private financing, also primarily from the sale of equity and debt securities.  We plan to continue to raise funds through the sale of our securities for the foreseeable future.  In addition in 2007, we received contracts to inspect certain bridges with nine states which generated gross revenue of approximately $201,917.  Thus far in 2008, we have received contracts to inspect certain bridges with four entities which generated gross revenue of approximately $30,359.  We have begun marketing our current technologies while continuing to develop new methods and applications.  We will need to raise additional capital to finance future activities and no assurances can be made that current or anticipated future sources of funds will enable us to finance future operations.  In light of these circumstances, substantial doubt exists about our ability to continue as a going concern.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of

19


recorded assets or liabilities that might be necessary should we be unable to continue as a going concern.

Results of Operations for the Nine Months Ended September 30, 2008 as Compared to the Nine Months Ended September 30, 2007 (unaudited)

Revenues and Loss from Operations

Our revenue, research and development costs, general and administrative expenses, and loss from operations for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 are as follows:

   
Nine Months
Ended
September 30, 2008
   
Nine Months
Ended
September 30, 2007
   
Percentage
Change
 
Revenue   $ 30,359     $ 146,745       (79.31 )%
Research and Development costs     423,428       3,533,343       (88.02 )%
General and Administrative expenses   $ 26,619,102     $ 82,608,673       (67.78 )%
Loss from operations   $ (27,042,530 )   $ (85,995,271 )     (68.55 )%
 
Our revenues were derived exclusively from bridge testing.

Of the $423,428 in research and development costs for the nine months ended September 30, 2008, $237,530 was incurred in salaries to our in-house engineering staff which included an officer and director, $146,998 was paid to outside consultants and for related expense reimbursements, and we valued the issuance of 150,000 shares of our common stock that were issued to various consultants at $34,500.  Of the $423,428 in research and development costs, $4,400 was compensation expense recognized on the granting of options to our staff to purchase a total of 400,000 shares of our common stock at a price per share of $0.011.

Of the $3,533,343 in research and development costs for the nine months ended September 30, 2007, $131,221 was incurred in salaries to our in-house engineering staff which included an officer and director, $257,022 was paid to outside consultants and for related expense reimbursements, and we valued the issuance of 2,116,000 shares of our common stock that were issued to various consultants at $3,145,100.

General and administrative expenses were $26,619,102 and $82,608,673, respectively, for the nine months ended September 30, 2008 and 2007.  The major expenses incurred during each of the quarters were:
 
 
20

 
   
Nine Months
Ended
September 30, 2008
   
Nine Months
Ended
September 30, 2007
 
Consulting services   $ 4,999,837     $ 16,506,521  
Officers’ salaries     351,002       207,916  
Officer’s stock based compensation     19,887,533       45,000,000  
Office salaries     108,100       66,756  
Office expense     63,167       66,480  
Professional fees     680,927       856,463  
Rent      24,648       23,004  
Marketing     182,474       335,706  
Impairment loss     -       19,294,875  
Payroll taxes     38,395       44,717  
Travel      82,173       104,659  
Insurance     51,997       30,208  
Telephone     16,696       19,740  
 
Of the $4,999,837 in consulting expense for the nine months ended September 30, 2008, $3,586,240 was related to the issuance of 11,099,167 shares of common stock.  In addition, in exchange for the payment of $1,100,000 in consulting fees by holders of convertible debt, we charged $1,100,000 in consulting fees through an increase in convertible debt of the same amount.  Of the $16,506,521 in consulting expense for the nine months ended September 30, 2007, $13,288,767 was related to the issuance of 8,650,424 shares of common stock.  Of the $$856,463 in professional fees for the nine months ended September 30, 2007, $655,300 was related to the issuance of 1,800,000 shares of common stock.
 
Other Income and Expenses and Net Loss

Our gain on modification of convertible debt, modification of research and development sponsorship agreement, loss on subscription receivables, interest expense, other-than-temporary impairment of marketable securities, change in fair value of derivative and warrant liabilities, loss on settlement of lawsuits, and net loss for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 are as follows:

   
Nine Months Ended
September 30, 2008
   
Nine Months Ended
September 30, 2007
   
Percentage
 Change
 
Interest expense    $ (1,808,697 )   $ (2,014,161     (10.20 )%
Loss on modification of Convertible debt   $ (964,730   $ -       -0-  
Net unrealized and realized loss of marketable securities   $ -     $ (10,866,553 )     -0-  
 
21

 
Change in fair value of derivative and warrant liabilities   $ 10,431,555     $ 14,505,323       (28,08 )%
Interest income   $ 15,879     $ 35,270       (54.98 )%
Provision for income taxes     (800 )     (800     0 %
Net loss   $ (19,338,972 )   $ (84,336,192     77.07 %
 
Our interest expense includes amortization of debt discounts totaling $1,497,618 during the nine months ended September 30, 2008 and $1,765,110 during the nine months ended September 30, 2007.  The change in fair value of derivative and warrant liabilities represents the change in derivative values related to warrants and convertible debt with Palisades Capital, LLC and Golden Gate Investors, Inc.

Results of Operations for the Year Ended December 31, 2007 as Compared to the Year Ended December 31, 2006 (audited)

Introduction

In 2007, we had revenues from bridge testing.  Our revenues for 2007 totaled $201,917.  We continued to fund the majority of our operations through the issuance of our stock, resulting in large expenses in the areas of research and development and consulting.  The amount of cash used in our operations was approximately $2,664,630 in 2007 compared to approximately $1,779,256 in 2006.  We anticipate that we will continue to fund a substantial portion of our operations through the sale of our securities until such time as we can begin to generate substantial revenue from the sale of our products, and we do not have an estimate of when such revenues will begin.

Revenues and Loss from Operations

Our revenue, research and development costs, general and administrative expenses, and loss from operations for the year ended December 31, 2007 as compared to the year ended December 31, 2006 are as follows:

   
Year Ended
 December 31,
 2007
   
Year Ended
 December 31,
 2006
   
Percentage
 Change
 
Revenue
  $ 201,917     $ 39,446       411.89 %
Research and development costs
    3,701,966       902,446       310.21 %
General and administrative expenses
    98,557,943       138,892,926       (29.04 )%
Loss from Operations
  $ (73,396,581 )   $ (177,884,101 )     (58.74 )%

Our revenues for both 2007 and 2006 were derived exclusively from bridge testing.
 

22


Of the $3,701,966 in research and development costs for 2007, $197,005 was incurred in salaries to our in-house engineering staff which included an officer and director, $359,861 was paid to outside consultants and for related expense reimbursements, and we valued the issuance of 2,116,000 shares of our common stock that were issued to various consultants at $3,145,100.  Of the $1,013,969 in research and development costs for 2006, $111,523 was incurred in salaries to our in-house engineering staff which included an officer and director, $ 271,279 was paid to outside consultants and for related expense reimbursements, and we valued the issuance of 36,028 shares of our common stock that were issued to various consultants at $631,167.

General and administrative expenses were $98,557,943 and $138,781,403, respectively, for the years ended December 31, 2007 and 2006.  The major expenses incurred during each of the years were:

   
Year Ended
December 31,
2007
   
Year Ended
December 31,
2006
 
Consulting services
  $ 16,855,747     $ 125,332,072  
Officer’s salary
    284,916       211,574  
Officer’s stock based compensation
    60,048,000       6,575,342  
Secretarial salaries
    132,754       114,561  
Professional Fees
    1,053,280       974,704  
Office expense
    97,459       52,855  
Rent
    139,173       28,176  
Impairment loss
    19,294,875       1,913,445  
Payroll taxes
    42,334       28,255  
Telephone
    27,929       17,375  

Of the $16,855,747 in consulting expense for the year ended December 31, 2007, $12,394,888 was related to the issuance of 8,926,724 shares of common stock.  In addition, we charged $1,100,000 in consulting fees through an increase in convertible debt of $1,100,000 and charged $2,845,000 to consulting in connection with the acquisition of shares of Rocket City Automotive. Of the $125,332,072 in consulting expense for the year ended December 31, 2006, $124,543,689 was related to the issuance of 35,021,248 shares of common stock. 

Other Income and Expenses and Net Loss

Our gain on modification of convertible debt, modification of research and development sponsorship agreement, loss on subscription receivables, interest expense, other-than-temporary impairment of marketable securities, change in fair value of derivative and warrant liabilities, loss on settlement of lawsuits, and net loss for the year ended December 31, 2007 as compared to the year ended December 31, 2006 are as follows:
 
 
23


   
Year Ended
December 31,
2007
   
Year Ended
December 31,
2006
   
Percentage
 Change
 
Gain on modification of convertible debt
  $ -0-     $ 1,033,479       (100 )%
Interest expense
    (2,374,032 )     (1,625,592 )     46.04 %
Net unrealized and realized loss of marketable securities
    (3,986,553 )     (3,798,516 )     4.95 %
Change in fair value of derivative and warrant liabilities
    34,962,617       (33,780,874 )     (196.5 )%
Interest income
    60,179       37,120       62.12 %
Other
    -0-       7,008       (100 )%
Provision for income taxes 
    (800 )     (800 )        
Net loss
  $ (73,396,581 )   $ (177,884,101 )     (58.74 )%

Our loss of the gain on modification of convertible debt of $1,033,479 from 2006 is related to our modification of the Palisades debt and removal of associated derivative liability.    Our interest expense includes amortization of debt discounts totaling $2,041,213 in 2007 and $968,716 in 2006.  The change in fair value of derivative and warrant liabilities represents the change in derivative values related to warrants and convertible debt with Palisades and Golden Gate.

