SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-27592
TECH LABORATORIES, INC.
(Exact name of Small Business issuer in its charter)
New Jersey 22-1436279
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
955 Belmont Avenue, North Haledon, New Jersey 07508
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(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (973) 427-5333
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Check whether the issuer (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 [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form and no disclosure will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year: $ 408,258
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock, as of a specified date within the last 60
days. On April 8, 2003, the aggregate market value of voting stock held by
non-affiliates, based on the closing price as quoted on the OTC Bulletin Board
under the symbol "TCHL", was $47,539.
The number of shares of common stock outstanding as of April 8, 2003: 5,522,416
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
TECH LABORATORIES, INC.
FORM 10-KSB
Table of Contents
Page
Part I.......................................................................................................... 1
Item 1. Description of Business......................................................................... 1
Item 2. Description of Property......................................................................... 6
Item 3. Legal Proceedings............................................................................... 7
Part II......................................................................................................... 7
Item 4. Submission of Matters to a Vote of Securityholders.............................................. 7
Item 5. Market for Common Equity and Related Stockholder Matters........................................ 7
Item 6. Management's Discussion and Analysis or Plan of Operation....................................... 9
Item 7. Financial Statements............................................................................ 11
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........III-1
Part III......................................................................................................III-1
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of
the Exchange Act..............................................................................III-1
Item 10. Executive Compensation........................................................................III-1
Item 11. Security Ownership of Certain Beneficial Owners and Management................................III-1
Item 12. Certain Relationships and Related Transactions................................................III-1
Item 13. Exhibits and Reports on Form 8-K..............................................................III-1
Item 14. Evaluation of Disclosure Controls and Procedures..............................................III-4
SIGNATURE PAGE................................................................................................III-5
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TECH LABORATORIES, INC.
Form 10-KSB
Forward-looking Statements
Statements made in this Form 10-KSB that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
federal securities laws. These statements often can be identified by the use of
terms such as "may," "will," "expect," "anticipate," "estimate," or "continue,"
or the negative thereof. Such forward-looking statements speak only as of the
date made. Any forward-looking statements represent management's best judgment
as to what may occur in the future. However, forward-looking statements are
subject to risks, uncertainties, and important factors beyond the control of
Tech Labs that could cause actual results and events to differ materially from
historical results of operations and events and those presently anticipated or
projected. These factors include, but are not limited to, those discussed under
the caption "Factors That May Affect Future Events" in Item 6 of this Form
10-KSB. Tech Labs disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statement or to reflect the occurrence of anticipated or unanticipated
events.
Part I
Item 1. Description of Business.
BUSINESS
General
Tech Laboratories, Inc. ("Tech Labs" or the "Company") manufactures and
sells various electrical and electronic components. During 2002, we marketed and
continued to develop DynaTraX(TM) 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.
Historical Business
We also manufacture and sell standard and customized transformers, and
rotary switches, the latter of which products permits an electrical signal to be
diverted from point A to point B. Approximately 10% of our products are
manufactured for military applications.
We sell our switch and transformer products in the electronics and
electrical industries, primarily as a contract manufacturer for other companies
or for inclusion in OEM products. We market our products in these industries in
the United States. This is a mature market. Competition is on the basis of price
and service. Pricing of our products is based upon obtaining a margin above cost
of production. The margin we will accept varies with quantity and the channels
of distribution.
Industry
DynaTraX(TM) Networking Management and Maintenance Technology
Tech Labs manufactures, markets, and sells a product which it believes
will create a new paradigm on automating and securing high-tech networks at the
physical layer. Our product, DynaTraX(TM), a patented, high-speed digital matrix
cross-connect switch with a dynamic new technology, can significantly reduce
network downtime and achieve substantial cost savings in data and
telecommunications networking environments. DynaTraX(TM) has the ability to
create a critical and meaningful solution to stop hackers from intruding into
networks and, thereby, to thwart cyber- terrorists. DynaTraX(TM) electronically
disconnects a hacker, detected by Intrusion Detection Software, and reconnects
the hacker to a simulated network within 60 - 90 nanoseconds and allows the user
to hold and trace the hacker.
On September 19, 2002, the United States Patent and Trademark Office
published our patent application for the use of our DynaTraX(TM) technology to
provide Positive Network Access Security control to prevent hacker attacks from
causing extensive harm to network services and systems.
Employing this physical layer security solution allows the user/system
to automatically disconnect circuits under attack from an unauthorized user by
quickly rerouting the hacker to a honey pot (track, trace & locate) simulator
network system to capture the intruder. The ability to automate creates a
self-healing environment for next generation robust high-tech communication
network.
The DynaTraX(TM) switch provides network administrators with the unique
capability to remotely manage and maintain the "physical level" (the actual
physical connectivity) of their networks from virtually any computer with a few
clicks of a mouse on a user-friendly graphical user interface (GUI). This
technology allows administrators to quickly and efficiently perform physical
changes electronically to repair networking problems (such as loss of
connectivity resulting in the need to move a cable to a different hub), or to
perform network reconfigurations (moves, adds or changes) to distribution
equipment such as computers and telecommunications devices. No longer does a
technician have to be dispatched to a telecommunication closet to resolve most
networking problems, or to provide changes to users' existing services on the
network.
Examples of where the DynaTraX(TM) has been found to be particularly
cost effective include: (1) active large remote corporate locations with minimal
or no IT personnel where expensive outside technicians must often be dispatched
to resolve problems or other requests; and (2) locations where very frequent
movement of personnel occurs, such as in the military or at a convention center
where network reconfigurations are frequently required. Reconfigurations are
expensive with costs ranging from $50 to $200 on-site, and two to ten times that
for off-site reconfigurations, versus virtually no cost if a DynaTraX(TM) is
utilized. These figures do not include potential losses in productivity and
revenues associated with extended downtimes.
DynaTraX(TM) is also equipped with two key complementary products - a
Test Card and a Data Base Management System. The Test Card enables
administrators to effectively locate and resolve cable fault problems on the
distribution portion of the network. Customers state that the Test Card is far
superior to alternative methods for diagnosing problems such as traditional
cable test equipment, which typically involves using technicians to search
throughout the entire network, moving equipment and possibly interfering with
the performance of the network. DynaTraX's(TM) Database Management System
documents every event that occurs within the network, assuring that all
reconfigurations and other adaptations to the network are reflected on the
DynaTraX's(TM) GUI. Given the maze of wires, plugs, and jacks that are typically
found in a telecommunications closet, administrators are notorious for not
properly noting changes made to the network, resulting in cabling connections
errors and significant loss of productivity from unforeseen downtime. With most
network problems originating on the physical level, the Test Card and Data Base
Management System make the DynaTraX(TM) a complete tool for managing and
ensuring the integrity of data networks.
Since launching its marketing campaign on a limited basis in early
2001, the DynaTraX(TM) has been reviewed favorably, particularly from the U.S.
military which frequently moves personnel and performs routine networking
changes for security purposes. DynaTraX(TM) has been tested and purchased by the
U.S. Air Force and the U.S. Navy for inclusion in government projects. Prominent
commercial users of the DynaTraX(TM) include Global Crossing Inc, Nortel
Networks, Allied Irish Bank, Sanko Telecom of Japan, and Blue Cross of Florida.
Tech Labs' long-term growth strategy includes development of
DynaTraX's(TM) technological capabilities, and, concurrently, product
integration and establishment of strategic partnerships with world-class
software and hardware vendors (especially enterprise management software
providers in the short term). With the use of our newly developed API
(Application Programmable Interface), vendors can write scripts to DynaTraX(TM)
allowing automatic reconfiguration.
