U.S. SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM________ TO ________
Commission File Number 000-27592
TECH LABORATORIES, INC.
(Exact name of Small Business issuer in its charter)
New Jersey 22-1436279
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
In c/o Anslow & Jaclin, LLP, Attn: Gregg Jaclin
195 Route 9 South, Suite 204, Manalapan, NJ 07726
---------------------------------------------- -----------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (973) 427-5333
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a shell company as defined in
Rule 12b-2 of the Exchange Act.
Yes |_| No |X|
The number of shares of Common Stock, par value $.01 per share, outstanding
as of the latest practicable date: As of November 14, 2005, there were
127,155,216 shares outstanding.
TECH LABORATORIES, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets................................................................... 1 - 2
Statements of Operations ........................................................ 3
Statements of Cash Flows......................................................... 4 - 5
Notes to Financial Statements.................................................... 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 8
Item 3. Controls and Procedures.......................................................... 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 10
Item 2. Changes in Securities............................................................. 10
Item 3. Defaults by the Company Upon its Senior Securities................................ 10
Item 4. Submission of Matters to a Vote of Security Holders............................... 10
Item 5. Other Information................................................................. 10
Item 6. Exhibits and Reports on Form 8-K.................................................. 10
SIGNATURES.......................................................................................... 11
Item 1. Financial Information
BASIS OF PRESENTATION
The accompanying reviewed financial statements are presented in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-QSB and item 310 under subpart A of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
occurring accruals) considered necessary in order to make the financial
statements not misleading, have been included. Operating results for the nine
months ended September 30, 2005 are not necessarily indicative of results that
may be expected for the year ending December 31, 2005. The financial statements
are presented on the accrual basis.
TECH LABORATORIES, INC.
BALANCE SHEETS
ASSETS
September 30, December 31,
2005 2004
(Unaudited)
-------------------- -----------------
Current Assets:
Cash $ 1,436 $ 106,283
Accounts receivable, net of allowance of $1,000 - 10,679
Inventories - 907,030
Prepaid expense 40,625 59,376
-------------------- -----------------
Total current assets 42,061 1,083,368
-------------------- -----------------
Certificate of deposit (restricted) - 36,499
-------------------- -----------------
Property, plant and equipment, at cost
Leasehold improvements - 2,247
Machinery, equipment, and instruments - 608,917
Furniture and fixtures - 109,584
-------------------- -----------------
- 720,748
Less accumulated depreciation and amortization - 442,570
-------------------- -----------------
Net property, plant and equipment - 278,178
-------------------- -----------------
Other - 14,420
-------------------- -----------------
Total Assets $ 42,061 $ 1,412,465
==================== =================
See notes to financial statements.
1
TECH LABORATORIES, INC.
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
September 30, December 31,
2005 2004
(Unaudited)
----------------- -----------------
Current liabilities:
Convertible notes $ 959,627 $ 828,885
Note payable 20,620 34,444
Accounts payable and accrued expenses 242,973 352,457
----------------- -----------------
Total current liabilities 1,223,220 1,215,786
----------------- -----------------
Stockholders' equity:
Common stock, $.01 par value;
195,000,000 shares authorized:
127,155,216 shares issued in 2005;
88,161,612 shares issued in 2004 1,271,552 881,616
Less: 15,191 shares reacquired and held in treasury (113) (113)
----------------- -----------------
1,271,439 881,503
Capital contributed in excess of par value 4,829,634 5,417,562
Accumulated deficit (7,282,232) (6,102,386)
----------------- -----------------
Total stockholders' equity (1,181,159) 196,679
----------------- -----------------
Total liabilities and stockholders' equity $ 42,061 $ 1,412,465
================= =================
See notes to financial statements.