Liquidity and Capital Resources

Introduction

During the nine months ended September 30, 2008, as with the nine months ended September 30, 2007, we did not generate positive cash flow.  As a result, we funded our operations through the private sale of equity and debt securities, the issuance of our securities in exchange for services, and loans.

Our cash, investments in marketable securities held for trading, investments in marketable securities available for sale, accounts receivable, prepaid services, prepaid expenses and other current assets, total current assets, total assets, total current liabilities, and total liabilities as of September 30, 2008, as compared to September 30, 2007, were as follows:

   
September 30,
2008
   
September 30,
2007
 
Cash    $ 441,076     $ 987,284  
Marketing securities                
   - trading    $ -     $ 453,181  
Marketing securities                
   - available for sale   $ -     $ 120,000  
Investment in certificates of deposit   $ -     $ 1,107,681  
 
24

 
Accounts receivable    $ 15,620     $ -  
Inventories   $ 156,054     $ -  
Prepaid expenses and other   $ 70,423     $ 204,501  
Total current assets   $ 683,173     $ 2,872,647  
Total assets   $ 1,128,852     $ 2,928,147  
Total current liabilities   $ 965,775     $ 524,057  
Total liabilities   $ 6,737,797     $ 34,171,450  
 
Cash Requirements

For the nine months ended September 30, 2008, our net cash used in operations was $(2,381,825) compared to $(2,450,964) for the nine months ended September 30, 2007. 

Negative operating cash flows during the nine months ended September 30, 2008 were primarily created by a net loss from operations of $(19,338,972), offset by the issuance of stock for services of $4,729,541, amortization of discount on convertible debentures of $1,497,617 and an increase in officer stock based compensation of $19,885,333.  There was also a decrease in the fair value of derivative and warrant liabilities of $(10,431,555), accrued interest on debt of $272,077, net decrease in other assets of $19,961 and net decrease in other liabilities of $19,443.

Negative operating cash flows during the nine months ended September 30, 2007 were primarily created by a net loss from operations of $(84,336,192), offset by impairment losses of $19,294,877 incurred in connection with the acquisition of a subsidiary, the issuance of stock for services of $19,519,168, amortization of discount on convertible debentures of $1,765,110, a decrease in the fair value of derivative and warrant liabilities of $(14,505,323), an increase in accounts payable and accrued expenses of $(14,942), an increase in officer stock based compensation of $45,000,000 and a net increase in other assets of $(40,215).  There was also a decrease in the fair value of derivative and warrant liabilities of $14,505,323.  Because of our need for cash to fund our continuing research and development, we do not have an opinion as to how indicative these results will be of future results.

Sources and Uses of Cash

Net cash provided by (used in) investing activities for the nine months ended September 30, 2008 and 2007 were $1,282,833 and $(865,333), respectively.  For the nine months ended September 30, 2008 and 2007, the net cash came primarily from the sale of securities and maturities of other investments in the amount of $1,865,000 and $537,174, respectively, offset by the amount for purchase of securities of $(565,000) and $(1,952,038), respectively.  Net cash from investment activities during the quarter ended September 30, 2008 and 2007 were further decreased by $17,167 and $50,469, respectively, for amounts we paid in the purchase of property and equipment.

Net cash provided by financing activities for the nine months ended September 30, 2008 and 2007, was $730,358 and $4,174,285, respectively.  For the nine months ended September 30, 2008, the net cash used pertained to the purchase of 207,000 shares of our common stock still

25


held in treasury totaling $3,266 and an increase in the amount of indebtedness of $1,115,000.  In addition, during the nine month ended September 30, 2008, the Company received $18,624 through the issuance of 77,600 shares of its common stock.  For the nine months ended September 30, 2007, the net cash came primarily from the sale of common stock and warrants of $4,079,935 and proceeds from convertible debentures and other notes payable of $200,000.

We are not generating sufficient cash flow from operations to fund growth.  We cannot predict when we will begin to generate revenue from the sale of our products, and until that time, we will need to raise additional capital through the sale of our securities.  If we are unsuccessful in raising the required capital, we may have to curtail operations.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  In consultation with our Board of Directors, we have identified the following accounting policies that we believe are key to an understanding of our financial statements.  These are important accounting policies that require management’s most difficult, subjective judgments.

The first critical accounting policy relates to revenue recognition.  Income from our research is recognized at the time services are rendered and billed.

The second critical accounting policy relates to research and development expense.  Costs incurred in the development of our products are expensed as incurred.

The third critical accounting policy relates to the valuation of non-monetary consideration issued for services rendered. We value all services rendered in exchange for our common stock at the quoted price of the shares issued at date of issuance or at the fair value of the services rendered, which ever is more readily determinable.  All other services provided in exchange for other non-monetary consideration is valued at either the fair value of the services received or the fair value of the consideration relinquished, whichever is more readily determinable.

Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services ” and EITF 00-18, Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees.”  The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete.  In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.  In accordance to EITF 00-18, an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified as an offset to equity on

26


the grantor’s balance sheet once the equity instrument is granted for accounting purposes.  Accordingly, we record the fair value of nonforfeitable common stock issued for future consulting services as prepaid services in our consolidated balance sheet.

The fourth critical accounting policy is our accounting for conventional convertible debt.  When the convertible feature of the conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (BCF”).  We record a BCF as a debt discount pursuant to EITF Issue No. 98-5 (EITF 98-05), Accounting for Convertible Securities with Beneficial Conversion Features or Contingency Adjustable Conversion Ratio,” and EITF Issue No. 00-27, Application of EITF Issue No. 98-5 to Certain Convertible Instrument(s).”   In those circumstances, the convertible debt will be recorded net of the discount related to the BCF.  We amortize the discount to interest expense over the life of the debt using the effective interest method.

The fifth critical account policy relates to the accounting for non-conventional convertible debt and the related stock purchase warrants.  In the case of non-conventional convertible debt, we bifurcate our embedded derivative instruments and record them under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,” as amended, and EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”  These embedded derivatives include the conversion feature, liquidated damages related to registration rights and default provisions.  The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date.  In addition, under the provisions of EITF Issue No. 00-19, as a result of entering into the non-conventional convertible debenture, we are required to value and classify all other non-employee stock options and warrants as derivative liabilities at that date and mark them to market at each reporting date thereafter.  Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date.  If the fair value of the derivatives is higher at the subsequent balance sheet date, we will record a non-operating, non-cash charge.  If the fair value of the derivatives is lower at the subsequent balance sheet date, we will record non-operating, non-cash income.  We value our derivatives primarily using the Black-Scholes Option Pricing Model.  The derivatives are classified as long-term liabilities.

The sixth critical accounting policy relates to the recording of marketable securities held for trading and available-for-sale.  Marketable securities purchased with the intent of selling them in the near term are classified as trading securities.  Trading securities are initially recorded at cost and are adjusted to their fair value, with the change in fair value during the period included in earnings as unrealized gains or losses.  Realized gains or losses on dispositions are based upon the net proceeds and the adjusted book value of the securities sold, using the specific identification method, and are recorded as realized gains or losses in the consolidated statements of operations.  Marketable securities that are not classified as trading securities are classified as available-for-sale securities.  Available-for-sale securities are initially recorded at cost.  Available-for-sale securities with quoted market prices are adjusted to their fair value, subject to an impairment analysis (see below).  Any change in fair value during the period is excluded from earnings and recorded, net of tax, as a component of accumulated other comprehensive income (loss).  Any decline in value of available-for-sale securities below cost that is considered to be

27


other than temporary is recorded as a reduction of the cost basis of the security and is included in the statement of operations as a write down of the market value (see below).

The seventh critical accounting policy is our accounting for the fair market value of non-marketable securities we have acquired.  Non-marketable securities are originally recorded at cost.   In the case of non-marketable securities we acquired with our common stock, we value the securities at a significant discount to the stated per share cost based upon our historical experience with similar transactions as to the amount ultimately realized from the sale of the shares.  Such investments are reduced when we have indications that a permanent decline in value has occurred.  At such time as quoted market prices become available, the net cost basis of these securities will be reclassified to the appropriate category of marketable securities.  Until that time, the securities will be recorded at their net cost basis, subject to an impairment analysis (see below).

In accordance with the guidance of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, we assess any decline in value of available-for-sale securities and non-marketable securities below cost as to whether such decline is other than temporary.  If a decline is determined to be other than temporary, the decline is recorded as a reduction of the cost basis of the security and is included in the statement of operations as an impairment write down of the investment.
 
 
 
 
 
 
 
 

28


Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Effective September 11, 2007, KMJ/Corbin and Company, LLP (“KMJ”) resigned as our independent registered public accounting firm for the fiscal year ended December 31, 2007.

