SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
{X} Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2004
{_} 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: $ 254,521
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 14, 2005, 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 $.01/share.
The number of shares of common stock outstanding as of April 14, 2005:
87,996,785
Transitional Small Business Disclosure Format (check one): Yes {_} No {X}
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
. 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.
Part I
Item 1. Description of 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 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
networks.
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.
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 connection 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.
The DynaTraX(TM) Enterprise Management Solution "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. 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
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.
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
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, 2004
and 2003, 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, 2004, was $31,712.
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 the
technology of a switch that can 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.
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 six 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, 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 and a former employee filed a joint
lawsuit in Superior Court of New Jersey, Passaic County, against us for
consulting fees and expenses, respectively. In the same lawsuit, W.T.
Sports filed a claim for a commission owed on sales due from a licensing
agreement with us. The claims by the former director and former employee
are for about $10,000 and we deny any liability under these claims and are
defending the lawsuit. With regard to W.T. Sports, our agreement has an
arbitration in case of dispute and therefore we are attempting to move
this case to arbitration. We believe that we have a counterclaim, which is
far in excess of the amount they claim we owe for the licensing fees. On
November 11, 2004, an arbitration hearing took place. On December 31, 2004,
the arbitrator awarded $35,148 to WT Sports. Tech Labs can continue to
manufacture the system in the United States.
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, quantim meruit, and unjust enrichment. We
disagree with the amount of the unpaid balance owed to the plaintiff. We
have filed a counterclaim for overcharging by the plaintiff.
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
---------------
2003 HIGH LOW
------ ---- ----
First Quarter .05 .01
Second Quarter .03 .01
Third Quarter .05 .01
Fourth Quarter .19 .02
2004 HIGH LOW
------ ---- ----
First Quarter .35 .02
Second Quarter .21 .01
Third Quarter .06 .01
Fourth Quarter .03 .01
As of April 14, 2005, there were 276 holders of record of our common stock. The
transfer agent for our common stock is:
Olde Monmouth Stock Transfer Co., Inc.
Suite 101, 77 Memorial Parkway,
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 2003 and 2004, and their approximate percentage
contribution to revenues for the period indicated:
PRODUCT TYPE 2003 % of Revenue 2004 % of Revenue
------------------ ---- ------------ ---- ------------
Switches $ 68,036 28.8% $ 66,360 26.1%
IDS Sensors 256,711 46.5% 159,073 62.5%
Transformers/Coils 35,357 17.2% 29,088 11.4%
Contract Manufacturing 3,404 7.5% 0 0.0%
------ ----- ------ -----
Totals $ 236,107 100.0% $ 254,521 100.0%
========= ====== ========= ======
The following table sets forth the percentages of gross profit for each of our
major business activities in 2003 and 2004.
Year Ended December 31,
PRODUCT TYPE 2003 2004 Net Change
------------ ---- ---- ----------
Switches 68.5% 64.3% (4.3%)
IDS Sensors 57.0% 58.1% 1.1%
Transformers/Coils 47.8% 50.5% 2.7%
Contract Manufacturing 49.6% 0.0% N/A
Unallocated company expenses,
including physical inventory
adjustments factory overhead and
Inventory Write-Down 142.1% 172.9% 30.8%
Total company gross profit % (83.9%) (201.9%) (118.0%)
* - 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 $254,521 for 2004 as compared to $236,107 for the year ended 2003
for an increase of 7.8%.
For the year ended 2004 cost of sales were $784,153 compared to $434,264 for the
year ended 2003. The Company's gross profit percentage was negative in 2004 and
2003 due to inventory write-offs of slow moving and obsolete inventory totaling
$265,358 in 2004 and $250,000 in 2003.
Selling, general, and administrative expenses increased by $225,945 in 2004 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 $159,312 due to the increased interest expense. Losses
from operations of $1,451,673 in 2004 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 2004, the company sought 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.
