U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
Commission File No. 000-30172
TECH LABORATORIES, INC.
(Exact name of small business issuer as specified in its charter)
New Jersey 22-1436279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
955 Belmont Avenue, North Haledon, NJ 07508
(Address of Principal Executive Offices)
(973) 427-5333
(Issuer's telephone number)
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of August 13, 2004: 63,954,001 shares of common stock outstanding,
$0.01 par value.
PART I FINANCIAL INFORMATION................................................. 1
Item 1. Financial Statements................................................. 1
June 30, 2004 and 2003 Balance Sheet (unaudited)..................... 1
Statement of Operations June 30, 2004 and 2003 (unaudited)........... 3
Statements of Cash Flow for the Six Months Ended June 30,
2004 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...................................................10
Item 1. Legal Proceedings ...................................................10
Item 2. Changes in Securities ...............................................10
Item 3. Defaults Upon Senior Securities .....................................10
Item 4. Submission of Matters to a Vote of Security Holders .................10
Item 5. Other Information ...................................................10
Item 6. Exhibits and Reports on Form 8-K ....................................10
SIGNATURES...................................................................10
TECH LABORATORIES, INC.
June 30, 2004 and 2003
Balance Sheet
(unaudited)
ASSETS
2004 2003
---- ----
Current Assets:
Cash $ 106,258 $ 33,113
Marketable Securities 40,000 40,000
Accounts Receivable, Net of
Allowance for Doubtful Accounts of $25,000 10,381 77,438
Inventories 1,429,486 1,636,787
Prepaid Expenses 6,303 6,303
----------- -----------
Total Current Assets $ 1,592,428 $ 1,793,641
----------- -----------
Property, Plant, and Equipment, at Cost
Leasehold Improvements 2,247 2,247
Machinery, Equipment, and Instruments 608,087 600,070
Furniture and Fixtures 109,183 106,453
----------- -----------
Total Property, Plant, and Equipment 719,517 708,770
Less: Accumulated Depreciation & Amortization (437,683) (418,135)
----------- -----------
Net Property, Plant, and Equipment $ 281,834 $ 290,635
----------- -----------
Other Assets $ 12,059 $ 12,059
----------- -----------
Total Assets $ 1,886,321 $ 2,096,335
=========== ===========
The accompanying notes are an integral part of these financial statements.
1
TECH LABORATORIES, INC.
June 30, 2004 and 2003
Balance Sheet
(unaudited)
LIABILITIES AND STOCKHOLDERS' INVESTMENTS
2004 2003
---- ----
Current Liabilities:
Convertible Notes $ 1,220,996 $ 1,192,291
Current Portion of Long-Term Debt 29,692 30,973
Short-Term Loans Payable 50,449 53,231
Accounts Payable and Accrued Expenses 154,904 132,181
Other Liabilities 62,648 31,033
----------- -----------
Total Current Liabilities $ 1,518,689 $ 1,439,709
----------- -----------
Stockholders' Investment:
Common Stock, $.01 Par Value; 25,000,000 Shares Authorized:
5,143,530 shares outstanding in 2003; 250,000,0000
Shares Authorized: 50,149,889 shares outstanding in 2004
$ 523,795 $ 49,848
Less: 15,191 Shares Reacquired and Held in Treasury
(113) (113)
----------- -----------
$ 523,682 $ 49,735
----------- -----------
Capital Contributed in Excess of Par Value $ 4,829,320 $ 4,480,381
Retained Earnings/(Accum. Deficit) (4,985,370) (3,873,490)
----------- -----------
$ (156,050) $ 606,891
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,886,321 $ 2,096,335
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
TECH LABORATORIES, INC.