We engaged KMJ on January 21, 2005.  For the last two fiscal years, KMJ’s reports on our financial statements did not contain an adverse opinion or a disclaimer of opinion, nor were the reports qualified or modified as to audit scope, or accounting principles, but they were modified as to uncertainty about our ability to continue as a going concern.  For the last two fiscal years and any subsequent interim period preceding the dismissal, there were no disagreements with KMJ on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of KMJ would have caused KMJ to make reference to the matter in their reports.

We engaged Weinberg & Company, P.A. (hereinafter “Weinberg”) as our principal accountants to audit our financial statements effective as of September 11, 2007.  Effective November 5, 2007, we dismissed Weinberg as our independent registered public accounting firm for the fiscal year ended December 31, 2007.  Weinberg never issued a report on our financial statements.  During their engagement, there were no disagreements with Weinberg on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Weinberg would have caused Weinberg to make reference to the matter in their reports.

We engaged Kabani & Company, Inc. (hereinafter “Kabani”) as our principal accountants to audit our financial statements effective as of November 5, 2007.  Effective March 13, 2008, we dismissed Kabani as our independent registered public accounting firm for the fiscal year ended December 31, 2008.  Kabani’s services were limited to a review of our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007.  During their engagement, there were no disagreements with Kabani on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Kabani would have caused Kabani to make reference to the matter in their reports.

We engaged Gruber & Co. LLC (hereinafter “Gruber”) as the principal accountants to audit our financial statements effective as of March 13, 2008.  We, during our most recent fiscal year and any subsequent interim period to the date hereof, did not have discussions nor have we consulted with Gruber regarding the following: (i) the application of accounting principles to a specified transaction, either completed or proposed or the type of audit opinion to be rendered on the our financial statements, and neither a written report was provided to us nor oral advice was provided that Gruber concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matters that were the subject of a “disagreement,” as that term is defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of Regulation S-B, or a reportable event.


29


DESCRIPTION OF BUSINESS

Development of Business

We were formed as a Delaware corporation on March 4, 1997.  We are the successor to the business of Material Technology, Inc., a Delaware corporation, also doing business as Tensiodyne Scientific, Inc.  Material Technology, Inc. was the successor to the business of Tensiodyne Corporation that began developing the Fatigue Fuse in 1983.  Our two predecessors, Tensiodyne Corporation and Material Technology, Inc. were engaged in developing and testing our Fatigue Fuse and, beginning in 1993, developing our Electrochemical Fatigue Sensor.  We changed our name from Material Technologies, Inc. to Matech Corp. on October 3, 2008.

Our Business

Over the last several years, we were engaged in research and development of metal fatigue detection, measurement, and monitoring technologies.  We have now developed several monitoring devices for metal fatigue detection and measurement.  We are currently marketing our technology.

Our efforts have been dedicated to developing devices and systems that indicate the true status of fatigue damage in a metal component.  We have developed two products.  The first is a small, simple device that continuously integrates the effect of fatigue loading in a structural member, called a Fatigue Fuse.  The second is an instrument that detects very small growing fatigue cracks in metals, the Electrochemical Fatigue Sensor.  The Electrochemical Fatigue Sensor has demonstrated in the laboratory that it can detect cracks as small as 10 microns (0.0004 inches), which we believe is smaller than any other practical crack detection technology.  The Company holds the patents on the Fatigue Fuse and the license on the technology on the Electrochemical Fatigue Sensor from the University of Pennsylvania and licenses both of those technologies to us.

We have completed the technology to the point where we are now performing real world bridge inspections.   

The Federal Highway Administration (FHA) has signed a $347,500 contract with us to purchase equipment and training as part of their Steel Bridge Testing Program.  They will use our EFS system in the laboratory and on actual bridges to find growing fatigue cracks.  Following the completion of this program, the FHA will recommend technologies for use on bridges for specific bridge problems.

Our on-call contract with the Pennsylvania Department of Transportation (PennDOT) is continuing to produce good results.  We have used the EFS on 12 bridges in Pennsylvania so far, totaling over $100,000.  We anticipate further work orders to be issued for the next inspection season.  We have also received interest from several inspection companies in Pennsylvania to purchase EFS equipment, as well as training and licensing, in order to execute these further work orders, with licensing fees payable to us for each bridge inspected.  One such company has already been trained at their cost to help us execute on-call contracts in 2008.

30


We completed a contract with Massachusetts (MassHighway) for $24,290.  We then met with MassHighway representatives who hired us to conduct additional bridge inspections during 2008.

New York State contracted with us to provide EFS inspection services on a high profile fracture critical bridge for $9,630.  As a result of this initial inspection for the New York State Department of Transportation, we will be performing a follow up inspection.  Additionally, they are evaluating purchase of equipment, training for their engineers, and licensing in 2008.

We have completed an inspection of a fracture critical bridge in West Sacramento, California, and are also in the process of analyzing and reporting the results.  At the same time we have met with several high-ranking state and national officials in California, with more meetings planned, all discussing the use of EFS across the state.

We have also formed a strategic alignment with a California-based independent testing laboratory called Smith Emery Company.  Smith Emery Company is over 100 years old and has over 400 employees in California as well as an office in China.  They perform weld testing, building façade testing, and metallurgical failure analysis.  Engineers and technicians have already been trained at their cost to execute contracts in the western U.S. region.

We have signed a contract with the Canadian National Railway to inspect a bridge in Wisconsin.  The Canadian National Railway owns a number of bridges in the United States.

We have completed and sent PennDOT a report on the nine bridges we inspected in Pennsylvania.  We hope to meet with PennDOT in the near future to discuss the use of EFS on their remaining steel bridges.

We have been invited by the U.S. Army Corps of Engineers to present at the U.S. Secretary of Defense’s office on May 1 and 2, 2008.  The U.S. Army Corps of Engineers owns all of the bridges over U.S. federal waterways.

We have scheduled inspections in 2008 for the following entities so far:

 
·
Virginia Department of Transportation
 
·
Canadian National Railway
 
·
Alabama Department of Transportation
 
·
MassHighway
 
·
New York Department of Transportation

We have been hired to perform inspections with the following entities which have not yet been scheduled:

 
·
New Jersey Department of Transportation
 
·
PennDOT
 
·
Union Pacific Railroad

31


 
·
URS Engineers

Our Technologies

The Fatigue Fuse

The Fatigue Fuse is designed to be affixed to a structure to give warnings at pre-selected percentages of the fatigue life that have been used up (i.e., how close to failure the structure has progressed).  It warns against a condition of widespread generalized cracking due to fatigue.

The Fatigue Fuse is a thin piece of metal similar to the material being monitored.  It consists of a series of parallel metal strips connected to a common base, much as fingers are attached to a hand.  Each “finger” has a different geometric pattern, called “notches,” defining its boundaries.  Each finger incorporates an application-specific notch near the base.  By applying the laws of physics and fracture mechanics to determine the geometric contour of each notch, the fatigue life of each finger is finite and predictable.  When the fatigue life of a finger (Fuse) is reached, the Fuse breaks.

By implementing different geometry for each finger notch in the array, different increments of fatigue life are observable.  Typically, notches will be designed to facilitate observing increments of fatigue life of 10% to 20%.   By mechanically attaching or bonding these devices to different areas of the structural member of concern, the Fuse undergoes the same fatigue history (strain cycles) as the structural member.  Therefore, breakage of a Fuse indicates that an increment of fatigue life has been reached for the structural member.  The notch and the size and shape of the notch concentrate energy on each finger.  The Fuse is intimately attached to the structural member of interest.  Therefore, the Fuse experiences the same strain and wear history as the member.  Methods are available for remote indication of Fuse fracturing.

In a new structure, we generally assume there is no fatigue and can thus design the Fatigue Fuse for 100% of its life potential.  But in an existing structure, one that has experienced loading and wear, we must determine the fatigue status of that structural member so we can design the Fatigue Fuse to monitor the remaining fatigue life potential.

We believe that the Fatigue Fuse is of value in monitoring aircraft, ships, bridges, conveyor systems, mining equipment, cranes, etc.  Little special training is needed to qualify individuals to report any broken segments of the Fatigue Fuse to the appropriate engineering authority for necessary action.  The success of the device is contingent upon our successful marketing of the Fatigue Fuse, and no assurance can be given that we will be able to overcome the obstacles relating to introducing a new product to the market.  To implement our ability to produce and market the Fatigue Fuse, we need substantial additional capital and no assurance can be given that this needed capital will be available.

The Electrochemical Fatigue Sensor (EFS”)

The EFS is a device that employs the principle of electrochemical/mechanical interaction of metals under repeated loading to find growing cracks.  It is an instrument that detects very small

32


cracks and has the potential to determine crack growth rates.  The Electrochemical Fatigue Sensor has demonstrated in the laboratory that it can detect cracks as small as 10 microns (0.0004 inches), which we believe is smaller than any other practical technology.  We believe that nothing comparable to this instrument currently exists in materials technology.  We have inspected approximately 33 bridges to date using this technology.