2
TECH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
2005 2004 2005 2004
----------------- ---------------- ------------------ ----------------
Sales $ - $ 167,872 $ 91,280 $ 233,138
----------------- ---------------- ------------------ ----------------
Costs and expenses:
Cost of sales - 92,179 30,557 131,043
Selling, general, and
administrative expense 23,447 181,065 273,514 491,138
----------------- ---------------- ------------------ ----------------
23,447 273,244 304,071 622,181
----------------- ---------------- ------------------ ----------------
Income (loss) from Operations (23,447) (105,372) (212,791) (389,043)
----------------- ---------------- ------------------ ----------------
Other income (expenses):
Other expense (17,614) (8,742) (82,481) (397,383)
Loss on settlement agreement (Note 2) (884,574) - (884,574) -
----------------- ---------------- ------------------ ----------------
(902,188) (8,742) (967,055) (397,383)
----------------- ---------------- ------------------ ----------------
Income (loss) before income taxes (925,635) (114,114) (1,179,846) (786,426)
Provision for income taxes - - - -
----------------- ---------------- ------------------ ----------------
Net income (loss) (925,635) (114,114) (1,179,846) (786,426)
(Accumulated deficit), Beg Qtr. (6,356,597) (5,415,388) (6,102,386) (4,743,076)
----------------- ---------------- ------------------ ----------------
(Accumulated deficit), End Qtr. (7,282,232) (5,529,502) (7,282,232) (5,529,502)
----------------- ---------------- ------------------ ----------------
Net loss per share, basic and diluted $ (0.01) $ - $ (0.01) $ (0.02)
================= ================ ================== ================
Weighted average number of common
shares and equivalents, basic and diluted 139,926,344 65,324,970 119,817,514 46,557,417
================= ================ ================== ================
See notes to financial statements.
3
TECH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------------
2005 2004
------------------ -----------------
Cash flow from (for) operating activities:
Net (loss) from operations $(1,179,846) $ (786,426)
Add (deduct) items not affecting cash:
Depreciation/amortization 9,774 14,661
Loss on settlement agreement 884,574 -
Capitalized interest 30,742 -
Expenses paid with the issuance of stock - 743,741
Changes in operating assets and liabilities
Accounts receivable (862) (94,704)
Inventories (165,312) (206,345)
Accounts payable and accrued expenses 115,348 25,628
Other assets/liabilities 18,751 2,347
------------------ -----------------
Net cash flow for operating activities (286,831) (301,098)
------------------ -----------------
Cash flows from (for) investing activities
Decrease in restricted certificate of deposit 1,364 -
------------------ -----------------
Net cash flow from (for) investing activities 1,364 -
------------------ -----------------
Cash flows from (for) financing activities:
Proceeds of convertible note 160,000 175,000
Proceeds from notes payable 20,620 -
------------------ -----------------
Net cash flow from (for) financing activities 180,620 175,000
------------------ -----------------
Net increase (decrease) in cash (104,847) (126,098)
Cash balance beginning of year 106,283 165,308
------------------ -----------------
Cash balance - end of third quarter $ 1,436 $ 39,210
================== =================
Supplemental schedule of noncash investing and financing activities:
Conversion of debt to common stock $ 60,000 $ 1,538,837
See notes to financial statements.
4
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Tech Laboratories,
Inc. ("the Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with Item 310(b) of Regulation SB. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended,
September 30, 2005 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2005. These unaudited
financial statements should be read in conjunction with the audited
financial statements and footnotes thereto included in the Company's
Form 10-KSB for the year ended, December 31, 2004, as filed with the
Securities and Exchange Commission.
Certain prior year balances have been reclassified to conform to the
current year presentation.
2. SETTLEMENT AGREEMENT AND RELEASE
On July 11, 2005, (the "Effective Date"), the Company finalized a
Settlement Agreement and Release (the "Agreement") with Bernard
Ciongoli and Earl Bjorndal (the "Settlement Parties"). In connection
with the Agreement, Mr. Ciongoli resigned from his positions as
President, Chief Executive Officer, Chief Financial Officer and member
of the Board of Directors of the Company, and agreed to the
cancellation of 17,754,806 of his shares of our common stock. Earl
Bjorndal resigned from his positions as Vice President and member of
the Board of Directors of the Company, and agreed to the cancellation
of 8,044,445 of his shares of our common stock. The parties agreed to
the transfer of all of the Company's assets, including all technologies
and product lines, to the Settlement Parties in exchange for the
cancellation of all outstanding obligations owed to the Settlement
Parties, including past due salaries and loans due to them, the
cancellation of the above mentioned shares, and the assumption of
certain liabilities of the Company and the lease by the Settlement
Parties. The Agreement grants the Company a seven-year license in the
transferred technology, pursuant to which the Company shall have the
right to sell the products developed for the DynaTrax technology as a
dealer to its customers at a dealer price of 25% off list price. The
Company will also receive a royalty of 5% of the profits per year for
the sale of DynaTrax products. The Company recorded a loss from this
transaction in the amount of $884,574.
