SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
{X} Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003
{_} Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-27592
TECH LABORATORIES, INC.
(Exact name of Small Business issuer in its charter)
New Jersey 22-1436279
---------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
955 Belmont Avenue, North Haledon, New Jersey 07508
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(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (973) 427-5333
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes {X} No {_}
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form and no disclosure will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB. {_}
State issuer's revenues for its most recent fiscal year: $ 236,107
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock, as of a specified date within the last 60
days. On April 12, 2004, the aggregate market value of voting stock held by
non-affiliates, based on the closing price as quoted on the OTC Bulletin Board
under the symbol "TCHL", was $3,527,335.95.
The number of shares of common stock outstanding as of April 12, 2004:
33,682,719
Transitional Small Business Disclosure Format (check one): Yes {_} No {X}
1
TECH LABORATORIES, INC.
FORM 10-KSB
Table of Contents
Page
Part I ..................................................................... 1
Item 1. Description of Business ..................................... 1
Item 2. Description of Property...................................... 6
Item 3. Legal Proceedings............................................ 7
Part II..................................................................... 7
Item 4. Submission of Matters to a Vote of Securityholders........... 7
Item 5. Market for Common Equity and Related Shareholder Matters..... 7
Item 6. Management's Discussion and Analysis or Plan of Operation.... 9
Item 7. Financial Statements......................................... 11
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... III-1
Part III.............................................. .................. III-1
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act ............................................. III-1
Item 10. Executive Compensation.................................... III-1
Item 11. Security Ownership of Certain Beneficial Owners and
Management ............................................... III-1
Item 12. Certain Relationships and Related Transactions............ III-1
Item 13. Exhibits and Reports on Form 8-K.......................... III-1
Item 14. Evaluation of Disclosure Controls and Procedures......... III-4
TECH LABORATORIES, INC.
Form 10-KSB
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-KSB that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
federal securities laws. These statements often can be identified by the use of
terms such as "may," "will," "expect," "anticipate," "estimate," or "continue,"
or the negative thereof. Such forward-looking statements speak only as of the
date made. Any forward-looking statements represent management's best judgment
as to what may occur in the future. However, forward-looking statements are
subject to risks, uncertainties, and important factors beyond the control of
Tech Labs that could cause actual results and events to differ materially from
historical results of operations and events and those presently anticipated or
projected. These factors include, but are not limited to, those discussed under
the caption "Factors That May Affect Future Events" in Item 6 of this Form
10-KSB. Tech Labs disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statement or to reflect the occurrence of anticipated or unanticipated
events.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
GENERAL
Tech Laboratories, Inc. ("Tech Labs" or the "Company") manufactures and sells
various electrical and electronic components. During 2003, we marketed and
continued to develop DynaTraX(TM) high-speed digital switch matrix system, an
electronic switching unit for network management and security. This equipment
manages video and data transmissions on a network.
HISTORICAL BUSINESS
We also manufacture and sell standard and customized transformers, and rotary
switches, the latter of which products permits an electrical signal to be
diverted from point A to point B. Approximately 10% of our products are
manufactured for military applications.
We sell our switch and transformer products in the electronics and electrical
industries, primarily as a contract manufacturer for other companies or for
inclusion in OEM products. We market our products in these industries in the
United States. This is a mature market. Competition is on the basis of price and
service. Pricing of our products is based upon obtaining a margin above cost of
production. The margin we will accept varies with quantity and the channels of
distribution.
INDUSTRY
DYNATRAX(TM) NETWORKING MANAGEMENT AND MAINTENANCE TECHNOLOGY
Tech Labs manufactures, markets, and sells a product, which it believes will
create a new paradigm on automating and securing high-tech networks at the
physical layer. Our product, DynaTraX(TM), a patented, high-speed digital matrix
cross-connect switch with a dynamic new technology, can significantly reduce
network downtime and achieve substantial cost savings in data and
telecommunications networking environments. DynaTraX(TM) has the ability to
create a critical and meaningful solution to stop hackers from intruding into
networks and, thereby, to thwart cyber- terrorists. DynaTraX(TM) electronically
disconnects a hacker, detected by Intrusion Detection Software, and reconnects
the hacker to a simulated network within 60 - 90 nanoseconds and allows the user
to hold and trace the hacker.
On September 19, 2002, the United States Patent and Trademark Office published
our patent application for the use of our DynaTraX(TM) technology to provide
Positive Network Access Security control to prevent hacker attacks from causing
extensive harm to network services and systems.
Employing this physical layer security solution allows the user/system to
automatically disconnect circuits under attack from an unauthorized user by
quickly rerouting the hacker to a honey pot (track, trace & locate) simulator
network system to capture the intruder. The ability to automate creates a
self-healing environment for next generation robust high-tech communication
network.
The DynaTraX(TM) switch provides network administrators with the unique
capability to remotely manage and maintain the "physical level" (the actual
physical connectivity) of their networks from virtually any computer with a few
clicks of a mouse on a user-friendly graphical user interface (GUI). This
technology allows administrators to quickly and efficiently perform physical
changes electronically to repair networking problems (such as loss of
connectivity resulting in the need to move a cable to a different hub), or to
perform network reconfigurations (moves, adds or changes) to distribution
equipment such as computers and telecommunications devices. No longer does a
technician have to be dispatched to a telecommunication closet to resolve most
networking problems, or to provide changes to users' existing services on the
network.
3
Examples of where the DynaTraX(TM) has been found to be particularly cost
effective include: (1) active large remote corporate locations with minimal or
no IT personnel where expensive outside technicians must often be dispatched to
resolve problems or other requests; and (2) locations where very frequent
movement of personnel occurs, such as in the military or at a convention center
where network reconfigurations are frequently required. Reconfigurations are
expensive with costs ranging from $50 to $200 on-site, and two to ten times that
for off-site reconfigurations, versus virtually no cost if a DynaTraX(TM) is
utilized. These figures do not include potential losses in productivity and
revenues associated with extended downtimes.
DynaTraX(TM) is also equipped with two key complementary products - a Test Card
and a Data Base Management System. The Test Card enables administrators to
effectively locate and resolve cable fault problems on the distribution portion
of the network. Customers state that the Test Card is far superior to
alternative methods for diagnosing problems such as traditional cable test
equipment, which typically involves using technicians to search throughout the
entire network, moving equipment and possibly interfering with the performance
of the network. DynaTraX's(TM) Database Management System documents every event
that occurs within the network, assuring that all reconfigurations and other
adaptations to the network are reflected on the DynaTraX's(TM) GUI. Given the
maze of wires, plugs, and jacks that are typically found in a telecommunications
closet, administrators are notorious for not properly noting changes made to the
network, resulting in cabling connections errors and significant loss of
productivity from unforeseen downtime. With most network problems originating on
the physical level, the Test Card and Data Base Management System make the
DynaTraX(TM) a complete tool for managing and ensuring the integrity of data
networks.