Statement of Operations
June 30, 2004 and 2003
(unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2004 2003 2004
----------- ----------- ----------- -----------
Sales $ 75,688 $ 13,565 $ 170,015 $ 65,266
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of Sales 55,290 9,053 113,455 38,864
Selling, General, and
Administrative Expense 13,538 160,563 76,240 313,495
----------- ----------- ----------- -----------
68,828 169,616 189,695 352,359
----------- ----------- ----------- -----------
Income/(Loss) from Operations $ 6,860 $ (156,051) (19,680) (287,093)
----------- ----------- ----------- -----------
Other Income (Expenses):
Interest Income 73 94 192 94
Interest Expense $ (18,425) $ (19,000) $ (36,850) $ (48,735)
----------- ----------- ----------- -----------
$ (18,352) $ (18,906) $ (36,658) $ (48,641)
Income/(Loss) Before Income Taxes $ (11,492) $ (174,957) $ (56,338) $ (335,734)
Provision for Income Taxes 0 0 0 0
----------- ----------- ----------- -----------
Net Income/(Loss) $ (11,492) $ (174,957) $ (56,338) $ (335,734)
Retained Earnings/(Accum. Deficit), Beg (3,861,998) (4,810,413) (3,817,152) (4,649,636)
----------- ----------- ----------- -----------
Retained Earnings/(Accum. Deficit), End (3,873,490) (4,985,370) (3,873,490) (4,985,370)
----------- ----------- ----------- -----------
Earnings Per Share $ 0 $ (0.01) $ (0.01) $ (0.01)
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
3
TECH LABORATORIES, INC.
Statements of Cash Flow
For the Six Months Ended
June 30, 2003 and 2004
(unaudited)
2003 2004
------------ ------------
Cash Flow From (For) Operating Activities:
Net Income/(Loss) From Operations $ (56,338) $ (335,734)
Add/(Deduct) Items Not Affecting Cash:
Depreciation/Amortization 15,034 9,774
Accrued expenses and other non-cash expense -- 312,102
Changes in Operating Assets and Liabilities
Marketable Securities -- --
Accounts Receivable (71,294) 726
Inventories 98,846 (179,709)
Accounts Payable (9,734) (20,096)
Other Assets/Liabilities 25,428 3,740
----------- -----------
Net Cash Flow From (For) Operating Activities 1,942 (209,197)
----------- -----------
Cash Flows From (For) Investing Activities
Addition of Machinery and Equipment 2,828 1,610
----------- -----------
Net Cash Flow From (For) Investing Activities: 2,828 1,610
----------- -----------
Cash Flow From (For) Financing Activities
Acquisition/(Repayment) 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 $ 4,770 $ ( 32,587)
Cash Balance Beginning of Year 28,343 138,845
----------- -----------
Cash Balance End of Second Quarter $ 33,113 $ 106,258
----------- -----------
Significant Non-Cash Financing Activities:
------------------------------------------
o As of June 30, 2004, $845,919 of Convertible Long-Term Debt and
accrued interest was converted into common stock on a cumulative basis.
The accompanying notes are an integral part of these financial statements.
4
TECH LABORATORIES, INC.
Notes to Financial Statements
For the Quarter Ended June 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.
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 and June 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.
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,
2003, March 31, 2004 and June 30, 2004.
(2) INVENTORIES:
Inventories were as follows:
Three Months Six Months
Dec.1, Ended Ended
2003 March 31, 2004 June 30, 2004
---------- -------------- -------------
Raw Materials & Finished Components $ 463,824 $ 445,655 $ 430,735
Work in Process & Finished Goods $ 705,953 $ 881,130 998,751
---------- ----------- -----------
$1,249,777 $ 1,326,785 $ 1,429,486
---------- ----------- -----------
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, 2003, and for the first quarter
of 2004 and the six months ended June 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.
Three Months Ended Six Months ended
2003 March 15, 2004 June 30, 2004
-------- ------------------ ----------------
Net Income for the Computation of Basic EPS (832,483) (160,777) (335,734)
========= ========== ==========
Shares for Computation of Basic EPS 9,368,992 9,520,680 34,092,160
========= ========== ==========
(4) INCOME TAXES:
At December 31, 2003, the balance of operating loss carryforward was
$5,224,216, and at March 31, 2004, the operating loss carryforward was
$5,384,993 and at June 30, 2004, the operating loss carry forward was $5,720,727
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% $30,392
March 15, 2004 Hudson United Bank Prime +1.5% $30,044
June 30, 2004 Hudson United Bank Prime +1.5% $29,692
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, 2003 was $55,449 and $50,450 as of March
31, 2004, and $50,449 as of June 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.