Tech Labs has established relationships with key businesses in this
field, including Computer Associates Inc. and EMC2 Inc., particularly in
relation to the DynaTraX(TM) Enterprise Management Solution "DEMS". DEMS
elevates the current DynaTraX(TM) electronic patching system to an interactive
intelligent enterprise management "Virtual Technician" system. The Virtual
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Technician dramatically reduces the need for on-site technicians to perform
physical layer tasks, which can now be performed electronically from a remote
location (i.e., remotely testing network circuits, reconnecting equipment and
circuits, rapidly recovering from a critical network failure, capturing and
trapping hackers). Our goal is to further enhance the DEMS technology beyond the
Virtual Technician application to a system that will perform "self healing"
(self-repair) network functions. Current and future products derived from the
DynaTraX(TM) will position the Company, we believe, as a provider of
state-of-the-art network enterprise management solution systems. We believe we
will expand from this base to become a recognized provider of enhanced networks
and integrated (voice/data/video) Internet (IP) compatible, private
customer-premise all-digital Automatic Call Directors, and PBX systems and
networks.
There are at least four companies that have products that compete with
the DynaTraX(TM) product. However, we believe none of these competitors offer a
product with all of the features or capabilities of DynaTraX(TM).
We continue to believe that competition in the sale of our DynaTraX(TM)
products will be on the basis of price, features, service and technical support.
Pricing of our products is based upon obtaining a margin above cost of
production. The margin we will accept varies with quantity and the channels of
distribution.
Competition for network management products comes from several
different sources. One source of competition is the designated employees of
large organizations which have been hired to manage and maintain their internal
networks. However, we believe the growing need to control and reduce costs by
using technology such as DynaTraX(TM) to automate tasks otherwise performed by
expensive technical labor, will provide Tech Labs with market opportunities.
Another group of competitors which produces products to manage and
maintain the network physical layer consists of NHC, RIT and Cyteck. Of these
three companies, NHC is the only one that offers a product comparable to
DynaTrax(TM), but which is not as fast as DynaTraX(TM). In addition, V-LAN
switching, which is a technology utilized by a number of companies, can be
regarded as a competing technology. However, V-LAN switching is limited to a
specific type of network, i.e., Ethernet, and not able to support many tasks
which our DynaTraX(TM) technology is designed to complete. These tasks are:
o rearranging network physical layer connections, e.g.s moves,
adds, and changes of equipment such as computer terminals; fax
machines; and printers;
o testing circuits;
o managing and maintaining end-to-end network configuration,
which is the connection between different points on a network
from the telecommunications closet to the user outlet; and
o maintaining asset inventory records.
We regard V-LAN as complementary to DynaTraX(TM) circuit switching
since they can work together to provide a more comprehensive network
management/maintenance solution. The four competitors all have greater financial
and other resources and currently account for substantially all of the existing
market.
Infrared Intrusion Detection System or "IDS"
As of January 2003, Tech Labs no longer has the exclusive right to
manufacture and sell in the U.S., Canada, and South America the IDS products.
Tech Labs, however, continues to sell its existing inventory of IDS products to
the security and anti-terrorist industry. During 2002, the Company sold
approximately $230,000 worth of IDS products to military, other governmental and
commercial users.
Marketing Strategies
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Marketing. Subject to available resources, we will employ a marketing
program consisting of:
Typical Resale Channel Partners. These are technically qualified
networking systems integration, implementation and management type
companies, in the business of providing network project-management
consulting services and/or on-site implementation, installation and
maintenance support services. The companies Tech Labs deals with will
be working in the markets (commercial or government) the Company has
targeted and already established a customer base.
Building Sales and Sales Leads. In addition to the already existing
networks of existing and potential clients known by the Company's
managers and resale channel partners, Tech Labs will also embark on a
promotion program consisting of advertising in trade journals, trade
show participation and mailing campaigns. The Company is establishing
itself as a certified approved partner of large Enterprise Management
systems providers, as well as large networking equipment companies
where there is a fit for integrating the Company's technology with
these companies' technologies and products.
Advertising. This will be a program for both commercial and military
markets involving a focused DynaTraX(TM) Enterprise Management Solution
campaign in trade magazines, including commercial and government
oriented trade magazines.
Trade Shows. The Company hopes to participate in industry and
government focused trade shows.
Mailing Campaign. Tech Labs will use commercial and government industry
mailing lists available through industry trade organizations. These
lists will be territorially arranged focusing on the proper person or
groups involved in specifying, recommending and/or purchasing
DynaTraX(TM) products.
Certified Partners Programs. Working under such arrangements, the
Company expects to be able to co-promote its technology through its
existing sales channels and marketing programs. In some instances,
these organizations will even sell the product through their sales
organization catalogs as a value-added product or as an OEM.
Marketing Channels
The sales infrastructure for DynaTraX(TM) will include, as funds become
available, a three-tier sales organization structure comprised of a senior
company sales executive managing up to six "market area" sales managers and
several resale channels in each area. These market areas will be located in the
following general regions: East Coast, Southwest, Mid West, West Coast, and
Northwest. Market territories will be selected based on the projected number of
commercial and government organizations considered to be primary target
customers. These regional areas will be further broken down to several "channel
sales territories".
The first market area to be developed is the East Coast but due to
economic factors and conditions has been delayed. The Company will recommence
the build-up of the East Coast region upon sufficient resources becoming
available. The goal is to have a minimum of three regional territory sales
managers in each market area. For example, on the East Coast, the Company will
set up managers in the Northeast, New York City/New Jersey Metro region,
Mid-Atlantic - Washington DC region, and Southeast - Orlando/Tampa Florida
region.
U.S. Military
The Department of Defense is presently under a mandate from the
President and Congress to minimize costs and maximize efficiency. The military,
unlike commercial organizations, will encourage, we believe, the use of new
technology such as DEMS to improve productivity, operations and reliability. The
specific military business opportunities the Company is targeting includes:
Improving IT network management and maintenance capabilities; supporting "rapid
deployment" for configuring networks and for recovering from network disasters;
having current and accurate information about network configurations, connected
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assets and usage statistics; preventing hackers or other type of unauthorized
attempts from gaining access to network resources, and then identifying and
capturing them.
Non-military Government Agencies
These government organizations primarily contract out their network
support operations. They are under significant pressure to reduce staff and
costs while also being asked to do more. In order to achieve these mandates,
agencies will have to rely on new technology such as DEMS that can help improve
their productivity while at the same time increase network services and
reliability. In addition, government agencies are also being challenged by
Congress regarding their poor track record on protecting their information and
network resources against hackers and other unauthorized users.
Commercial Organizations
Opportunities include large organizations with many regional business
offices and/or local call centers (remote office operations) as well as mid-size
organizations with medium size headquarters and small remote branch operations.
Included in this group are Fortune 1000 service organizations (banks, financial
investment companies, medical insurance companies, large retail operations,
etc.) that have regional operations and rely on territory branch offices to sell
their products or services to their customers, and organizations that have a
need to change their network arrangement "churn" to support relocating personal
or to service temporary users of their facilities. In addition to relying on
their networks to conduct business, these organizations also have a need to
protect the network resources and customer information from hackers and other
unauthorized users.
Source of Supply
Current inventory component purchases for all our products are made
from OEMs, brokers, and other vendors. We typically have multiple sources of
supply for each part, component, or service, and during the years ended December
31, 2002 and 2001, cannot characterize any particular company as being our
"largest" supplier. We have no long-term agreements with any of our suppliers.