Since launching its marketing campaign on a limited basis in early 2001, the
DynaTraX(TM) has been reviewed favorably, particularly from the U.S. military
which frequently moves personnel and performs routine networking changes for
security purposes. DynaTraX(TM) has been tested and purchased by the U.S. Air
Force and the U.S. Navy for inclusion in government projects. Prominent
commercial users of the DynaTraX(TM) include Global Crossing Inc, Nortel
Networks, Allied Irish Bank, Sanko Telecom of Japan, and Blue Cross of Florida.
Tech Labs' long-term growth strategy includes development of DynaTraX's(TM)
technological capabilities, and, concurrently, product integration and
establishment of strategic partnerships with world-class software and hardware
vendors (especially enterprise management software providers in the short term).
With the use of our newly developed API (Application Programmable Interface),
vendors can write scripts to DynaTraX(TM) allowing automatic reconfiguration.
Tech Labs has established relationships with key businesses in this field,
including Computer Associates Inc. and EMC2 Inc., particularly in relation to
the DynaTraX(TM) Enterprise Management Solution "DEMS". DEMS elevates the
current DynaTraX(TM) electronic patching system to an interactive intelligent
enterprise management "Virtual Technician" system. The Virtual Technician
dramatically reduces the need for on-site technicians to perform physical layer
tasks, which can now be performed electronically from a remote location (i.e.,
remotely testing network circuits, reconnecting equipment and circuits, rapidly
recovering from a critical network failure, capturing and trapping hackers). Our
goal is to further enhance the DEMS technology beyond the Virtual Technician
application to a system that will perform "self healing" (self-repair) network
functions. Current and future products derived from the DynaTraX(TM) will
position the Company, we believe, as a provider of state-of-the-art network
enterprise management solution systems. We believe we will expand from this base
to become a recognized provider of enhanced networks and integrated
(voice/data/video) Internet (IP) compatible, private customer-premise
all-digital Automatic Call Directors, and PBX systems and networks.
There are at least four companies that have products that compete with the
DynaTraX(TM) product. However, we believe none of these competitors offer a
product with all of the features or capabilities of DynaTraX(TM). We continue to
believe that competition in the sale of our DynaTraX(TM) products will be on the
basis of price, features, service and technical support. Pricing of our products
is based upon obtaining a margin above cost of production. The margin we will
accept varies with quantity and the channels of distribution.
4
Competition for network management products comes from several different
sources. One source of competition is the designated employees of large
organizations which have been hired to manage and maintain their internal
networks. However, we believe the growing need to control and reduce costs by
using technology such as DynaTraX(TM) to automate tasks otherwise performed by
expensive technical labor, will provide Tech Labs with market opportunities.
Another group of competitors which produces products to manage and maintain the
network physical layer consists of NHC, RIT and Cyteck. Of these three
companies, NHC is the only one that offers a product comparable to DynaTrax(TM),
but which is not as fast as DynaTraX(TM). In addition, V-LAN switching, which is
a technology utilized by a number of companies, can be regarded as a competing
technology. However, V-LAN switching is limited to a specific type of network,
i.e., Ethernet, and not able to support many tasks which our DynaTraX(TM)
technology is designed to complete. These tasks are:
o rearranging network physical layer connections, e.g. moves,
adds, and changes of equipment such as computer terminals; fax
machines; and printers;
o testing circuits;
o managing and maintaining end-to-end network configuration, which
is the connection between different points on a network from the
telecommunications closet to the user outlet; and
o maintaining asset inventory records.
We regard V-LAN as complementary to DynaTraX(TM) circuit switching since they
can work together to provide a more comprehensive network management/maintenance
solution. The four competitors all have greater financial and other resources
and currently account for substantially all of the existing market.
INFRARED INTRUSION DETECTION SYSTEM OR "IDS"
As of January 2003, Tech Labs no longer has the exclusive right to manufacture
and sell in the U.S., Canada, and South America the IDS products. Tech Labs,
however, continues to sell its existing inventory of IDS products to the
security and anti-terrorist industry.
MARKETING STRATEGIES
Marketing. Subject to available resources, we will employ a marketing
program consisting of:
Typical Resale Channel Partners. These are technically qualified
networking systems integration, implementation and management type
companies, in the business of providing network project-management
consulting services and/or on-site implementation, installation and
maintenance support services. The companies Tech Labs deals with will be
working in the markets (commercial or government) the Company has
targeted and already established a customer base.
Building Sales and Sales Leads. In addition to the already existing
networks of existing and potential clients known by the Company's
managers and resale channel partners, Tech Labs will also embark on a
promotion program consisting of advertising in trade journals, trade
show participation and mailing campaigns. The Company is establishing
itself as a certified approved partner of large Enterprise Management
systems providers, as well as large networking equipment companies where
there is a fit for integrating the Company's technology with these
companies' technologies and products.
5
Advertising. This will be a program for both commercial and military
markets involving a focused DynaTraX(TM) Enterprise Management Solution
campaign in trade magazines, including commercial and government
oriented trade magazines.
Trade Shows. The Company hopes to participate in industry and government
focused trade shows.
Mailing Campaign. Tech Labs will use commercial and government industry
mailing lists available through industry trade organizations. These
lists will be territorially arranged focusing on the proper person or
groups involved in specifying, recommending and/or purchasing
DynaTraX(TM) products.
Certified Partners Programs. Working under such arrangements, the
Company expects to be able to co-promote its technology through its
existing sales channels and marketing programs. In some instances, these
organizations will even sell the product through their sales
organization catalogs as a value-added product or as an OEM.
MARKETING CHANNELS
The sales infrastructure for DynaTraX(TM) will include, as funds become
available, a three-tier sales organization structure comprised of a senior
company sales executive managing up to six "market area" sales managers and
several resale channels in each area. These market areas will be located in the
following general regions: East Coast, Southwest, Mid West, West Coast, and
Northwest. Market territories will be selected based on the projected number of
commercial and government organizations considered to be primary target
customers. These regional areas will be further broken down to several "channel
sales territories".
The first market area to be developed is the East Coast but due to economic
factors and conditions has been delayed. The Company will recommence the
build-up of the East Coast region upon sufficient resources becoming available.
The goal is to have a minimum of three regional territory sales managers in each
market area. For example, on the East Coast, the Company will set up managers in
the Northeast, New York City/New Jersey Metro region, Mid-Atlantic - Washington
DC region, and Southeast - Orlando/Tampa Florida region.