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, 2004, $685,546 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. In October 2003 a cure was successfully negotiated and is further
described in the Company's 8-K filed in October 2003.
(11) GOING CONCERN:
As a result of operating losses and negative cash flows experienced during
2001, 2002 and 2003, 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, 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 the
statement of financial accounting standards No.123 and Accounting Principles
Board ("APB") opinion No.25. Accordingly all compensations to employees or
outside Consultants in the form of common stock awards have been expensed.
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, 2003.
Quarter ending June 30, 2004, compared to Quarter ending June 30, 2003.
-----------------------------------------------------------------------
Sales were $13,565 for the second quarter of 2004 as compared to $75,688
for the similar period of 2003. This decrease was due to the continuing effects
of the economic downturn. The company is seeking long term contracts with major
computer companies. The company believes these contracts will provide future
growth in its major product, Dyntrax.
Cost of sales of $9,053 for the second quarter of 2004 has been decreased
by $46,297 compared to the same period of 2003, primarily due to the sales
decline.
Selling, administrative, and general expenses increased by $147,025
compared to the same period of 2003 due to increases in expenses associated with
the company's attempts to raise long term capital.
Loss from operations of ($174,957) increased ($163,465) compared to a loss
of ($11,492) for the prior period as a direct result of sales declines and
expenses incurred to explore long term financing prospects.
Six months ending June 30, 2004, compared to year ending December 31, 2003.
--------------------------------------------------------------------------
SIGNIFICANT CHANGES
During the first half of 2004, the Company is still suffering from the
economic downturn.
Cash Flow for the first half of 2004 was ($32,587) as a result of the
reductions in sales caused by the downturn in the telecommunications industry.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities utilized cash of ($32,587) during the
six months ended June 30, 2004, as compared to generating cash of $4,770 during
the six months ended June 30, 2003.
As a result of operating losses and negative cash flow experienced during
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. 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 filed an SB-2 registration Statement in August 2004 registering the
shares included in this agreement.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. A former employee of Tech Labs filed the suit
against us 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 Tech Labs, 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 or about November 1, 2003, we were served with a lawsuit filed by W. T.
Sports Limited, Salvatore Griscifi, a former Director, and Edward Branca, a
former employee. We have filed a response and counter-claim. The first claim
involving Salvatore Griscifi and Mr. Branca has been settled. The second claim
is in the process of being settled. The last claim with W. T. Sports Limited is
going to arbitration, which is mandatory pursuant to a written agreement entered
into between the parties in 1987. We believe W. T. Sports Limited will owe us in
excess of the plaintiff's claim.
On June 30, 2004, the law firm of Stursberg & Veith, former counsel to
Tech Laboratories, Inc., filed a lawsuit in the United States District Court for
the Southern District of New York claiming that the plaintiff delivered certain
good and valuable services to Tech Laboratories and is owed $161,179.26 plus
interest, costs, and disbursements for each cause of action, and other and
further relief as the Court may deem necessary. The complaint alleges four
causes of action including an unpaid account stated, breach of contract, quantum
meruit, and unjust enrichment. To date we have not been served with this
lawsuit. We disagree with the amount of the unpaid balance owed to the plaintiff
and are attempting to negotiate a settlement of the amount owed.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the quarter ending June 30, 2004, covered by this
report to a vote of the Company's shareholders, through the solicitation of
proxies or otherwise.
Item 5. Other Information.
None
Item 6. Exhibits and Reports of Form 8-K.
(a) Exhibits
31.1 Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002
32.1 Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002
(b) Reports of Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TECH LABORATORIES, INC.
Date: August 13, 2004 /s/ Bernard M. Ciongoli
--------------------------------
Bernard M. Ciongoli
Chief Executive Officer,
Chief Financial Officer