Order Backlog
The backlog of written firm orders for our products and services as of
December 31, 2001, and December 31, 2002, was as follows:
As of December 31, 2001: $14,145
As of December 31, 2002: $30,015
Patents
In connection with our acquisition of the DynaTraX(TM) assets, we
acquired certain patents and pending patent applications. Four patents have been
granted in Great Britain, which are listed below:
o Patent title: User Interface for Local Area Network. This
patent covers technology which allows communication between
the user and the equipment controlling the network. This
patent expires in 2013.
o Patent title: Token Ring. This patent covers technology which
transmits information between devices on a network. This
patent expires in 2013.
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o Patent title: Half Duplex Circuit for Local Area Network. This
patent covers technology which allows one-way communication
either to or from the Local Area Network. This patent expires
in 2013.
o Patent title: Matrix Switch Arrangement. This patent covers
technology which is a switch that can either connect or
disconnect one or more devices on a network. This patent
expires 2015.
We also have been granted a patent from the U.S. Patent and Trademark
office in connection with our Multi-protocol Cross Connect Switch.
On September 19, 2002, the U.S. Patent Office published our patent
application for the use of our DynaTraX(TM) technologies to provide Positive
Network Access Security control to prevent an unauthorized hacker attack to
network services and systems. Tech Labs Positive Access Security System works
with the DynaTraX(TM) digital cross-connect physical layer switch. This security
physical layer enhancement solution allows the ability to automatically
disconnect circuits detected to be under attack from an unauthorized user
(hacker) and capture the hacker by quickly rerouting the circuit the hacker is
on to a honey pot (track, trace and locate) simulator network system. As an
integral part of an existing or new Enterprise Management System's security, the
DynaTraX(TM) Enterprise Management System software will quickly respond to an
SNMP alarm instruction by having the DynaTraX(TM) switch disconnect the circuit
being used by a hacker within 90 nanoseconds.
Employees
We have three full-time employees, one of whom is an engineer and two
are officers, one of whom is also an engineer. We also employ eight part-time
workers, one of whom performs clerical services and the others as production
workers.
Item 2. Description of Property.
Our corporate headquarters and manufacturing facility is located in
North Haledon, New Jersey. Our primary manufacturing and office facility is a
one-story building that is adequate for our current needs. We lease this
facility of 8,000 square feet, from a non-affiliated person, under a lease that
ends in April, 2007. The annual base rent is $56,400 until April 2004, $57,600
from May 2004 until April 2006, and $58,800 from May 2006 until April 2007, and
includes property taxes and other adjustments. We believe our premises are
adequate for our current needs and that if and when additional space is
required, it would be available on acceptable terms.
We are an integrated manufacturer and, accordingly, except for plastic
moldings and extrusions, produce nearly all major subassemblies and components
of our devices from raw materials. We purchase certain components from outside
sources and maintain an in-house, light machine shop allowing fabrication of a
variety of metal parts and castings, complete tool room for making and repairing
dies, a stamping shop and an assembly shop with light assembly presses. Our test
lab checks and tests our products at various stages of assembly and each
finished product undergoes a complete test prior to shipment.
We anticipate that we will either manufacture any new products
ourselves or subcontract their manufacture, in whole or in part, to others. We
believe that personnel, equipment, and/or subcontractors will be readily
available as and when needed.
We offer warranties on all our current products, including parts and
labor for one year.
Item 3. Legal Proceedings.
Litigation
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We are involved in a lawsuit arising from a letter of intent relating
to a small potential transaction we did not complete because we believed there
were misrepresentations made to us. The suit was filed against us by a former
employee of Tech Labs in 1995. We believe that the outcome is likely to be
favorable, but that our maximum liability if we do not prevail would be $30,000.
The suit was transferred to arbitration, but the arbitrator never issued a
ruling because the plaintiff never paid the arbitration fee.
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.
A lawsuit was filed against a subsidiary of the Company, Tech Labs
Community Networks, Inc. ("TLCN"), in the Superior Court of New Jersey, Passaic
County, on February 20, 2003, claiming that the plaintiff delivered certain
goods and services to TLCN and is owed $23,856, plus interest and attorney fees.
We disagree that any goods or services were contracted to be provided by the
plaintiff, and believe we will prevail in this litigation.
Part II
Item 4. Submission of Matters to a Vote of Securityholders.
None.
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock has been trading publicly on the OTC Bulletin Board
under the symbol "TCHL" since 1994. The table below sets forth the range of
quarterly high and low closing sales prices for our common stock on the OTC
Bulletin Board during the calendar quarters indicated. The quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs, or conversion, and may
not represent actual transactions.
TCHL COMMON STOCK
CLOSING BID CLOSING ASK
--------------------- --------------------
HIGH LOW HIGH LOW
---- --- ---- ---
YEAR ENDING DECEMBER 31, 2003
First Quarter........................................ .02 .015 .05 .02
YEAR ENDING DECEMBER 31, 2002
-----------------------------
First Quarter ....................................... .50 .16 .59 .19
Second Quarter....................................... .28 .16 .34 .18
Third Quarter........................................ .16 .025 .18 .08
Fourth Quarter....................................... .12 .02 .18 .055
YEAR ENDING DECEMBER 31, 2001
First Quarter ....................................... 1.625 0.71875 1.75 0.875
Second Quarter....................................... .75 .43 .875 .50
Third Quarter........................................ .60 .27 .73 .32
Fourth Quarter....................................... .51 .28 .56 .34
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As of April 8, 2003, there were 248 holders of record of our common stock.
We have never paid any cash dividends on our common stock and
anticipate that, for the foreseeable future, we will continue to retain any
earnings for use in the operation of our business. Payment of cash dividends in
the future will depend upon our earnings, financial condition, any contractual
restrictions, restrictions imposed by applicable law, capital requirements, and
other factors deemed relevant by our Board of Directors.
The transfer agent for our common stock is Interwest Transfer Co.,
Inc., P.O. Box 17136, Salt Lake City, Utah 84117.
Recent Sales of Unregistered Securities
As listed below, the Company issued shares of its Common Stock, par
value $.01 per share, to the following individuals or entities for the
consideration as listed in cash or services. All sales made within the United
States or to United States citizens or residents were made in reliance upon the
exemptions from registration under the Securities Act of 1933 (the "Securities
Act") as follows:
1. In April 2001, we issued to Pierre Bergeron, an employee of Tech
Labs, 10,000 shares. The issuance of the shares was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof. The shares were
issued to Mr. Bergeron in consideration of his services to Tech Labs. Mr.
Bergeron had complete access to all relevant information regarding Tech Labs.
2. In April 2001, we issued to Concurrent Resources Group, a consultant
to Tech Labs, 27,465 shares. The issuance of the shares was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
3. In March 2001, we issued to Ed Branca, a former employee of Tech
Labs Community Networks of Southeast, Inc., a subsidiary of Tech Labs, 10,000
shares. The issuance of the shares was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof. The shares were issued to Mr.
Branca in consideration of his services. Mr. Branca had complete access to all
relevant information regarding Tech Labs.
4. In January 2001, we issued to Barry Bendett, a former consultant to
Tech Labs, 65,000 shares pursuant to terms of a consulting agreement. The
issuance of the shares was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof. Mr. Bendett is a sophisticated investor and
has complete access to all relevant information regarding Tech Labs.
5. In November 2000, we issued to Barry Bendett options to purchase
100,000 shares at $4.00 per share. The issuance of the options was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof. Mr.