U.S. MILITARY
The Department of Defense is presently under a mandate from the President and
Congress to minimize costs and maximize efficiency. The military, unlike
commercial organizations, will encourage, we believe, the use of new technology
such as DEMS to improve productivity, operations and reliability. The specific
military business opportunities the Company is targeting includes: Improving IT
network management and maintenance capabilities; supporting "rapid deployment"
for configuring networks and for recovering from network disasters; having
current and accurate information about network configurations, connected assets
and usage statistics; preventing hackers or other type of unauthorized attempts
from gaining access to network resources, and then identifying and capturing
them.
NON-MILITARY GOVERNMENT AGENCIES
These government organizations primarily contract out their network support
operations. They are under significant pressure to reduce staff and costs while
also being asked to do more. In order to achieve these mandates, agencies will
have to rely on new technology such as DEMS that can help improve their
productivity while at the same time increase network services and reliability.
Government agencies are being challenged by Congress regarding their poor track
record on protecting their information and network resources against hackers and
other unauthorized users.
COMMERCIAL ORGANIZATIONS
Opportunities include large organizations with many regional business offices
and/or local call centers (remote office operations) as well as mid-size
organizations with medium size headquarters and small remote branch operations.
Included in this group are Fortune 1000 service organizations (banks, financial
investment companies, medical insurance companies, large retail operations,
etc.) that have regional operations and rely on territory branch offices to sell
their products or services to their customers, and organizations that have a
6
need to change their network arrangement "churn" to support relocating personal
or to service temporary users of their facilities. In addition to relying on
their networks to conduct business, these organizations also have a need to
protect the network resources and customer information from hackers and other
unauthorized users.
SOURCE OF SUPPLY
Current inventory component purchases for all our products are made from OEMs,
brokers, and other vendors. We typically have multiple sources of supply for
each part, component, or service, and during the years ended December 31, 2003
and 2002, cannot characterize any particular company as being our "largest"
supplier. We have no long-term agreements with any of our suppliers.
ORDER BACKLOG
The backlog of written firm orders for our products and services as of December
31, 2003, was $37,296.
PATENTS
In connection with our acquisition of the DynaTraX(TM) assets, we acquired
certain patents and pending patent applications. Four patents have been granted
in Great Britain, which are listed below:
o Patent title: User Interface for Local Area Network. This patent
covers technology which allows communication between the user
and the equipment controlling the network. This patent expires
in 2013.
o Patent title: Token Ring. This patent covers technology which
transmits information between devices on a network. This patent
expires in 2013.
o Patent title: Half Duplex Circuit for Local Area Network. This
patent covers technology which allows one-way communication
either to or from the Local Area Network. This patent expires in
2013.
o Patent title: Matrix Switch Arrangement. This patent covers
technology which is a switch that can either connect or
disconnect one or more devices on a network. This patent expires
2015.
We also have been granted a patent from the U.S. Patent and Trademark office in
connection with our Multi-protocol Cross Connect Switch.
On September 19, 2002, the U.S. Patent Office published our patent application
for the use of our DynaTraX(TM) technologies to provide Positive Network Access
Security control to prevent an unauthorized hacker attack to network services
and systems. Tech Labs Positive Access Security System works with the
DynaTraX(TM) digital cross-connect physical layer switch. This security physical
layer enhancement solution allows the ability to automatically disconnect
circuits detected to be under attack from an unauthorized user (hacker) and
capture the hacker by quickly rerouting the circuit the hacker is on to a honey
pot (track, trace and locate) simulator network system. As an integral part of
an existing or new Enterprise Management System's security, the DynaTraX(TM)
Enterprise Management System software will quickly respond to an SNMP alarm
instruction by having the DynaTraX(TM) switch disconnect the circuit being used
by a hacker within 90 nanoseconds.
7
EMPLOYEES
We have three full-time employees, one of whom is an engineer and two are
officers, one of whom is also an engineer. We also employ eight part-time
workers, one of whom performs clerical services and the others as production
workers.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters and manufacturing facility is located in North
Haledon, New Jersey. Our primary manufacturing and office facility is a
one-story building that is adequate for our current needs. We lease this
facility of 8,000 square feet, from a non-affiliated person, under a lease that
ends in April, 2007. The annual base rent is $56,400 until April 2004, $57,600
from May 2004 until April 2006, and $58,800 from May 2006 until April 2007, and
includes property taxes and other adjustments. We believe our premises are
adequate for our current needs and that if and when additional space is
required, it would be available on acceptable terms.
We are an integrated manufacturer and, accordingly, except for plastic moldings
and extrusions, produce nearly all major subassemblies and components of our
devices from raw materials. We purchase certain components from outside sources
and maintain an in-house, light machine shop allowing fabrication of a variety
of metal parts and castings, complete tool room for making and repairing dies, a
stamping shop and an assembly shop with light assembly presses. Our test lab
checks and tests our products at various stages of assembly and each finished
product undergoes a complete test prior to shipment.
We anticipate that we will either manufacture any new products ourselves or
subcontract their manufacture, in whole or in part, to others. We believe that
personnel, equipment, and/or subcontractors will be readily available as and
when needed.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
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.
On July 30, 2003 , a former director, Salvatore Grisafi, and a former employee,
Edward Branca, filed a joint lawsuit in Superior Court of New Jersey, Passaic
County, against Tech Labs for consulting fees and expenses, respectively. In the
same lawsuit, W.T. Sports filed a claim for a commission on sales due under a
licensing agreement with the company. Tech Labs filed a response and
counter-claim. The claims by the former director and former employee were about
$10,000. The claims have been settled and satisfied. With regard to W.T. Sports,
the agreement had a provision for arbitration in case of any dispute. We
believed we had a counterclaim, which was far in excess of the amount the
plaintiff claimed Tech Labs owed for the licensing fee. On November 11, 2004 an
arbitration hearing took place. On December 21, 2004 the arbitrator awarded
$31,000 to W.T. Sports for commission owed by Tech labs. Under the licensing
agreement Tech labs can compete with the plaintiff after December 17, 2004.
On June 30, 2004, the law firm of Stursberg & Veith, former counsel to Tech Labs
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 labs 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 negotiating a settlement with the plaintiff.
No agreement has been made as of January 6, 2005.
8
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock has been trading publicly on the OTC Bulletin Board under the
symbol "TCHL" since 1994. The table below sets forth the range of quarterly high
and low closing sales prices for our common stock on the OTC Bulletin Board
during the calendar quarters indicated. The quotations reflect inter-dealer
prices, without retail mark-ups, markdowns, or conversion, and may not represent
actual transactions.