The EFS functions by treating the location of interest (the target) associated with the structural member as an electrode of an electrochemical cell (similar to a battery).  By imposing a constant voltage-equivalent circuit as the control mechanism for the electrochemical reaction at the target surface, current flows as a function of stress action.  The EFS is always a dynamic process; therefore stress action is required, e.g., to measure a bridge structural member it is necessary that cyclic loads be imposed, such as normal traffic on the bridge would do.  The results are a specific set of current waveforms and amplitudes that characterize and indicate fatigue damage i.e., growing fatigue cracks.

Status of our Technologies

Currently, our primary focus is on the commercialization of the EFS.

Status of the EFS

Within the past twelve months, we have successfully used EFS on 18 highway and railroad bridges.  We are now actively marketing the EFS for bridges.

Status of the Fatigue Fuse

To date, certain organizations have included our Fatigue Fuse in test programs.  We have already completed the tests for welded steel civil bridge members conducted at the University of Rhode Island.  In 1996, Westland Helicopter, a British firm, tested the Fatigue Fuse on helicopters.  That test was successful with the legs of the Fatigue Fuses failing in sequence as predicted. At the present time, we are applying Fatigue Fuses to several portable aluminum bridges for the U.S. Army.

The Fatigue Fuse has been at this stage for the past several years as we have not had the necessary financial resources to finalize our development and commence marketing.  At the present time we have elected to defer future development of the Fatigue Fuse and apply our resources to pursue the EFS technology.

Commercial Markets for our Products and Technologies

Our technology is applicable to many market sectors such as bridges and aerospace as well as ships, cranes, railways, power plants, nuclear facilities, chemical plants, mining equipment, piping systems, and heavy iron.

 

33


Application of Our Technologies for Bridges
 
Our EFS and Fatigue Fuse products primarily address the detection of fatigue in structures such as bridges.  In the United States alone, there are more than 610,000 bridges of which over 260,000 are rated by the Federal Highway Administration as requiring major repair, rehabilitation, or replacement.  Our EFS and Fatigue Fuse products can be effectively used as fatigue detection devices for all metal bridges located within the United States.  Our detection devices also address maintenance problems associated with bridge structures.

Although there are normal business imperatives, the bridge market is essentially macro-economically and government policy driven.  In our opinion, only technology can provide the solution.  The need for increased spending accelerates significantly each year as infrastructure ages.  The Federal government has mandated bridge repair and detection through the passage of the Intermodal Surface Transportation and Efficiency Act in 1991 and again in the $200 billion, 1998 Transportation Equity Act.  We have completed several contracts to install our fatigue detection products on bridge structures within the United States, and are in negotiations for several others.

Our Patent Protections

We have the following patent protection on our technology through either ownership or license as indicated:

Title
Patent Number
Our Status
Expiration Date
Device for Monitoring Fatigue Life
4,590,804
Owner by assignment
12/31/2014
Method of Making a Device for Monitoring Fatigue Life
4,639,997
Owner by assignment
12/31/2015
Metal Fatigue Detector
5,237,875
Owner by assignment
12/31/2011
Device for Monitoring the Fatigue Life of a Structural Member and a Method of Making Same
5,319,982
Owner by assignment
12/31/2012
Device for Monitoring the Fatigue Life of a Structural Member and a Method of Making Same
5,425,274
Owner by assignment
12/31/2014
Methods and Devices for Electrochemically Determining Metal Fatigue Status
5,419,201
Licensee
12/31/2013
Methods and Devices for Electrochemically Determining Metal Fatigue
6,026,691
Licensee
12/31/2015

 

34


Our Patents are Encumbered
 
The patents described in the preceding section are pledged as collateral to secure the repayment of loans extended to us or indebtedness that we currently owe.  On August 30, 1986, we entered into a funding agreement with the Advanced Technology Center, whereby ATC paid $45,000 to us for the purchase of a royalty of 3% of future gross sales and 6% of sublicensing revenue.  The royalty is limited to the $45,000 plus an 11% annual rate of return.  The payment of future royalties was secured by equipment we used in the development of technology as specified in the funding agreement, however, no lien against our equipment or our patents in favor of ATC vested until we generated royalties from product sales.

On May 4, 1987, we entered into a funding agreement with ATC whereby ATC provided $63,775 to us for the purchase of a royalty of an additional 3% of future gross sales and 6% of sublicensing revenue.  The agreement was amended August 28, 1987, and as amended, the royalty cannot exceed the lesser of (1) the amount of the advance plus a 26% annual rate of return or, (2) total royalties earned for a term of 17 years.  As with our first agreement with ATC, no lien or encumbrance against our assets, including our patents, vested in favor of ATC until we generated royalties from product sales.

On September 28, 2006, we entered into an agreement with Ben Franklin Technology, the successor to ATC, to give Ben Franklin 3,334 shares of our common stock, valued at $40,000, in exchange for a general release of the above liabilities.

On May 27, 1994, we borrowed $25,000 from Sherman Baker, one of our shareholders.  We gave Mr. Baker a promissory note due May 31, 2002 and we pledged our patents as collateral to secure the repayment of this note.  As of December 31, 2007, there is a first priority security interest in our patents as collateral for the repayment of the amounts we owe to Mr. Baker.  As additional consideration for this loan, we granted to Mr. Baker a 1% royalty interest in the Fatigue Fuse and a 0.5% royalty interest in the Electrochemical Fatigue Sensor.  We are in default of the repayment terms of the note held by Mr. Baker, and at December 31, 2007, we owe Mr. Baker $56,761 in principal and accrued interest.  Mr. Baker has not taken any action to foreclose his interest in the collateral and we are in discussions with Mr. Baker, with the expectation that we will cure any default in the note he holds and avoid any foreclosure of his security interest held in our patents.  We believe that although we have not yet cured our defaults on the loans to Mr. Baker, our current communications with him suggest that Mr. Baker does not have the present intention of foreclosing on the patents as collateral or the pursuit of legal action against us to collect the balance due under our note.
 
On July 31, 2008, we issued a $1,000,000 10% convertible debenture to Kreuzfeld Ltd.  Also on July 31, 2008, we entered into a Security Agreement with Kreuzfeld Ltd. whereby we granted Kreuzfeld Ltd. a security interest in our assets, including all of our patents.  See "Description of Securities to be RegisteredConvertible Debentures."
 
Distribution of our Products

Subject to available financing, we have and continue to exhibit the Electrochemical Fatigue Sensor, and to a lesser extent the Fatigue Fuse, at various trade shows and intend to also market our products directly to end users including certain state regulatory agencies charged with overseeing bridge maintenance, companies engaged in manufacturing and maintaining large ships and tankers, and the military.  Although we intend to undertake marketing, dependent on the availability of funds, within and without the United States, no assurance can be given that any such marketing activities will be implemented.

35


Competition

Other technologies exist which identify cracks which may be the result of fatigue damage.  Single cracks larger than a minimum size can be found by nondestructive inspection methods such as dye penetrant, radiography, eddy current, acoustic emission, and ultrasonics.  Tracking of load and strain history, to subsequently estimate fatigue damage by computer processing, is possible with recording instruments such as strain gauges and counting accelerometers.  These methods have been used for over 40 years and also offer the advantage of having been accepted in the market, whereas our products remain largely unproven.  Companies marketing these alternate technologies include Magnaflux Corporation, Kraut-Kramer-Branson, Dunegan-Endevco, and Micro Measurements.  These companies have more substantial assets, greater experience, and more resources than us, including, but not limited to, established distribution channels and an established customer base.  The familiarity and loyalty to these technologies may be difficult to dislodge.  Because we are still in the development stage, we are unable to predict whether our technologies will be successfully developed and commercially attractive in potential markets.

Employees

We have six full-time employees.  In addition, we retain consultants on an independent contractor basis for specialized work.

Description of Property

We lease an office at 11661 San Vicente Blvd., Suite 707, Los Angeles, California, 90049.  The space consists of 830 square feet and will be adequate for our current and foreseeable needs.  The total rent is payable at $2,582 per month on a month-to-month basis.  Either party may cancel the lease on 30 days notice.

Legal Proceedings

Stephen Beck

In July 2002, we settled a lawsuit related to a contract dispute with Mr. Stephen Beck.  In March 2006, Mr. Beck filed a lawsuit against us alleging breach of contract related to the lawsuit settlement and sought monetary damages, plus the issuance of shares of our common stock plus interest.

In December 2006, we entered into a settlement and release agreement, as well as irrevocable escrow instructions, to settle the lawsuit Mr. Beck filed in March 2006.  As consideration under the settlement, we issued 5,000,000 shares of our common stock to Mr. Beck, with the shares to be held by an escrow agent and distributed to Mr. Beck monthly with a trading limit equal to 8% of the previous month’s trading volume of our common stock, until Mr. Beck received a total of $800,000.  As Mr. Beck received proceeds from the sale of his shares into the market and 7.5% (net of any expenses incurred by us) of any cash raised by us from the sale of equity, we would reduce our guarantee by that amount.  We have paid a total of $285,182 to Mr. Beck in cash as

36


part of the settlement.   Mr. Beck also had anti-dilution rights on those shares to maintain his percentage ownership through September 27, 2008.  We issued another 5,000,000 shares to Mr. Beck to be held in escrow until the conditions were met with respect to the anti-dilution shares.  As of the date of this prospectus, we have issued a total of 1,393,617 shares of common stock to Mr. Beck pursuant to the anti-dilution provision in the settlement arrangement.  In or about February 2008, Mr. Beck reached the $800,000 guarantee from the sale of our common stock and the cash received from us for 7.5% of the capital we raised.  Therefore, as of the date of this prospectus, we have no further liability to Mr. Beck.

