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 September 30, 2004.
[_] 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
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TECH LABORATORIES, INC.
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(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 November 19, 2004, there
were 72,047,257 shares outstanding.
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Balance Sheet September 30, 2004 3
Statement of Operations for the three and nine
months ended September 30, 2004 and 2003 4
Statement of Cash Flows for the nine months ended
September 30, 2004 and 2003 5
Notes to Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 12-15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults by the Company upon its
Senior Securities 15
Item 4. Submission of Matter to a Vote of
Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports of Form 8-K 15
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
TECH LABORATORIES, INC.
September 30, 2003 and 2004
Balance Sheet
(unaudited)
ASSETS
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
2003 2004
----------- -----------
Current Assets:
Cash .............................................. $ 45,793 $ 43,470
Accounts Receivable, Net of Allowance for
Doubtful Accounts of $25,000 .................... 16,415 104,293
Inventories ....................................... 1,619,651 1,392,863
Prepaid Expenses .................................. 6,303 6,303
----------- -----------
Total Current Assets ............... $1,688,162 $1,546,929
Property, Plant, and Equipment, at Cost
Leasehold Improvements ............................ 2,247 2,247
Machinery, Equipment, and Instruments ............. 600,070 607,987
Furniture and Fixtures ............................ 109,317 109,378
----------- -----------
Total Property, Plant, and Equipment 711,634 719,612
Less: Accumulated Depreciation & Amortization (423,022) (440,223)
----------- -----------
Net Property, Plant, and Equipment . $ 288,612 $ 279,389
----------- -----------
Other Assets ........................................ $ 12,059 $ 14,420
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Total Assets ....................... $1,988,833 $1,840,738
=========== ===========
The accompanying notes are an integral part of these
financial statements.
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TECH LABORATORIES, INC.
September 30, 2003 and 2004
Balance Sheet
(unaudited)
LIABILITIES AND STOCKHOLDERS' INVESTMENTS
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
2003 2004
----------- -----------
Current Liabilities:
Defaulted Convertible Notes ............................. $ 1,207,106 $ 1,104154
Current Portion of Long-Term Debt ....................... 30,741 29,306
Short-Term Loans Payable ................................ 53,427 50,449
Accounts Payable ........................................ 105,480 104,139
Other Liabilities ....................................... 177,721 13,941
----------- -----------
Total Current Liabilities ................ $ 1,574,475 $ 1,301,989
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Stockholders' Investment:
Common Stock, $.01 Par Value;
25,000,000 Shares Authorized;
5,143,530 shares outstanding in 2003 250,000,000 ........ $ 49,848 $ 699,380
shares authorized; 67,522,832 shares outstanding in 2004 $ 49,848 $ 699,380
Less: 15,191 Shares Reacquired and
Held in Treasury ................................... (113) (113)
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$ 49,735 $ 699,267
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Capital Contributed in Excess of Par Value .............. $ 4,480,381 $ 4,865,702
Retained Earnings/(Accum. Deficit) ...................... (4,115,758) (5,026,220)
----------- -----------
414,358 538,749
Total Liabilities and Stockholders' Equity $ 1,988,833 $ 1,840,738
=========== ===========
The accompanying notes are an integral part of these
financial statements.
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TECH LABORATORIES, INC.
Statement of Operations For The
Third Quarter and Nine Months Ended
September 30, 2003 and 2004
(unaudited)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Sales ........................................ $ 164,200 $ 32,619 $ 229,466 $ 202,634
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of Sales .............................. 80,711 28,338 119,575 141,793
Selling, General, and Administrative Expense 116,684 228,049 430,179 304,289
----------- ----------- ----------- -----------
197,395 256,387 549,754 446,082
----------- ----------- ----------- -----------
Income/(Loss) from Operations ................ (33,195) $ (223,768) $ (320,288) $ (243,448)
Other Income (Expenses):
Interest Income ............................ 10 -- 104
192
Interest Expense ........................... (7665) (18,500) (56,400) (55,350)
----------- ----------- ----------- -----------
(7655) (18,500) (56,296) (55,150)
Income/(Loss) Before Income Taxes ............ $ (40,850) $ (242,268) $ (376,584) $ (298,606)
Provision for Income Taxes ................... -- -- -- --
----------- ----------- ----------- -----------
Net Income/(Loss) ............................ $ (40,850) $ (242,268) $ (376,584) $ (298,606)
Retained Earnings/(Accum. Deficit), Beg ...... (4,985,370) (3,873,490) (4,649,636) (3,817,152)
----------- ----------- ----------- -----------
Retained Earnings/(Accum. Deficit), End ...... (5,026,220) $(4,115,758) (5,026,220) $(4,115,758)
----------- ----------- ----------- -----------
Earnings Per Share ........................... $-0- $ (0.05) $ (0.01) $ (0.06)
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these
financial statements.