TCHL COMMON STOCK
CLOSING PRICE
---------------------
HIGH LOW
---- ---
2003
----
First Quarter..................................... .05 .01
Second Quarter.................................... .03 .01
Third Quarter..................................... .05 .01
Fourth Quarter.................................... .19 .02
2004
----
First Quarter..................................... .55 .06
As of January 7, 2005, there were 406 holders of record of our common stock. The
transfer agent for our common stock is Olde Monmouth Stock Transfer Co., Inc. 77
Memorial Parkway, Suite 101, Atlantic Highlands, NJ 07716.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
We were incorporated in 1947 as a New Jersey corporation. Our focus has
historically been the design, manufacture, and sale of rotary switches. Switches
have been a significant part of our revenue for five decades. In 1995, to
augment revenues, we sought business in transformers and contract manufacturing.
In 1998, we made a shift to new product development. In 1998, we also made our
first sales of the IDS product, and in April of 1999, we completed the
acquisition of the DynaTraX(TM) switch and technology. We will continue to focus
on DynaTraX(TM) sales and development of additional products using these
technologies.
The following table sets forth the components of our revenues for each of our
major business activities in 2002 and 2003, and their approximate percentage
contribution to revenues for the period indicated:
PRODUCT TYPE 2002 % of Revenue 2003 % of Revenue
- ------------ ---- ------------ ---- ------------
Switches $ 112,786 27.6% 68,036 28.8%
IDS Sensors 256,711 62.9% 109,719 46.5%
Transformers/Coils 35,357 8.6% 40,527 17.2%
Contract Manufacturing 3,404 0.9% 17,825 7.5%
--------- ------- --------- --------
Totals $ 408,258 100.0% $ 236,107 100.0%
========= ======= ========= ========
The following table sets forth the percentages of gross profit for each of our
major business activities in 2002 and 2003.
9
Year Ended December 31,
------------------------------
PRODUCT TYPE 2002 2003 Net Change
------------ ---- ---- ----------
Switches 75.4% 68.5% (6.9%)
IDS Sensors 57.4% 57.0% (0.4%)
Transformers/Coils 54.4% 47.8% (6.6%)
Contract Manufacturing * 49.6% 49.6%
Unallocated company expenses,
including physical inventory
adjustments factory overhead and
Inventory Write-Down (165.2%) (142.1%) 23.1%
Total company gross profit % * (83.9%) (47.1%)
* - Negative Percentage
We have continued to shift out of the subcontracting and transformer business,
which provides low gross profit margins, for higher gross profit margin
products. While rotary switches produce high gross profits, demand for rotary
switches is low.
We have gradually shifted our product offering from less profitable to more
profitable proprietary products.
RESULTS OF OPERATIONS
Sales were $236,107 for 2003 as compared to $408,258 for the year ended 2002.
The decline in sales of (42.2%) was a direct result of the economic downturn.
Cost of sales of $434,264 for the year ended 2003 compared to $828,194 for the
year ended 2002 due to the volume decrease. The Company's gross profit
percentage was negative in 2003 and 2002 due to inventory write-offs of slow
moving and obsolete inventory totaling $250,000 in 2003 and $500,000 in 2002.
Selling, general, and administrative expenses decreased by $55,232 in 2003 as
compared to the prior period. This decrease was due to the Company's continuing
efforts to reduce these expenses during this economic downturn.
Other Income decreased $154,464 due to the increased interest expense. Losses
from operations of $899,493 in 2003 were a direct result of volume declines as
well as the inventory write-off and consulting fees.
LIQUIDITY AND CAPITAL RESOURCES
During 2000 we completed two significant transactions that improved our
liquidity. On May 3, 2000 we completed an offering of our common stock to the
public pursuant to a registration statement on Form SB-2. We sold to the public
an aggregate of 293,379 shares for gross proceeds of $2,273,723. Subsequently,
on October 13, 2000 we completed a private placement, pursuant to Rule 506 of
Regulation D, of convertible promissory notes for gross proceeds of $1,500,000.
During 2003, as a result of the economic downturn, we suffered severe operating
losses and negative cash flows, which impaired our liquidity position and caused
a default on an underlying conversion and redemption agreement related to the
convertible notes issued in October 2000. In 2003, Tech Labs' negative cash flow
was primarily caused by operating losses plus the buildup of inventory in
anticipation of increased sales of our high margin proprietary products, which
did not occur.
During 2003, our inventories increased in order to meet demand for our IDS
sensor and DynaTraX(TM) products. In order that we are able to meet any
anticipated purchase orders from the military, non-military governmental
agencies and private industry, we must carry sufficient inventory.
During 2004, the company is seeking to negotiate contacts with major computer
technology companies. We believe that long-term agreements with these companies
will provide future growth in our product DYNATRAX.
10
FACTORS THAT MAY AFFECT FUTURE EVENTS
The following factors, among others, could cause actual events and financial
results to differ materially from those anticipated by forward-looking
statements made in this Annual Report on Form 10-KSB and presented elsewhere by
management from time to time.
On August 2, 2002, the Company announced that an Event of Default occurred under
the terms of the Company's outstanding 6.5% convertible notes (the "Convertible
Notes"). The Company was unable to have its registration statement filed April
5, 2002, declared effective by June 29, 2002, as required by the terms of the
amended redemption and conversion agreement the Company entered into with the
note holders on April 19, 2002 (the "Amended Redemption Agreement"), and was
unable to reach a new agreement with the note holders prior to the expiration of
the waiver the Company had been granted by the note holders, which had been
granted in order to permit the parties time to negotiate a new agreement. Under
the terms of the Convertible Notes, the Company is required to maintain an
effective registration statement covering the shares of the Company's common
stock underlying the Convertible Notes. Under the terms of the Amended
Redemption Agreement, the Company had until June 29, 2002, in order to have its
registration statement declared effective. The Company is presently in
negotiations with the holders to cure the Event of Default, but no assurance can
be given as to whether an agreement can be reached with the holders for mutually
acceptable terms. If the holders accelerate payment of the principal and
interest due under the Notes, the Company will be unable to make payment and may
be forced into bankruptcy. In October 2003, the Company negotiated a cure for
this default.
In August 2003, we retained a financial advisory firm, Knightsbridge Holdings,
LLC as a business consultant to assist in a variety of areas relating our
financial, strategic and related development growth. The term of the engagement
is six months and shall automatically renew on a month-to-month basis, subject
to termination by either party with a twenty-four month follow on period,
whereby transactions consummated within the subsequent twenty-four months
following the termination of this agreement the transaction may have fees due
and payable to the financial advisory firm. Pursuant to this agreement,
Knightsbridge has provided general financial services to us and, more
specifically, assisted us in the settlement of the default on our outstanding
convertible notes.
Historically, we had no patent or copyright protection on our current products,
other than aspects of the DynaTraX(TM) product and technology, which was
patented on July 2, 2002. Our ability to compete effectively with other
companies will depend, in part, on our ability to maintain the proprietary
nature of our technologies. Other than with regard to the DynaTraX(TM) patents,
we intend to rely substantially on unpatented, proprietary information and
know-how. We are also presently prosecuting the patent applications filed in the
United States and the European Common Market.