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 the entire
inventory by fire, theft or by acts of nature would result in substantial losses
and would harm our business.
Item 7. Financial Statements
Tech Laboratories, Inc.
Page
----
Report of Independent Registered Public Accounting Firm F1
Balance Sheets as of December 31, 2004 and 2003 F2
Statements of Operations for the Years Ended
December 31, 2004 and 2003 F3
Statements of Shareholders' Equity for the
Years Ended December 31, 2004 and 2003 F4
Statements of Cash Flows for the Years
Ended December 31, 2004 and 2003 F5
Notes to Financial Statements F6 - F11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Tech Laboratories, Inc.
We have audited the accompanying consolidated balance sheet of Tech
Laboratories, Inc. as of December 31, 2004 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the two-year period ended December 31, 2004. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tech Laboratories,
Inc. as of December 31, 2004 and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Demetrius & Company, L.L.C.
Wayne, New Jersey
April 14, 2005
-F1-
TECH LABORATORIES, INC.
BALANCE SHEET
December 31,
--------------------------
2004 2003
----------- -----------
Current Assets:
Cash $ 106,283 $ 125,308
Accounts receivable, net of allowance of $1,000 10,679 10,107
Inventories 907,030 1,249,777
Prepaid expense 59,376 1,074
----------- -----------
Total current assets 1,083,368 1,386,266
Certificate of deposit (restricted) 36,499 40,000
Property, plant and equipment, at cost
Leasehold improvements 2,247 2,247
Machinery, equipment, and instruments 608,917 607,987
Furniture and fixtures 109,584 110,893
----------- -----------
720,748 721,127
Less accumulated depreciation and amortization 442,570 427,909
----------- -----------
Net property, plant and equipment 278,178 293,218
----------- -----------
Other 14,420 12,063
----------- -----------
Total Assets $ 1,412,465 $ 1,731,547
=========== ===========
Current liabilities:
Defaulted convertible notes $ 828,885 $ 1,480,785
Note payable 34,444 34,444
Accounts payable and accrued expenses 352,457 300,712
Other liabilities -- 3,271
----------- -----------
Total current liabilities 1,215,786 1,819,212
Shareholders' Investment:
Common stock, $.01 Par Value;
195,000,000 Shares Authorized
88,161,612 and 18,045,376 Shares Issued 881,616 175,143
Less: 15,191 Shares Reacquired and held in Treasury (113) (113)
----------- -----------
881,503 175,030
Capital contributed in excess of par value 5,417,562 4,480,381
Accumulated deficit (6,102,386) (4,743,076)
----------- -----------
196,679 (87,665)
----------- -----------
Total liabilities and Shareholders' Investment $ 1,412,465 $ 1,731,547
=========== ===========
The accompanying notes are an integral part of these financial statements.
-F2-
TECH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Year Ended
December 31,
----------------------------
2004 2003
------------ ------------
Sales $ 259,761 $ 236,107
------------ ------------
Costs of expenses:
Cost of sales 784,153 434,264
Selling, general and administrative expenses 927,281 701,336
------------ ------------
1,711,434 1,135,600
Income (loss) from operations (1,451,673) (899,493)
------------ ------------
Other income (expenses):
Interest income 189 113
Interest expense (61,077) (220,313)
------------ ------------
(60,888) (220,200)
Loss before income taxes (1,512,561) (1,119,693)
Income taxes benefit 153,251 193,770
------------ ------------
Net loss (1,359,310) (925,923)
Accumulated deficit, beginning of year (4,743,076) (3,817,153)
------------ ------------
Accumulated deficit, end of year $ (6,102,386) $ (4,743,076)
============ ============
Loss per share, basic and diluted $ (0.03) $ (0.12)
Basic and diluted weighted average shares outstanding 52,043,074 7,926,675
The accompanying notes are an integral part of these financial statements.