3. LONG-TERM CONVERTIBLE DEBT
On October 13, 2000, Tech Labs completed a $1.5 million financing of
6.5% convertible promissory notes due October 15, 2002. Interest is
payable quarterly in cash or in shares of common stock at the option of
the noteholders. Tech Labs disclosed all terms of this financing on
Form 8-K filed on October 18, 2000. As of June 30, 2005, $986,913 of
principal and interest on the 6.5% convertible notes has been converted
into shares of Tech Labs' common stock.
On January 11, 2002, Tech Labs entered into a conversion and redemption
agreement concerning this long-term debt. An Event of Default, as
defined in the 6.5% convertible notes, occurred on January 25, 2002,
when Tech Labs was unable to make the first payment of $750,000 to the
holders of the notes.
5
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
(UNAUDITED)
3. LONG-TERM CONVERTIBLE DEBT (Cont'd)
On April 19, 2002, Tech Labs successfully negotiated a cure of the
default referenced above. This cure required that Tech Labs'
registration statement, filed with the Securities and Exchange
Commission on April 5, 2002, covering the shares underlying the 6.5%
convertible notes, to have been declared effective on or before June
29, 2002. If the registration statement was declared effective by such
date and Tech Labs made certain payments described in the Tech Labs'
report on Form 8-K filed April 25, 2002, the maturity date of the 6.5%
convertible notes would have been extended from October 13, 2002 to
December 30, 2002.
On August 2, 2002, the Company announced that an Event of Default
occurred on the 6.5% convertible notes. The Company was unable to have
its registration statement declared effective by June 29, 2002, and was
unable to reach a new agreement with the holders of the 6.5%
convertible notes prior to the expiration of the waiver the Company had
been granted by the holders of the notes, which had been granted in
order to permit the parties time to negotiate a new agreement. The
Company continued to seek a cure for the default with the holders of
the 6.5% convertible notes, and in October 2003, a cure was
successfully negotiated and is described in the Company's 8-K filed in
October, 2003.
On May 18, 2004, the Company issued an additional $250,000 convertible
debenture at a rate of 5.0% due on May 18, 2007. On April 22, 2005, the
convertible debt of $250,000 was renegotiated with an additional
$160,000 plus accrued interest for a total amount of $420,514. The
interest rate is 5% per annum and is due upon demand. In connection
with this transaction, the Company issued 50,000,000 shares of common
stock to be held in escrow, as collateral, for the transaction. On
April 22, 2005, the Company issued warrants to Montgomery Equity
Partners, Ltd. to purchase 100,000 shares of common stock at the par
value of $.0001 per share.
6
Item 2. Management's Discussion and Analysis or Plan of Operation
We were incorporated in 1947 as a New Jersey corporation. Our focus has
historically been the design, manufacture, and sale of rotary switches. Switches
have been a significant part of our revenue for five decades. In 1995, to
augment revenues, we sought business in transformers and contract manufacturing.
In 1998, we made a shift to new product development. In 1998, we also made our
first sales of the IDS product, and in April of 1999, we completed the
acquisition of the DynaTraX(TM) switch and technology. DynaTraX(TM) is a
high-speed digital switch matrix system, an electronic switching unit for
network management and security. This equipment manages video and data
transmissions on a network.
On July 11, 2005 (the "Effective Date"), the Company finalized a Settlement
Agreement and Release (the "Agreement") with Bernard Ciongoli and Earl Bjorndal
(the "Settlement Parties"). In connection with the Agreement, Mr. Ciongoli
resigned from his positions as President, Chief Executive Officer, Chief
Financial Officer, and member of the Board of Directors of the Company, and
agreed to the cancellation of 17,931,806 of his shares of our common stock. Earl
Bjorndal resigned from his positions as Vice President and member of the Board
of Directors of the Company, and agreed to the cancellation of 8,044,445 of his
shares of our common stock. The parties agreed to the transfer of all of the
Company's assets, including all technologies and product lines, to the
Settlement Parties in exchange for the cancellation of all outstanding
obligations owed to the Settlement Parties, including past due salaries and
loans due to them, the cancellation of the above mentioned shares, and the
assumption of certain liabilities of the Company and the lease by the Settlement
Parties. As part of the Agreement, we agreed to transfer of all of the issued
and outstanding shares of common stock of Tech Logistics, Inc., our subsidiary
to Bernard Ciongoli.