On September 12, 2007, we filed a complaint for declaratory relief against Mr. Beck in the Superior Court of the State of California, County of Los Angeles, Central Judicial District, seeking a judicial determination as to the respective rights and duties of us and Mr. Beck with respect to certain terms and conditions of the settlement agreement and escrow instructions.

On February 7, 2008, we filed a first amended complaint in our action against Mr. Beck for declaratory relief which now also seeks to have the settlement agreement and escrow instructions rescinded.  On March 6, 2008, Mr. Beck filed a cross-complaint against us and Robert M. Bernstein, our President and a Director, for breach of contract, specific performance, declaratory relief, conversion, intentional interference with contract (against Mr. Bernstein only) and, in the alternative, equitable restitution.  Trial is scheduled for February 2, 2009.

Gem Advisors, Inc., GEM Global Emerging Markets, and Global Emerging Markets of North America, Inc.

On June 15, 2005, we filed a Complaint in the Los Angeles Superior Court, State of California, case number BC336689, against Gem Advisors, Inc., GEM Global Emerging Markets, and Global Emerging Markets of North America, Inc., seeking a declaration regarding certain agreements we entered into with the parties.  We did not seek monetary damages.  On November 16, 2005, Gem Advisors, Inc. filed an Answer and Cross-Complaint, seeking approximately $1.9 million in damages arising out of finders fees for certain transactions.  On November 30, 2005, default judgments were entered against the other defendants who failed to respond to our Complaint.  In September 2006, this case was dismissed as to all parties because the parties thought they could agree on the terms of a written settlement agreement.  However, the parties failed to reach a settlement and no formal settlement agreement was ever executed.

On November 30, 2007, Gem Advisors, Inc. filed a lawsuit against us, Robert M. Bernstein, and Lawrence I. Washor (who represented us in the lawsuit against Gem Advisors, Inc. filed on June 15, 2005), for breach of contract (settlement), breach of contract (for transfer to Gem Advisors, Inc. of 585,000 shares we held in another company), breach of covenant of good faith and fair dealing, and fraud and deceit – promise made without intention to perform (the only cause of action asserted against Robert M. Bernstein and Lawrence I. Washor).  Gem Advisors, Inc. sought damages in excess of $250,000. On April 10, 2008, the court dismissed Lawrence I. Washor from the lawsuit.  On October 9, 2008, we agreed to a settlement with the plaintiffs that, in exchange for dismissal of the lawsuit, we will pay the plaintiffs the total sum of $250,000 as follows: (1) $15,000 by November 30, 2008; (2) $5,000 per month each month thereafter; and (3) a percentage of any net funds received for any equity or debt instrument sold, including any funds received from Robert M. Bernstein from the sale of his stock, to reduce the $250,000 Settlement amount, as follows: (i) 5% up to the first $2,000,000 received, (ii) 4% for amounts received between $2,000,001 to $4,000,000, and (iii) 3% of all amounts received over $4,000,000.

37


MANAGEMENT

Directors and Executive Officers

The following table sets forth the names, positions, and ages of our current directors and executive officers.  Our executive officers are appointed by the Board of Directors.  The directors serve one-year terms until their successors are elected.  The executive officers serve until their death, resignation or removal by the Board of Directors.  Unless described below, there are no family relationships among any of the directors and officers, and none of our officers or directors serves as a director of another reporting issuer.

Name
Age
Position(s)
     
Robert M. Bernstein
74
Chief Executive Officer, President, Chief Financial Officer, Director
 Officer and Chairman of the Board (1988)
Marybeth Miceli Newton  
31
Chief Operating Officer
Joel R. Freedman
47
Secretary and Director
William I. Berks
77
Vice President and Director
Brent Phares
36
Chief Engineer

Robert M. Bernstein, President, CEO, Chief Financial Officer, and Director.  Mr. Bernstein received a Bachelor of Science degree from the Wharton School of the University of Pennsylvania in 1956.  From August 1959 until his certification expired in August 1972, he was a Certified Public Accountant licensed in Pennsylvania.  From 1961 to 1981, he was a consultant specializing in mergers, acquisitions, and financing.  From 1981 to 1986, Mr. Bernstein was Chairman and Chief Executive Officer of Blue Jay Enterprises, Inc. of Philadelphia, Pennsylvania, an oil and gas exploration company.  In December 1985, Mr. Bernstein formed a research and development partnership for our company, funding approximately $750,000 for research on the Fatigue Fuse.  In October 1988, Mr. Bernstein became our President, CEO, and Chief Financial Officer.
 
Joel R. Freedman, Secretary and Director.  From October 1989 and continuing through the present, Mr. Freedmen has been our Secretary and a Director.  From 1983 through 1999, Mr. Freedmen was President of Genesis Advisors, Inc., an investment advisory firm in Bala Cynwyd, Pennsylvania.  From January 2000 through December 2002, Mr. Freedmen was a Senior Vice President of PMG Capital Corp., a securities brokerage and investment advisory firm in West Conshohocken, Pennsylvania.  From December 2002 and continuing through the present, Mr. Freedmen has been Senior Vice President of Wachovia Securities, LLC, a securities brokerage and investment advisory firm in Conshohocken, Pennsylvania.
 
William Berks, Vice President and Director.  Mr. Berks joined us as our Vice President and Director in June 1997.  Mr. Berks holds six patents and has over 30 years experience in spacecraft mechanical systems engineering.  Mr. Berks has a Bachelor of Science in Aeronautical Engineering and a Master of Science in Applied Mechanics from Polytechnic Institute of New York, as well as a Master of Science in Industrial Engineering from Stevens Institute of Technology.  Prior to joining us, Mr. Berks was with TRW Incorporated for 26 years

38


in a variety of management positions, where his duties included flight hardware fabrication and testing and where he was responsible for overseeing 350 employees.
 
Marybeth Miceli, Chief Operating Officer.  Ms. Miceli has over 12 years experience in nondestructive evaluation and testing of civil infrastructure.  Ms. Miceli joined us as our Chief Operating Officer in July 2007.  From June 2005 through August 2007, Ms. Miceli was Director of Marketing for Sam Schwartz, LLC, Engineering and Planning Consultants, New York, in the areas of infrastructure management, non-destructive testing, and fatigue testing.  From January 2001 through May 2005, Ms. Miceli was with Lucius Pitkin, Inc., Engineering Consultants, where Ms. Miceli’s responsibilities included Quality Assurance Manager, and Assistant Radiation Safety Officer.  Among Ms. Miceli’s duties was the supervision and performance of failure analysis investigations, fatigue testing investigations, and interfacing with government agencies on testing, regulations, and safety.  Ms. Miceli is currently in the first year of a three year term serving as a director of the American Society of Non-destructive Testing, and Chairman in 2003 of the Metropolitan New York Chapter.  Ms. Miceli is a graduate of Johns Hopkins University and has a Master of Science in Materials Science and Engineering, from Virginia Polytechnic Institute.  Ms. Miceli is a member of the American Society of Metals and has published several papers on non-destructive testing of bridge components and other related subjects.
 
Brent M. Phares, Chief Engineer.  Dr. Phares has over 15 years of management, inspection, research, and testing experience related to bridge structures.  From October 2001 and continuing through the present, Dr. Phares has been the Associate Director for Bridges and Structures at Iowa State University.  In this position, Dr. Phares is responsible for the development and deployment of innovative bridge evaluation and techniques and for the development of applications for innovative materials in bridge engineering.  From June 2001 through October 2004, Dr. Phares served as President and CEO of MGPS, Inc., an engineering firm specializing in the evaluation of civil infrastructure based on innovative sensors and monitoring strategies.  Dr. Phares has served as a consulting Research Engineer at the Federal Highway Administration’s Nondestructive Evaluation Validation Center where he led the execution of several validation and developmental studies.  Dr. Phares is a registered professional engineer and serves as a voting member of many national and international technical committees.  Dr. Phares joined us in June 2007.

Director Independence; Committees of the Board of Directors; Shareholder Communications

We are not required to have independent directors and, accordingly, have not made any determination whether any of our directors are independent using any standard.  We are not required to have and do not have a nominating committee, audit committee, compensation committee, or any other committee of our board of directors.  We do not have a formal process for security holders to send communications to our board of directors, however, security holders may send communications to our contact information listed in all of our filings with the Securities and Exchange and Commission as well as to the contact information listed on our website.

39


Terms of Office

Our directors are appointed for a one year term to hold office until the next annual general meeting of the holders of our Common Stock or until removed from office in accordance with our by-laws.  Our officers are appointed by our board of directors and hold office until removed by our board of directors.