There is a risk that our current products may malfunction and cause loss of, or
error in, data, loss of man hours, damage to, or destruction of, equipment or
delays. Consequently, we as the manufacturer of components, assemblies and
devices may be subject to claims if such malfunctions or breakdowns occur. We
are not aware of any past or present claims against us. We cannot predict at
this time our potential liability if customers make claims against us asserting
that DynaTraX(TM), or other products fail to function. Since we have no
insurance we could incur substantial expenses defending ourselves against a
product liability claim.
In connection with the acquisition of the DynaTraX(TM) technology, we acquired
digital switches, finished products and parts from NORDX/CDT. We do not have
insurance on that inventory. Damage or destruction of some or all of the
inventory by fire, theft or by acts of nature would result in substantial losses
and would harm our business.
11
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .....................F-1
Consolidated balance sheet as of December 31, 2003......................F-2, F-3
Consolidated statements of operations for the years ended
December 31, 2003 and 2002...................................................F-4
Consolidated statements of shareholders' equity for the years ended
December 31, 2003 and 2002...................................................F-5
Consolidated statements of cash flows for the years ended
December 31, 2003 and 2002. .................................................F-6
Notes to consolidated financial statements............................F-7 - F-12
12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tech Laboratories, Inc.
We have audited the accompanying consolidated balance sheet of Tech
Laboratories, Inc. as of December 31, 2003 and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the two years than ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tech
Laboratories, Inc. as of December 31, 2003 and the results of their operations
and cash flows for each of the two years than ended in conformity with
accounting principles generally accepted in the United States of America.
/s/DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
January 5, 2005
F-1
TECH LABORATORIES, INC.
Consolidated BALANCE SHEET
as of DECEMBER 31, 2003
ASSETS
2003
----------
Current Assets:
Cash (Including restricted cash)........... $ 165,308
Accounts Receivable, Net of Allowance
of $1,000 ......... ...................... 10,107
Inventories .. ............................ 1,249,777
Prepaid Expense ............................. 1,074
----------
Total Current Assets ................... $1,426,266
----------
Property, Plant and Equipment at Cost
Leasehold Improvements .................... 2,247
Machinery, Equipment and Instruments ...... 607,987
Furniture and Fixtures .................... 110,893
----------
721,127
Less: Accumulated Depreciation & Amortization 427,909
----------
Net, Property, Plant and Equipment ........ 293,218
----------
Other Assets .................................. 12,063
----------
Total Assets ........................... $1,731,547
==========
The accompanying notes are an integral part of these financial statements
F-2
TECH LABORATORIES, INC.
Consolidated BALANCE SHEET
as of DECEMBER 31, 2003
LIABILITIES AND SHAREHOLDERS' INVESTMENT
2003
-----------
Current Liabilities:
Defaulted Convertible Notes ................. $ 1,480,785
Note Payable ................................ 34,444
Accounts Payable and Accrued Expenses ....... 300,712
Other Liabilities ........................... 3,271
-----------
Total Current Liabilities ................ 1,819,212
-----------
Shareholders' Investment:
Common Stock, $.01 Par Value;
25,000,000 Shares Authorized
18,045,376 Shares Issued............... 175,143
Less: 15,191 Shares Reacquired and
and Held in Treasury ................ (113)
-----------
175,030
Capital Contributed in Excess of Par Value .. 4,480,381
Accumulated Deficit ......................... (4,743,076)
-----------
(87,665)
Total Liabilities and Shareholders' Investment $ 1,731,547
-----------
The accompanying notes are an integral part of these financial statements.
F-3
TECH LABORATORIES, INC.
Consolidated STATEMENTS OF OPERATIONS
For the years ended DECEMBER 31, 2002 and 2003
2002 2003
----------- -----------
Sales .......................................... $ 408,258 $ 236,107
----------- -----------
Costs and Expenses:
Cost of Sales .............................. 828,194 434,264
Selling, General and Administrative Expenses 756,568 701,336
----------- -----------
1,584,762 1,135,600
Income(Loss) From Operations .................. $(1,176,504) $ (899,493)
----------- -----------
Other Income (Expenses):
Interest Income .............................. $ 12,398 $ 113
Interest Expense ............................. (77,554) (220,313)
----------- -----------
(65,756) (220,200)
----------- -----------
Loss Before Income Taxes ..................... $(1,241,660) $(1,119,693)
Income Taxes Benefit ......................... -- 193,770
----------- -----------
Net Loss ....................................... $(1,241,660) $ (925,923)
Accumulated Deficit Beg. of Year ............. (2,575,492) (3,817,153)
----------- -----------
Accumulated Deficit End of Year .............. $(3,817,153) $(4,743,076)
----------- -----------
Loss per share, basic and diluted............ $ (0.24) $ (0.12)
Basic and diluted weighted average shares outstanding 6,156,679 7,926,675
The accompanying notes are an integral part of these financial statements.
F-4
TECH LABORATORIES, INC.
Consolidated STATEMENT OF SHAREHOLDERS' EQUITY
For the years ended DECEMBER 31, 2002 and 2003
Capital in
Common Stock Excess of Accumulated
Shares Amount Par Value Deficit Total
---------- ---------- ---------- ---------- ----------
Balance
January 1, 2002. 5,106,607 $47,723 $4,508,428 $(2,575,493) $1,980,658
Stock Issued ... 415,809 2,012 (63,153) -- (61,141)
Net Loss ... -- -- -- (1,241,660) (1,241,660)
---------- ---------- ---------- ---------- ----------
Balance
December 31, 2002 5,522,416 49,735 4,445,275 (3,817,152) 677,858
Stock Issued ... 12,522,960 125,295 35,106 -- 160,401
Net Loss ... -- -- -- (925,923) (925,923)
---------- ---------- ---------- ---------- ----------
Balance
December 31, 2003 18,045,376 $175,030 $4,480,381 $(4,743,676) $(87,665)
The accompanying notes are an integral part of these financial statements.
F-5
TECH LABORATORIES, INC.
