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, 2002.
[_] 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)
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New Jersey 22-1436279
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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955 Belmont Avenue, North Haledon, NJ 07508
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(Address of principal executive offices) (zip code)
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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 18, 2002, there were
15,862,376 shares outstanding.
Tech Laboratories, Inc.
FORM 10-QSB
Table of Contents
PART I. FINANCIAL INFORMATION.................................................................................. 1
Item 1. Financial Statements................................................................................... 1
September 30, 2002 and 2003 Balance Sheet (unaudited)........................................................... 1
Statement of Operations For The Third Quarter and Nine Months Ended September 30, 2002 and 2003 (unaudited)..... 3
Statement of Cash Flow For The Nine Months Ended September 30, 2002 and 2003 (unaudited)........................ 4
Notes to Consolidated Financial Statements...................................................................... 5
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 9
Item 3.Controls and Procedures.................................................................................. 10
PART II. OTHER INFORMATION...................................................................................... 11
Item 1.Legal Proceedings.........................................................................................11
Item 3.Defaults Upon Senior Securities.......................................................................... 11
Item 6.Exhibits and Reports on Form 8-K......................................................................... 11
SIGNATURES...................................................................................................... 12
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
TECH LABORATORIES, INC.
September 30, 2002 and 2003
Balance Sheet
(unaudited)
ASSETS
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
2002 2003
---- ----
Current Assets:
Cash .............................................. $ 136,288 $ 5,793
Marketable Securities ............................. 40,000 40,000
Accounts Receivable, Net of Allowance for
Doubtful Accounts of $25,000 .................... 23,962 16,415
Inventories ....................................... 2,148,018 1,619,651
Prepaid Expenses .................................. 6,303 6,303
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Total Current Assets ............... $ 2,354,571 $ 1,688,162
Property, Plant, and Equipment, at Cost
Leasehold Improvements ............................ 2,247 2,247
Machinery, Equipment, and Instruments ............. 607,971 600,070
Furniture and Fixtures ............................ 100,142 109,317
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Total Property, Plant, and Equipment 710,360 711,634
Less: Accumulated Depreciation & Amortization (397,448) (423,022)
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Net Property, Plant, and Equipment . $ 312,912 $ 288,612
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Other Assets ........................................ $ 12,059 $ 12,059
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Total Assets ....................... $ 2,679,542 $ 1,988,833
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The accompanying notes are an integral part of these
financial statements.
-1-
TECH LABORATORIES, INC.
September 30, 2002 and 2003
Balance Sheet
(unaudited)
LIABILITIES AND STOCKHOLDERS' INVESTMENTS
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
2002 2003
---- ----
Current Liabilities:
Defaulted Convertible Notes ............................. $ 1,133,339 $ 1,207,106
Current Portion of Long-Term Debt ....................... 32,102 30,741
Short-Term Loans Payable ................................ 53,231 53,427
Accounts Payable ........................................ 135,731 105,480
Other Liabilities ....................................... 52,602 177,721
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Total Current Liabilities ................ $ 1,407,005 $ 1,574,475
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Stockholders' Investment:
Common Stock, $.01 Par Value;
25,000,000 Shares Authorized;
5,143,530 shares outstanding in 2002 and 2003 ...... $ 49,848 $ 49,848
Less: 15,191 Shares Reacquired and
Held in Treasury ................................... (113) (113)
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$ 49,735 $ 49,735
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Capital Contributed in Excess of Par Value .............. 4,407,949 $ 4,480,381
Retained Earnings/(Accum. Deficit) ...................... (3,185,147) (4,115,758)
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1,272,537 364,623
Total Liabilities and Stockholders' Equity $ 2,679,542 $ 1,988,833
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The accompanying notes are an integral part of these
financial statements.
-2-
TECH LABORATORIES, INC.
Statement of Operations For The
Third Quarter and Nine Months Ended
September 30, 2002 and 2003
(unaudited)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2003 2002 2003
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Sales ........................................ $ 42,597 $ 32,619 $ 337,286 $ 202,634
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Costs and Expenses:
Cost of Sales .............................. 20,376 28,338 216,099 141,793
Selling, General, and Administrative Expense 249,161 228,049 675,935 304,289
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269,537 256,387 892,034 446,082
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Income/(Loss) from Operations ................ $ (226,940) $ (223,768) $ (554,748) $ (243,448)
Other Income (Expenses):
Interest Income ............................ 855 -- 4,230 192
Interest Expense ........................... (18,122) (18,500) (59,137) (55,350)
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(17,267) (18,500) (54,907) (55,150)
Income/(Loss) Before Income Taxes ............ $ (244,207) $ (242,268) $ (609,655) $ (298,606)
Provision for Income Taxes ................... -- -- -- --
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Net Income/(Loss) ............................ $ (244,207) $ (242,268) $ (609,655) $ (298,606)
Retained Earnings/(Accum. Deficit), Beg. ...... (2,940,940) (3,873,490) (2,575,492) (3,817,152)
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Retained Earnings/(Accum. Deficit), End ...... (3,185,147) $(4,115,758) (3,185,147) $(4,115,758)
----------- ----------- ----------- -----------
Earnings Per Share ........................... $ (0.04) $ (0.05) $ (0.11) $ (0.06)
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The accompanying notes are an integral part of these
financial statements.