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TECH LABORATORIES, INC.
Statement of Cash Flow For The
Nine Months Ended
September 30, 2003 and 2004
(unaudited)
2003 2004
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Cash Flow From (For) Operating Activities:
Net Income/(Loss) From Operations ...................... $(298,606) $(376,584)
Add/(Deduct) Items Not Affecting Cash:
Depreciation accrued expenses and other non cash expense 19,921 384,231
Changes in Operating Assets and Liabilities
Accounts Receivable ............................... (10,271) (93,186)
Inventories ....................................... 115,982 (143,096)
Accounts Payable .................................. (36,435) (70,861)
Other Assets/Liabilities .......................... 186,631 (12,394)
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Net Cash Flow For Operating Activities ................. (22,574) (311,890)
--------- ---------
Cash Flows From (For) Investing Activities
Addition of Machinery and Equipment .................. (36) 1,515
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Net Cash Flow From Investing Activities ................ (36) 1,515
--------- ---------
Cash Flow From (For) Financing Activities:
Acquisition/(Payment) of Short/Long-Term Debt ........ -0- 175,000
Issuance of Common Stock ............................. -0- -0-
--------- ---------
Net Cash Flow From (For) Financing Activities .......... -0- 175,000
--------- ---------
Net Increase/(Decrease) in Cash ........................ (22,550) (135,375)
Cash Balance Beginning of Year ......................... 68,343 178,845
Cash Balance End of Third Quarter ...................... $ 45,793 $ 43,470
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SIGNIFICANT NON-CASH FINANCING ACTIVITIES:
-----------------------------------------
As of September 30, 2004, an aggregate of $981,761 of Convertible Long-Term Debt
was converted into Common Stock.
The accompanying notes are an integral part of these
financial statements.
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TECH LABORATORIES, INC.
Notes to Financial Statements
For the Quarter Ended September 30, 2004
(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 and a CD
at Hudson United Bank serving as collateral for the current portion long term
debt.
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, 2002 and 2003, physical inventories were taken and
tested. No physical inventory was taken at March 31, 2004 June 30, 2004, and
September 30, 2004.
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.
USE OF ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the associated expenses during the
reporting period. Actual results could differ from those estimates.
(2) INVENTORIES:
Inventories were as follows:
Six Months Nine Months
Dec.31, Ended Ended
2003 June 30, 2004 September, 30 2004
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Raw Materials & Finished Components $ 463,824 $ 430,735 $ 352,041
Work in Process & Finished Goods .. $ 705,953 998,751 $1,040,822
---------- ---------- ----------
$1,249,777 $1,429,486 $1,392,863
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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, 2003, for the nine months ended
September 30, 2004.
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.
Nine Months ended
2003 Sept. 30, 2004
----------- -----------------
Net Income for the Computation of Basic EPS (832,483) (376,584)
=========== ===========
Shares for Computation of Basic EPS ....... 9,368,992 42,450,204
=========== ===========
(4) INCOME TAXES:
At December 31, 2003, the balance of operating loss carryforward was
$5,224,216 and at September 30,2004 the operating loss carryforward was
$5,591,587 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
---------- ----- ------------- ------ ------
2003 Hudson United Bank Prime +1.5% $33,347
March 15, 2004 Hudson United Bank Prime +1.5% $31,713
June 30, 2004 Hudson United Bank Prime +1.5% $30,741
September 30, 2004 Hudson United Bank Prime +1.5% $29,306 This loan was
negotiated in 1995 at an original amount of $35,000 and fluctuated to a maximum
of $35,000.
A Time Deposit CD is 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, 2003 was $55,449, and $50,449 as of
September 30, 2004 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. $8,000 of distributions are still owed and
subject to arbitration.
(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 has negotiated a cure for this default which is described
in the Company's Form 8-K filed in October, 2003. In May, 2004, Cornell Capital
acquired this convertible debt and signed a stand by equity financing agreement
with Tech Labs, Inc. Financing availability is contingent on registration of the
shares underlying this agreement. An SB-2 to register these shares is in
process.
(11) GOING CONCERN:
As a result of operating losses and negative cash flows experienced during
2001, 2002, 2003, and nine months ended September 30, 2004 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.
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(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
--------------
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)
-----------
(13) DISCLOSURE OF STOCK BASED COMPENSATION:
Beginning in 2002, Tech Labs adopted the expense provision of financial
accounting standards No.123 and Accounting Principles Board ("APB") opinion No.
25. Accordingly, all compensation to employees or outside consultants in the
form of common stocks awards have been expensed.
(14) NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS:
The Company does not anticipate the adoption of recently issued accounting
pronouncements to have a significant effect on the Company's results of
operations, financial position or cash flows.
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Item 2. Management's Discussion and Analysis of Financial Conditions 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 Sept. 30, 2004, compared to Quarter ending Sept. 30, 2003.