Pursuant to the Agreement, the Settlement Parties granted the Company a seven
year license in the transferred technology, pursuant to which the Company shall
have the right to sell the products developed from the DynaTraX technology as a
dealer to its customers at a dealer price of 25% off list price. The Company
will also receive a royalty of 5% of the profits per year for the sale of
DynaTrax products. In exchange for all of the Company's assets, the Settlement
Parties agreed to the cancellation of all outstanding obligations owed to the
Settlement Parties, including past due salaries and loans due to them; the
cancellation of the above mentioned shares; and the assumption of certain
liabilities of the Company and the lease by the Settlement Parties.
On July 11, 2005, Bernard Ciongoli resigned from his positions as President,
Chief Executive Officer, Chief Financial Officer, and member of the Board of
Directors of the Company. Also on July 11, 2005, Earl Bjorndal resigned from his
positions as Vice President and member of the Board of Directors of the Company.
Such resignation was in accordance with the terms of an Agreement and is not due
to any disagreement with the Company on any matter relating to the Company's
operations, policies or practice. On July 11, 2005, Donna Silverman was
appointed as the Company's President, Chief Executive Officer, and Chief
Financial Officer and to the Board of Directors of the Company.
We are now seeking a merger candidate for the purpose of a merger. Although we
have begun preliminary negotiations with several candidates, we have not entered
into any letters of intent to date.
Quarter ending September 30, 2005, compared to Quarter ending September 30, 2004
--------------------------------------------------------------------------------
See Note 2 to the financial statements regarding the settlement agreement and
release. There were no sales during the third quarter of 2005.
Selling, general, and administrative expenses decreased by $157,618 compared to
the same period of 2004 due to decreases in selling expenses, and expenses
associated with the company's attempts to raise long-term capital due to the
successful completion of the stand by equity agreement and the settlement
agreement.
9
Net loss from operations of $925,635 increased $811,521 compared to a loss of
$114,114 for the prior period as a direct result of the settlement agreement
during the third quarter 2005.
Nine Months Ending September 30, 2005 Compared to Nine Months Ending September
30, 2004
Sales were $91,280 for the nine months ended, September 30, 2005, as compared to
$233,138 for the similar period of 2004. The decrease was primarily due to no
sales occurring during the third quarter of 2005.
Cost of sales of $30,557 for the nine months ended September 30, 2005 decreased
by $100,486 compared to the same period of 2004, primarily due to the reduction
in sales.
Selling, general, and administrative expenses decreased by $217,624 compared to
the same period of 2004 due to the curtailment of marketing activities and the
settlement agreement.
Loss from operations of $1,179,846 increased $393,420 compared to a loss of
$786,426 for the prior period as a result of the reduction in sales and the
settlement agreement.
SIGNIFICANT CHANGES
None
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities utilized cash of $286,831 during the nine
months ended, September 30, 2005, as compared to $301,098 during the nine months
ended, September 30, 2004.
As a result of the continuing operating losses and negative cash flow
experienced during 2003, 2004 and the nine months of 2005, Tech Labs has a
tenuous liquidity position. If sales do not improve or alternative financing is
not obtained, substantial doubt exists about Tech Labs' ability to continue as a
going concern.
SUBSEQUENT EVENTS
On October 13, 2005, we were informed by the State of New Jersey, Department of
the Treasury that we were delinquent in filing certain Sales Tax Returns and
Employer Withholding Tax Returns. Our charter will not be reinstated with the
State of New Jersey until all such returns have been filed. We are currently
working with our accountant to complete such returns in a timely fashion.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer (collectively the
"Certifying Officers") maintain a system of disclosure controls and procedures
that is designed to provide reasonable assurance that information, which is
required to be disclosed, is accumulated and communicated to management timely.