EXECUTIVE COMPENSATION

Summary Compensation Table

Set forth below is a summary of compensation for our principal executive officer and our two most highly compensated officers other than our principal executive officer (collectively, the “named executive officers”) for our last two fiscal years. There have been no annuity, pension or retirement benefits ever paid to our officers, directors or employees.

With the exception of reimbursement of expenses incurred by our named executive officers during the scope of their employment and unless expressly stated otherwise in a footnote below, none of the named executive officers received other compensation, perquisites and/or personal benefits in excess of $10,000.

Name and Principal Position
 
Year
   
Salary ($)
   
Bonus ($)
   
Stock Awards ($)
   
Option Awards ($)
   
Non-equity Incentive Plan Compen-sation ($)
   
All Other Compen-sation ($)
   
Total ($)
 
Robert M. Bernstein, CEO, President, CFO
 
2007
    $ 250,000     $ -0-     $ -0-     $ -0-     $ -0-     $ -0-     $ 250,000  
   
2006
    $ 206,500     $ -0-     $ 180,000,000 3   $ -0-     $ -0-     $ -0-     $ 180,206,500  
Marybeth Miceli Newton, COO
    2007 4   $ 52,083.33     $ -0-     $ -0-     $ -0-     $ -0-     $ -0-     $ 52,083.33  
Brent Phares, Chief Engineer
    2007 5   $ 65,625     $ -0-     $ -0-     $ -0-     $ -0-     $ -0-     $ 65,625  

 


3 Shares redeemed by Company on May 6, 2008 in exchange for 30,000,000 options exercisable at 110% of fair market value.
4 Joined us July 6, 2007.
5 Joined us June 1, 2007.

40

 
Employment Agreements
 
On October 1, 2006, we entered into an Employment Agreement with Robert M. Bernstein, our Chief Executive Officer, President and Chief Financial Officer, which provides certain terms and conditions with respect to Mr. Bernstein’s employment.  The Employment Agreement is for a three year term.  Under the Employment Agreement, Mr. Bernstein will be paid an annual salary of $250,000, with one year of paid severance if he is terminated without good cause prior to the expiration of the employment term.

Other Compensation

There are no annuity, pension or retirement benefits proposed to be paid to officers, directors, or employees of our company in the event of retirement at normal retirement date as there was no existing plan as of December 31, 2007 provided for or contributed to by our company.

Director Compensation

Our directors are not compensated for their services, but are entitled for reimbursement of expenses incurred in attending board of directors meetings.

Grants of Plan Based Awards

There were no grants of plan based awards made in 2007.

Outstanding Equity Awards at Fiscal Year-End

There were no outstanding equity awards for our executive officers as of December 31, 2007.

On April 18, 2006, our Board of Directors approved the 2006 Non-Qualified Stock Grant and Option Plan (the 2006 Plan”) with 100,000 shares of our common stock available for issuance under the plan.  The plan offers selected employees, directors, and consultants an opportunity to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees.  As of the date of this prospectus, we have issued all 100,000 shares of common stock under the 2006 Plan.

On December 1, 2006, our Board of Directors approved the 2006/2007 Non-Qualified Company Stock Grant and Option Plan (the 2006/2007 Plan”) with 3,000,000 shares of our common stock available for issuance under the plan.  The plan offers selected employees, directors, and consultants an opportunity to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees.  As of the date of this prospectus, we have not issued any options or shares of common stock under the 2006/2007 Plan.
 
On April 22, 2008, our Board of Directors approved the 2008 Incentive and Nonstatutory Stock Option Plan (the “2008 Plan”) with 100,000,000 shares of our common stock available for issuance under the plan.  On May 23, 2008, our Board of Directors amended the 2008 Plan increasing the number of shares of our common stock available for issuance under the plan to 400,000,000.  On December 4, 2008, our Board of Directors amended the 2008 Plan decreasing the number of shares of our common stock available for issuance under the plan to 30,400,000.  The 2008 Plan offers selected employees, directors, and consultants an opportunity
 
 
to acquire our common stock, and serves to encourage such persons to remain employed by us and to attract new employees.  On December 4, 2008, our Board of Directors amended the 2008 Plan decreasing the number of shares of our common stock available for issuance under the 2008 Plan to 30,400,000.  As of the date of this prospectus, we have issued 30,000,000 stock options to employees under the 2008 Plan.
 
Indemnification of Directors and Officers

The laws of the State of Delaware and our Bylaws provide for indemnification of our directors for liabilities and expenses that they may incur in such capacities.  Under the laws of the State of Delaware and our bylaws, directors and officers are indemnified with respect to actions taken in good faith in a manner reasonably believed to be in, or not opposed to, our best interests, and with respect to any criminal action or proceeding, actions that the indemnitee had no reasonable cause to believe were unlawful.  Additionally, on November 17, 2006, we entered into an indemnification agreement with each of our directors.  Under the terms of the indemnification agreements, we agreed to indemnify each director to the fullest extent permitted by law if the director was or is a party or threatened to be made a party to any action or lawsuit by reason of the fact that he is or was a director.  The indemnification shall cover all expenses, penalties, fines and amounts paid in settlement, including attorneys’ fees.  A director will not be indemnified for intentional misconduct for the primary purpose of his or her own personal benefit.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers or control persons pursuant to the foregoing provisions, we are informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
 
 
 
 
 
 

42


DESCRIPTION OF SECURITIES TO BE REGISTERED

Common Stock
 
We are authorized to issue 600,000,000 shares of common stock with a par value of $0.01 per share.  As of the date of this prospectus, there are 22,390,410 shares of common stock outstanding, which are held of record by approximately 1,729 stockholders.
 
The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders.  Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose.  In the event of our liquidation, dissolution, or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.  The common stock has no preemptive or conversion rights or other subscription rights.  There are no redemption or sinking fund provisions applicable to the common stock.

Warrants

On August 29, 2008, we issued the following warrants to purchase shares of our common stock which are being registered herein:

Number of Warrants
Exercise Price
Expiration Date
6,200,200
$0.20
September 18, 2009
5,850,000
$0.20
September 18, 2011
6,000,000
$0.10
September 15, 2009

Convertible Debentures

On July 31, 2008, we issued a $1,000,000 10% convertible debenture to Kreuzfeld Ltd. (the “Debenture”).  Interest on the Debenture is payable quarterly and may be paid in either cash or in shares of our common stock, valued at 50% of the average closing price of our common stock on the ten trading days immediately prior to such share issuance, at our option.  All or any portion of the amounts due under the Debenture, which matures on December 31, 2011, may be converted at any time, at the option of Kreuzfeld Ltd., into shares of our common stock at a conversion price equal to the lesser of (i) 50% of the average closing price of our common stock for the ten trading days immediately preceding the conversion date, or (ii) $0.10.  On August 6, 2008, we entered into a Registration Rights Agreement with Kreuzfeld Ltd. pursuant to which we agreed to file a registration statement with the SEC registering the shares issuable upon the Debenture’s conversion.
 

43


MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock is quoted on the OTC Bulletin Board under the symbol MTCH.  The following table sets forth the high and low bid prices per share of common stock for the last two fiscal years.  These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

   
High
   
Low
 
Fiscal year ended December 31, 2006:
           
First quarter
  $ 0.29     $ 0.09  
Second quarter
  $ 0.35     $ 0.08  
Third quarter
  $ 0.10     $ 0.03  
Fourth quarter
  $ 13.80     $ 0.03  
  
               
Fiscal year ended December 31, 2007:
               
First quarter
  $ 3.70     $ 0.41  
Second quarter
  $ 1.65     $ 1.01  
Third quarter
  $ 1.97     $ 0.55  
Fourth quarter
  $ 0.75     $ 0.40  
                 
Nine months ended September 30, 2008
               
First quarter
  $ 0.95     $ 0.02  
Second quarter
  $ 0.03     $ 0.002  
Third quarter
  $ 0.002     $ 0.001  

The closing price of our common stock on December 9, 2008 was $2.10.

Holders
 
As of the date of this prospectus, we had 22,390,410 shares of our Class A common stock issued and outstanding and held by approximately 1,729 holders of record.  The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.  The transfer agent for our Class A common stock is Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.
 
Dividends

We have never declared or paid any cash dividends on our common stock.  We do not anticipate paying any cash dividends to stockholders in the foreseeable future.  In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant.

44


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding our shares of outstanding common stock beneficially owned as of the date hereof by (i) each of our directors and executive officers, (ii) all directors and executive officers as a group, and (iii) each other person who is known by us to own beneficially more than 5% of our common stock based upon 22,390,410 shares of Class A common stock outstanding.
 