-F3-
TECH LABORATORIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Capital
---------------------------- in Excess Accumulated
Shares Amount of 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 (3,817,153) 677,857
Stock issued (for services) 5,000,000 50,000 -- -- 50,000
Stock issued 7,522,960 75,295 35,106 -- 110,401
Net loss -- -- -- (925,923) (925,923)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 18,045,376 175,030 4,480,381 (4,743,076) (87,665)
Stock issued (for services) 47,391,034 473,910 232,831 -- 706,741
Stock issued (for debt conversion) 22,725,202 232,563 704,350 -- 936,913
Net loss -- -- -- (1,359,310) (1,359,310)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 88,161,612 $ 881,503 $ 5,417,562 $(6,102,386) $ 196,679
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-F4-
TECH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Year Ended
December 31,
--------------------------
2004 2003
----------- -----------
Cash flows from (for) operating activities:
Net (loss) from operations $(1,359,310) $ (925,923)
Add (deduct) items not affecting cash:
Depreciation/amortization 14,661 24,808
Doubtful accounts expense -- (48,000)
Expenses paid with the issuance of common stock 706,741 50,000
Interest expense capitalized to debt 35,013 --
Inventory write-down 265,358 250,000
Changes in operating assets and liabilities:
Accounts receivable (572) (4,349)
Inventories 77,389 235,856
Accounts payable and accrued expenses 51,745 157,182
Prepaid expenses (58,302) --
Other assets and liabilities (5,628) (68,426)
----------- -----------
Net cash flows for operating activities (272,905) (328,852)
----------- -----------
Cash flows from (for) investing activities:
Reduction in certificate of deposit 3,501
Proceeds from sale of equipment 1,309 --
Purchase of equipment (930) (9,529)
----------- -----------
Net cash flows from (for) investing activities 3,880 (9,529)
----------- -----------
Cash flows from financing activities:
Acquisition of debt 250,000 324,945
Issuance of common stock -- 110,401
----------- -----------
Net cash flows from financing activities 250,000 435,346
----------- -----------
Net increase (decrease) in cash (19,025) 96,965
Cash balance, beginning of year 125,308 28,343
----------- -----------
Cash balance, end of year $ 106,283 $ 125,308
=========== ===========
Supplemental schedule of noncash investing
and financing activities:
Coversion of debt to common stock $ 936,913 $ --
=========== ===========
The accompanying notes are an integral part of these financial statements.
-F5-
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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 are stated at the lower of cost (first-in, first-out) or market.
Inventories at December 31, 2004 and 2003 consisted of the following, net of
write-down of $265,358 and $250,000 in 2004 and 2003 respectively for obsolete
and slow moving items:
2004 2003
---------- ----------
Raw materials and finished components $ 121,077 $ 463,824
Work in process and finished goods 785,953 785,953
---------- ----------
$ 907,030 $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.
-F6-
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
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
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 the 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, 2004 and 2003, were nominal.
Accounting for Stock Option Based Compensation
SFAS No. 123, "Accounting for Stock Based Compensation," sets forth accounting
and reporting standards for stock based employee compensation plans. As allowed
by SFAS 123, the Company continues to measure compensation cost under Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees" and complies with the pro forma disclosure requirements of the
standard (see Note 8).
-F7-
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
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.
Segment Information
Sales of switches and IDS sensors made up 75% and 90% of our revenues in 2004
and 2003 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 to 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 entities. The Company does
not hold any variable interest entities.
