SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 205249
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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 March 31, 2003.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
955 Belmont Avenue, North Haledon, NJ 07508
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(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 [_]
The number of shares of Common Stock, par value $.01 per share, outstanding
as of the latest practicable date: As of May 19, 2003, there were 5,522,416
shares outstanding.
Tech Laboratories, Inc.
FORM 10-QSB
Table of Contents
PART I FINANCIAL INFORMATION..................................................................................... 1
Item 1. Financial Statements................................................................................... 1
March 31, 2002 and 2003 Balance Sheet (unaudited)...................................................... 1
Statement of Operations March 31, 2002 and 2003 (unaudited)............................................ 3
Statements of Cash Flow March 31, 2002 and 2003 (unaudited)............................................ 4
Notes to Financial Statements.......................................................................... 5
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..................................................................................... 9
Item 6. Exhibits and Reports on Form 8-K....................................................................... 9
SIGNATURES..................................................................................................... 10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TECH LABORATORIES, INC.
March 31, 2002 and 2003
Balance Sheet
(unaudited)
ASSETS
2002 2003
---- ----
Current Assets:
Cash $ 476,012 $ 85,038
Marketable Securities 40,000 40,000
Accounts Receivable, Net of
Allowance for Doubtful Accounts of $25,000 155,789 28,887
Inventories 2,243,180 1,655,386
Prepaid Expenses 6,303 6,303
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Total Current Assets $2,921,284 $1,815,614
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Property, Plant, and Equipment, at Cost
Leasehold Improvements 2,247 2,247
Machinery, Equipment, and Instruments 524,730 607,987
Furniture and Fixtures 97,090 105,287
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Total Property, Plant, and Equipment 624,067 715,521
Less: Accumulated Depreciation & Amortization (379,590) (414,248)
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Net Property, Plant, and Equipment $ 244,477 $ 301,273
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Other Assets $ 12,059 $ 12,059
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Total Assets $3,177,820 $2,128,946
========== ==========
The accompanying notes are an integral part of these financial statements.
1
TECH LABORATORIES, INC.
March 31, 2002 and 2003
Balance Sheet
(unaudited)
LIABILITIES AND STOCKHOLDERS' INVESTMENTS
2002 2003
---- ----
Current Liabilities:
Defaulted Convertible Notes $ 1,165,375 $1,170,181
Current Portion of Long-Term Debt 33,074 29,751
Short-Term Loans Payable 53,427 54,827
Accounts Payable and Accrued Expenses 85,500 135,644
Other Liabilities 2,234 67,425
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Total Current Liabilities $ 1,339,610 $ 1,460,828
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Stockholders' Investment:
Common Stock, $.01 Par Value; 25,000,000 Shares Authorized:
5,143,530 shares outstanding in 2002, 5,522,415
outstanding in 2003 $ 47,836 $ 49,848
Less: 15,191 Shares Reacquired and Held in Treasury (113) (113)
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$ 47,723 $ 49,735
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Capital Contributed in Excess of Par Value $ 4,339,478 $ 4,480,381
Retained Earnings/(Accum. Deficit) (2,548,991) (3,861,998)
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$1,790,387 $ 618,353
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Total Liabilities and Stockholders' Equity $ 3,177,820 $ 2,128,946
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
TECH LABORATORIES, INC.
Statement of Operations
March 31, 2002 and 2003
(unaudited)
2002 2003
---- ----
Sales $ 122,830 $ 94,327
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Costs and Expenses:
Cost of Sales 82,296 58,165
Selling, General, and Administrative Expense 164,662 62,702
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246,958 120,867
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Income/(Loss) from Operations $ (124,128) $ (26,540)
Other Income (Expenses): (18,321) (18,306)
Income/(Loss) Before Income Taxes $ (142,449) $ (44,846)
Provision for Income Taxes -0- -0-
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Net Income/(Loss) $ (142,449) $ (44,846)
Retained Earnings/(Accum. Deficit), Beg. Qtr. (2,406,542) (3,817,152)
----------- -----------
Retained Earnings/(Accum. Deficit), End. Qtr. $(2,548,991) $(3,861,998)
----------- -----------
Earnings Per Share $(0.03) $(0.01)
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3
TECH LABORATORIES, INC.
Statements of Cash Flow
March 31, 2002 and 2003
(unaudited)
2002 2003*
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Cash Flow From (For) Operating Activities:
Net Income/(Loss) From Operations $ (142,449) $(44,846)
Add/(Deduct) Items Not Affecting Cash:
Depreciation 7,837 7,900
Amortization -0- -0-
Changes in Operating Assets and Liabilities
Marketable Securities -0- -0-
Accounts Receivable (43,589) (22,743)
Inventories (167,701) 80,247
Prepaid Expenses -0- -0-
Accounts Payable and Accrued Expenses 3,276 3,271
Other Assets/Liabilities (18,110) 28,943
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Net Cash Flow From (For) Operating Activities (360,736) 52,772
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Cash Flows From (For) Investing Activities (1,428) 3,923
Cash Flow From (For) Financing Activities:
Defaulted Convertible Notes - repayment (53,827) -0-
Issuance of Common Stock -0- -0-
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Net Cash Flow From (For) Financing Activities (53,827) -0-
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Net Increase/(Decrease) in Cash (415,991) 56,695
Cash Balance Beginning of Year 892,003 28,343
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Cash Balance End of First Quarter $ 476,012 $ 85,038
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* As of March 31, 2003, an aggregate of $373,730 of Convertible Long-Term
Debt was converted into Common Stock.