-3-
TECH LABORATORIES, INC.
Statement of Cash Flow For The
Nine Months Ended
September 30, 2002 and 2003
(unaudited)
2002 2003
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Cash Flow From (For) Operating Activities:
Net Income/(Loss) From Operations ........... $ (609,655) $ (298,606)
Add/(Deduct) Items Not Affecting Cash:
Depreciation/Amortization ................ 23,548 19,921
Changes in Operating Assets and Liabilities
Marketable Securities .................... -0- -0-
Accounts Receivable ...................... 88,238 (10,271)
Inventories............................... (72,539) 115,982
Accounts Payable ......................... 53,507 (36,435)
Other Assets/Liabilities ................. 45,040 186,631
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Net Cash Flow For Operating Activities ........ (471,861) (22,574)
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Cash Flows From (For) Investing Activities
Addition of Machinery and Equipment ......... (87,721) (36)
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Net Cash Flow From Investing Activities ....... (87,721) (36)
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Cash Flow From (For) Financing Activities:
Acquisition/(Payment) of Short/Long-Term Debt (197,633) -0-
Issuance of Common Stock .................... 1,500 -0-
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Net Cash Flow From (For) Financing Activities . (196,133) -0-
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Net Increase/(Decrease) in Cash ............... (755,715) (22,550)
Cash Balance Beginning of Year ................ 892,003 28,343
Cash Balance End of Third Quarter ............. 136,288 $ 5,793
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*RESTATED FOR PRIOR PERIOD ADJUSTMENT - SEE NOTE 13.
SIGNIFICANT NON-CASH FINANCING ACTIVITIES:
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As of September 30, 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.
-4-
TECH LABORATORIES, INC.
Notes to Financial Statements
For the Quarter Ended September 30, 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 September 30, 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
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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, March 31, 2003, June 30, 2003 and September 30, 2003.
(2) INVENTORIES:
Inventories were as follows:
Six Months Nine Months
Dec.31, Ended Ended
2002 June 30, 2003 September, 30 2003
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Raw Materials & Finished Components $ 676,996 $ 523,254 $ 462,607
Work in Process & Finished Goods $1,058,651 1,113,533 $ 1,157,044
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$1,735,633 $ 1,636,787 $ 1,619,651
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5
(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 third 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.
Nine Months ended
2001 2002 Sept. 30, 2003
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Net Income for the Computation of Basic EPS (1,026,432) (1,241,660) (298,606)
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Shares for Computation of Basic EPS 4,562,832 5,156,679 5,143,530
========= ========= =========
(4) INCOME TAXES:
At December 31, 2002, the balance of operating loss carryforward was
$4,391,733, and at Sept. 30, 2003, the operating loss carryforward was
$4,690,339, 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
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2001 Hudson United Bank Prime +1.5% $33,347
2002 Hudson United Bank Prime +1.5% $31,713
Sept. 30, 2003 Hudson United Bank Prime +1.5% $30,741
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 $53,427 as of Sept. 30,
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.
6
(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.
(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.
(11) GOING CONCERN:
As a result of operating losses and negative cash flows experienced during
2001 and 2002, and continuing in 2003, Tech Labs has a tenuous liquidity
position. If sales do not improve or alternate financing is not obtained,
7
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) ADDITIONAL BORROWING:
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
was in default. This default was also cured in October, 2003
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
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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, 2003, compared to Quarter ending Sept. 30, 2002.
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Sales were $32,619 for the third quarter of 2003 as compared to $42,597
for the similar period of 2002. This decrease was due to the continuing effects
of the economic downturn.
Cost of sales of $28,338 for the third quarter of 2003 has inreased by
$7,962 compared to the same period of 2002, primarily due to inefficiencies
caused by the sales decline.
Selling, administrative, and general expenses decreased by $421,112
compared to the same period of 2002 due to reductions in marketing, sales, and
administrative expense necessitated by sales reductions offset by accruals of
executive salaries not paid to date, in 2003.
Loss from operations of $(223,768) improved $3,172 compared to a loss of
($226,940) for the prior period as a direct result of cost reductions.
Nine months ending Sept. 30, 2003, compared to year ending December 31, 2002.
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8
SIGNIFICANT CHANGES
During the first nine months of 2003, the Company is still suffering from
the economic downturn.
Cash Flow for the first nine months of 2003 was a negative ($22,550) as a
result of the continuing economic downturn in the telecommunications industry.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated a negative cash flow of
($22,550) during the nine months ended Sept. 30, 2003, as compared to a negative
cash flow of ($755,715) during the nine months ended Sept. 30, 2002.
As a result of operating losses and negative cash flow experienced during
2001, 2002 and 2003, 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 Sept. 30, 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 Sept. 30, 2003. There have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls subsequent to Sept. 30, 2003.
9
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 and a former employee filed a joint lawsuit
in Superior Court of New Jersey, Passaic County against us for consulting fees
and expenses, respectively. In the same lawsuit, W.T. Sports filed a claim for a
commission owed on sales due them under a licensing agreement with us. The
claims by the former director and former employee are for about $10,00 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 them
for the licensing fees.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
On September 25, 2003, the Company entered into a Security Agreement and
Collateral Agent Agreement in which it obtained a waiver and cured the Event of
Default on its comvertible notes.
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
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)