Consolidated STATEMENTS OF CASH FLOWS
For the years ended DECEMBER 31, 2002, AND 2003
2002 2003
----------- -----------
Cash Flows From (For) Operating Activities:
Net Income(Loss) From Operations ........ $(1,241,660) (925,923)
Add/(Deduct) Items Not Affecting Cash:
Depreciation/Amortization .............. 29,201 (24,808)
Doubtful accounts expense -- (48,000)
Stock Compensation ...................... -- 50,000
Inventory write-down ................... 500,000 250,000
Changes in Operating Assets and Liabilities:
Accounts Receivable ...................... 106,056 (4,349)
Inventories .............................. (160,154) 235,856
Accounts Payable and Accrued Expenses .... 59,691 157,182
Other Assets and Liabilities ............. 69,360 (68,426)
----------- -----------
Net Cash Flows For Operating Activities ...... (637,506) (328,852)
----------- -----------
Cash Flows From (For) Investing Activities:
Purchase of Equipment ................. (88,959) (9,529)
----------- -----------
Cash Flows From (For) Financing Activities:
Acquisition(Repayment) of Short Term Debt (304,503) 324,945
Issuance of Common Stock ................. 167,308 110,401
----------- -----------
Net Cash Flows From (For) Financing Activities (137,195) 435,346
----------- -----------
Net Increase(Decrease) in Cash .............. (863,660) 96,965
Cash Balance, Beginning of Year .............. 932,003 68,343
----------- -----------
Cash Balance, End of Year .................... $ 68,343 $ 165,308
----------- -----------
The accompanying notes are an integral part of these financial statements.
F-6
TECH LABORATORIES, INC.
NOTES TO Consolidated FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
Tech Laboratories, Inc. ("Tech Labs" or the "Company") manufactures and
sells various electrical and electronic components and systems. During 2003, we
continued to develop DynaTraX(TM) high-speed digital switch matrix system, an
electronic switching unit for network management and security. This equipment
manages video and data transmissions on a network. We also manufacture and sell
standard and customized transformers, and rotary switches and intrusion
detection systems.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
wholly owned subsidiary, Tech Logistics, Inc., formed in 1997. All of
Tech Logistics' accounts and transactions are consolidated on the Tech
Laboratories, Inc. financial statements.
ACCOUNTS RECEIVABLE
Trade accounts receivable is recorded net of allowance for expected
losses. The allowance is estimated from historical performance and
projections of trends.
INVENTORIES
Inventories at December 31, 2003 consisted of the following, net of
write-down of $250,000 for obsolete and slow moving items:
2003
----------
Raw Materials & Finished Components $ 463,824
Work in Process & Finished Goods $ 785,953
----------
$1,249,777
----------
PROPERTY AND EQUIPMENT DEPRECIATION
Depreciation is provided for by straight-line methods over the
estimated useful lives of the assets, which vary from five to seven
years. Cost of repairs and maintenance are charged to operations in the
period incurred.
EARNINGS PER SHARE
Basic EPS is computed by dividing net income or net loss by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from the exercise or
conversion of other securities into common stock, but only if dilutive.
CASH AND CASH EQUIVALENTS
The Company considers all short-term deposits with a maturity of three
months or less to be cash equivalents.
F-7
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LONG-LIVED ASSETS
The company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated
by those assets are less than the carrying amounts of those assets.
REVENUE RECOGNITION
The Company recognizes product revenue at the time of shipment.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
INCOME TAXES
At December 31, 2003 the company had a net operating loss carryforward
of $5,224,216 which can be utilized to offset future taxable income.
These operating loss carry-forwards begin to expire in 2014.
The Company uses the liability method to determine its income tax
expense as required under Statement of Financial Accounting Standards
No. 109 (SFAS 109). Under SFAS 109, deferred tax assets and liabilities
are computed based on differences between financial reporting and tax
basis of assets and liabilities, and are measured
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, accounts receivable, accounts payable,
accrued expenses and other current liabilities are representative of
their fair value due to the short-term maturity of these instruments.
The carrying value of the Company's long-term debt is considered to
approximate its fair value, based on current market rates and
conditions.
ADVERTISING COSTS
Advertising costs are reported in selling, general and administrative
expenses, and include advertising, marketing and promotional programs.
These costs are charged to expense in the year in which they are
incurred. Advertising costs for the years ended December 31, 2003 and
2003 were nominal.
STOCK-BASED COMPENSATION
On October 10, 2003 6,000,000 shares of Tech Laboratories, Inc. stock
was issued to Messrs. Ciongoli and Bjorndal, President and
Vice-President, respectively in consideration for assignment to Triple
Crown Consulting of back payroll owed for services rendered to the
Company in 2001, 2002 and 2003.
WARRANTIES
The Company offers warranties on all products, including parts and
labor that ranges from one (1) to five (5) years depending on the type
of product. The Company passes along any OEM warranty to the end user
if applicable. The Company charges operations with warranty expenses as
incurred.
F-8
SEGMENT INFORMATION
Sales of switches and IDS sensors made up 75% and 90% of our revenues
in 2003 and 2002 respectively.
FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information"
(Statement 131"), that establishes standards for the reporting by
public business enterprises of financial and descriptive information
about reportable operating segments in annual financial statements and
interim financial reports issued to shareholders. The Company primarily
provides products and services for various test and security control
systems. The company considers all of its operations as one segment
because expenses support multiple products and services. Management
uses one measurement of profitability and does not disaggregate its
business for internal reporting.
RECENT PRONOUNCEMENTS
In December 2003, The Financial Accounting Standards Board (FASB)
issued a revised Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46R). FIN 46R addresses consolidation by
business enterprises of variable interest entities and significantly
changes the consolidation application of consolidation policies to
variable interest entities and, thus improves comparability between
enterprises engaged in similar activities when those activities are
conducted through variable interest entities. The Company does not hold
any variable interest entities.
NOTE 3 - LEASE OBLIGATIONS
Lease expenses consisting principally of office and warehouse rentals, totaled
$56,000 for the years ended December 31, 2003 and 2002, respectively. At
December 31, 2003 the Company's future minimum lease payments under operating
leases with initial or remaining non-cancelable lease terms in excess of one
year are presented in the table below:
Year ending December 31: Total
2004 $57,000
2005 57,000
2006 58,000
2007 19,000
------
Total $191,000
NOTE 3 - INCOME TAXES
The provision for taxes for the year ended December 31, 2003 and 2002 includes
the following:
2002 2003
----------- -----------
Current
Federal
State
Deferred
Federal
State
The components of the deferred tax accounts as of December 31, 2003 and 2002 are
as follows:
2002 2003
----------- -----------
Deferred tax assets
Net operating loss carryforward $ 1,500,000 $ 1,800,000
Other - -
----------- -----------
Valuation allowance $ 1,500,000 $ 1,800,000
Net deferred tax assets 0 0
The valuation at December 31, 2003 was
F-9
The reconciliation of estimated income taxes attributed to operations at the
statutory tax rates to the reported income tax benefit is as follows:
2002 2003
----------- -----------
Expected federal tax at statutory rate...
State taxes, net of federal tax rate.....
Change in valuation allowance............ 500,000 300,000
----------- -----------
Net Cash Flows For Operating Activities ...... (637,506) (328,852)
----------- -----------
Cash Flows From (For) Investing Activities:
Purchase of Equipment ................. (88,959) (9,529)
----------- -----------
F-10
TECH LABORATORIES, INC.