Sales were $164,200 for the third quarter of 2004 as compared to $32,619
for the similar period of 2003. This increase was due to the sale of IDS Sensors
to BAE Systems. The Company continues to seek long term contracts with major
computer companies. The company believes these contracts will provide future
growth for its major Product DYNTRAX. Cost of sales of $80,711 for the third
quarter of 2004 has increased by $52,373 compared to the same period of 2003,
primarily due to the BAE sale.
Selling, administrative, and general expenses decreased by $111,365
compared to the same period of 2003 due to decreases in selling expenses, and
expenses associated with the company's attempts to raise long term capital due
to the successful completion of the stand by equity agreement.
Net Loss from operations of $(40,850) decreased $201,418 compared to a
loss of ($242,268) for the prior period as a direct result of the BAE sale and
declines in expenses incurred to explore long term financing prospects.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities utilized a cash flow of ($135,375)
during the nine months ended Sept. 30, 2004, as compared to a cash flow of
($22,550) during the nine months ended Sept. 30, 2003.
As a result of operating losses and negative cash flow experienced during
2001, 2002 and 2003, and continuing in 2004 Tech Labs has a tenuous liquidity
position. If sales do not improve or the new alternative financing is not
available in the near future, substantial doubt exists about Tech Labs' ability
to continue as a going concern. The company has signed a stand-by equity
distribution agreement with Cornell Capital Partners in May 2004, which could
potentially provide approximately $8.5 million of future equity financing. The
company is in the process of preparing an SB-2 registration Statement
registering the shares included in this agreement.
During the first nine months of 2004, the Company is still suffering from
the economic downturn.
Cash Flow for the first nine months of 2004 was ($135,375) as a result of
the downturn in the telcommunications industry plus the cost of seeking
alternate financing.
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Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer (collectively the
"Certifying Officers") maintain a system of disclosure controls and procedures
that is designed to provide reasonable assurance that information, which is
required to be disclosed, is accumulated and communicated to management timely.
Under the supervision and with the participation of management, the Certifying
Officers evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule [13a-14(c)/15d-14(c)]
under the Exchange Act) within 90 days prior to the filing date of this report.
Based upon that evaluation, the Certifying Officers concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relative to our company required to be disclosed in our
periodic filings with the SEC.
(b) Changes in internal controls.
Our Certifying Officer has indicated that there were no significant changes in
our internal controls or other factors that could significantly affect such
controls subsequent to the date of his evaluation, and there were no such
control actions with regard to significant deficiencies and material weaknesses.
- 10 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 31, 2002, Tawfik Khalil and Amneh Khalil filed a lawsuit in the Superior
Court of Passaic County, New Jersey, against Glen Venza, a Company part-time
employee, Tech Labs, and certain other parties for property damages and personal
injuries. The case arose from a car accident involving Mr. Venza and the
plaintiffs, which occurred while Mr. Venza was performing certain duties for
Tech Labs in a vehicle Mr. Venza borrowed from a third party. Tech Labs has only
been named as a party to the personal injuries, and not for property damages,
and believes it is covered for the accident by its insurance policy.
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.
On July 30, 2003, a former director an a former employee filed a joint lawsuit
in Superior Court of New Jersey, Passaic County against us for consulting fees
and expenses, respectively. In the same lawsuit, W.T. Sports filed a claim for a
commission owed on sales due from under a licensing agreement with us. The
claims by the former director and former employee are for about $10,000 and we
deny any liability under these claims and are defending this lawsuit. With
regard to W.T. Sports, our agreement has an arbitration in case of dispute and
therefore we are attempting to move this case to arbitration. We believe that we
have a counterclaim, which is far in excess of the amount they claim we owe for
the licensing fees. On November 11, 2004 an arbitration hearing took place. The
decision by the arbitrator will known by December 10, 2004.
On June 30, 2004, the law firm of Stusberg & Veith, former counsel to Tech
Laboratories, Inc., filed a lawsuit in the United States District Court for the
Southern District of New York claiming that The plaintiff delivered certain good
and valuable services to Tech Laboratories and is owed $161,179.26 plus
interest, costs, and disbursements for each cause of action, and other and
further relief as the court may deem necessary. The complaint alleges four
causes of action including an unpaid account stated, breach of contract, quantum
meruit, and unjust enrichment. We disagree with the amount of the unpaid balance
owed to the plaintiff. We are in the process of filing a counterclaim for
overcharging and certain wrongdoing by plaintiff.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports of 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 of Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant casued
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TECH LABORATORIES, INC.
Date: November 19, 2003 /s/ Bernard M. Ciongoli
-----------------------------------------
Bernard M. Ciongoli
Chief Executive Officer,
Principal Financial Officer and
Chief Accounting Officer)
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