Bendett is a sophisticated investor and had complete access to all relevant
information regarding Tech Labs.
6. In October 2000, we issued a $1,500,000 principal amount convertible
notes which was due on October 13, 2002 to certain accredited investors. The
issuance of the note was made pursuant to Rule 506 of Regulation D under the
Securities Act.
7. In October 2000, we issued warrants to purchase 412, 500 shares of
our common stock to accredited investors in connection with the issuance of
certain 6.5% convertible notes. The issuance of the warrants was made pursuant
to Rule 506 of Regulation D under the Securities Act.
8. In July 2000, we issued 25,000 shares and an option to purchase
100,000 shares at $5.75 per share for a term of three years to m3communications,
Inc. pursuant to an asset purchase agreement between Tech Labs, Tech Labs
Community Networks of the Southeast, Inc. and the shareholders of
m3communications, Inc. The issuance of the securities was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
-8-
9. In June 2000, we issued 25,000 shares to Nathan Perlmutter pursuant
to a convertible note agreement dated September 5, 1997 which note was issued as
part of a private placement conducted pursuant to Rule 504 of Regulation D in
1997.
10. In July 2000, we issued 20,000 shares to Louis Tomasella, a
former director of Tech Labs, pursuant to Mr. Tomasella's exercise of stock
options granted to him under the Tech Labs stock option plan.
In addition, the Company transmitted a memorandum to Jeffrey Langsberg in which
it represented that in consideration for certain services, 200,000 shares of the
Company`s Common Stock would be issued to Bressner Partners Ltd. The Company has
never issued these shares because it believes Mr. Langsberg never satisfied his
obligations. Mr. Langsberg has, however, made a claim for the 200,000 shares.
Item 6. Management's Discussion and Analysis or Plan of Operation.
General
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. We will continue to focus
on DynaTraX(TM) sales and development of additional products using these
technologies.
The following table sets forth the components of our revenues for each
of our major business activities in 2000, 2001, and 2002, and their approximate
percentage contribution to revenues for the period indicated:
PRODUCT TYPE 2000 % of Revenue 2001 % of Revenue 2002 % of Revenue
------------ ---- ------------ ---- ------------ ---- ------------
Switches $ 400,082 39.3% $ 306,678 53.9% $ 112,786 27.6%
IDS Sensors 472,374 46.4% 156,409 27.6% 256,711 62.9%
Transformers/Coils 41,849 4.1% 46,111 8.1% 35,357 8.6%
Contract Manufacturing 103,213 10.2% 58,885 10.4% 3,404 0.9%
---------- ------ --------- ------- --------- ------------
Totals $1,017,518 100.0% $ 568,083 100.0% $ 408,258 100.0%
========== ====== ========= ====== ========= ============
The following table sets forth the percentages of gross profit for each
of our major business activities in 2000, 2001, and 2002:
Year Ended December 31,
--------------------------------------------------------
PRODUCT TYPE 2000 2001 Net Change 2001 2002 Net Change
------------ ---- ---- ---------- ---- ---- ----------
Switches 79.3% 72.2% (7.1%) 72.2% 75.4% 3.20%
IDS Sensors 55.5% 57.6% 2.1% 57.6% 57.4% (.02%)
Transformers/Coils 49.1% 41.6% (7.5%) 41.6% 54.4% 12.8%
Contract Manufacturing 31.0% 50.1% 19.1% 50.1% * (50.1%)
Unallocated company expenses,
including physical inventory
adjustments factory overhead and
Inventory Write-Down (26.2%) (26.6%) (0.4%) (26.6%) (165.2%) (136.8%)
Total company gross profit % 36.0% 36.8% 0.8% 36.8% *
* - Negative Percentage
We have continued to shift out of the subcontracting and transformer
business which provides low gross profit margins, for higher gross profit margin
products. While rotary switches produce high gross profits, demand for rotary
switches is low.
We have gradually shifted our product offering from less profitable to
more profitable proprietary products.
-9-
Results of Operations
2002 compared to 2001
Sales were $408,258 for 2002 as compared to $568,083 for 2001 a decline
of ($159,825) or (28.1%). The economy and the delay in sales to the Department
of Homeland Security continues to have a dramatic negative impact on the
Company.
Cost of Sales of $828,194 includes a $500,000 write-down of obsolete
and slow moving inventory. Without this write-down the Company gross profit was
19.6% which is a reduction from 2001 due to cost inefficiencies caused by
declining sales.
Selling and Administrative expenses declined $462,858 to $756,568, due
to stock options expense recorded in 2001 plus a drastic reduction caused by
declining sales as the Company operates in survival mode.
Loss from operations increased by ($215,228) caused by declining sales,
and Inventory write-down which were partially offset by selling and
administrative expense reduction.
2001 compared to 2000
Sales were $568,083 for 2001 as compared to $1,017,518 for the year
ended 2000. The decline in sales of (55.8%) was a direct result of the economic
downturn in 2001.
Cost of sales of $355,754 for the year ended 2001 compared to $651,460
for the year ended 2000 declined due to the volume decrease. The Company's gross
profit percentage improved to 36.8% even though volume declined.
Selling, general, and administrative expenses increased by $400,874 in
2001 as compared to the prior period in 2000. This 49% increase was due to the
Company's continuing efforts to secure short- and long-term financing in 2001
plus stock option expenses.
Losses from operations of ($1,026,432) in 2001 increased by $587,605
compared to losses of ($418,655) for the prior period as a direct result of
volume declines and expenses.
Liquidity and Capital Resources.
During 2000 we completed two significant transactions that improved our
liquidity. On May 3, 2000 we completed an offering of our common stock to the
public pursuant to a registration statement on Form SB-2. We sold to the public
an aggregate of 293,379 shares for gross proceeds of $2,273,723. Subsequently,
on October 13, 2000 we completed a private placement, pursuant to Rule 506 of
Regulation D, of convertible promissory notes for gross proceeds of $1,500,000.
During 2001 and 2002 as a result of the economic downturn, we suffered
severe operating losses and negative cash flows which impaired our liquidity
position and caused a default on an underlying conversion and redemption
agreement related to the convertible notes issued in October 2000. In 2002, Tech
Labs' negative cash flow was primarily caused by operating losses plus the
buildup of inventory in anticipation of increased sales of our high margin
proprietary products which did not occur.
Our inventories have increased. This increase is necessary to meet
demand for our IDS sensor and DynaTraX(TM) products. In order that we are able
to meet any anticipated purchase orders from the military, non-military
governmental agencies and private industry, we must carry sufficient inventory.
As a result of operating losses and negative cash flows experienced
during 2001 and 2002, Tech Labs has a tenuous liquidity position. If sales do
not improve or alternate financing is not obtained, substantial doubt exists
about Tech Labs' ability to continue as a going concern.
Factors that May Affect Future Events.
The following factors, among others, could cause actual events and
financial results to differ materially from those anticipated by forward-looking
statements made in this Annual Report on Form 10-KSB and presented elsewhere by
management from time to time.