Under the supervision and with the participation of management, the Certifying
Officers evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule [13a-14(c)/15d-14(c)]
under the Exchange Act) within 90 days prior to the filing date of this report.
Based upon that evaluation, the Certifying Officers concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relative to our company required to be disclosed in our
periodic filings with the SEC.
10
(b) Changes in internal controls.
Our Certifying Officers have indicated that there were no significant changes in
our internal controls or other factors that could significantly affect such
controls subsequent to the date of their evaluation, and there were no such
control actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 31, 2002, Tawfik Khalil and Amneh Khalil filed a lawsuit in the Superior
Court of Passaic County, New Jersey, against Glen Venza, a Company part-time
employee, Tech Labs, and certain other parties for property damages and personal
injuries. The case arose from a car accident involving Mr. Venza and the
plaintiffs, which occurred while Mr. Venza was performing certain duties for
Tech Labs in a vehicle Mr. Venza borrowed from a third party. Tech Labs has only
been named as a party to the personal injuries, and not for property damages,
and believes it is covered for the accident by its insurance policy.
On July 30, 2003, a former director and a former employee filed a joint lawsuit
in Superior Court of New Jersey, Passaic County, against us for consulting fees
and expenses, respectively. In the same lawsuit, W.T. Sports filed a claim for a
commission owed on sales due from a licensing agreement with us. The claims by
the former director and former employee are for about $10,000 and we deny any
liability under these claims and are defending the lawsuit. With regard to W.T.
Sports, our agreement has an arbitration in case of dispute and therefore we are
attempting to move this case to arbitration. We believe that we have a
counterclaim, which is far in excess of the amount they claim we owe for the
licensing fees. On November 11, 2004, an arbitration hearing took place. On
December 31, 2004, the arbitrator awarded $35,148 to WT Sports. Tech Labs can
continue to manufacture the system in the United States.We are currently
attempting to negotiate a settlement with W.T. Sports.
On June 30, 2004, the law firm of Stursberg & Veith, former counsel to Tech
Laboratories, Inc., filed a lawsuit in the United States District Court for the
Southern District of New York claiming that the plaintiff delivered certain good
and valuable services to Tech laboratories and is owed $161,179.26 plus
interest, costs, and disbursements for each cause of action, and other and
further relief as the Court may deem necessary. The complaint alleges four
causes of action including an unpaid account, stated breach of contract, quantim
meruit, and unjust enrichment. We disagree with the amount of the unpaid balance
owed to the plaintiff. We have filed a counterclaim for overcharging by the
plaintiff.Stursberg & Veith have filed a motion for summary judgment; however,
we are currently trying to negotiate a settlement with them.
Item 2. Changes in Securities.
On July 11, 2005 (the "Effective Date"), the Company finalized a
Settlement Agreement and Release (the "Agreement") with Bernard
Ciongoli and Earl Bjorndal (the "Settlement Parties"). In connection
with the Agreement, Mr. Ciongoli resigned from his positions as
President, Chief Executive Officer, Chief Financial Officer, and member
of the Board of Directors of the Company, and agreed to the
cancellation of 17,931,806 of his shares of our common stock. Earl
Bjorndal resigned from his positions as Vice President and member of
the Board of Directors of the Company, and agreed to the cancellation
of 8,044,445 of his shares of our common stock.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
A 14C Information Statement was filed on September 6, 2005, informing
the shareholders that the Majority Stockholders approved the Settlement
Agreement and Release by and among the Company, Bernard Ciongoli and
Earl Bjorndal, our former officers and directors.
11
Item 5. Other Information.
None.
Item 6. Exhibits and Reports of Form 8-K
On July 18, 2005, the Company filed an 8K pursuant to the execution of
the Settlement Agreement and Release by and among the Company, Bernard
Ciongoli and Earl Bjorndal, our former officers and directors.
12
TECH LABORATORIES, INC.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, there unto
duly authorized.
Date: November 14, 2005
TECH LABORATORIES, INC.
By: /s/ Donna Silverman
-------------------
Donna Silverman
Chief Executive Officer, Chief Financial
Officer and President