 
Name and Address of
Beneficial Owners1
Class A Common Stock
Class B Common Stock
Amount and Nature of
Beneficial Ownership
Percent Ownership
of Class2
Amount and Nature of
Beneficial Ownership
Percent Ownership
of Class
Robert M. Bernstein, President, CEO, CFO, and Director
30,000,0723
57.3%
597,0004
99.5%
William Berks, Vice President and Director
2,520
*
0
0%
Joel R. Freedman, Secretary and Director
3,505
*
0
0%
Marybeth Miceli, Chief Operating Officer
2,040
*
0
0%
Brent Phares, Chief Engineer
3,313
*
0
0%
All executive officers and directors as a group (five persons)
30,011,450
57.3%
597,000
99.5%
Delana International, Inc.
38 Ru de la Faiencerie L-1510
Luxembourg
1,500,000
6.7%
0
0%
Bank Julius Baer & Co. Hong Kong
Hohlstrasse 602 CH-B040
Zurich, Switzerland
2,000,0005
8.6%
0
0%
 

1  C/o our address, 11661 San Vicente Blvd., Suite 707, Los Angeles, CA 90049, unless otherwise noted.
2   Except as otherwise indicated, we believe that the beneficial owners of common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.
3  Includes 30,000,000 options to purchase shares of Class A common stock at $0.011 per share expiring on April 22, 2018.
4  Each share of Class B common stock has 2,000 votes on any matter which is brought for shareholders vote.  As a result, Mr. Bernstein holds 1,194,000,000 votes represented by the Class B common stock, and 97.8% of the overall votes.
5  Includes 1,000,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20 per share.

 
Kreuzfeld, Ltd.
c/o RCB, Tegetthoffstrasse 1, 1015
Vienna, Austria
12,550,0006
37.8%
0
0%
Montalcino S.A.
38 Ave de Faiencerie
L-100 Luxembourg
2,000,000
8.9%
0
0%
RBC Dexia Investor Services Bank Luxembourg
Hohlstrasse 602 CH-B040
Zurich, Switzerland
3,562,743
15.9%
0
0%
Anima S.G.R.P.A. Rubrica-Anima America
Via Brera 18 20121
Milano, Italy
4,660,6007
18.9%
0
0%
Cambridge Services
c/o Shirley & Diaz, 45 Street Nueva Urbanizacion Obarrio, Panama City, Panama
5,410,0008
19.8%
0
0%
Rubrica Anima Fondattivo
Via Brera 20121
Milano, Italy
2,277,4009
9.7%
0
0%
Rubrica Anima Fondo Trading
Via Brera 18 20121
Milano, Italy
3,000,00010
12.6%
0
0%
Discover Advisory Company
c/o Horymor Trust Corp. Ltd.,
50 Shirley Street, Nassau, Bahamas
6,100,000
27.2%
0
0%
Continental Advisors S.A.
Corso Alfieri 241 14100 Asti at Italy
6,001,00011
21.4%
0
0%
Palisades Capital, LLC
c/o Corporate Legal Services
2224 Main Street
Santa Monica, CA  90405
14,157,17112
38.7%
0
0%
 
 

6  Includes 10,000,000 shares of common stock underlying $1,000,000 convertible debenture; and 850,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2011 at an exercise price of $0.20 per share.
7 Includes 2,328,750 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20 per share.
8  Includes 5,000,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2011 at an exercise price of $0.20 per share.
9  Includes 1,171,250 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20 per share.
10 Includes 1,500,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20 per share.
11  Includes 6,000,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.10 per share.
12 Consists of 14,157,171 shares of common stock issuable upon conversion of a convertible debenture as of September 30, 2008.

 
Hyde Investments, Ltd.
c/o Corporate Legal Services
2224 Main Street
Santa Monica, CA  90405
21,926,29813
49.5%
0
0%
Livingston Investments, Ltd.
c/o Corporate Legal Services
2224 Main Street
Santa Monica, CA  90405
6,958,48314
23.7%
0
0%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

13 Consists of 21,926,298 shares of common stock issuable upon conversion of a convertible debenture as of September 30, 2008.
14 Consists of 6,958,483 shares of common stock issuable upon conversion of a convertible debenture as of September 30, 2008.

 
47


SELLING SECURITYHOLDERS

All of our shares of common stock offered under this prospectus may be sold by the holders.  We will not receive any of the proceeds from sales of shares offered under this prospectus.  We will receive $0.20 per share from the exercise of 12,050,200 warrants and $0.10 per share from the exercise of 6,000,000 warrants which have been granted to date which have been included in this prospectus.

All costs, expenses and fees in connection with the registration of the selling securityholders’ shares will be borne by us.  All brokerage commissions, if any attributable to the sale of shares by selling securityholders will be borne by such holders.
 
The selling securityholders are offering 19,607,943 shares of our common stock, 18,050,200 shares underlying warrants and 10,000,000 shares issuable upon conversion of debentures pursuant to this prospectus for an aggregate of  48,829,193 shares.  The selling securityholders may sell common stock at market prices during the term of this offering. The selling securityholders are deemed “underwriters” within the meaning of the Act in connection with the sale of their common stock under this prospectus. We will pay the expenses of registering these shares. The selling securityholders are not affiliated with broker-dealers.  The following table sets forth: (a) the name of each person who is a selling securityholder; (b) the number of securities owned by each such person at the time of this offering; and (c) the number of shares of common stock such person will own after the completion of this offering.
 
The column “Shares Owned After the Offering” gives effect to the sale of all the shares of common stock being offered by this prospectus.

   
Shares Owned Prior to the Offering
Shares Owned After the Offering
Selling securityholder
No. of Shares Offered
Number
Percentage
Number
Percentage
Anima S.G.R.P.A. Rubrica Anima America
Via Brera 18 20121
Milano, Italy
4,657,5001
4,660,6002
18.9%
3,100
*
Bank Julius Baer & Co. Hong Kong
Hohlstrasse 602 CH-B040
Zurich, Switzerland
2,000,0003
2,000,0003
8.6%
-0-
0%
Cambridge Services, Inc.
c/o Shirley & Diaz, 45 Street Nueva Urbanizacion Obarrio, Panama City, Panama
5,410,0004
5,410,0004
19.8%
-0-
0%
 

1  Consists of 2,328,750 shares of common stock and 2,328,750 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20.
2 Consists of 2,331,850 shares of common stock and 2,328,750 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20.
3  Consists of 1,000,000 shares of common stock and 1,000,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20.
4  Consists of 410,000 shares of common stock and 5,000,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2011 at an exercise price of $0.20.
 
 
Continental Advisors S.A.
Corso Alfieri 241 14100 Asti at Italy
6,000,0005
6,001,0006
21.4%
1,000
*
Delana International, Inc.
38 Ru de la Faiencerie L-1510 Luxembourg
1,500,000
1,500,000
6.7%
-0-
0%
Discover Advisory Company
c/o Horymor Trust Corp. Ltd., 50 Shirley Street, Nassau, Bahamas
6,100,000
6,100,000
27.2%
-0-
0%
Kreuzfeld Ltd.
c/o RCB, Tegetthoffstrasse 1, 1015
Vienna, Austria
10,850,0007
12,550,0008
37.8%
1,700,000
5.1%
Montalcino S.A.
38 Ave de Faiencerie
L-100 Luxembourg
2,000,000
2,000,000
8.9%
-0-
0%
Patrick Fischli
UBS Einsiedeln 216-509011 S 4 Einsiedeln 8840 Switzerland
300,5009
300,5009
1.3%
-0-
0%
RBC Dexia Investor Services Bank Luxembourg
Hohlstrasse 602 CH-B040
Zurich, Switzerland
3,562,743
3,562,743
15.9%
-0-
0%
Rubrica Anima Fondattivo
Via Brera 20121
Milano, Italy
2,277,40010
2,277,40010
9.7%
-0-
0%
Rubrica Anima Fondo Trading
Via Brera 18 20121
Milano, Italy
3,000,00011
3,000,00011
12.6%
-0-
0%
TOTAL
47,658,943
49,362,243
 
1,704,100
 
 

5  Consists of shares of common stock issuable upon exercise of warrants expiring September 15, 2009 at an exercise price of $0.10.
6 Consists of 1,000 shares of common stock and 6,000,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.10 per share.
7  Consists of 10,000,000 shares of common stock underlying $1,000,000 convertible debenture and 850,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2011 at an exercise price of $0.20.
8 Consists of 1,700,000 shares of common stock; 10,000,000 shares of common stock underlying $1,000,000 convertible debenture; and 850,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2011 at an exercise price of $0.20 per share.
9 Consists of 100,300 shares of common stock and 200,200 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20.
10  Consists of 1,106,150 shares of common stock and 1,171,250 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20.
11  Consists of 1,500,000 shares of common stock and 1,500,000 shares of common stock issuable upon exercise of warrants expiring September 18, 2009 at an exercise price of $0.20.
*Less than 1%.

 
49


PLAN OF DISTRIBUTION

The shares covered by this prospectus may be offered and sold during the term of this offering by the selling securityholders.  The selling securityholders will act independently of us in making decisions with respect to the timing, manner and size of each sale.  The selling securityholders may offer and sell the shares from time at market prices as quoted on the over-the-counter Bulletin Board system throughout the period of the offering.