-10-
On August 2, 2002, the Company announced that an Event of Default
occurred under the terms of the Company's outstanding 6.5% convertible notes
(the "Convertible Notes"). The Company was unable to have its registration
statement filed April 5, 2002, declared effective by June 29, 2002, as required
by the terms of the amended redemption and conversion agreement the Company
entered into with the noteholders on April 19, 2002 (the "Amended Redemption
Agreement"), and was unable to reach a new agreement with the noteholders prior
to the expiration of the waiver the Company had been granted by the noteholders,
which had been granted in order to permit the parties time to negotiate a new
agreement. Under the terms of the Convertible Notes, the Company is required to
maintain an effective registration statement covering the shares of the
Company's common stock underlying the Convertible Notes. Under the terms of the
Amended Redemption Agreement, the Company had until June 29, 2002, in order to
have its registration statement declared effective. The Company is presently in
negotiations with the holders to cure the Event of Default, but no assurance can
be given as to whether an agreement can be reached with the holders for mutually
acceptable terms. If the holders accelerate payment of the principal and
interest due under the Notes, the Company will be unable to make payment and may
be forced into bankruptcy.
We have no patent or copyright protection on our current products,
other than aspects of the DynaTraX(TM) product and technology. Our ability to
compete effectively with other companies will depend, in part, on our ability to
maintain the proprietary nature of our technologies. Other than with regard to
the DynaTraX(TM) patents, we intend to rely substantially on unpatented,
proprietary information and know-how. We are also presently prosecuting the
patent applications filed in the United States and the European Common Market.
There is a risk that our current products may malfunction and cause
loss of, or error in, data, loss of man hours, damage to, or destruction of,
equipment or delays. Consequently, we, as the manufacturer of components,
assemblies and devices may be subject to claims if such malfunctions or
breakdowns occur. We are not aware of any past or present claims against us. We
cannot predict at this time our potential liability if customers make claims
against us asserting that DynatraX(TM), or other products fail to function.
Since we have no insurance we could incur substantial expenses defending
ourselves against a product liability claim.
In connection with the acquisition of the DynaTraX(TM) technology, we
acquired digital switches, finished products and parts from NORDX/CDT. We do not
have insurance on that inventory. Damage or destruction of some or all of the
inventory by fire, theft or by acts of nature would result in substantial losses
and would harm our business.
As a result of operating losses and negative cash flows experienced
during 2001, Tech Labs has a tenuous liquidity position. If sales do not improve
or alternate financing is not obtained, substantial doubt exists about Tech
Labs' ability to continue as a going concern.
Item 7. Financial Statements.
Report of independent certified public accountants..............................................................F-1
Consolidated balance sheet for the years ended December 31, 2002, 2001, and 2000...........................F-2, F-3
Consolidated statements of operations for the years ended December 31, 2002, 2001, and 2000.....................F-4
Consolidated statements of stockholders' equity for the years ended
December 31, 2002, 2001, and 2000...............................................................................F-5
Consolidated statements of cash flows for the years ended
December 31, 2002, 2001, and 2000...............................................................................F-6
Notes to consolidated financial statements................................................................F-7 - F-9
-11-
REPORT OF INDEPENDENT AUDITORS
Charles J. Birnberg, CPA
72 Rolling Views, Drive
West Paterson, New Jersey 07424
April 14, 2003
To The Board of Directors of Tech Laboratories, Inc.
I have audited the Balance Sheets of Tech Laboratories, Inc. as of
December 31, 2000, 2001, and 2002, and the related Statements of Income and
Retained Earnings, and Cash Flows for the years then ended. These financial
statements are the responsibility of the company's management.
The audits were conducted in accordance with generally accepted
auditing standards. Those standards require that I plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that the audits provide a reasonable basis for
my opinion.
Therefore, the financial statements in my opinion, present fairly the
financial position of Tech Laboratories, Inc. as of December 31, 2000, 2001, and
2002, and the results of operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
Sincerely,
/s/ Charles J. Birnberg
--------------------------------------
Charles J. Birnberg
Certified Public Accountant
Hackensack, New Jersey
F-1
TECH LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 2000, 2001, AND 2002
ASSETS
2000 2001 2002
---- ---- ----
Current Assets:
Cash.................................................... $2,523,446 $ 892,003 $ 28,343
Marketable Securities,
(Note 1)................................. 64,333 40,000 40,000
Accounts Receivable, Net of Allowance
of $25,000 in 2001 and 2002 . . ....................... 93,952 112,200 6,144
Inventories (Notes 1 & 2)............................... 1,286,838 2,075,479 1,735,633
Prepaid Expense........................................... 4,055 6,303 6,303
----------- --------- ------------
Total Current Assets................................. $3,972,624 $3,125,985 $ 1,816,423
---------- ---------- ------------
Property, Plant and Equipment at Cost (Note 1)
Leasehold Improvements.................................. 2,247 2,247 2,247
Machinery, Equipment and Instruments ................... 467,100 524,730 600,000
Furniture and Fixtures.................................. 81,603 95,662 109,281
----------- --------- ------------
$ 550,950 $622,639 $ 711,598
Less: Accumulated Depreciation & Amortization............. 342,551 373,900 403,101
---------- ---------- ------------
Net, Property, Plant and Equipment...................... $ 208,399 $ 248,739 $ 308,497
---------- ---------- ------------
Other Assets................................................ $ 12,059 $ 12,059 $ 12,059
---------- ---------- ------------
Total Assets......................................... $4,193,082 $3,386,783 $ 2,136,979
========== ========== ============
The accompanying notes are an integral part of these financial statements
F-2
TECH LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 2000, 2001, AND 2002
LIABILITIES AND STOCKHOLDERS' INVESTMENT
2000 2001 2002
---- ---- ----
Current Liabilities:
Defaulted Convertible Notes........................................ $ -0- $ 1,219,202 $ 1,151,756
Current Portion of Long Term Debt (Note 5)......................... 17,198 33,347 31,713
Short-Term Loans Payable (Note 6).................................. 63,623 63,789 56,815
Accounts Payable and Accrued Expenses.............................. 32,961 82,224 141,915
Other Liabilities.................................................. 8,375 7,562 76,922
---------- ----------- -----------
Total Current Liabilities $ 122,157 $ 1,406,124 $ 1,459,121
----------- ----------- -----------
Long Term Convertible Notes Payable.................................... $ 1,520,318 -0- -0-
Stockholders' Investment:
Common Stock, $.01 Par Value;
10,000,000 Shares Authorized in 2001,
25,000,000 Shares Authorized in 2002:
4,790,942 Shares Outstanding in 2001 and
5,522,416 Shares Outstanding in 2002............................ $ 39,493 $ 47,836 $ 49,848
Less: 15,191 Shares Reacquired and
and Held in Treasury............................................... (113) (113) (113)
----------- ----------- ----------
$ 39,380 $ 47,723 $ 49,735
Capital Contributed in Excess of Par Value......................... 4,060,287 4,508,428 4,445,275
Retained Earnings.................................................. 0 0 0
Accumulated Deficit................................................ (1,549,060) (2,575,492) (3,817,152)
----------- ----------- ----------
$ 2,550,607 $ 1,980,659 $ 628,123
Total Liabilities and Stockholders' Investment...................... $ 4,193,082 $ 3,386,783 $2,136,979
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-3
TECH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
DECEMBER 31, 2000, 2001, AND 2002
2000 2001 * 2002
---- ---- ----
Sales....................................................... $ 1,017,518 $ 568,083 $ 408,258
------------ ------------ -----------
Costs and Expenses:
Cost of Sales........................................... 651,460 358,754 828,194
Selling, General and Administrative Expenses............ 818,552 1,219,426 756,568
------------ ------------ -----------
1,470,012 1,578,180 1,584,762
Income/(Loss) From Operations............................... $ (452,494) $ (1,010,097) $(1,176,504)
------------ ------------ -----------
Other Income (Expenses):
Interest Income........................................... $ 63,543 $ 69,442 $ 12,398
Interest Expense.......................................... (29,704) (85,777) (77,554)
------------ ------------ -----------
$ 33,839 (16,335) (65,756)
----------- ------------ -----------
Income/(Loss) Before Income Taxes......................... $ (418,655) $ (1,026,432) $(1,241,660)
Provision for Income Taxes (Notes 1 & 4).................. -- -- --
----------- ------------ -----------
Net Income/(Loss)........................................... $ (418,655) $ (1,026,432) $(1,241,660)
Accum. Earnings/(Deficit,) Beg. of Year................... $(1,130,405) $ (1,549,060) (2,575,492)
------------ ------------ -----------
Accum. Earnings/(Deficit,) End of Year.................... $(1,549,060) $ (2,575,492) (3,817,153)
------------ ------------ -----------
EPS......................................................... $ (0.10) $ (0.22) $ (0.24)
* Re- Stated for prior period adjustment of $168,950
For Stock option expense- See Note-12
The accompanying notes are an integral part of these financial statements.