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TECH LABORATORIES, INC.
Notes to Financial Statements
For the Quarter Ended March 31, 2003
(unaudited)
(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, 2001 and 2002, physical inventories were taken and tested. No
physical inventory was taken at March 31, 2003.
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,
2002 and March 31, 2003.
(2) INVENTORIES:
Inventories at December 31, 2001 and 2002 were as follows:
Three Months
Ended
2001 2002 March 31, 2003
---- ---- --------------
Raw Materials & Finished Components $ 993,666 $ 676,996 $ 554,683
Work in Process & Finished Goods $1,081,813 $1,058,651 $1,100,703
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$2,075,479 $1,735,633 $1,655,386
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(3) INCOME/(LOSS) PER SHARE:
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, 2001, for the year ended December
31, 2002, and for the first quarter of 2003.
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.
Three Months ended
2001 2002 March 31, 2003
---- ---- --------------
Net Income for the Computation of Basic EPS (1,026,432) (1,241,660) (44,846)
========== ========== =======
Shares for Computation of Basic EPS 4,562,832 5,156,679 5,156,679
========= ========= =========
(4) INCOME TAXES:
At December 31, 2002, the balance of operating loss carryforward was
$4,391,733, and at March 31, 2003, the operating loss carryforward was
$4,436,579, 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
---------- ----- ------------- ------ ------
2001 Hudson United Bank Prime +1.5% $33,347
2002 Hudson United Bank Prime +1.5% $31,713
March 31, 2003 Hudson United Bank Prime +1.5% $31,347
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, 2002 was $56,815 and $54,827 as of March 31,
2003, 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 is now in default.
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(7) COMMON STOCK:
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. $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 March 31, 2003, $373,730 of principal on the 6.5% 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, 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 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 continues to seek a cure for the default with the holders
of the 6.5% 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,
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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, 2002.
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:
FULL YEAR 2001
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Closing Balance retained Earnings as reported $(2,406,542)
Adjustment referenced above $(168,950)
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Revised December 31, 2001, Closing Balance of Retained Earnings $(2,575,492)
Net Loss - 2002
$(1,241,660)
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December 31, 2002, Retained Earnings after prior period Adjustment $(3,817,152)
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(13) SUBSEQUENT EVENT:
The Company signed a promissory note in the principal amount of $12,000,
dated April 8, 2003, which was due May 8, 2003 and is presently outstanding and
in default.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information contained in this section should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing in this
report Form 10-QSB and the Company's Annual Report for the year ended December
31, 2002.
Quarter ending March 31, 2003, compared to Quarter ending March 31, 2002.
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Sales were $94,327 for the first quarter of 2003 as compared to $122,830
for the similar period of 2002. This decrease was due to the continuing effects
of the economic downturn.
Cost of sales of $58,165 for the first quarter of 2003 has been decreased
by $24,131 compared to the same period of 2002, primarily due to the sales
decline.
Selling, administrative, and general expenses decreased by $101,960
compared to the same period of 2002 due to reductions in marketing, sales, and
administrative expense necessitated by sales reductions.
Loss from operations of ($26,540) improved $97,588 compared to a loss of
($124,128) for the prior period as a direct result of cost reductions.
Quarter ending March 31, 2003, compared to year ending December 31, 2002.
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SIGNIFICANT CHANGES
During the first quarter of 2003, the Company is still suffering from the
economic downturn.
Cash Flow for the first quarter of 2003 was a positive $56,695 as a result
of the reductions in current assets necessitated by the continuing economic
downturn in the telecommunications industry.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated cash of $52,772 during the
three months ended March 31, 2003, as compared to utilizing cash of ($360,736)
during the three months ended March 31, 2002.
As a result of operating losses and negative cash flow experienced during
2002, 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.
Item 3. Controls and Procedures
As of March 31, 2003, an evaluation was performed under the supervision and with
the participation of our management, including our Chief Executive Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including our Chief
Executive Officer, concluded that our disclosure controls and procedures were
effective as of March 31, 2003. There have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls subsequent to March 31, 2003.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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.
(b) Reports on form 8-K.
None.
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TECH LABORATORIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 20, 2003
TECH LABORATORIES, INC.
By: /s/ Bernard M. Ciongoli
----------------------------------------
Bernard M. Ciongoli
Chief Executive Officer, Principal Financial
Officer and Chief Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Bernard M. Ciongoli, President, Chief Executive Officer, and Chief
Financial Officer of Tech Laboratories, Inc. certify that:
1. I have reviewed this quarterly report on Form 10-Q for the Tech
Laboratories, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report.
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly 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 quarterly 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
quarterly report is being prepared;
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(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 quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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 quarterly 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: May 20, 2003
By: /s/ Bernard M. Ciongoli
-----------------------------------------
President, Chief Executive Officer, and Chief
Financial Officer
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