3. LEASE OBLIGATIONS
Lease expenses consisting principally of office and warehouse rentals, totaled
$57,895 and $56,000, for the years ended December 31, 2004 and 2003,
respectively. At December 31, 2004 and 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:
Total
December 31,
-------------------
2004 2003
-------- --------
Year Ending, December 31:
2004 $ -- $ 57,000
2005 57,600 57,000
2006 58,300 58,000
2007 19,600 19,000
2008 --
-------- --------
$135,500 $191,000
======== ========
-F8-
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
4. INCOME TAXES
The income tax benefit for the year ended, December 31, 2004 and 2003, includes
the following:
2004 2003
----------- -----------
Federal $ -- $ --
State 153,251 193,770
----------- -----------
153,251 193,770
Deferred
Federal -- --
State -- --
----------- -----------
$ 153,251 $ 193,770
=========== ===========
The components of deferred tax accounts as of December 31, 2004 and 2003 are as
follows:
2004 2003
----------- -----------
Deferred tax assets
Net operating loss carryforward $ 2,238,000 $ 1,855,000
Other -- --
----------- -----------
Subtotal 2,238,000 1,855,000
Valuation allowance (2,238,000) (1,855,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The net change in the valuation allowance was an increase of $383,000 and
$328,000 in 2004 and 2003, respectively.
The reconciliation of estimated income taxes attributed to operations at the
statutory tax rates to the reported income tax benefit is as follows:
2004 2003
----------- -----------
Expected federal tax at statutory rate $ (435,105) $ (436,680)
State taxes, net of federal tax rate (101,146) (85,090)
Change in valuation allowance 383,000 328,000
----------- -----------
$ (153,251) $ (193,770)
=========== ===========
At December 31, 2004 and 2003, the company had a net operating loss carryforward
of $6,583,526 and $5,224,216, respectively, which can be utilized to offset
future taxable income. These operating loss carry-forwards begin to expire in
2014.
-F9-
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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 $36,499 and $40,000 at December 31,
2004 and 2003 respectively.
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 on 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.
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.
On May 18, 2004, the Company issued an additional $250,000 convertible debenture
at a rate of 5.0% due on May 18, 2007.
As of December 31, 2004, an aggregate of $936,913 of Convertible Long Term Debt
was converted into Common Stock.
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
-F10-
TECH LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE CONTRACT (Cont'd)
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 $.54 per share, which option vests in increments of 100,000
shares every (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.
8. STOCK OPTIONS
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 total number of options granted was 12,500,000 and all of the options
were vested immediately.
The Company measures compensation for these plans under APB Opinion No. 25. No
compensation cost has been recognized as all options were granted at the fair
market value of the underlying stock at the date of grant. Had compensation
expense for these plans been determined consistent with SFAS No. 123, the
Company's net (loss) and net (loss) per share would be as follows:
2004
-------------
Net (loss), as reported $ (1,359,310)
Net (loss), pro forma $ (1,396,810)
Basic (loss) per share, as reported $ (0.03)
Basic (loss) per share, pro forma $ (0.03)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2004: risk-free interest rates of 3.529%,
expected volatility of 94.75% and expected lives of three years. No dividends
were assumed in the calculations.
Stock option transactions for 2004 are summarized as follows:
Weighted Average
Shares Exercise Price
------ --------------
Outstanding, beginning of year -- $ --
Granted 12,500,000 0.005
Exercised -- --
Expired -- --
---------- ----------
Outstanding, end of year 12,500,000 0.005
========== ==========
Exercisable, end of year 12,500,000 0.005
========== ==========
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Our accountants are Demetrius & Company, LLC, 155 Route 46 West, Wayne Plaza II
Wayne, NJ 07470. We do not presently intend to change accountants. At no time
has there been any disagreements with such accountants regarding any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. On October 1, 2004, we dismissed Charles J. Birnberg, CPA as
as our independent auditors due t the fact that he was not registered with the
Public Accountants Oversights Board and we engaged Russell & Atkins, PLC as our
independent auditor. Subsequently on October 22, 2004, Russell & Atkins, PLC
resigned as our independent auditor due to the fact that Russell & Atkins
decided that is it will no longer be registered with the PCAOB. On November 4,
2005, Demetrius & Company was engaged as our new independent auditor. At no time
has there been any disagreements with Charles Birnberg, Russell & Atkins or
Demetrius & Company regarding any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
Item 8a. 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.