F-4
TECH LABS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEARS 2000, 2001, AND 2002
Capital in
Common Stock Excess of Accumulated
Shares Amount Par Value Deficit Total
------ ------ --------- ------- -----
Balance
December 31, 2000 4,019,039 $ 39,380 $ 4,060,287 $(1,549,060) $ 2,550,607
Stock Issued 1,087,568 8,343 279,191 -- 287,534
Stock Options -- -- 168,950 168,950
Net Income/(Loss) -- -- -- (1,026,432) (1,026,432)
--------- ---------- ---------- ------------ ------------
Balance
December 31, 2001 5,106,607 47,723 4,508,428 (2,575,492) 1,980,659
Stock Issued 415,809 2,012 (63,153) -- (61,141)
Net Income/Class -- -- -- (1,241,660) (1,241,660)
--------- ---------- ---------- ------------ ------------
Balance
December 31, 2002 5,522,416 49,735 4,445,275 (3,817,152) 677,858
The accompanying notes are an integral part of these financial statements.
F-5
TECH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31, 2000, 2001, AND 2002
2000 2001 * 2002
---- ---- ----
Cash Flows From (For) Operating Activities:
Net Income/(Loss) From Operations....................... $ (418,655) $ (1,026,432) (1,241,660)
Add/(Deduct) Items Not Affecting Cash:
Depreciation/Amortization (Note 1)...................... 28,389 31,349 29,201
Stock Compensation 168,950 --
Inventory write-down-.................................. -- -- 500,000
Changes in Operating Assets and Liabilities:
Marketable Securities................................... (2,880) 24,333 -0-
Accounts Receivable..................................... (36,255) (18,248) 106,056
Inventories............................................. (470,135) (788,641) (160,154)
Accounts Payable and Accrued Expenses................... (227,784) 49,263 59,691
Other Assets and Liabilities............................ 5,185 (3,061) 69,360
----------- ------------ -----------
Net Cash Flows For Operating Activities..................... $(1,122,135) $(1,562,488) (637,506)
------------ ------------ -----------
Cash Flows From (For) Investing Activities:
Increase in Fixed Assets................................ $ (92,989) $ (71,689) $ (88,959)
Net Cash Flows From (For) Investing Activities.............. $ (92,989) $ (71,689) (88,959)
------------ ------------ -----------
Cash Flows From (For) Financing Activities:
Acquisition/(Repayment) of Short Term Debt.............. $ 1,328,688 $ (284,800) $ (304,503)
Issuance of Common Stock................................ 2,246,957 287,534 167,308
------------ ------------ -----------
Net Cash Flows From (For) Financing Activities.............. $ 3,575,645 $ 2,734 $ (137,195)
------------ ------------ -----------
Net Increase/(Decrease) in Cash............................. $ 2,360,521 $(1,631,443) $ (863,660)
Cash Balance, Beginning of Year............................. 162,925 2,523,446 892,003
------------ ------------ -----------
Cash Balance, End of Year................................... $ 2,523,446 $ 892,003 $ 28,343
------------ ------------ -----------
* Restated for prior period adjustments - See note-13
As of December 31, 2002, an aggregate of $ 373,730 of Convertible Long term
Debt was converted into Common Stock.
The accompanying notes are an integral part of these financial statements.
F-6
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH - Includes Tech Labs' checking account at Hudson United Bank plus
a Demand Money Market Account at Prudential Securities and Bear Stearns.
REVENUE RECOGNITION - Tech Labs recognizes all revenues when orders are
shipped.
ACCOUNTS RECEIVABLE - Tech Labs recognizes sales when orders are
shipped to customers. The allowance for bad debts is accrued based on a review
of customer accounts receivables aging.
INVENTORIES - Inventories are valued at cost or market, whichever is
lower. The FIFO cost method is generally used to determine the cost of the
inventories. At December 31, 2000, 2001, and 2002, physical inventories were
taken and tested. At December 31, 2002, Inventories were written-down $500,000.
This write-down was for obsolete and slow moving inventory as determined by
company management.
PROPERTY AND DEPRECIATION - Additions to property and equipment are
recorded at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets as follows:
Assets Estimated Useful Lives
------ ----------------------
Machinery 5 to 7 years
Furniture & Fixtures 5 to 7 years
Maintenance and repairs are charged to expense as incurred. The cost of
betterments is capitalized and depreciated at appropriate rates. Upon retirement
or other disposition of property items, cost, and accumulated depreciations are
removed from the accounts and any gain or loss is reflected in the statement of
income.
INCOME TAXES - Income tax expense is based on reported income and
deferred tax credit is provided for temporary differences between book and
taxable income.
MARKETABLE SECURITIES - The marketable securities are a time deposit at
Hudson United Bank. The amount of this deposit was $40,000 as of December 31,
2001 and December 31, 2002.
(2) INVENTORIES:
Inventories at December 31, 2000,2001 and 2002 were as follows:
2000 2001 2002
---- ---- --------------
Raw Materials & Finished Components $ 912,358 $ 993,666 $ 676,996
Work in Process & Finished Goods $ 374,480 $ 1,081,813 $ 1,058,637
------- --------- ---------
$ 1,286,838 $ 2,075,479 $ 1,735,633
--------- --------- ---------
(3) INCOME/(LOSS) PER SHARE:
F-7
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002
Pursuant to the provisions of SFAS No. 128, "Earnings Per Share," the
Net Income/(Loss) per share was calculated on the weighted average number of
shares outstanding during the year ended December 31, 2000, for the year ended
December 31, 2001, and for the year ended December 31, 2002.
Fully Diluted Earnings per share would be based on the assumed
conversion of all convertible notes. However, these notes are anti-dilutive and
have been excluded. The assumed conversion of all outstanding options and
warrants were also excluded due to anti-dilution.
2000 2001 * 2002
---- ---- ----
Net Income for the
Computation of Basic EPS (418,655) (1,026,432) (1,241,660)
========= ========== ==========
Shares for Computation of
Basic EPS 3,834,485 4,562,823 5,156,679
========= ========== ==========
* Restated for Stock option Expense of $ 168,950.
(4) INCOME TAXES:
At December 31, 2000, 2001, and 2002 the balance of operating loss
carryforward was $2,292,591, and $3,150,073 and $ 4,391,733 respectively, which
can be utilized to offset future taxable income. These operating loss
carry-forwards begin to expire in 2014.
(5) CURRENT PORTION OF LONG-TERM DEBT:
Loans payable to banks were as follows for the years indicated:
CURRENT NON-CURRENT
YEAR ENDED PAYEE INTEREST RATE AMOUNT AMOUNT
2000 Hudson United Bank Prime +1.5% $17,198
2001 Hudson United Bank Prime +1.5% $33,347
2002 Hudson United Bank Prime +1.5% $31,713
This loan was negotiated in 1995 at an original amount of $35,000 and fluctuated
to a maximum of $35,000.