NOTES TO Consolidated FINANCIAL STATEMENTS
NOTE 5 - NOTES PAYABLE
This consists of a note payable to Hudson United Bank, with a balance of $34,444
due on demand, with an annual interest rate of prime + 1.5%. The note is secured
by a certificate of deposit in the amount of $40,000.
NOTE 6 - 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 note holders. Tech
Labs disclosed all terms of this financing on Form 8-K filed on October 18,
2000. As of December 31, 2002, $373,730 of principal on the convertible notes
has been converted into shares of Tech Labs' common stock.
On January 11, 2002, Tech Labs entered into a conversion and redemption
agreement concerning the Long- Term Debt referenced in Note (9). An Event of
Default, as defined in the 6.5% convertible notes Tech Labs issued in October
2000, occurred on January 25, 2002, when Tech Labs was unable to make the first
payment of $750,000 to the holders of the notes.
On April 19, 2002, Tech Labs successfully negotiated a cure of the default
referenced above. This cure required that Tech Labs' registration statement,
filed with the Securities and Exchange Commission on April 5, 2002,covering the
shares underlying the 6.5% convertible notes, to have been declared effective on
or before June 29, 2002. If the registration statement was declared effective by
such date and Tech Labs made certain payments described in Tech Labs' report on
Form 8-K filed April 25, 2002, the maturity date of the 6.5% convertible notes
would have been extended from October 13, 2002 to December 30, 2002.
On August 2, 2002, the Company announced that an Event of Default occurred on
the Convertible Notes. The Company was unable to have its registration statement
declared effective by June 29, 2002, and was unable to reach a new agreement
with the holders of the Convertible Notes prior to the expiration of the waiver
the Company had been granted by the note holders, which had been granted in
order to permit the parties time to negotiate a new agreement. The Company
continued to seek a cure for the default with the holders of the Convertible
Notes, and in October, 2003 a cure was successfully negotiated and is described
in the Company's 8-K filed in October, 2003.
As of December 31, 2003, an aggregate of $ 373,730 of Convertible Long term Debt
was converted into Common Stock.
NOTE 7 - EMPLOYEE CONTRACT
The Company has an employment contract with its chief operating officer. The
agreement is for a term of five (5) years with Mr. Ciongoli, dated as of August
1, 2001, which agreement supersedes the employment agreement that was in effect
with Mr. Ciongoli dated October 1, 1998, as amended June 18, 1999, and February
21, 2001. Mr. Ciongoli is compensated under the terms of the employment
agreement at the base salary rate of $150,000 per annum. Mr. Ciongoli is also
entitled to receive two percent (2%) of our sales in excess of $1,000,000 during
any year he is employed by us. In addition, Mr. Ciongoli was granted an option,
exercisable for five (5) years from the date of grant, to purchase up to 500,000
shares of stock at $.43 per share, which option vests in increments of 100,000
shares every six (6) months since February 1, 2002.
F-11
The agreement is automatically renewable for three (3) years unless either party
terminates the agreement in writing at least 180 days prior to the expiration of
the initial term period.
NOTE 8 - SUBSEQUENT EVENTS
On November 15, 2004, a three-year option to purchase common stock of Tech
Laboratories, inc. was granted by the majority members of the Board of Directors
of Tech Laboratories, inc. to certain directors and employees at $.005 per
share. The closing price of TCHL stock on November 15th, 2004 was $.01 per
share. The total number of options granted was 12,500,000.
The Company had a dispute with W.T. Sports, LTD, et al over a certain agreement.
The matter was arbitrated and on December 27, 2004 the arbitrator awarded WT
Sports LTD the amount of $35,148. This amount is payable by January 31, 2005 and
has been accrued on the accompanying financial statements.
NOTE 11 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
NOTE 12 - CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer evaluated our
disclosure controls and procedures (as defined in rule 13a-14(c) and 15d-14(c)
under the securities Exchange Act of 1934, as amended) as of a date within 90
days before the filing of this annual report (the Evaluation Date). Based on
that evaluation, our principal executive officer and principal financial officer
concluded that, as of the Evaluation Date, the disclosure controls and
procedures in place were adequate to ensure that information required to be
disclosed by us, including our consolidated subsidiaries, in reports that we
file or submit under the Exchange Act, is recorded, processed, summarized and
reported on a timely basis in accordance with applicable rules and regulations.
Although our principal executive officer and principal financial officer
believes our existing disclosure controls and procedures are adequate to enable
us to comply with our disclosure obligations, we intend to formalize and
document the procedures already in place and establish a disclosure committee.
We have not made any significant changes to our internal controls subsequent to
the Evaluation Date. We have not identified any significant deficiencies or
material weaknesses or other factors that could significantly affect these
controls, and therefore, no corrective action was taken.
F-12
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
NAME AGE TITLE
---- --- -----
Bernard M. Ciongoli 56 President, Chief Executive Officer, Chief
Financial Officer and Director
Earl M. Bjorndal 52 Vice President and Director
Carmine O. Pellosie, Jr. 60 Secretary and Director
Each director is elected for a period of one year and until his successor is
duly elected by shareholders and qualified.
Bernard M. Ciongoli became our president and a director in late 1992, and became
Treasurer in 1998. From 1990 through 1991 he served as president of HyTech Labs,
a company engaged in sales and servicing of electronic test equipment. During
the years of 1987 to 1990, he acted as the principal owner and President of
Bernco Developers, a real estate developer. Mr. Ciongoli holds a degree in
electronic engineering from Paterson Institute of Technology.
13
Earl M. Bjorndal has been with us in various capacities since 1981. He
has been a director since 1985, and became a vice president in 1992. He is a
graduate of the New Jersey Institute of Technology with both bachelor's and
master's degrees in industrial engineering.
Carmine O. Pellosie, Jr. has been a director since the formation of Tech
Logistics, Inc. in 1997 and has been our secretary since April 1999. Since
January 1, 1999, he has been the Controller of the Passaic County Department of
Health and Human Services. Prior to January 1999, he was, for more than five
years, president of International Logistics, Inc.
Tech Labs' success depends, to a large extent, upon the continued
efforts of Bernard M. Ciongoli, our president and chief executive officer. Mr.
Ciongoli has an intricate understanding of Tech Labs, its business operations,
and the technology underlying its products. It would be very difficult for Tech
Labs to replace Mr. Ciongoli, and, accordingly, the loss of his services would
be detrimental to our operations. We do not have key-man life insurance on Mr.
Ciongoli. We do, though, have an employment agreement with Mr. Ciongoli.