The selling securityholders may sell their shares through registered broker-dealers by one or more of, or a combination of, the following methods: (a) purchase by a broker-dealer as principal and resale by such broker-dealer for its own account through this prospectus; or (b) ordinary brokerage transactions and transactions in which the broker solicits purchasers.  In offering the shares covered by this prospectus, the selling securityholders and any broker-dealers who execute sales for the selling securityholders are deemed “underwriters” within the meaning of the Act in connection with such sales.  Any profits realized by the selling securityholders and the compensation of any broker-dealer will be deemed to be underwriting discounts and commissions.
 
 
 
 
 
 
 
 
 

50


MATECH CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial Statements and Notes for the Nine and Three Months Ended September 30, 2008 as compared to the Nine and Three Months Ended September 30, 2007 (unaudited)

Financial Statements and Notes for the Year Ended December 31, 2007 as compared to the Year Ended December 31, 2006 (audited)
 
 
 
 
 
 
 
 
 
 
 
 
 

51

 
Financial Statements and Notes for the Nine and Three Months Ended September 30, 2008 as compared to the Nine and Three Months Ended September 30, 2007 (unaudited)
 
 
MATECH CORP.
 
(A Development Stage Company)
 
       
CONDENSED CONSOLIDATED BALANCE SHEET
 
       
   
September 30,
 
   
2008
 
   
(Unaudited)
 
ASSETS
     
       
Current assets:
     
Cash and cash equivalents
  $ 441,076  
Accounts receivable
    15,620  
Inventories
    156,054  
Prepaid expenses and other current assets
    70,423  
         
Total current assets
    683,173  
         
Property and equipment, net
    84,590  
Deferred loan fees
    356,708  
Intangible assets, net
    2,033  
Deposit
    2,348  
         
    $ 1,128,852  

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
MATECH CORP.
     
(A Development Stage Company)
     
       
CONDENSED CONSOLIDATED BALANCE SHEET - Continued
   
       
   
September 30,
 
   
2008
 
   
(Unaudited)
 
LIABILITIES AND STOCKHOLDERS'  DEFICIT
     
       
   Current liabilities:
     
   Accounts payable and accrued expenses
  $ 646,208  
   Current portion of research and development sponsorship payable
    25,000  
   Notes payable - current portion
    294,567  
   Total current liabilities
    965,775  
         
   Accrued legal settlement
    222,852  
   Research and development sponsorship payable, net of current portion
    768,934  
   Convertible debentures and accrued interest payable, net of discounts
    1,280,201  
   Derivative and warrant liabilities
    3,500,035  
      5,772,022  
         
   Total liabilities
    6,737,797  
         
   Minority interest in consolidated subsidiary
    825  
         
   Commitments and contingencies
       
         
   Stockholders' deficit:
       
   Class A preferred stock, $0.001 par value, liquidation preference
       
   of  $720 per share; 350,000 shares authorized; 337 shares issued
       
   and outstanding as of September 30, 2008
    -  
   Class B preferred stock, $0.001 par value, liquidation preference of
       
   $10,000 per share; 15 shares authorized;  none issued and
       
   outstanding as of September 30, 2008
    -  
   Class C preferred stock, $0.001 par value, liquidation preference of
       
   $0.001 per share; 25,000,000 shares authorized; 1,517 shares issued
       
   and outstanding as of September 30,2008
    1  
   Class D preferred stock, $0.001 par value, liquidation preference of
       
   $0.001 per share; 20,000,000 shares authorized; none shares issued
       
   and outstanding as of September 30,2008
    -  
   Class E  convertible preferred stock, $0.001 par value, no liquidation
       
   preference; 60,000 shares authorized; 49,200 shares issued and
       
   outstanding as of September 30,2008
    49  
   Class A Common Stock, $0.001 par value, 600,000,000 shares
       
 
 
        authorized; 205,736,018 shares issued and 186,567,253 shares outstanding
     
        at September 30,2008
    186,567  
     Class B Common Stock, $0.001 par value, 600,000 shares authorized,
       
        issued and outstanding as of September 30,2008
    600  
     Warrants subscribed
    10,000  
     Additional paid-in-capital
    326,742,387  
     Deficit accumulated during the development stage
    (332,547,374 )
     Treasury stock (200,000 shares at cost at September 30, 2008)
    (2,000 )
         
        Total stockholders' deficit
    (5,609,770 )
         
    $ 1,128,852  


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 


MATECH CORP.
 
(A Development Stage Company)
 
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
                           
From October 21, 1983
 
   
For the Three Months Ended
   
For the Nine Months Ended
   
(Inception)
 
   
September 30,
   
September 30,
   
through
 
   
2007
   
2008
   
2007
   
2008
   
September 30, 2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                               
Revenues:
                             
Research and development
  $ -     $ -     $ -     $ -     $ 5,392,085  
Revenue from bridge testing
    80,000       29,269       146,745       30,359       348,983  
Other
    -       -       -       -       274,125  
                                         
Total revenues
    80,000       29,269       146,745       30,359       6,015,193  
                                         
Costs and expenses
                                       
Research and development
    21,266       113,588       3,533,343       423,428       20,986,417  
General and administrative
    20,133,368       773,334       82,608,673       26,619,102       330,114,343  
Modification of research and development sponsorship agreement
    -       -       -       -       5,963,120  
Loss on Settlement of lawsuits
    -       -       -       -       1,267,244  
                                         
Total Costs and expenses
    20,154,634       886,922       86,142,016       27,042,530       358,331,124  
                                         
Loss from operations
    (20,074,634 )     (857,653 )     (85,995,271 )     (27,012,171 )     (352,315,931 )
                                         
Other income (expense):
                                       
Loss on modification of convertible debt
    -       -       -       (964,730 )     (378,485 )
Loss on subscription receivables
    -       -       -       -       (1,368,555 )
Interest expense
    (423,510 )     (831,678 )     (2,014,161 )     (1,808,697 )     (13,548,890 )
 
 
Other-than-temporary impairment of marketable securities available for sale
    (2,310,000 )     -       (10,254,000 )     -       (9,785,947 )
Net unrealized and realized loss of marketable securities
    (335 )             (612,553 )     (8 )     (9,398,226 )
Change in fair value of investments derivative liability
    -       -       -       -       (210,953 )
Change in fair value of derivative and warrant liabilities
    (8,414,694 )     72,975,655       14,505,323       10,431,555       54,018,644  
Interest income
    19,304       356       35,270       15,879       482,761  
Other
    -       -       -       -       (25,992 )
                                         
Other income (expense), net
    (11,129,235 )     72,144,333       1,659,879       7,673,999       19,784,357  
                                         
Income (loss) before provision for income taxes
    (31,203,869 )     71,286,680       (84,335,392 )     (19,338,172 )     (332,531,574 )
                                         
Provision for income taxes
    -       -       (800 )     (800 )     (15,800 )
                                         
Net Income (loss)
  $ (31,203,869 )   $ 71,286,680     $ (84,336,192 )   $ (19,338,972 )   $ (332,547,374 )
                                         
Per share data:
                                       
Basic and diluted net loss per share
  $ (0.25 )   $ 0.41     $ (0.83 )   $ (0.12 )        
                                         
Weighted average Class A common shares outstanding - basic and diluted
    124,276,444       175,239,753       101,671,169       156,873,303          
 
 
 
 
 

 

MATECH CORP.
                 
(A Development Stage Company)
                 
                   
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
   
                   
               
From October 21, 1983
 
   
For the Nine Months Ended
   
(Inception)
 
   
September 30,
   
through
 
   
2007
   
2008
   
September 30, 2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                   
Net income (loss)
  $ (31,203,869 )   $ 71,286,680     $ (332,547,374 )
                         
Other comprehensive loss:
                       
Temporary increase (decrease) in market
                       
   value of securities available for sale
    -               -  
Reclassification to other-than-temporary
                       
   impairment of marketable securities
                       
   available for sale
    -       -       -  
                         
      -       -       -  
                         
Net comprehensive income (loss)
  $ (31,203,869 )   $ 71,286,680     $ (332,547,374 )


 
 
 
 
 
 
 
 
 

 



MATECH CORP.
 
(A Development Stage Company)
 
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                   
               
From October 21, 1983
 
   
For the Nine Months Ended
   
(Inception)
 
   
September 30,
   
through
 
   
2007
   
2008
   
September 30, 2008
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
   
(Restated)
             
                   
Cash flows from operating activities:
                 
Net loss
  $ (84,336,192 )   $ (19,338,972 )   $ (332,547,374 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
(Gain) loss  on modification of convertible debt
    -       964,730       378,485  
Impairment loss
    19,294,877       -       21,391,528  
Loss on charge off of subscription receivables
    -       -       1,368,555  
Issuance of common stock for services
    19,519,168       4,729,541       211,214,381  
Increase in debt for services and fees
    -               4,456,625  
Officer's stock based compensation
    45,000,000       19,885,333       86,460,675  
Issuance of common stock for modification of
                       
   research and development sponsorship agreement
    -       -       7,738,400  
Change in fair value of derivative and warrant liabilities
    (14,505,323 )     (10,431,555 )     (51,783,444 )
Net realized and unrealized loss on marketable securities
    612,553       -       7,895,705  
Other-than-temporary impairment of marketablesecurities available for sale
    10,254,000  <