Marketable Securities are pledged as collateral on the above loans.
(6) SHORT-TERM LOANS PAYABLE:
Demand loans Payable include loans from third parties. The outstanding
loan balances due as of December 31, 2000, December 31, 2001 and December 31,
2002 was $63,623 for 2000, $63,789 for 2001 and $ 56,815 for 2002 which includes
accrued interest for all years. The annual interest rate for these loans ranges
between six (6%) percent and ten (10%) percent. In October of 1999, three
short-term loans for a total of $200,000 at ten percent (10%) annual interest
were completed. Certain contractual revenues were pledged to secure these loans.
As of December 31, 2000, $150,000 of such loans were repaid. The remaining
$50,000 is outstanding and was due by December 31, 2002 and as in default.
(7) COMMON STOCK:
F-8
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002
In 1999, Tech Labs filed a registration statement on Form SB-2 with the
Securities and Exchange Commission. The registration statement was declared
effective on February 3, 2000. The offering was completed on May 3, 2000 for
total proceeds of $2,273,723.
(8) COMMITMENTS AND CONTINGENCIES:
In 1997 Tech Labs entered into an exclusive agreement with Elektronik
Apparatebau (EAG), FUA Safety Equipment and Double T Sports LTD. whereby it
received exclusive rights to manufacture and market IDS products until September
30, 2007 in the US, Canada, and South America. Gross profits will be calculated
according to GAAP and distributed quarterly 70% to Tech Labs and 30% to FUA
until March 2001. Thereafter, until 2007 quarterly distribution will be based on
pretax profits in excess of 16% being shared 70% to Tech Labs and 30% to FUA. In
addition, FUA will receive a 5% royalty based on the cost of any IDS products
Tech Labs manufactures and sells. Since 1997, sales and distributions to FUA
have been $1.4 million and $198,200, respectively. $13,000 of distributions are
still owed.
(9) LONG-TERM CONVERTIBLE DEBT:
On October 13, 2000 Tech Labs completed a $1.5 million dollar 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 December 31, 2002, $373,730 of principal on the convertible notes
has been converted into shares of Tech Labs' common stock.
(10) On January 11, 2002, Tech Labs entered into a conversion and redemption
agreement concerning the Long- Term Debt referenced in Note (9). An Event of
Default, as defined in the 6.5% convertible notes Tech Labs issued in October
2000, occurred on January 25, 2002, when Tech Labs was unable to make the first
payment of $750,000 to the holders of the notes.
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 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 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 Convertible Notes prior to the
expiration of the waiver the Company had been granted by the noteholders, which
had been granted in order to permit the parties time to negotiate a new
agreement. The Company continues to seek a cure for the default with the holders
of the Convertible Notes.
(11) GOING CONCERN:
As a result of operating losses and negative cash flows experienced
during 2001 and 2002. Tech Labs has a tenuous liquidity position. If sales do
not improve or alternate financing is not obtained, substantial doubt exists
about Tech Labs' ability to continue as a going concern.
(12) Prior Period Adjustment.
Over the course of 2001, Tech Labs issued and distributed 170,000
shares of common stock to Mr. Barry Bendett pursuant to the terms of a
consulting agreement the Company entered into with Mr. Bendett on November 13,
2000. Valuing these shares at their market value on their respective dates of
issuance and distribution. Tech Labs should have expensed $168,950. This
compensation was never expensed. This error is corrected as follows:
(13) Subsequent Event
The Company signed a promissory note in the principal amount of $12,000
dated April 8, 2003 due May 8, 2003 at an interest rate of 10%.
FULL YEAR 2001
--------------
Closing Balance retained Earnings as reported $(2,406,542)
Adjustment referenced above (168,950)
-----------
Revised December 31, 2001, Closing Balance of Retained Earnings $(2,575,492)
Net Loss - 2002 (1,241,660)
-----------
December 31, 2002 , Retained Earnings after prior period Adjustment $(3,817,152)
-----------
F-9
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The information required by Item 9 shall be set forth in the
Company's amendment to this Annual Report on Form 10-KSB, and is incorporated by
reference.
Item 10. Executive Compensation.
The information required by Item 10 shall be set forth in the
Company's amendment to this Annual Report on Form 10-KSB, and is incorporated by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 11 shall be set forth in the
Company's amendment to this Annual Report on Form 10-KSB, and is incorporated by
reference.
Item 12. Certain Relationships and Related Transactions.
The information required by Item 12 shall be set forth in the
Company's amendment to this Annual Report on Form 10-KSB, and is incorporated by
reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed herewith or have been previously
filed with the Securities and Exchange Commission and are incorporated by
reference herein.
EXHIBIT INDEX
3.1 Certificate of Incorporation.(1)
3.2 By-Laws of Tech Labs.(1)
III-1
10.1 Amended Joint Marketing Agreement and Confidentiality and Manufacturing
Agreement dated as of October 1, 1998, between Tech Labs and Elektronic
Apparutebau Gmbh (EAG), W.T. Sports, Ltd. and FVA Safety Equipment,
AG.(1)
10.2 Employment Agreement between Tech Labs and Bernard M. Ciongoli.(1)
10.3 First Amendment to Employment Agreement between Tech Labs and Bernard
M. Ciongoli.(2)
10.4 Second Amendment to Employment Agreement between Tech Labs and Bernard
M. Ciongoli dated February 21, 2001.(10)
10.6 Patent and Trademark assignments.(1)
10.7 Consulting Agreement dated March 10, 1999, between Tech Labs and Mint
Corporation.(2)
10.8 Consulting Agreement dated March 22, 1999, between Tech Labs and MPX
Network Solutions.(2)
10.9 Consulting Agreement dated June 2, 1999, between Tech Labs and Coby
Capital Corporation.(2)
10.10 Assignment of Lease dated May 1, 1992 between William Tanis as
Landlord, Forsee Corporation as Assignor and Tech Labs as Assignee.(2)
10.11 Asset Acquisition Agreement dated as of March 12, 1999, by and between
NORDX/CDT, Inc. and Tech Labs.(2)
10.12 Tech Labs Stock Option Plan.(2)
10.13 Stock Option Agreement dated June 3, 1999, between Tech Labs and Coby
Capital Corporation.(2)
10.14 Stock Option Agreement dated March 10, 1999, between Tech Labs and Mint
Corporation.(2)
10.15 Stock Option Agreement dated March 10, 1999, between Tech Labs and Mint
Corporation.(2)
10.16 Joint Marketing Agreement dated October 15, 1999, between Tech Labs and
TravelNet Technologies, Inc.(3)
10.17 Promissory Note and Security Agreement dated October 25, 1999, between
Tech Labs and Peter B. Hirschfield, Trustee, Olive Cox-Sleeper Trust
dated 10/3/58 f/b/o Bert L. Atwater.(4)
10.18 Promissory Note dated December 13, 1999, between Tech Labs and Campbell
Steward.(5)
10.19 Promissory Note dated December 15, 1999, between Tech Labs and Herbert
L. Camp, Esq.(5)
10.20 Promissory Note dated December 20, 1999, between Tech Labs and Thomas
McKean, Esq.(5)
10.21 Shareholders Agreement dated June 23, 2000 by and between Tech Labs
Community Networks, Inc., the Shareholders of M3Communications, Inc.