Expansion of our business, upon resources becoming available, will
require additional managers and employees with industry experience. In general,
only highly qualified managers have the necessary skills to develop and market
our products and provide our services. Competition for skilled management
personnel in the industry is intense, which may make it more difficult and
expensive to attract and retain qualified managers and employees. Expansion of
our business, upon available resources, will likely also require additional
non-employee board members with business and industry experience. We do not,
however, have directors' and officers' liability insurance, which may limit our
ability to attract qualified non-employee board members.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and officers and persons who own more than ten percent (10%)
of its equity securities to file reports of ownership and changes in ownership
with the Securities and Exchange Commission (the "SEC"). Directors, officers,
and greater than ten percent (10%) shareholders are required by SEC regulations
to furnish the Company with copies of all Section 16(a) reports filed.
To the best of the Company's knowledge, all filing requirements
applicable to its officers, directors, and greater than ten percent (10%)
shareholders were complied with in a timely manner with the exception of Form 4
and an amended Schedule 13D filed late on behalf of the Company's president,
Bernard Ciongoli, which were required to be filed to reflect the vesting of
certain stock options which had been previously granted to Mr. Ciongoli.
Item 10. Executive Compensation.
Item 10. Executive Compensation.
The following table summarizes the compensation paid to or earned by our
president. No other officer has received compensation in excess of $100,000 in
any recent fiscal year.
14
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
SHARES OF COMMON
STOCK ISSUABLE
NAME AND 2003 UPON EXERCISE OF
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS
-------------- ------- ---------- --------- ----------------
Bernard M. Ciongoli 2003 * 0 0
President, CEO, CFO 2002 $132,000* 0 0
2001 $135,000 0 600,000
---------
* Pursuant to the terms of Mr. Ciongoli's employment agreement with the Company,
Mr. Ciongoli was entitled to a salary of $150,000 in 2002 and 2003. Because of
the Company's financial difficulties, Mr. Ciongoli elected not to receive all of
his salary in 2002. Since January 1, 2003 Mr. Ciongoli, morever, has elected not
to receive any salary because of the Company's current financial difficulties.
Mr. Ciongoli's unpaid salary is being accrued and shall be paid upon the
Company's obtaining adequate resources.
OPTION GRANTS IN FISCAL YEAR 2003
No options were granted to any named executive officer of Tech Labs in
2002.
Tech Labs has entered into an employment agreement for a term of five
(5) years with Mr. Ciongoli, dated as of August 1, 2001, which agreement
supersedes the employment agreement that was in effect with Mr. Ciongoli dated
October 1, 1998, as amended June 18, 1999, and February 21, 2001. Mr. Ciongoli
is compensated under the terms of the employment agreement at the base salary
rate of $150,000 per annum. Mr. Ciongoli is also entitled to receive two percent
(2%) of our sales in excess of $1,000,000 during any year he is employed by us.
In addition, Mr. Ciongoli was granted an option, exercisable for five (5) years
from the date of grant, to purchase up to 500,000 shares of stock at $.43 per
share, which option vests in increments of 100,000 shares every six (6) months
since February 1, 2002. The agreement is automatically renewable for three (3)
years unless either party terminates the agreement in writing at least 180 days
prior to the expiration of the initial term period.
In addition, in 2001, we granted to Mr. Ciongoli an option to purchase
up to 100,000 shares under our 1996 stock option plan exercisable for five (5)
years at $0.9625 per share which vest over a period of two (2) years. In 2000,
we granted to Mr. Ciongoli (i) a non-plan option in consideration and in
recognition of his services to Tech Labs to purchase up to 139,000 shares
exercisable over five (5) years at $2.4375, which vests over the course of three
(3) years from the date of grant; and (ii) an option to purchase up to 111,000
shares of common stock under our 1996 stock option plan exercisable for five (5)
years at $2.68125 per share, which vests over a period of three (3) years.
We do not have employment agreements with any other named executive
officers. Our directors are not presently compensated.
15
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table describes, as the date of this amended annual
report, the beneficial ownership of our common stock by:
o persons known to us to own more than 5% of such stock, and
o the ownership of common stock by our directors, and by all
officers and directors as a group.
NUMBER OF SHARES
OWNED % OF
NAME BENEFICIALLY COMMON STOCK
------------------------ ---------------- ------------
Bernard M. Ciongoli 9,625,500 28.58%
Earl Bjorndal 3,370,684 10.01%
Carmine O. Pellosie, Jr. 40,000 *
Phoenix Capital 1,750,000 5.20%
Partners, LLC
All officers and
directors as a group
(3 persons) 13,036,184 38.70%
* Less than one (1%) percent
Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of common stock that an individual or entity has a right to
acquire within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purposes of computing the percentage ownership
of such individual or entity, but are not deemed to be outstanding for the
purposes of computing the percentage ownership of any other person or entity
shown in the table.
Item 12. Certain Relationships and Related Transactions.
None.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K.
On June 11, 2003, the Company filed a Current Report (Item V) on Form
8-K reporting that the Company Tech Laboratories, Inc. received a notice of
non-payment and default on May 27, 2003 from two holders of its 6.5% convertible
notes issued on October 13, 2000. The Notice of Non-payment and Default states
that the maturity date of the Notes was October 13, 2002; that the Company is in
default under the terms of the Notes and the subscription agreement entered into
by and between the Company and the Note holders; that $380,000 of principal was
presently outstanding and owed to each of the two Note holders; that in
accordance with the terms of the Subscription Agreement, $129,700 of liquidated
damages will be owed to each of the two Note holders as of May 31, 2003; and
that $32,499 of interest is due and owed to each of the two Note holders.
On October 27, 2003, the Company filed a current report (Item V) on
Form 8-K reporting that Tech Laboratories, Inc. (the "Company") issued a press
release on October 24, 2003, announcing that it had entered into a Security
Agreement and Collateral Agent Agreement dated September 25, 2003 (the "Security
Agreement "), pursuant to which it obtained a waiver and thereby cured the
existing Event of Default under its outstanding 6.5% convertible promissory
notes with the Lenders set forth in such notes ("Lenders". In consideration for
the waiver and cure of the Event of Default existing under the notes, the
Company agreed to grant the Lenders a security interest in the Company's
inventory ("Collateral") as well as additional consideration.
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ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
We were billed a total of $15,000 by our principal accountant for audit fees for
the years 2003 and 2002.
All Other Fees
The Company did not incur any other fees related to services rendered by our
principal accountant for the fiscal year ended December 31, 2003.
Pursuant to the requirements of Section 13 or 15(d) 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.
TECH LABORATORIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: January 7, 2005 TECH LABORATORIES, INC.
By: /s/ Bernard M. Ciongoli
------------------------------
Bernard M. Ciongoli
President
As required by the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
---------- ------- ----
/s/Bernard M. Ciongoli President, CEO, CFO January 7, 2005
---------------------- and Director
Bernard M. Ciongoli
/s/ Earl M. Bjorndal Vice President and Director January 7, 2005
---------------------
Earl M. Bjorndal
17