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 58 President, Chief Executive Officer, Chief
Financial Officer and Director
Earl M. Bjorndal 53 Vice President and Director
Craig Press 46 Director
Jeff Sternberg 59 Director
George Kanakis 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.
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.
Jeffrey Sternberg was appointed to our Board of Directors on March 25, 2005.
Mr. Sternberg is the President, Chief Executive Officer, Chief Financial
Officer and Chairman of the Board of Directors of Advantage Capital Development
Corp. Since June 2002, Mr. Sternberg has been the managing member of Phoenix
Capital Partners, LLC a financial investment company located in Hollywood,
Florida. Prior to his acquiring Phoenix Capital Partners, LLC, between August
2002 and November 2002, he worked for Atico International based in South
Florida. Atico is a specialty importer of goods. Immediately prior to that time,
Mr. Sternberg had worked for seven years as a Senior Vice President at Herbko
International, a worldwide manufacturer of general merchandise. Mr. Sternberg
spent over two decades working with mass merchandisers, drug chains and
specialty stores and consulting with regional and national buyers to distribute
goods throughout the United States and Asia. Additionally, Mr. Sternberg served
these and other customers by managing their imports and exports of products and
arranging for the financing and the manufacturing of a wide variety of retail
merchandise.
Craig Press was appointed to our Board of Directors on March 25, 2005. From 1996
to the present, Mr. Press has been the Vice President and head of operations for
Georal International, Corp. and AJR International, Ltd., both located in
Whitestone, New York. His responsibilities include the oversight and management
of day to day operations of both company's employees, its sales, marketing,
public relations and construction, of all of the company's products and
services. Additionally, he is responsible for the day to day operations of the
company's California facility and its personnel as well. Mr. Press also
maintains control of the company's contacts with federal, state and municipal
organizations as well as major real estate, banking and industrial corporations.
Mr. Press is also a security consultant for anti-terrorism perimeter security,
employee entrance and egress, fire, building and safety codes and negotiates all
labor contracts with the New York City unions with which his company interacts.
Mr. Press also sits on the Board of Directors of Advantage Capital Development
Corp.
George Kanakis was appointed to our Board of Directors on March 25, 2005. Mr.
Kanakis is the Director and President, Chief Executive Officer and member of the
Board of Directors of NuWave Technologies,Inc. From March 2002 through August
2003, he had been a Vice President Of Corporate Finance for Cornell Capital
Partners, LP, where he structured equity and debt financings, as well as
provided consulting to clients on mergers and acquisitions. From 1993 to 2001
Mr. Kanakis managed the Futures and Options Group at Barclays Capital, where he
serviced primarily institutional clients, around the world. Mr. Kanakis holds an
MBA in Finance and Investments from the Zicklin School of Business at Baruch
College where he graduated in December 2001 and a degree in Economics from
Rutgers University where he graduated in May 1995
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.
CODE OF ETHICS
The company has adopted a Code of Ethics applicable to its Chief Executive
Officer and Chief Financial Officer. This Code of Ethics is filed herewith as an
exhibit.
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 $100,000 in
any recent fiscal year.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG-TERM COMPENSATION
SHARES OF COMMON STOCK
NAME AND 2004 ISSUABLE UPON EXERCISE
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OF OPTIONS
--------------------------------------------------------------------------------------------------
Bernard M. Ciongoli 2004 * 0 0
President, CEO, CFO 2003 * 0 0
2002 $132,000* 0 0
* 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, moreover, 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 2004
No options were granted to any named executive officer of Tech Labs in 2004.
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.
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
NAME OWNED BENEFICIALLY % OF COMMON STOCK *
-------------------------------- ----------------- ------------------
Bernard M. Ciongoli 22,275,500 25.31%
Earl Bjorndal 9,548,184 10.85%
Jeff Sternberg 0 0
Craig Press 0 0
George Kanakis 0 0
All officers and
Directors as a group (5 persons) 31,823,684 36.16%
* Based on 87,996,785 shares outstanding as of April 14, 2005
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 October 7, 2004, the Company filed an 8K based on a change in
accountant to Russell & Atkins, PLC and then filed an amendment to
the 8K on October 12, 2004.