and Tech Labs Community Networks of the South East, Inc.(5)
10.22 Warrant Agreement dated June 23, 2000 executed by Tech Labs and
delivered to m3communications, Inc.(5) 10.23 First Amendment to Asset
Purchase Agreement dated June 9, 2000 entered into by and between Tech
Labs, M3communications, Inc. and the shareholders of M3.(5)
10.24 Consulting Agreement dated as of November 13, 2000 by and between Barry
Bendett and Tech Labs.(5)
10.25 Subscription Agreement entered into between the subscribers and Tech
Labs dated October 13, 2000.(6)
10.26 Common Stock Purchase warrant entered into between the warrant holders
and Tech Labs dated October 13, 2000.(6)
10.27 Amendment to Consulting Agreement dated as of April 9, 2001, and
retroactive from March 13, 2001, between Tech Labs and MPX Network
Solutions.(7)
10.28 Amended and Restated Employment Agreement dated August 24, 2001, by and
between the Company and Bernard Ciongoli.(8)
10.29 Conversion and Redemption Agreement dated January 11, 2002, by and
between the Company and the holders of the 6.5% convertible promissory
notes the Company issued in October 2000.(9)
10.30 Lease Modification dated February 27, 2002.
21.1 Subsidiaries of the Company.
99.1 Certification of the Chief Executive and Chief Financial Officer of the
Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
------------------------------------
(1) Incorporated by reference from the Registrant's Registration
Statement on Form SB-2, File No. 333-82595, effective February 3,
2000, filed on July 9, 1999.
(2) Incorporated by reference from Amendment No. 1 Registrant's
Registration Statement on Form SB-2, File No. 333-82595, effective
February 3, 2000, filed on October 18, 1999.
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(3) Incorporated by reference from Amendment No. 2 to Registrant's
Registration Statement on Form SB-2, File No. 333-82595, effective
February 3, 2000, filed on November 19, 1999.
(4) Incorporated by reference from Amendment No. 3 to Registrant's
Registration Statement on Form SB-2, File No. 333-82595, effective
February 3, 2000, filed on December 17, 1999.
(5) Incorporated by reference from the Registrant's Registration
Statement on form SB-2, File No. 333-50158, effective January 22,
2001, filed on November 17, 2000.
(6) Incorporated by reference from Amendment No. 5 to Registrant's
Registration Statement on Form SB-2, File No. 333-82595, effective
February 3, 2000, filed on January 28, 1999.
(7) Incorporated by reference from Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form SB-2, File No. 333-50158,
effective May 7, 2001.
(8) Incorporated by reference from the Registrant's Quarterly Report
filed on Form 10-QSB, File No. 000- 30172, filed on November 14,
2001.
(9) Incorporated by reference from the Registrant's Currant Report on
Form 8-K, File No. 000-30172, filed on January 11, 2002.
(10) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB, File No. 000-30172, filed on April 3, 2001.
(b) Reports on Form 8-K.
On January 11, 2002, the Company filed a Current Report (Item V) on
Form 8-K reporting that the Company entered into a redemption and conversion
agreement (the "Redemption Agreement") with the holders (the "Holders") of its
6.5% convertible promissory notes originally issued in October 2000 (the
"Notes"). Under the terms of the Redemption Agreement, the Holders were entitled
to receive two installments: (i) $750,000 and 300,000 shares of stock on or
before January 25, 2002, and (ii) on or before April 25, 2002, an aggregate of
$360,000 plus an additional $90,000 in cash or common stock, at the election of
the Company, based upon the closing price of the shares of the Company's common
stock on April 18, 2002. Provided the Company complied with the terms of the
Redemption Agreement, (i) interest on the Notes was to cease to accrue on the
Notes from and after January 25, 2002, and (ii) the Holders were not to exercise
their right to convert outstanding balances on the Notes into shares of common
stock.
On January 30, 2002, the Company filed a current report (Item V) on
Form 8-K reporting that an Event of Default occurred under its outstanding 6.5%
convertible promissory notes. The outstanding principal and interest under the
notes at January 25, 2002, was $1,218,099. The Event of Default occurred due to
the Company's non- payment of the first installment due under that certain
Redemption Agreement dated January 11, 2002, relating to the redemption by the
Company from holders of the notes originally issued in October 2000 (the
"Notes"). Under the terms of the Redemption Agreement, the holders were entitled
to receive in two installments (i) the first installment of $750,000 and 300,000
shares of stock on or before January 25, 2002, and (ii) on or before April 25,
2002, the second installment of an aggregate of $360,000 plus an additional
$90,000 in cash or common stock, at the election of the Company, based upon the
closing price of the shares of the Company's common stock on April 18, 2002. An
Event of Default, as defined in the Notes, occurred when the Company did not
make the first installment under the Redemption Agreement of $750,000 and
deliver the 300,000 shares on or before on Friday, January 25, 2002, and it
allows each holder to elect to cancel any unfulfilled or future redemption and
conversion and to accelerate payment of all outstanding principal and interest
due under the Notes.
On July 8, 2002, the Company filed a current report on Form 8-K
reporting under Item V (Other Events) that the Company issued a press release
announcing that it had entered into an agreement pursuant to which the holders
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of its 6.5% convertible promissory notes agreed to waive any defaults until July
15, 2002, that may otherwise have occurred under the Amended Redemption
Agreement in order to allow the parties time to negotiate revised terms of their
agreement.
On July 18, 2002, the Company filed a current report on Form 8-K
reporting under Item V (Other Events) that the Company issued a press release
announcing that it had entered into an agreement pursuant to which the holders
of its 6.5% convertible promissory notes agreed to waive any defaults until July
30, 2002, that may otherwise have occurred under the Amended Redemption
Agreement in order to allow the parties time to negotiate revised terms of their
agreement.
On August 6, 2002, the Company filed a current report on Form 8-K
reporting under Item V (Other Events) that the Company issued a press release
announcing that an Event of Default occurred under its outstanding 6.5%
convertible promissory notes. The Event of Default occurred due to the fact that
the waiver the Company had been granted by noteholders waiving any event of
default under the notes, including the requirement to have declared effective on
or before June 29, 2002, the registration statement covering the shares
underlying the notes had expired without the Company and the noteholders having
reached a new agreement.
Item 14. Evaluation of Disclosure Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. We maintain controls and
procedures designed to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. Based upon his
evaluation of those controls and procedures performed within 90 days of the
filing date of this report, our chief executive officer and principal financial
officer concluded that our disclosure controls and procedures were adequate.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the chief
executive officer and principal financial officer.
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TECH LABORATORIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 2003 TECH LABORATORIES, INC.
By: /s/ Bernard M. Ciongoli
------------------------------
Bernard M. Ciongoli
President
As required by the Securities Exchange Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
President, Chief Executive Officer, Chief April 15, 2003
/s/Bernard M. Ciongoli Financial Officer, and Director
--------------------------------------
Bernard M. Ciongoli
/s/ Earl M. Bjorndal Vice President and Director April 15, 2003
--------------------------------------
Earl M. Bjorndal
CERTIFICATIONS
I, Bernard M. Ciongoli, President, Chief Executive Officer, and Chief
Financial Officer of Tech Laboratories, Inc. certify that:
1. I have reviewed this annual report on Form 10-KSB for Tech
Laboratories, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report.
3. Based on my knowledge, the financial statements and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operation, and cash flows of the registrant as of,
and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
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(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls.
6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 15, 2003
By: /s/ Bernard M. Ciongoli
-----------------------------------------------
President, Chief Executive Officer, and Chief
Financial Officer
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