On November 5, 2004, the Company filed an 8K based on a change in
accountant to Demetrius & Co,. and then filed an amendment to the 8K
on December 22, 2004.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
For the Company's fiscal years ended December 31, 2004 and 2003, the Company was
billed approximately $15,000 and $20,000 respectively for professional services
rendered for the audit and review of its financial statements.
Tax Fees
For the Company's fiscal year ended December 31, 2004, the Company incurred
$-0- for preparation of their corporate income tax returns.
All Other Fees
The Company did not incur any other fees related to services rendered by its
principal accountant for the fiscal years ended December 31, 2004.
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: April 15, 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 April 15, 2005
---------------------- and Director
Bernard M. Ciongoli
/s/ Earl M. Bjorndal Vice President and Director April 15, 2005
--------------------
Earl M. Bjorndal
TECH LABORATORIES, INC.
FINANCIAL CODE OF ETHICS
As a public company, it is of critical importance that Tech Laboratories, Inc.
("Tech Laboratories") filings with the Securities and Exchange Commission be
accurate and timely. Depending on their position with Tech Laboratories,
employees may be called upon to provide information to assure that Tech
Laboratories' public reports are complete, fair, and understandable. Tech
Laboratories expects all of its employees to take this responsibility seriously
and to provide prompt and accurate answers to inquiries related to Tech
Laboratories' public disclosure requirements.
Tech Laboratories' Finance Department bears a special responsibility for
promoting integrity throughout Tech Laboratories, with responsibilities to
stakeholders both inside and outside of Tech Laboratories. The Chief Executive
Officer (CEO), Chief Financial Officer (CFO), and Finance Department personnel
have a special role both to adhere to the principles of integrity and also to
ensure that a culture exists throughout Tech Laboratories as a whole that
ensures the fair and timely reporting of Tech Laboratories' financial results
and conditions. Because of this special role, the CEO, CFO, and all members of
Tech Laboratories' Finance Department are bound by Tech Laboratories' Financial
Code of Ethics, and by accepting the Financial Code of Ethics, each agrees that
they will:
- Act with honesty and integrity, avoiding actual or actual conflicts of
interest in personal and professional relationships.
- Provide information that is accurate, complete, objective, relevant, timely
and understandable to ensure full, fair, accurate, timely, and
understandable disclosure in the reports and documents that Tech
Laboratories files with, or submits to, government agencies and in other
public communications.
- Comply with the rules and regulations of federal, state and local
governments, and other appropriate private and public regulatory agencies.
- Act in good faith, responsibly, with due care, competence and diligence,
without misrepresenting material facts or allowing one's independent
judgment to be subordinated.
- Respect the confidentiality of information acquired in the course of one's
work, except when authorized or otherwise legally obligated to disclose.
Confidential information acquired in the course of one's work will not be
used for personal advantage.
- Share job knowledge and maintain skills important and relevant to
stakeholders needs.
- Proactively promote and be an example of ethical behavior as a responsible
partner among peers, in the work environment and in the community.
- Achieve responsible use of, and control over, all Tech Laboratories assets
and resources employed by, or entrusted to yourself, and your department.
- Receive the full and active support and cooperation of Tech Laboratories'
Officers, Sr. Staff, and all employees in the adherence to this Financial
Code of Ethics.
- Promptly report to the CEO or CFO any conduct believed to be in violation
of law or business ethics or in violation of any provision of this Code of
Ethics, including any transaction or relationship that reasonably could be
expected to give rise to such a conflict. Further, to promptly report to
the Chair of Tech Laboratories' Audit Committee such conduct if by the CEO
or CFO or if they fail to correct such conduct by others in a reasonable
period of time.